- While current account deficits are a common economic challenge, there are several different ways in which can be employed to address them:
- What methods have the UK implemented?
- What is an emerging economy?
- Economic characteristics
- So what countries have emerging economies?
- Impact of emerging economies on the UK
- What is a developed economy?
- Economic characteristics
- What countries have developed economies?
- Issues in Developed Economies
- Ageing Population
- Inequality
- Deindustrialisation - Japan
- Global Institutions
- World Trade Organisation (WTO)
- The World Bank
- International Monetary Fund (IMF)
- Knowledge Checkpoint
While current account deficits are a common economic challenge, there are several different ways in which can be employed to address them:
- Devaluation - Lowering the value of the pound can make exports cheaper and imports more expensive. This can potentially increase export demand and reduce import demand.
- Deflationary policies - Can help reduce a current account deficit by cooling down the economy and reducing spending on imports. These policies mainly involve monetary and fiscal approaches:
- Monetary - This involves controlling money through interest rates. When the central bank raises interest rates, borrowing become more expensive reducing spending on imports. While this can make the UK exports more competitive, it can also attract foreign investment, strengthening the pound and potentially making exports more expensive
- Fiscal - This is about government management of taxes and spending. Increasing taxes or reducing government spending leaves people with less money, potentially reducing import purchases. While this doesn’t directly affect exchange rates, it can slow economic growth and job creation, making it a challenging decision for government.
- Supply-side policies - Improving the economy’s competitiveness through measures like privatisation or deregulation can boost exports over time. These polices aim to increase efficiency and reduce production costs.
- Wage reduction - Lowering wages, particularly in the public sector, can reduce production costs and improve export competitiveness. However, this approach may lead to lower aggregate demand.
- Protectionism - Implementing tariffs or quotas on imports can directly reduce the volume of imports.
What methods have the UK implemented?
- Fiscal targets - Set fiscal rules to manage public finances, including targets for government borrowing and debt
- The current rules aim to have public sector net debt falling as a % of GDP by the fifth year of the forecast period
- Additionally, keep public sector new borrowing below 3% of GDP in the same timeframe
- Monetary policy - The Bank of England has used interest rate adjustments to influence spending and investment.
- Welfare cap - The government has implemented a cap on certain welfare spending to control expenditure
While the fiscal targets are currently being met according to the Office for Budget Responsibility (OBR), the margin for success is narrow.
As we have seen, the current account deficit has persisted since the mid-1980s, suggesting that these policies have not fully addressed the underlying issues.
What is an emerging economy?
These nations are characterised by rapid economic growth, increasing engagement with global markets, and the development of financial and regulatory institutions.
Economic characteristics
- Rapid economic growth - emerging markets typically experience faster GDP growth compared to developed economies
- Creates opportunities for both domestic and foreign investors
- Can also lead to economic volatility
- Increasing global market integration - becoming more connected to the global financial system
- Work on making their stock markets and bond markets easier to buy and sell in
- Attracting more investment from foreign companies
- Developing financial and regulatory systems - emerging markets are in the process of establishing modern financial institutions and regulatory frameworks
- While they may have basic financial infrastructure like banks and stock exchanges, these systems are often less sophisticated and less stable than developed economies
- Transitioning economic focus - typically moving away from agriculture and resource extraction towards industrial and manufacturing activities
- Governments often pursue deliberate strategies to encourage this shift, such as export-led growth or investments in education and infrastructure
- Higher risk-return profile - emerging markets can offer higher potential returns due to their rapid growth, but they also come with increased risks
- Can include political instability, currency volatility, and issues with corporate governance and transparency
- Improving living standards - often see rising per capital incomes and improving quality of life
- However, significant income inequality can persist
So what countries have emerging economies?
The global economic landscape is increasingly shaped by emerging economies, many of which have formed strategic alliances to amplify their collective influence. Let’s examine some of the most prominent emerging economy groups:
CIVETS is an acronym for Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa, coined in 2009 by the Economist Intelligence Unit. These countries were identified as the next generation of emerging market.
These countries have emerging economies, as they are fast-growing, diverse economies. These nations generally enjoy relative political stability and place a strong focus on higher education. They have reasonably sophisticated financial systems and maintain a low dependence on external demand or commodity exports.
As of 2022, the GDP of these countries ranged from $343.94 billion (Colombia) to $1.32 trillion (Indonesia).
There are ways to invest into the CIVETS countries:
- Exchange-Traded Funds (ETFs) were created to provide exposure to these markets
- S&P launched the CIVETS 60 Index in 2011 to target emerging market investments
- HSBC introduced a CIVETS fund but closed it in 2013 due to limited growth
It’s worth considering that these markets may have little in common beyond broad economic concepts.
BRICS is an acronym for Brazil, Russia, India, China, and South Africa, originally coined by Goldman Sachs economist Jim O’Neill in 2001, initially without South Africa. This group of emerging economies has evolved into an informal alliance aimed at increasing their collective economic and political influence on the global stage.
- As of 2023, BRICS countries account for 31.5% of global GDP, slightly surpassing the G7 nations.
- The group seeks to deepen economic cooperation, reform global financial institutions, and provide an alternative to Western-dominated international organisations
- In 2023, BRICS invited Saudi Arabia, Iran, Ethiopia, Egypt, and the United Arab Emirates to join, with Argentina initially invited but later withdrawing
- This expanded group represents about 45% of the world’s population
- BRICS has established the New Development Bank to fund infrastructure projects in emerging economies and created a BRICS Parliamentary Forum for inter-parliamentary cooperation
- Despite their collective economic power, BRICS nations face internal disagreements and varying levels of economic growth
To learn more check this video out 👇🏻
Impact of emerging economies on the UK
- India (£8 billion)
- Taiwan (£2.8 billion)
- Thailand (£2.2 billion)
- Kuwait (£2.5 billion)
The positive impact of emerging economies on the UK are very similar to the advantages to globalisation in the fact that there’s expanded market access, job creation, economic growth, and innovation. If you want to revisit these, go back to this learning block 👉🏻 Global Trade
However, political instability is a major concern when dealing with emerging markets. Recent events, such as Russia’s invasion of Ukraine, highlight how geopolitical tensions can rapidly disrupt business operation and international trade. This instability can lead to sudden changes in government policies, trade restrictions, or asset seizes, which can severely impact UK firms with investments or operations in these countries.
- For example, many Western companies have faced difficulties in Russia due to the sanctions and reputation risks following the outbreak of the war.
In addition, economic volatility is a risk as emerging markets often experience more dramatic fluctuations in currency values, inflation rates, and economic growth compared to developed economies. Furthermore, less developed regulatory systems and market structures in emerging economies can expose UK businesses to issues such as intellectual property theft, unfair competition, or difficulties in contract enforcement.
What is a developed economy?
Economic characteristics
- High income levels - developed economies generally have high per capita Gross Domestic Product (GDP)
- Many economists consider a per capita GDP of $25,000 to $30,000 or more as indicative of a developed economy
- This high income translates to greater purchasing power for citizens
- Advanced industrialisation - these economies have moved beyond primary sectors like agriculture and raw material extraction
- Typically have strong manufacturing and service sectors, often with a focus on high-tech and knowledge-based industries
- High standard of living - citizens generally enjoy better quality of life
- This is reflected in factors like low infant mortality rates (usually fewer than 10 death per 1,000 live births) and high life expectancy (75 years or more on average)
- Access to quality healthcare, education, and social services is typically widespread
- Technological infrastructure - developed economies have extensive and advanced technological infrastructure
- Wide spread access to the interest, advanced telecommunication networks, and the integration of technology in various sectors of the economy
- Strong human development - these countries often score highly on the Human Development Index (HDI), typically above 0.8
- Indicates high levels of education, literacy and overall well-being
- Countries like Norway, Ireland and Switzerland consistently rank at the top of the HDI
- Stable economic and political systems - usually have well-established financial markets, stable currencies and effective regulatory systems
- Also tend to have stable political systems with strong institutions, which provide a secure environment for economic activities
What countries have developed economies?
As mentioned, developed economies generally perform better on measurement indexes, which are ways to measure the economic and non-economic factors of a country
Some of the indexes that are commonly used to measure economic factors:
- Gross Domestic Product (GDP)
- GDP per capita
- Gross National Income (GNI)
- Income per capita
As expected, developed economies usually score high on these indexes. We have seen this when we compared developing, emerging and developed economies in the Developing Economies learning block.
Other measures of a developed economy are:
- The Human Development Index (HDI)
- The World Happiness Index
Let’s look at some of the indicators 👀
Gross National Income (GNI) Per Capita
Gross National Income (GNI) per capita is the value of a country’s final income in a year divided by its population.
Human Development Index
The Human Development Index (HDI) is a summary measure of key dimensions of human development
- Long and healthy life - life expectancy at birth
- Knowledge - expected years of schooling + mean years of schooling
- A decent standard of living - gross national income per capita
These two indicators clearly demonstrate that countries classified as “developed”, such as the United States, Canada, the United Kingdom, and others mentioned earlier, consistently score highly on these indexes.
Issues in Developed Economies
Ageing Population
- Increasing life expectancy
- Declining birth rates
Advancements in healthcare and improved living standards have led to longer lifespans, while societal changes and economic factors have contributed to lower fertility rates.
- Labour force - a shrinking working-age population leads to labour shortages
- Healthcare costs - increased demand for healthcare services strains public resources and systems
- Pension systems - fewer workers supporting a larger retired population puts pressure on pension schemes and social security systems
- Fiscal pressure - governments face challenges in balancing increased spending on elderly care with reduced tax revenues from a smaller workforce
Developed nations are implementing various strategies to address the economic challenges of ageing populations. A common approach is extending the retirement age to maintain a larger workforce and reduce strain on pension systems. Additionally, some countries are exploring options to reform social security benefits and increasing taxes to bolster funding for elderly care and pension programs.
Inequality
Income inequality between countries has improved, yet income inequality within countries has worsened.
Income inequality is the extent to which income is unevenly distributed among individuals or groups in a society. Higher inequality indicates a wider gap between top earners and the rest of the population.
In 2018, the richest 26 people in the world held as much wealth as half of the worlds population (United Nations). Since 1990, income inequality has increased in most developed countries.
Let’s take a look at the United States:
- Before world war II, the top 1% had a higher share of income than the bottom 1%
- Larger proportion of inherited wealth
- during the war the US government raised their taxes significantly on high-income earners to fund the war effort
- government implemented wage controls during the war
- the war fostered a sense of shared sacrifice and national unity, which made high levels of inequality less socially acceptable
- Between the 1940s-1970s, income shares were held at a much higher rate by the bottom 50% than the top 1%
- strong labour unions and worker protections
- robust manufacturing sector providing middle-class jobs
- From the 1980s, there is a reversal - the top 1% income share increases while the bottom 50% decreases steadily
- deregulation of various industries
- decline in union membership and influence
- tax cuts that disproportionately benefited high earners
- growth of the financial sector
- By 2022, the disparity widens to the top 1% commanding over 20% of national income, while the bottom 50% receives only about 10%
- rising costs of education and healthcare, impacting the bottom 50% more severely
- growth in the financial sector has disproportionately benefitted high earners
- in fields like entertainment, sports, and business, top performers are earning far more than their predecessors due to global audiences and marketing opportunities
Wealth is the total value of an individual’s or household’s assets minus their debts. It’s often referred to as “net worth”.
- Assets include - cash and savings, investments (stocks, bonds, real estate), personal property (homes, vehicles), retirement accounts
- Debts/liabilities include - mortgages, car loans, credit card balances, student loans, any unpaid bills
Wealth inequality tends to be more pronounced than income inequality and can persist or even grow over generations due to factors such as inheritance, investment returns, and access to opportunities.
Over the last 30 + years, the wealth gap in the US has widened significantly, with the richest families increasing their wealth and the poorest families falling into “negative wealth”. This means that their debts now outweigh their assets.
- You can’t see on the graph because the figures are so low but the bottom 40% is:
- 1983: $6,900
- 2019: -$72,000
From 1953 to 2018, the wealthiest 0.01% of Americans saw their share of national wealth grow dramatically, from 2.5% to 9.6%, nearly quadrupling. However, their share of total US taxes paid in 2018 was similar to what it was in 1953, despite this massive increase in wealth. The ultra-rich have become wealthier, because they’ve been paying a proportionately smaller share of taxes relative to their growing wealth.
Regional inequality is the difference in the standards of living and opportunities for work between regions.
If we have a look at the median household income in the US, and break it up by each state, we can see the regional inequality.
There’s a clear pattern of higher median household incomes concentrated in coastal regions, particularly the Northeast and West Coast. In contrast, much of the South and portions of the Midwest show lower median incomes. Larger metropolitan areas tend to have higher incomes, even when adjusted for cost of living, compared to smaller cities and rural areas.
Several factors contribute to these differences:
- Economic concentration in major urban centers
- Differences in industry composition across regions
- Varying levels of educational attainment
- Historical patterns of economic development
Deindustrialisation - Japan
Japan experienced significant deindustrialisation starting in the 1990s, with a decline in manufacturing employment and output relative to services. This was driven by several factors:
- Increasing productivity in manufacturing, allowing fewer workers to produce more goods
- A shift in consumer demand towards services as incomes rose
- Growing international competition, especially from other Asian countries, leading some manufacturing to move overseas
- The bursting of Japan’s economic bubble in the early 1990s, which hit manufacturing particularly hard
The effects of deindustrialisation were not uniform across Japan’s manufacturing sectors. The “export core” industries like automobiles remained relatively strong, while other manufacturing industries declined more sharply.
Many workers who lost manufacturing jobs were absorbed into the service sector, often as non-regular employees with lower wages and job security.
Global Institutions
You need to know about three different global institutions:
- World Trade Organisation (WTO)
- World Bank
- International Monetary Fund
World Trade Organisation (WTO)
The WTO’s primary function is to facilitate international trade by providing a framework for negotiating trade agreements and resolving disputes between member countries.
Some key aspects of the WTO include:
- As of February 2024, the WTO has 166 member countries, representing over 98% of international trade. It serves as a forum for governments to negotiate trade agreements and settle trade-related disputes.
- The WTO has worked to lower trade barriers and increase trade among member countries, however, it also still maintains certain trade barriers when deemed necessary for the global economy.
- The WTO provides a platform for mediating trade disputes between nations. It offers a neutral control resolution process.
- WTO has been a significant force for globalisation. While it has contributed to international economic growth, critics argue that it may increase wealth inequality and negatively impact local workers and communities.
This video can help explain the organisation further:
Here are some things that the WTO has achieved:
The World Bank
One of the World Bank’s key roles is offering financial support through various mechanisms. These include low-interest loans, zero-interest credits, and grants. This funding helps countries improve critical areas like education, healthcare, public administration, and infrastructure.
- In 2016, the World Bank approved a $377.42 million project in Pakistan to enhance vaccine distribution for young children between 0-23 months (The World Bank Group).
- The Learning for the Future in the Kyrgyz Republic project focuses on establishing 500 community-based kindergarten programs to enroll 20,000 children, training 500 new teachers, and providing digital learning resources.
The World Bank Group actually consists of five distinct organisations, each with its own focus:
- The International Bank for Reconstruction and Development (IBRD), which lends to middle-income countries
- The International Development Association (IDA), providing interest-free loans to the poorest nations
- The International Finance Corporation (FC), supporting private sector development in developing countries
- The Multilateral Investment Guarantee Agency (MIGA), which promotes foreign direct investments
- The International Centre for Settlement of Investment Disputes (ICSID), which handles arbitration of international investment conflicts
While the World Bank has made substantial contributions to global development, it’s important to note that it has faced criticism over the years. Some argue that its policies can sometimes lead to increased debt burdens for developing countries or that its conditions for assistance may not always align perfectly with local needs.
The World Bank explains the organisation on their Youtube channel 👇🏻
International Monetary Fund (IMF)
The key roles of the IMF include:
- Economic surveillance - The IMF monitors global economic and financial events, tracking country performance and potential risks. They publish reports like the “World Economic Outlook” to provide economic forecasts.
- Advisory services - The IMF offers guidance to member countries on improving their economies
- Financial assistance - As a “lender of last resort”, the IMF provides loans to countries facing economic difficulties. In 2018, Argentina received a record $57 billion loan
The IMF’s lending capacity is around $1 trillion, funded mainly by quota subscriptions from member countries.
- wealthier nations contribute more, which influences their voting power in the organisation
Leadership of the IMF has traditionally been European, with Kristalina Georgieva, an economist from Bulgaria, serving as the current Managing Director since 2019.
The IMF’s relationship with the UK has been significant
- the UK was a founding member in 1945
- the UK received a substantial bailout loan in 1976 during a period of high inflation
- more recently, the IMF has commented on UK economic policies, including criticism of the 2022 mini-budget and predications about inflation and interest rates
This is the IMF’s explanation of who they are: