Economy of Ireland (EC2020) Tutorial 4 – MT Term Teaching Week 6 Plan for today • Any issues/questions? • B1 (iv) Examine critically the concept of competitiveness and why it matters so much for a small regional economy like Ireland’s. • C1 (i) What is the rationale in principle for government in a market economy? • C1 (ii) Why must some of these functions be applied increasingly at a global and in particular in recent years at an EU level? • Class Test B1 (iv) B1 (iv) Examine critically the concept of competitiveness and why it matters so much for a small regional economy like Ireland’s. • Two questions here: • Examine critically the concept of competitiveness • Why competitiveness matters so much for a small regional economy like Ireland’s B1 (iv) • Examine critically the concept of competitiveness • Narrow sense: • Prices out of line, relative to others • Broader sense: • Think of all the things that go into being competitive in any field: B1 (iv) • Examine critically the concept of competitiveness • The ‘right’ goods • High quality products • Selling at a competitive price • Having reliable supply • Marketing • Amount and type of human capital in the country • Infrastructure • Legal, tax, patents, transport… • High up the value-chain if you want to be a ‘rich’ country • E.g. apple products B1 (iv) • Why competitiveness matters so much for a small regional economy like Ireland’s • NB issue for a regional economy as a policy instrument • Regional economy prices taken over the long-term - importers of price • If prices & productivity rise together it’s not an issue • Deviations (short-run) can cause damage – prices get out of line: • With productive and less productive sectors wage pressure will raise costs and prices • Exchange rate and the amount of trade outside monetary system can impact prices B1 (iv) • When prices/costs rise relatively you lose competitiveness • i.e. exports more expensive and imports relatively cheaper (deficit) • Borrow to finance deficit – which will need to be repaid • With monetary policy you can devalue exchange rate for a sortterm solution • But, raises domestic prices and pay claims • Small economy & no Monetary Policy - can’t effect currency • Rising prices and pay claims mean export sales fall and imports rise • Lose export markets, growth and labor demand fall • Painful mean reversion/internal devaluation and repayment!!! C1 (i) C1 (i) What is the rationale in principle for government in a market economy? • Think of the absurdity of no government! • Anarchy • Hobbesian state of nature C1 (i) • (a) Referee - sets the rules of the game. • i) A central authority and legal system are needed for contracts that govern economic activity - - design and enforce rules that allow economic activity to take place • Property rights etc. • ii) Empirical evidence • no rule of law leads to poor economic performance (insights from institutional economics) C1 (i) • (b) Correct Market Failures/efficiency • i) Pure public goods (non-rival and non-excludable) • infrastructure, military etc. • non-excludable prevents market provision – pay for with tax • ii) Externalities • Positive: rival & somewhat excludable - under produced • Negative: producer isn’t paying (all?) costs - over produced • iii) Monopoly power • Firm maximizing behavior - prices too high, output too low C1 (i) • iv) Imperfect information • Risk assessment - - incomplete credit/insurance markets • Provision or subsidization • - But, government failure? • It’s not clear that there is a more efficient outcome - electoral pressures, lobbying, inefficient public sector • (c) Redistribution: • Efficient outcome is not not necessarily the ‘fair’ outcome (general equilibrium theory). C1 (i) • i) Success as a random walk • Distribution depends on luck e.g. A lot of economic outcomes are random. E.g. weather. • Hence voters demand redistribution • ii) Caveats: • E.g. too high taxes can distorts incentives • E.g. mobile factors may move (EU). C1 (ii) C1 (ii) Why must some of these functions be applied increasingly at a global and in particular in recent years at an EU level? • If you had the power to solve one issue in the world what would it be? Could this issue be dealt with at a national level, or does it require a level of super-national power? • Always ask what is the best level of governance for a particular issue to be dealt at – e.g. global, supra-national (EU), national, local, individual – subsidiarity principle and efficiency arguments (bi-lateral VS multilateral and scale economies) • Lots of information here you have to choose what to use!!! C1 (ii) • a) A global marketplace needs global rules • Trade • Banking • Investment • Health and Safety • Airline Regulations • Infections and Viruses • b) Easier to achieve common goals • E.g. Competition policy in Europe C1 (ii) • c) Co-ordination issues • E.g. Tax • d) Externalities • Environmental policy (has common goals but incentive issues) • Nuclear power • Market solution? • e) Free rider problem • Definition C1 (ii) • Some Other International Issue Areas • 1) Global foreign policy issues • Stateless Wars • Global sanctions • E.g. Russia/Ukraine, Iran, Syria • 2) Regulations for ‘common areas’ – e.g. international waters and space • 3) Migration policies C1 (ii) • 4) Global inequality and poverty • High global inequality can be bad for its own sake (Rawls) • Can lead to global instability • Can lead to migration issues • EU case study: The Crisis • European Bailout Fund - ESM/EFSF - Crisis resolution mechanism. Needed to prevent ‘runs’ on Eurozone countries • Joint banking supervision - ECB as EU-wide financial regulator • However, it can be difficult to find a consensus on many issues! Slow policy response one-size doesn’t always fit all C1 (ii) • Finally: • Although there is no international government to regulate and enforce rules, there are some supra-national bodies • EU • WTO • UN • How do they enforce rules? • Globally there is a reliance on norms and peer pressure. However, some bodies (EU, WTO) can enforce rules through punishments/fines etc. Exam Information • The Class Test takes place on November 11th at 15.15 in the Burke Theatre. • Test is worth 25% of your overall grade. • There will be 5 questions on the test (from the possible 9 we have covered in tutorials -- 3 in A2; 4 in B1; the first 2 in C1). Please make sure to answer all 5! • You will have approximately 15 minutes per question • Prepare answers in advance and practice writing them out • Remember your answers shouldn’t be information driven. You should be using information to tell a story/make an argument. • And please, please structure your answers for clarity! • Finally… surveys