The World Credit Crisis: Understanding It,and What to Do

The origin of the world credit crisis has four stages: (1) too much credit – an international perspective; (2) too much risk – reaction to low real interest rate; (3) the fatal flaw – the new complex financial instruments; and (4) the panic – bank lending dries up. The paper also discusses how the crisis spread around the world from the US, whether the high credit expansion was the fault of Alan Greenspan, whether China is to blame, and how this crisis related to the often expected crisis of global imbalances. Some implications for long‐term reform are discussed.     

Quotas and the second best

This note makes two observations about trade restrictions on subgroups of commodities. First, unlike tariffs, unalterable quotas provide no second-best justification for general restrictions. Second, the optimal allocation of intra-subgroup trade depends on the form of restraint imposed.     

Those Current Account Imbalances: A Sceptical View1

The international current account imbalances, where the United States has a vast deficit, and several countries, notably Japan, China, Germany and the oil exporters have corresponding surpluses, are usually seen as problems. The argument here is that current account imbalances simply indicate intertemporal trade – the exchange of goods and services for claims. There are likely to be gains from trade of that kind as from ordinary trade. What, then, are the problems? This paper considers five scenarios, notably one where net savings of the surplus countries decline so that the world real interest rate rises, and another where the US fiscal deficit is reduced, so that the world real interest rate falls and there could be a worldwide aggregate demand problem, essentially caused by the high net savings of the surplus countries. The paper reviews the reasons for the large surpluses in terms of savings and investment ratios (especially China) and also discusses the long‐term problem for the United States. While four of the scenarios involve a decline in the dollar, they do not necessarily imply a sudden – and even ‘disruptive’– dollar crisis.     

Protection and Liberalisation in Australia and Abroad

This article reviews changes in Australian protection policy between 1967 and 1995, particularly the political economy aspects. The story is quite complex, and until 1974 was unusual by international standards, with a sophisticated Australian tariff debate and the remarkable transparency role of the Industry Assistance Commission (IAC), and its predecessor, the Tariff Board. The role of Alf Rattigan, Chairman of the Tariff Board and later the IAC, is stressed. Liberalisation since 1988 has been drastic, so that most tariffs will be brought down to 5 per cent by the year 2000. All quotas were ended by 1993. This can be contrasted with very high protection levels in 1967 and quite high levels even in 1987. Substantial unilateral trade liberalisation normally requires exchange rate depreciation, and the floating of the Australian dollar made the tariff reductions possible. The motives for Australian trade liberalisation in the 1980s are compared with those for similar liberalisations in many developing countries.     

The Balassa-Samuelson Model: an Overview*

This paper introduces a special issue marking the thirtieth anniversary of the publication of two classic papers in international economics, Balassa (1964) and Samuelson (1964). We provide a brief analytical treatment of the basic model and an overview of the contributions in this special issue. the special issue includes novel empirical and theoretical approaches related to the Balassa-Samuelson model. Theoretical models include dynamic two-sector growth models, two-country general-equilibrium models, and openeconomy models with imperfectly competitive nontraded-goods sectors. Several papers exploit new sources of data or datasets constructed in new ways from traditional sources. “Under the skin of any international economist lies a deep-seated belief in some variant of the PPP theory of exchange rates.” (Rudiger Dornbusch and Paul Krugman, 1976, p. 540)     

Customs union theory and the nonuniformity of tariffs

Allowance is made for the initial nonuniformity of the tariffs of a union country before it joins a customs union. The reduction of such nonuniformity is a possible source of welfare again distinct from the usual trade creation and trade diversion effects. A net welfare gain from a union may result even when the country's total trade stays unchanged and even when all trade with the outsider ceases. A three-product, small-country model is used, domestic production and consumption substitution between the two importables yielding the import pattern effect that produces the possible gains referred to.     

Dutch Disease in Australia: Policy Options for a Three‐Speed Economy

‘Dutch Disease’ refers to the adverse effects through real exchange rate appreciation that the mining boom can have on various export‐ and import‐competing industries. The distinction is made between the booming sector (mining), the lagging sector (exports not part of the booming sector and import‐competing goods and services) and the non‐tradeable sector. What should the government do to reduce this Dutch ‘disease’? The principal options are: do nothing, piecemeal protectionism, moderate exchange rate effects by running a fiscal surplus, combined with lowering the interest rate, and possibly establishing a sovereign wealth fund. The costs of the latter measures may be considerable.     

THE GLOBAL IMBALANCES: WHAT IS THE PROBLEM?

In the 2007 Wincott Lecture the author argues that global current account imbalances are an indication of 'intertemporal trade'. Savings and investment, both private and public, determine the imbalances. He expounds Richard Cooper's argument that it is perfectly natural for the USA to have a big deficit and suggests that the large Chinese surplus may be temporary.