FRENCH WELFARENOMICS

Here (link) is an interesting story from The Economist which discusses huge price disparities between French and German retailers. For example, a basket of almost identical durable goods costs 30 percent more in France than in Germany.

The article reports that in many places in France there are local retail monopolies protected against domestic and foreign competition. There is also no free negotiation with suppliers, the sale of non-prescription drugs is prohibited, and the consumers do not support the new law that would deregulate the retail market to liberalize entry conditions and enforce competitive mechanism.

There is a well-known fact from microeconomic theory that consumer demand curve for monopoly firm equals average revenue of the monopoly firm and that monopoly firm will never like rigid or completely elastic demand but the elasticity of demand that will be equal to 1, given the point of the maximum profit taken by the monopoly firm. Hence, the price charged by the monopolist is P = MC/1+(1/Ex,px) which means that greater monopoly power leads to higher mark-ups. And also, the allocative inefficiency of the monopoly means that firm will set the price at the point where marginal revenue and marginal cost are crossed. Hence, higher prices and quantity regulation maximize the profit of the monopoly firm but consumers face a significant welfare loss.

In France, however, only 42 percent of the respondents favored more competitive retail market while 85 percent favored sales tax cuts and 72 percent prefered the rise in the minimum wage. Competitive market is always the only way to break the rigidity and monopoly position of the firm inparticular markets. For example, if there would be sales tax cut, that would not change the structure of the market but it would have an effect on the price elasticity of demand and since a local monopoly firm would face changes in the composition of the local demand, a tax cut would ease the prices but would still give local monopoly firms incentives to impose the mark-up. A rise in the minimum wage is a fallacy that, empirically, results in the rise of the unemployment and further labor market rigidity that hinders the growth of real productivity, decreases job growth and does not stimulate the real increase in purchasing power parity since higher prices, charged by firms to cover-up the loss from minimum wage, discourage the increase in purchasing power that is not linked to real productivity growth.

HAYEK'S THOUGHT ON ECONOMIC DEVELOPMENT

RETHINKING ARGENTINA'S ECONOMIC CRISIS

BrinkLindsey of the Cato Institute wrote a piece on the origins and causes of Argentina's economic crisis. The article can be read here.

INFLATIONARY PRESSURES IN GULF COUNTRIES

From FT (link):

"Inflation has replaced unemployment as the most pressing short-term problem facing the oil-rich Gulf economies, which are reaping the benefits of record oil revenues but do not have the tools available to cap rising prices, the International Monetary Fund warned on Monday. Creating jobs for the region’s growing youth population continued to be the main longer-term challenge for Middle Eastern oil exporters, said Mohsin Khan, the IMF’s regional director, but rising prices, already a concern in Qatar and the United Arab Emirates, had now extended across the Gulf Co-operation Council members to traditionally low-inflation countries such as Saudi Arabia, where inflation is approaching 10 per cent... The IMF predicts the Arab Gulf states’ consumer price index will average 7.1 per cent this year, up from 6.1 per cent in 2007 – while the broader Middle East and north Africa region will reach 10.4 per cent this year. With many regional economies pegged to the dollar, central banks lack any monetary policy tools to tackle inflation, leaving fiscal spending, rent caps and price subsidies as the only policy tools available to policymakers. In November last year, for example, rumours of a revaluation in the UAE sparked speculative inflows of $45bn (€29bn, £23bn) in one month, almost a third of the UAE’s gross domestic product... The Middle East and central Asia, which has been largely insulated from global economic uncertainty, was set to continue its strong performance, with oil-exporting countries seeing growth pick up to 6.25 per cent, the IMF said in its biannual regional economic outlook report. The region’s oil and gas exports will amount to $940bn this year, almost $200bn more than last year, as an almost fivefold increase in the price of oil fills the GCC’s coffers. The IMF estimates that the GCC’s combined GDP will reach more than $1,000bn this year, up from $805bn in 2007. The oil exporter’s growing external current account surplus, which is expected to grow to $1,400bn for 2004-2008, signals a continuing ability to invest abroad, while coping with increasing imports and investment into their domestic economies. The GCC’s current account surplus is expected to rise to $332bn from $227bn in 2007, with the UAE’s surplus rising 58 per cent and Qatar’s almost doubling. Official reserves of oil exporters had reached $800bn by the end of 2007. Foreign direct investment into the region reached $80bn in 2007, four times as high as 2002, 55 per cent of which flowed into Egypt, Saudi Arabia and the UAE."

THE REAL FACE OF PUTINOMICS

Aleh Tsvynski and Sergei Guriev wrote a brief article on Russia's state of the economy and political stability. Here's a slice of the article:

"The other major barrier to growth is corruption. In another World Bank-EBRD survey, 40% of firms in Russia reported making frequent unofficial payments, and roughly the same percentage indicated that corruption is a serious problem in doing business. Unlike in other emerging markets, corruption has not declined with economic growth; it remains as high as in countries with one-quarter the per capita income of Russia."

RUSSIA'S ECONOMIC NATIONALISM

Financial Times reports that Russia's outgoing president Mr. Putin has signed an act which defined 42 sectors of the economy in which state control of the economy is expanded and foreign investment roughly restricted. Under new law, foreign-owned companies will have to seek government permission in case they want to stake more than 25 percent of the company share in the sectors where free investment and ownership participation is staunchly restricted.

WILL CANADA, POLAND AND FINLAND JOIN THE FLAT TAX CLUB?

The proposition to move towards flat-rated income tax has been suggested in Canada (link), Finland (link) and Poland (link).

GERMANY'S ECONOMIC GROWTH EXPECTATIONS REDUCED

From FT (link):

"Germany’s economic growth will “lose momentum” this year because of high oil and food prices, the strong euro and the turmoil in the global financial markets, according to a projection by leading economic think-tanks. Europe’s largest economy grew by 2.5 per cent in 2007, a rate set to fall this year to only 1.8 per cent, says the joint forecast prepared for the German government by eight economic institutes, presented on Thursday in Berlin. The institutes had previously predicted growth of 2.2 per cent in 2008, but revised this downwards in the face of the “large number of negative shocks” in recent months. Their six-monthly forecast – one of the key barometers of Germany’s economic fortunes – predicts even lower growth next year of 1.4 per cent. “The negative international economic influences will become increasingly apparent [in 2008] and the economy’s expansion will lose momentum”, says the 80-page report, obtained by the Financial Times. Despite the economists’ cautious tone, their projection for 2008 is still higher than the government’s own forecast of 1.7 per cent. The report is also positive on the economy’s resilience to the fall-out from the financial markets crisis and the slowing US economy. “The German economy has become more robust in recent years, so the danger of a recession is lower,” the report says. Unemployment will continue to fall – although at a slower rate than in previous months – and in 2009 the average jobless figure will be 2.98m, below the symbolically important 3m mark for the first time since the early 1990s. In a reversal of the recent pattern, Germany’s exports are expected to weaken while domestic consumption – long the economy’s Achilles’ heel – will expand, the economists predict. Causes are, on the one hand, the strong euro and the unstable international economy, while on the other the rises in domestic employment and wage settlements. The high oil and food prices will lead to relatively high inflation, of 2.6 per cent this year and 1.8 per cent next year, the think-tanks predict. Inflation remains a concern throughout the eurozone, according to separate figures released on Wednesday. Price growth in the 15-country region grew by 3.6 per cent in March, according to revised figures released by the European Union’s statistics office on Wednesday, the highest annual inflation rate since measurements for the eurozone began in 1997."

AVERAGE WORKING WEEK IN OECD COUNTRIES

RISING FOOD PRICES

Professor Gary Becker offers an opinion on why export restrictions on food and other prevailing measures of intervention and policy failures are having inequitable and negative outcome effects (link):

"Some analysts have justified these export restrictions as a way to combat the effect of rising food prices on poverty. However, poverty is much more prevalent among rural than urban families in developing countries like China, Egypt, India and Vietnam. So restrictions on food exports in developing nations not only lower the efficiency of their food production, but also usually raise inequality and overall poverty. The greater political clout of urban households in developing nations is the pressure behind the support for these inefficient and inequitable export restrictions, just as the greater political clout of farmers in developed nations maintains the inefficient, and probably energy-wasteful, ethanol subsidies in the United States and other rich countries."

SELECTED READINGS IN ECONOMICS

Here's my current reading list of economics books:

Paul Krugman, Maurice Obstfeld, International Economics, Theory and Policy, Addison-Wesley, 1997
Dominick Salvatore, International Economics, 8th Edition, Wiley, 2004
Simon Kuznets, Economic Growth of Nations, Harvard University Press, 1971
Alan Walters, Britain's Economic Renaissance, Oxford University Press, 1986
Christian Montet, Daniel Serra, Game Theory & Economics, Palgrave Macmillan, 2003
Paul Krugman, Pop Internationalism, MIT Press, 1996
Paul Krugman, Peddling Prosperity, W.W. Norton & Company, 1994

FREE SPEECH IN POST-COMMUNIST SLOVENIA

I recently decided to delete the comment written by a person nicknamed abaris. The content of the comment was marred by aggresive propaganda and hateful speech against the author of this blog. Honestly, free speech could hardly be a subject of abuse and personal attack on the opinion of other individuals. In addition, the comment has not been associated with the topic of the post which quoted the article of Financial Times about the surge of interest rate in Iceland.

On behalf of her personal experience, Ana Jud recently showed how free speech and the respect for personal privacy and liberty in Slovenia are virtually banned out (link) and how popular media slaughtering, invasion into private property, disrespect for privacy and deceptive media propaganda really are. Read here, here and here.

Today, Rado Pezdir wrote an article published in Finance. The article entitled A Country Where Only Swindlers and Madmen Succeed brilliantly describes the nature of Slovenia's totalitarian coercion-designed society where there're no traces of economic, individual and political liberty and where primitive coercion driven by interest groups discounts both - economic and individual liberty.