Regional Gap in Europe, US, and Japan Ryoichi Imai 1
MOVEMENTS AGAINST IMMIGRATION 2
UK Referendum on EU On June 24, 2016, the UK people decided to leave the EU in the national referendum. Media reports that the majority of UK people has been complaining about the social burden caused by the increasing immigrants from the EU nations on Medical care, school education, and social welfare service,. This slide considers the economic gaps that reside within EU, US, and Japan. 3
GDP per capita in EU countries GDP per capita is the highest in Luxemburg and some Scandinavian countries within EU. They should be excluded from the comparison. Nominal GDP per capita is $45,000 in the leading countries such as UK and Germany. People in Estonia, Portugal, Poland, and Hungary earn income less than $20,000. The largest gap within EU is more than triple 4
Japan Prefectural income per capita 4.37 million for Tokyo (to be excluded) 3.16 million for Shizuoka 2.01 million for Okinawa An average person in Okinawa earns more than 60% of the income earned by an average person in Shizuoka. Prefectural income gap in Japan is smaller than in EU. 5
Investment In the postwar era, Japan s government took a policy to invest in rural areas remote from Tokyo to reduce capital gap between Tokyo and rural areas. The EU government should have taken a similar policy to enable those peripheral nations to take off for industrialization. 6
Nominal or Real? Japan s nominal GDP per capita is much smaller than UK, and comparable to France and Italy. However, realization based on PPP moves UK into the same group of nations (UK, France and Japan) with similar real GDP per capita. Suggesting overvaluation of UK sterling ( ). 7
Why overvaluation? UK sterling might be overvalued because of the following reasons: 1. They speak English as their native language. 2. UK dominated the World in politics and economy in the 19 th century. 3. They still lead the world in culture and science. 4. (the Dutch disease) UK owns the North Sea oil. 8
America GDP per capita is the highest in Alaska, which is an exceptional state. GDP per capita in the state of NY is $72,000, while it is $35,000 in the state of Mississippi. The output gap is around twice. Contrary to the common image, the domestic income gap in US is smaller than EU. 9
Greece An average Greek earns $29,000, comparable to the Spanish and the Italian. However, the real GDP per capita of Greece is ranked lower and comparable to Portugal and Poland. The downgrading is partially explained by the use of Euro: The Euro is too high for the Greece economy. This is the background for the sovereign debt crisis in 2010. 10
The Price Level Gap In Poland, people use the Zloti, their original currency. The consumer price level gap within EU is large. 130 for UK 120 for France 100 for Germany 80 for Greece 55 for Poland It is clever for a Polish student to commute to London weekly by flight! http://www.independent.co.uk/student/student-commutes-touniversity-of-london-from-poland-to-save-money-onaccommodation-rent-a6670016.html 11
CPI gap is small in Japan CPI by prefecture is highest at 108 for Tokyo Lowest at 91 for Okinawa 12
Why EU does not work well? In Japan and US, the regional gap remains less than twice, suggesting that the government spends special efforts to reduce regional infrastructure gap. In EU, there still remains a large income gap between nations, which seems to create too many immigrants from the peripheral to the leading states such as UK and Germany. 13
Immigrants in UK Before EU started, UK belongs to a group of nations with few immigrants (8%). However, since 1999, the population of immigrants has increased to 12%. http://www2.ttcn.ne.jp/honkawa/1171.html 14
Why quality decline? Media says that people voted for Leave mainly because the quality of healthcare and education has been reduced by increasing immigrants, while other authors say that quality decline was mainly caused by the budget cut by the Conservative government. The UK birth rate seems to turn to increase in 2002, when the Euro bills started to circulate. The quality decline might be caused mainly by the increasing child population. 15
Too many immigrants? When UK returned Hong Kong to China in 1997, it did not grant the full UK citizenship to all the residents even if they wanted it. The population of Hong Kong then was 6 million. The population of UK in 2015 is 65 millions. The increase of immigrants to UK since 1999 was around 2.6 millions, 4% of the current population of UK. Is it large enough to explain the too much demand for healthcare and schooling in UK? 16
EUROPEAN DEBT CRISIS 17
Sovereign Debt Crisis in EU A sovereign debt crisis burst in Greece in early 2010. At the beginning, the crisis is limited to the southern Europe, but eventually infected the global financial market. The turmoil in the Greek society such as general strikes of (public) employees has been interpreted as a sign of the insolvency of the state by the international investors. 18
The Euro Greece is within the Eurozone, which amplified the magnitude of the sovereign debt crisis. Floating exchange rate system has a builtin stabilizer: A country in a crisis can recover its competitiveness through the devaluation of its currency. However, this is not the case of Greece. 19
Is getting out of Euro a solution? If Greece gets out of the Eurozone, it can revive through the devaluation of Drachma against Euro. However, the weaker Drachma might make Greece even more insolvent, since the debt is denominated in Euro. 20
Trilemma Dani Rodrik, a Havard professor, says: The crisis is yet another manifestation of what I call the political trilemma of the world economy : economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time. 21
Examples The United States created a unified national market once its federal government deprived sufficient political control of individual states. The transition was far from a smooth process, as the American Civil War amply demonstrates. Japan: Local government spending is strictly monitored and controlled by the central government. Strengthening relative autonomy of local governments might make them insolvent in the future. 22
Greek Case Political integration is a much slower process than economic one. Greece benefited from a common currency, unified capital markets, and free trade with other EU member countries. But Greece has no automatic access to a European lender of last resort, which is a function of a political union of the nations. 23
Dilemma in Democracy The sustainability of the debt financing requires budget austerity. However, people do not support political leaders who promote budget austerity. The Greek people want to remain in the Eurozone, even though they reject the austerity policy. In Greece, people induces their government to play a chicken game with Germany. 24
Germany should help Greece The recent economic booms in Germany have been caused mainly by the creation of the Euro zone. Agglomeration: Concentration of resources in Germany allow for more efficient production in the manufacturing industries. Competence: The integration with the financially weak countries have made the Euro relatively weak against other major currencies. Germany has exploited these advantages of the economic integration, but people in Germany tend to forget it. http://ecodb.net/country/de/imf_bca.html 25
Market Discipline does not Work Economists tend to expect market discipline to work to exclude financially unreliable debtors. In the current crisis, that mechanism does not work. German banks implicitly assume that the government would bailout them if Greece became insolvent. This assumption is reasonable, because the financial sector has a large influence on politicians. This situation is called as soft budget. 26
Implication for Japan The EU crisis suggests that economic integration without political integration might destabilize the economy. In Japan, all the debts issued by local governments are endorsed by the central government, and then there will be no local debt crisis. The government plays a role of the lender for the last resort. However, the government subsidy might induce local governments to invest in useless projects. 27