Trade and Development

Trade and Development

Run 75411 picked up this recent report over at Economists View where someone (Goldilocksisableachblond?) pointed to a recent UN report TRADE AND DEVELOPMENT REPORT, 2012

Run says: There are some interesting comments within the Overview to the much longer report, which I found germaine to what is happening in the US and which have been addressed before by many of us. I have not had a chance to read the entire report. Bolding within the quotes are my own. I am more interested in your thoughts and comments. This is on developed countries and there is more on developing countries to be added later.

The turning point: financial liberalization and “market-friendly” policy reforms
In order to comprehend the causes of growing inequality, it should be borne in mind that the trend towards greater inequality has coincided with a broad reorientation of economic policy since the 1980s. In many countries, trade liberalization was accompanied by deregulation of the domestic financial system and capital-account liberalization, giving rise to a rapid expansion of international capital flows. International finance gained a life of its own, increasingly moving away from financing for real investment or for the international flow of goods to trading in existing financial assets. Such trading often became a much more lucrative business than creating wealth through new investments.

More generally, the previous more interventionist approach of public policy, which strongly focused on reducing high unemployment and income inequality, was abandon. This shift was based on the belief that the earlier approach could not solve the problem of stagflation that had emerged in many developed countries in the second half of the 1970s. It was therefore replaced by a more “market-friendly” approach, which emphasized the removal of presumed market distortions and was grounded in the strong belief in a superior static efficiency of markets.” (Page 18)

The failure of labour market and fiscal reforms
Just ahead of the new jump in unemployment in developed countries − from an average of less than 6 per cent in 2007 to close to 9 per cent in 2011 − the share of wages in GDP had fallen to the lowest level in the post-war era. Due to their negative effect on consumer demand, neither lower average wages nor greater wage differentiation at the sector or firm level can be expected to lead to a substitution of labour for capital and reduce unemployment in the economy as a whole. In addition, greater wage differentiation among firms to overcome the current crisis in developed countries is not a solution either, because it reduces the differentiation of profits among firms. Yet it is precisely the profit differentials which drive the investment and innovation dynamics of a market economy. If less efficient firms cannot compensate for their lower profits by cutting wages, they must increase their productivity and innovate to survive.”
(Page 22)

A reorientation of wage and labour market policies is essential ?????????????????

In addition to employment- and growth-supporting monetary and fiscal policies, an appropriate incomes policy can play an important role in achieving a socially acceptable degree of income inequality while generating employment-creating demand growth. A central feature of any incomes policy should be to ensure that average real wages rise at the same rate as average productivity. Nominal wage adjustment should also take account of an inflation target. When, as a rule, wages in an economy rise in line with average productivity growth plus an inflation target, the share of wages in GDP remains constant and the economy as a whole creates a sufficient amount of demand to fully employ its productive capacities.”

Run here: I think as Spencer and others have so aptly pointed out, productivity gains have been skewed to Capital since the seventies.

Influencing income distribution through taxation

The net demand effect of an increase in taxation and higher government spending is stronger when the distribution of the additional tax burden is more progressive, since part of the additional tax payments is at the expense of the savings of the taxpayers in the higher income groups, where the propensity to save is higher than in the lower income groups.

The experience of the first three post-war decades in developed countries, when marginal and corporate tax rates were higher but investment was also higher, suggests that the willingness of entrepreneurs to invest in new productive capacity does not depend primarily on net profits at a given point in time; rather, it depends on their expectations of future demand for the goods and services they can produce with that additional capacity. These expectations are stabilized or even improve when public expenditures rise, and, through their income effects, boost private demand.

Taxing high incomes, in particular in the top income groups, through greater progressivity of the tax scale does not remove the absolute advantage of the high income earners nor the incentive for others to move up the income ladder. Taxing rentier incomes and incomes from capital gains at a higher rate than profit incomes from entrepreneurial activity – rather than at a lower rate as practiced so far in many countries – appears to be an increasingly justifiable option given the excessive expansion of largely unproductive financial activities.
Page 26