Low Interest Rates and Bank’s Profitability – Update May 2019
My last post on this important topic was in 2017. Since then several new articles and research papers have been published. I have compiled them in this post. Please see references.
In my posts I have shown how many trends in economics for the last thirty years can be explained by unintendend consequences of US Federal Researve monetary policy of lowering interest rates to boost economic growth.
Rise of Shadow Banking – MMMF
Rise of International capital flows in USA
Growth of Consumer credit – Credit Cards and Housing Loans
Decline in Net Interest Margins of the Banks
Risk taking by banks to maintain and increase their profits
Rise of Non interest income of Banks
Rise of Non core business of banks
Rise of Mergers/Acquisitions/Consolidation in Banking sector
Related to these are:
Business Investments by Production side of economy
Increase in Market concentration of Products
Increase in Mergers and Acquisitions/consolidation among Product market businesses
Decreasing monitory policy effectiveness
Wrong economic growth forecasts
Secular Stagnation Hypothesis
Rise of Outsourcing and global value chains
Free Trade agreements
Increase in Ineqality of wealth and Income
Increase in corporate profits and equities market
Increase in corporate savings
Increase in share buybacks, and dividends payouts
I have yet to see an effort by economists and policy makers to analyze these trends in an integrated manner.
To be prepared for any future crisis in economic/financial system, collective efforts have to be made to understand non linear sources of complexity and fragility.
Increasing Market Concentration in USA: Update April 2019
In this post, I have compiled recent articles and papers on the issues of:
Increased Market Power
Increased Market Concentration
Increased Corporate Profits
Anti Trust Laws and Competition policy
Interest rates and Business Investments
Interest rates and Mergers and Acquisitions
Stock Buybacks, Dividends, and Business Investments
Outsourcing, and Global Value Chains
Corporate Savings Glut
Slower Economic Growth
From Low Interest Rates, Market Power, and Productivity Growth
How does the production side of the economy respond to a low interest rate environment? This study provides a new theoretical result that low interest rates encourage market concentration by giving industry leaders a strategic advantage over followers, and this effect strengthens as the interest rate approaches zero. The model provides a unified explanation for why the fall in long-term interest rates has been associated with rising market concentration, reduced dynamism, a widening productivity-gap between industry leaders and followers, and slower productivity growth. Support for the model’s key mechanism is established by showing that a decline in the ten year Treasury yield generates positive excess returns for industry leaders, and the magnitude of the excess returns rises as the Treasury yield approaches zero.
Recent Economic Policy Symposium at Jackson Hole Wyoming (August 23-25) where economists, central bankers, policy makers gather together annually discussed issues of Rising Market Concentration, Declining Business Investments, and Declining Economic Dynamism.
2018 Economic Policy Symposium, Jackson Hole, Wyoming
FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms
Foreign Direct Investments of Firms can have three objectives:
Vertical Integration (Control of Supply Chain)
Horizontal Integration (Seeking Market Share)
Diversification ( Market Seeking)
In this post, Focus is on Sourcing of Goods and Services in FDI and Outsourcing Decisions of Firms. That means focusing on supply chain related issues.
From GLOBAL SOURCING
A fi rm that chooses to keep the production of an intermediate input within its boundaries can produce it at home or in a foreign country. When it keeps it at home, it engages in standard vertical integration. And when it makes it abroad, it engages in foreign direct investment (FDI) and intra- firm trade. Alternatively, a firm may choose to outsource an input in the home country or in a foreign country. When it buys the input at home, it engages in domestic outsourcing. And when it buys it abroad, it engages in foreign outsourcing, or arms-length trade.
Intel Corporation provides an example of the FDI strategy; it assembles most of its microchips in wholly-owned subsidiaries in China, Costa Rica, Malaysia, and the Philippines. On the other hand, Nike provides an example of the arms-length import strategy; it subcontracts most of its manufacturing to independent producers in Thailand, Indonesia, Cambodia, and Vietnam.
Intermediate Goods – Make vs. Buy Decisions of Firms
From Integration of Trade and Disintegration of Production in the Global Economy
The rising integration of world markets has brought with it a disintegration of the production process, in which manufacturing or services activities done abroad are combined with those performed at home. Companies are now finding it profitable to outsource increasing amounts of the production process, a process which can happen either domestically or abroad. This represents a breakdown in the vertically-integrated mode of production – the so-called “Fordist” production, exemplified by the automobile industry – on which American manufacturing was built. A number of prominent researchers have referred to the importance of the idea that production occurs internationally: Bhagwati and Dehejia (1994) call this “kaleidoscope comparative advantage,” as firms shift location quickly; Krugman (1996) uses the phrase “slicing the value chain”; Leamer (1996) prefers “delocalization;” while Antweiler and Trefler (1997) introduce “intra-mediate trade.” There is no single measure that captures the full range of these activities, but I shall compare several different measures of foreign outsourcing, and argue that they have all increased since the 1970s.
Types of Supply Chain Relations:
Intra-firm Trade of MNCs
Fragmentation of Production
Global Value Chains
Intermediate Goods Trade
Value Added Tasks
Transaction Cost Economics
Trade in Value Added Tasks
Vertical Production Networks
Key Sources of Research:
PHYSICAL CAPITAL, KNOWLEDGE CAPITAL AND THE CHOICE BETWEEN FDI AND OUTSOURCING
Ignatius J. Horstmann
James R. Markusen
The Distributional Effects of International Fragmentation,
Kohler, Wilhelm (2002)
Working Paper, Department of Economics, Johannes Kepler University of Linz, No. 0201
International Fragmentation of Production and the Intrafirm Trade of U.S. Multinational Companies
Maria Borga and William J. Zeile
January 22, 2004
Paper presented at:
The National Bureau of Economic Research/Conference on Research in Income and Wealth meeting on Firm-level Data, Trade, and Foreign Direct Investment, Cambridge, Massachusetts
August 7-8, 2003,
The OECD Committee on Industry and Business Environment/Working Party on Statistics
Session on Globalization,
November 3-4, 2003.
The governance of global value chains
The economic consequences of increased protectionism
Riksbank of Sweden
Deep integration and production networks: an empirical analysis
World Trade Organization
Manuscript date: July 2011
Measuring success in the global economy: international trade, industrial
upgrading, and business function outsourcing in global value chains
Timothy J. Sturgeon and Gary Gereffi
Topics in International Trade
FOREIGN DIRECT INVESTMENT, TRADE, AND GLOBAL PRODUCTION NETWORKS
IN ASIA AND EUROPE
GPN Working Paper 2
Why has world trade grown faster than world output?
Vertical Specialization, Global Value Chains and the changing Geography of Trade: the Portuguese Rubber and Plastics Industry Case
João Carlos Lopes and Ana Santos
The changing structure of trade linked to global production systems: What are the policy implications?
WHO PRODUCES FOR WHOM IN THE WORLD ECONOMY?
Guillaume Daudin (Lille-I (EQUIPPE) & Sciences Po (OFCE), Christine Rifflart, Danielle
Schweisguth (Sciences Po (OFCE))1
This version: July 2009
THE NATURE AND GROWTH OF VERTICAL SPECIALIZATION IN WORLD TRADE
On Inequality of Wealth and Income – Causes and Consequences
Disparity in Wealth and Income of American workers/household is a hot public policy/economic/social/political issue.
what are the causes and consequences of Inequality on economics and society?
From TRENDS IN INCOME INEQUALITY AND ITS IMPACT ON ECONOMIC GROWTH (OECD)
The disparity in the distribution of household incomes has been rising over the past three decades in a vast majority of OECD countries and such long-term trend was interrupted only temporarily in the first years of the Great Recession. Addressing these trends has moved to the top of the policy agenda in many countries. This is partly due to worries that a persistently unbalanced sharing of the growth dividend will result in social resentment, fuelling populist and protectionist sentiments, and leading to political instability. Recent discussions, particularly in the US, about increased inequality being one possible cause of the 2008 financial crisis also contributed to its relevance for policy making. But another growing reason for the strong interest of policy makers in inequality is concern about whether the cumulatively large and sometimes rapid increase in inequality might have an effect on economic growth and on the pace of exit from the current recession. Is inequality a pre-requisite for growth? Or does a greater dispersion of incomes across individuals rather undermine growth? And which are the short and long-term consequences of redistributive policies on growth?
From Causes and Consequences of Income Inequality: A Global Perspective (IMF)
Widening income inequality is the defining challenge of our time. In advanced economies, the gap between the rich and poor is at its highest level in decades. Inequality trends have been more mixed in emerging markets and developing countries (EMDCs), with some countries experiencing declining inequality, but pervasive inequities in access to education, health care, and finance remain. Not surprisingly then, the extent of inequality, its drivers, and what to do about it have become some of the most hotly debated issues by policymakers and researchers alike. Against this background, the objective of this paper is two-fold.
First, we show why policymakers need to focus on the poor and the middle class. Earlier IMF work has shown that income inequality matters for growth and its sustainability. Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.
Second, we investigate what explains the divergent trends in inequality developments across advanced economies and EMDCs, with a particular focus on the poor and the middle class. While most existing studies have focused on advanced countries and looked at the drivers of the Gini coefficient and the income of the rich, this study explores a more diverse group of countries and pays particular attention to the income shares of the poor and the middle class—the main engines of growth. Our analysis suggests that
Technological progress and the resulting rise in the skill premium (positives for growth and productivity) and the decline of some labor market institutions have contributed to inequality in both advanced economies and EMDCs. Globalization has played a smaller but reinforcing role. Interestingly, we find that rising skill premium is associated with widening income disparities in advanced countries, while financial deepening is associated with rising inequality in EMDCs, suggesting scope for policies that promote financial inclusion.
Policies that focus on the poor and the middle class can mitigate inequality. Irrespective of the level of economic development, better access to education and health care and well-targeted social policies, while ensuring that labor market institutions do not excessively penalize the poor, can help raise the income share for the poor and the middle class.
There is no one-size-fits-all approach to tackling inequality. The nature of appropriate policies depends on the underlying drivers and country-specific policy and institutional settings. In advanced economies, policies should focus on reforms to increase human capital and skills, coupled with making tax systems more progressive. In EMDCs, ensuring financial deepening is accompanied with greater financial inclusion and creating incentives for lowering informality would be important. More generally, complementarities between growth and income equalityobjectives suggest that policies aimed at raising average living standards can also influence the distribution of income and ensure a more inclusive prosperity.
From World changes in inequality: an overview of facts, causes, consequences and policies (BIS)
Public concern about inequality has grown substantially in recent years. Politicians and journalists descant with increasing frequency on the increase in inequality as a threat to social stability, laying the blame on globalisation and its attendant so-called neo-liberal policies. There is certainly much truth in such views. However, the lack of rigour in the public debate is striking, and one may doubt whether a constructive discussion of inequality, its causes and its economic, social and political consequences can take place without more clarity. Is it really the case that inequality is everywhere increasing more or less continuously, as actually seems to be happening in the United States? What type of inequality are we talking about: earnings, market income, household disposable income per consumption unit, wealth? What matters most: the inequality of opportunity or the inequality of economic outcome, including income? What kind of measure should be used? The recently highly publicised share of the top 5, 1.1% taken from tax data may not evolve in the same way as the familiar Gini coefficient defined on disposable incomes. And, then, what is known about the nature of the unequalising forces that seem to affect our economies and what tools might be available to counteract them?
In an international survey conducted in 2010, people were asked how they thought inequality had changed over the previous 10 years.1 In few countries was the perception of inequality trends in agreement with what could be observed from standard statistical sources about inequality. US citizens felt inequality had remained the same, whereas it was surging by most accounts, Brazilians found it was also increasing despite the fact that, for the first time in over 40 years, inequality was declining, while French and Dutch people thought that inequality had increased although the usual inequality coefficients were remarkably stable.
Good policies must rely on precise diagnostics. It is the purpose of this paper to take stock of what is known at this stage about the evolution of inequality around the world. In so doing, it will be shown that an ever-increasing degree of inequality at all times and everywhere over the last 30 years is far from the reality, and that there is a high degree of specificity across countries. In turn, this suggests that the combination of equalising and unequalising forces may be quite different from one country to another. Some factors may be common and truly global but others may be country-specific, the outcome being quite variable across countries. It also follows that tools to correct inequality, if need be, may have to differ in nature depending on the causes of increased inequality.
Tackling all these issues in depth is beyond the scope of this paper. My aim is only to offer an overview of what is observed and the main ideas being debated in the field of economic inequality. The paper is organised as follows. It starts with a quick “tour d‘horizon“ of the evidence for the evolution of various dimensions of economic inequality. It then tackles the issue of the potential causes, identifying what may be seen as common to most countries and what may be specific. Finally, it touches upon the consequences of excessive inequality and the tools available to counter it, emphasising the rising constraints imposed by globalisation.
Causes of Inequality
Focus on Cost Minimization
Focus on ROIC and Economic Value Added (EVA)
Consolidation – Mergers and Acquisitions
Free Trade Agreements – NAFTA
Global Commodity Chains
Global Production Networks
Global Value Chains
Lack of Educated Workforce
Lack of protection for Low income earners
Compensation for Executives vs Labor
Value of High Skilled Technical Workers
Consequences of Inequality
Impact on Effective Demand
Slows Economic Growth
Decreased Economic Mobility
Health and Social effects
Living Standards at the Bottom (Poverty)
Democratic Process and Social Justice
Hampers Poverty reduction
Access to Health services
Access to Financial Services
Access to Education
Key Sources of Research:
The Age of Inequality
Edited by Jeremy Gantz
The Price of Inequality
A Firm-Level Perspective on the Role of Rents in the Rise in Inequality
Understanding Global Value Chains – G20/OECD/WB Initiative
There is lot of opacity in understanding of GVCs. Efforts are underway since last few years to get better analytical and statistical tools to understand International Trade and Global Value Chains.
Globalization in Trade and Finance encouraged by International organizations such as IMF/WB/OECD/WTO/UNCTAD/UNIDO and others has changed the landscape of Trade.
There is still a long way to go to make better sense of issues and concerns for policy makers.
OECD/WB/WTO along with G20 Trade Ministers have initiated efforts since 2012.
From Global Value Chains
Introduction to GVCs
International production, trade and investments are increasingly organised within so-called global value chains (GVCs) where the different stages of the production process are located across different countries. Globalisation motivates companies to restructure their operations internationally through outsourcing and offshoring of activities.
Firms try to optimise their production processes by locating the various stages across different sites. The past decades have witnessed a strong trend towards the international dispersion of value chain activities such as design, production, marketing, distribution, etc.
This emergence of GVCs challenges conventional wisdom on how we look at economic globalisation and in particular, the policies that we develop around it.
Trade in Value Added
The goods and services we buy are composed of inputs from various countries around the world. However, the flows of goods and services within these global production chains are not always reflected in conventional measures of international trade. The joint OECD – WTO Trade in Value-Added (TiVA) initiative addresses this issue by considering the value added by each country in the production of goods and services that are consumed worldwide. TiVA indicators are designed to better inform policy makers by providing new insights into the commercial relations between nations.
GVCs and Trade Policy
Global value chains (GVCs) have become a dominant feature of world trade, encompassing developing, emerging, and developed economies. The whole process of producing goods, from raw materials to finished products, is increasingly carried out wherever the necessary skills and materials are available at competitive cost and quality. Similarly, trade in services is essential for the efficient functioning of GVCs, not only because services link activities across countries but also because they help companies to increase the value of their products. This fragmentation highlights the importance of an ambitious complementary policy agenda to leverage engagement in GVCs into more inclusive growth and employment and the OECD is currently undertaking comprehensive statistical and analytical work that aims to shed light on the scale, nature and consequences of international production sharing.
From Global Value Chains/Global Production Networks: Organizing the Global Economy
The key organizational feature of the global economy?
“Global Value Chains are defined by fragmented supply chains, with internationally dispersed tasks and activities coordinated by a lead firm (a TNC)” (UNCTAD, 2013, p.125; original italics).
Data gathering exercises:UNCTAD,OECD,WTO,JETRO…
Now firmly on the agenda among leading international economic organizations
The international division of labour:imperial/colonialsystems and exchanges of raw materials and finished goods
The new international division of labour(NIDL):establishment of overseas production bases of core country TNCs
The global division of labour:much more complex global networks lying behind the production of different goods and services
About 60% of global trade, which today amounts to more than $20 trillion, consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption” (UNCTAD, 2013, p. 122)
Not new, but since 2000 trade and FDI have increased exponentially, and ahead of GDP growth, highlighting a growth in TNC coordinated global value chains
Double counting – approx. 25-30% of value of world trade, e.g. the iPhone example. Not just trade from China to US, but incorporates high value components from Japan, South Korea etc.
Beyond national economies and basic trade data, and beyond TNCs and FDI, to more complex organizational structures involving intra-firm trade, arm’s length trade and non-equity modes e.g. subcontracting
From GLOBAL VALUE CHAIN ANALYSIS: A PRIMER
From Global Capitalism and Commodity Chains: Looking Back, Going Forward
From Global Value Chains/Global Production Networks: Organizing the Global Economy
Global Commodities Chains (GCCs)
Global Production Networks (GPNs)
Global Value Chains (GVCs)
Trans National Corporation (TNC)
Multi National Corporation (MNC)
Multi National Enterprises (MNE)
UNIDO (United Nations Industrial Development Organization)
OECD (Organization for Economic Cooperation and Development)
WTO (World Trade Organization)
WB (World Bank)
UNESCAP (Economic and Social Commission for Asia and Pacific)
UNCTAD ( United Nations Commission for Trade and Development)
ILO ( International Labor Organization)
G20 ( Group of 20 Nations)
TIVA ( Trade in Value Added)
Neil M Coe
Henry Wai-chung Yeung
Key Sources of Research:
Measuring Trade in Value Added: An OECD-WTO joint initiative