The Crisis of another World: Eurozone

No one has thought that the rising eurozone will ever face a financial dogmatism. European Union, once considered as a potential rival to the US, the world’s largest economy, is today increasingly losing its stance and is suffering a clear leadership failure. Both financial pundits and diplomatic psychoanalysts are describing the EU as ‘no-hoper zone’ with no consistency on its future role. Today the analysts are finding a bit difficulty to analyze the ‘herd behavior’ of the EU and are questioning about the stability of its single currency. Eurozone needs a strong leader who will stabilize its economy and restore its rising growth. Due to increasing fragile of financial credibility and political destabilization in some of its member states, the EU is today suffering the hypersensitivity of its position, dignity and power to its rivals. Greece, with foreign debt 200% of its GDP and an average debt of 38,073 euro per person, is heavily indebted to eurozone countries and the biggest fear is the factor of ‘contagion’ that its financial catastrophe could have a similar effect to other member countries. Spain with 41,366 foreign debts per person with a 67% govt. debt to GDP is increasing pressurizing not only on EU but also the global economy. Italy, the third largest economy in the EU and the seventh largest in the world in terms of nominal GDP, is a country of concern today. The recent leadership changes from the most controversial leader Berlusconi to a technocratic leader Monti, Italy is expecting an immediate solution to its economic imbalance and the rising unemployment issues which is continuously decreasing the consumer demand and is a big concerned to the EU leaders.

 

The heyday of the EU is significantly unimportant today as the huge financial damages the union is suffering has become a serious burden. Though its leaders are profoundly focusing on grand strategy to pitch a sustainable solution to the collateral damages, even Paris and Berlin could not reach in a conclusion how to tackle this biggest financial cost ever since its unification. The issue of containment has become a huge debate among the EU leaders as the eurozone is enormously failed to make a mark on its diplomatic policies. So, the financial price of diplomatic disintegrity has triggered its economy down and member countries are trying to calculate the cost of the relationship damage which analysts describe ‘very unsystematic’. Though the United States is preparing for a painful adjustment to shape the economy, but the question of recent bond crisis and longstanding instability of sovereign debts of some of the member countries are constantly a matter of ambiguity. The financial irregularity and the fiscal irresponsibility are factors of growing concern today and the PIGS (Portugal, Italy, Greece and Spain) countries have recently revaluated the price of risk. Mr. Monti’s “rigorous consolidation” of its public finance may not yield an immediate result and Ms. Merkel’s ‘can do speech’  “we will do everything to defend the euro” does not tell how to do it.

 

As diplomatic issues are concerned, the litany of diplomatic failures in Europe should be analyzed carefully and the financial impact must be conceptualized.  The political storm in the Arab spring and diplomatic pressure in the Middle East are growing concern today for the whole world, and Washington, Berlin, and Jerusalem are trying hard to make a move.  Tehran’s tremendous move and increasing power could be a difficult task for the NATO and Europe and should well be prepared for the price of the consequence. The recent Palestine bid at the UN is still questioning about the peaceful solution. So, the authorities should calculate the cost of both diplomatic damage and financial mishandled before they face another critical crisis which could have unintended consequences.

 

N.B.: Foreign Debt per person and GDP and Foreign Debts,      Source: Bank for International Settlements, IMF, World Bank, UN Population Division http://www.bbc.co.uk/news/business-15748696

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Social Capital

Social Capital has become an engaging factor and we all are serious to build up social capital. Many people are wondering about this unique scientific term. Social capital does not have a clear, undisputed meaning, for substantive and ideological reasons (Dolfsma and Dannreuther 2003; Foley and Edwards 1997).

Man is by nature a social animal; an individual who is unsocial naturally and not accidentally is either beneath our notice or more than human. Society is something that precedes the individual. Anyone who either cannot lead the common life or is so self-sufficient as not to need to, and therefore does not partake of society, is either a beast or a god. ( Greek Philosopher Aristotle  384 – 322 BC)

Social capital is about the value of social networks, bonding similar people and bridging between diverse people, with norms of reciprocity (Dekker and Uslaner 2001; Uslaner 2001).

Social capital means a network of relationships between individuals and various entities. John Field’s (2003: 1-2) social capital theory emphasizes on ‘relationships matter’. Dekker and Uslaner (2001) wrote that social capital is fundamentally about how people interact with each other. So, how can we define the term social capital? The World Bank defines:

‘Social capital refers to the institutions, relationships, and norms that shape the quality and quantity of a society’s social interactions… Social capital is not just the sum of the institutions which underpin a society – it is the glue that holds them together’ (The World Bank 1999).

According to Robet Putman, the social capital guru:

Whereas physical capital refers to physical objects and human capital refers to the properties of individuals, social capital refers to connections among individuals – social networks and the norms of reciprocity and trustworthiness that arise from them. In that sense social capital is closely related to what some have called “civic virtue.” The difference is that “social capital” calls attention to the fact that civic virtue is most powerful when embedded in a sense network of reciprocal social relations. A society of many virtuous but isolated individuals is not necessarily rich in social capital’ (Putnam 2000: 19).

So, Social capital is all about a relationship between individuals, entities and other social norms. It is very unique that it focuses on trusting relationship that add values, opportunities and possibilities which helps in promoting a quality life. It depicts about cultivating cultures, engagement, equality, trust, tolerance and solidarity.

Social capital is, in my view, an engaging experience of relationship of networks. It is all about how we are related to each other. We are considering three important factors – individual interest, shared interest and common interest. So, when these three interests mutually are engaged that provide an incentive in building social capital. With good quality of social capital, we can better deal with a ‘wasted opportunity’. The quality of our existence comes from the quality of social capital.

Social capital provides incentives to globalization, knowledge spillover, community development and human progress. When a society is unable to meet growth, it means, it is facing a huge deficit of social capital. Today’s non-profit organizations are undoubtedly helping the society creating social capital but the government and international bodies should provide appropriate platform to build social capital in order to face the future challenges.

The Challenges of Global Innovation

Innovation has no longer been a passive word. What is innovation? Innovation means doing of something new for the first time from research and experiments.  Baregheh et al. (2009) within the organizational context, defines innovation as:

Innovation is the multi-stage process whereby organizations transform ideas into new/improved products, service or processes, in order to advance, compete and differentiate themselves successfully in their marketplace.

Schumpeter defined innovation as the ‘process of creative destruction’ (1942)  and identified innovation as the critical dimension of economic change. He argued technological innovation often creates temporary monopolies, provides right platform and necessary incentive for firms to develop new products and helps in processes innovation.

So, why do firms do innovation? Firms generally do innovation at manufacturing level and Innovation can be supply- pushed (based on new technological possibilities) or demand-led (based on market requirements and new markets). Increasing competition forces the firms to do innovation in order to stay in the market and compete with their rivals. As no firms want  a negative profit and some firms want to dominate the market creating market power and innovators face unsubtle competition from the rivals in the form of imitation, which of course costs something to the rivals. International trade and globalization have made the world a global village and the world becomes a solid platform for competitors to face the global challenges.

The rising growth of global innovation often provides firms to widen their knowledge through global networks and international projects. It helps to access new knowledge, skills, customers, collaboration and technology. Technological innovation, no doubts, plays an important role and force the firms to become technologically independent in order to exploit better benefits than their rivals, and to meet difficult challenges in the global market.

Finally, How do the firms meet this global challenges? In order to sustain in the competing market, firms do find new sources of knowledge and they engage themselves through collaborators in specialist clusters and Research and Development to create new knowledge with new ideas. And it does have a significant impact on future pattern of growth both planned and usual growth.

Picture courtesy: mfauscette.com

The Significance of Signal

Signaling plays a vital role not only in Economics but also in Biology. Our game theory Professor Andreozzi has discussed briefly about how does signaling shape our both economic and social life. We can find this signaling in both animals and human beings. Everybody likes to give a signal.

Signal means a nonverbal gesture that encodes a message. Whether it is an honest signal or harsh signal, it shows how the agent behaves towards the ultimate objective. If we consider the case of job market, a job seeker gives a signal by wearing good dresses to the employer that he is smart, talented and different from others. There is no doubt that there is a gap between academic world and real life world. Suppose, we study MBA, to get an MBA from the university like Stanford, we study statistics, economics, quantitative analysis and some other difficulty subjects and at the same time, we  give a signal to others that it’s really harder on part of others to purse the same course, so signaling is a type of isolation that isolate or differentiate between categories. It is true that we don’t apply all of our courses we generally learn at our academic career but it shows a strong signal that we are talented enough and can take decision efficiently and wisely than others who did not study the same courses.

If we look at market economics, we can find how a buyer gives a signal to a seller in bargaining. Recently I read an article in the Economist by Michael Bordo on ‘a signal of future inflation’ and he discussed on commodity prices and inflation.

COMMODITY prices are rising for two reasons. The first is that the Fed signalled that it would easy monetary policy and then followed through in announcing QE2. Commodity prices tend to be the first signals of excess liquidity and possible future inflation. They are traded in vast highly liquid markets with few impediments to information. In past inflationary episodes commodity prices always rose first as they are dominated by existing stocks which have inelastic supplies. This was the case after the gold discoveries in the 1840s, in the Great Inflation and many other episodes.

The second reason is growing demand for many commodities by the fast growing emerging countries in Asia and Latin America. This is a longer run structural phenomenon.

I expect what is driving most of the current run up in commodity prices is the US’ expansionary monetary policy and fears of global inflation in the future.

So, we can easily say that the importance of signaling plays a vital role in our life.

If we go to the animals world, we can observe signals everywhere. We will generally experience three types of signaling. Singling between potential rivals, signaling between relatives and signaling potential mates [Source: Prof. Kevin J.S. Zollman; Signaling]. The signals depends on a number of factors like cost, circumstance and conflict of interest. In the jungle, if you see a tiger, tiger will give you a signal that he can be dangerous in case you attack. Look at  butterfly  and colored fishes and see how it changes its color, it’s all game of signaling. It’s no doubt that signaling is very important in Biology.

Take the case of a chick and a parent, when the Chick is begging ( it entails some energetic cost), it can generate a conflict of interest, and it also pays an impact on how honest the communication should be [Source: Prof. Kevin J.S. Zollman; Signaling].

Picture Courtesy: http://www. static.reelmovienews.com

Is Obama shaping Geopolitics?

The large majority of Americans are thinking today Obama is no different than other US presidents.  The mid election result pushed Mr. Obama to do some changes both in his policies and international activities. It’s clear that Obama’s mere rhetoric no longer works to galvanize Americans to support for a second term. He is bargaining hard with his oval office position not only domestically but at international stage. Now, the question is – Is Obama working on to shape the Global Geopolitics?

The recent so expensive trip to India, which was criticized by many republicans, has shown a dramatic success as many analysts say it as a ‘Political Motivation’. Indeed, Obama’s more than 4,300 words long historic speech at Indian Parliament is one of  his best speech. Obama ‘s prolific speech has focused not only on India but also on Global Geopolitics.

On Pakistan: The President has heavily criticized Pakistan for not taking active action both on terrorism and Mumbai attackers. He explicitly said –

“We will continue to insist to Pakistan’s leaders that terrorist safe-havens within their borders are unacceptable, and that the terrorists behind the Mumbai attacks be brought to justice.”

Arguing that US will not meditate between the two conflicts nations, he made it clear that only people of two nations can resolve the Kashmir issue.

“We will continue to welcome dialogue between India and Pakistan, even as we recognize that disputes between your two countries can only be resolved by the people of your two countries.”

On India’s ambitious UNSC: Though analysts say it a mere political motivation, but, the body language of state politicians made it clear that Obama is their all time favorite leader.

“The just and sustainable international order that America seeks includes a United Nations that is efficient, effective, credible and legitimate. That is why I can say today—in the years ahead, I look forward to a reformed U.N. Security Council that includes India as a permanent member.”

On Afghanistan: Insisting on US Army deployment, Obama said to the world that they will work on Afghanistan as long as the country does not succeed in their own security.

. “We’re making progress in our mission to break the Taliban’s momentum and to train Afghan forces so they can take the lead for their security. And while I have made it clear that American forces will begin the transition to Afghan responsibility next summer, I have also made it clear that America’s commitment to the Afghan people will endure. The United States will not abandon the people of Afghanistan—or the region—to the violent extremists who threaten us all.”

On Burma’s Dictatorship and Human Rights: Obama has strongly criticized Burma’s dictatorship and persuaded India to take responsibility to act.

Every country will follow its own path.  No one nation has a monopoly on wisdom, and no nation should ever try to impose its values on another.  But when peaceful democratic movements are suppressed—as in Burma—then the democracies of the world cannot remain silent.  For it is unacceptable to gun down peaceful protesters and incarcerate political prisoners decade after decade.  It is unacceptable to hold the aspirations of an entire people hostage to the greed and paranoia of a bankrupt regime.  It is unacceptable to steal an election, as the regime in Burma has done again for all the world to see.

Faced with such gross violations of human rights, it is the responsibility of the international community—especially leaders like the United States and India—to condemn it.  If I can be frank, in international fora, India has often avoided these issues.  But speaking up for those who cannot do so for themselves is not interfering in the affairs of other countries.  It’s not violating the rights of sovereign nations.  It’s staying true to our democratic principles.  It’s giving meaning to the human rights that we say are universal.  And it sustains the progress that in Asia and around the world has helped turn dictatorships into democracies and ultimately increased our security in the world.

On Nuclear Weapons: Remembering his controversial Noble prize, Obama reiterated and gave importance on world without nuclear power.

Since I took office, the United States has reduced the role of nuclear weapons in our national security strategy, and agreed with Russia to reduce our arsenals.  We have put preventing nuclear proliferation and nuclear terrorism at the top of our nuclear agenda, and strengthened the cornerstone of the global non-proliferation regime—the Nuclear Non-Proliferation Treaty.

We can make it clear that even as every nation has the right to peaceful nuclear energy, every nation must also meet its international obligations—and that includes the Islamic Republic of Iran.  And together, we can pursue a vision that Indian leaders have espoused since independence—a world without nuclear weapons.


Free Trade: Mr. President has once again explained the importance of free trade and said, the US market is always open to the whole world. He further argued that the major economies should work together for our mutual growth and to re -balance the world economy and to strengthen the international financial system.

Together we can resist the protectionism that stifles growth and innovation. The united states remains – and will continue to main-one of the most open economies in the world. By opening markets and reducing barriers to foreign investment, India can realize its full economic potential as well.

Obama at G20 summit: Defending his country’s foreign policy, for pumping of $600bn into the economy to boost the recovery, obama said –

“In a prudent, stable way, we want to make sure that we are boosting growth rates at home as well as abroad. It is difficult to do that if we start seeing the huge imbalances redevelop that helped to contribute to the crisis that we just went through.”

Obama defined at G20 summit in Seoul that “Shared Interest” can only be a solution to re-balance the world economy. He said that the US alone could not restore balance growth and asked the major economies to do their part.

“When all nations do their part… we all benefit from higher growth.”

On International Trade: Mr. Obama explained that only production can lead the world into bankruptcy and insists on to increase the world consumptions.

“We all now recognize that the foundation for a strong and durable recovery will not materialize if American households stop saving and go back to spending based on borrowing.

“Yet, no one country can achieve our joint objective of a strong, sustainable, and balanced recovery on its own.

“Just as the United States must change, so too must those economies that have previously relied on exports to offset weaknesses in their down demand.”

On China’s Currency Devaluation: Obama implicitly pledged the G20 major economies to act on currency devaluation.

“that helped to contribute to the crisis that we just went through”.

“Exchange rates must reflect economic realities.”

“Emerging economies need to allow for currencies that are market-driven. This is something that I raised with President Hu of China and we will closely watch the appreciation of China’s currency.”

From the above, it is quite clear that Mr. Obama is working hard not to restore his image but also to restore the American dream. He once said during his presidential inauguration speech ““Well I do not accept second-place for the United States of America. As hard as it may be, as uncomfortable and contentious as the debates may be, it’s time to get serious about fixing the problems that are hampering our growth.”

His oval office is ready to act whether it is Iran or China or any European country and he made it clear that America is no way going to tolerate any monopoly on wisdom. But, It does not seem Obama can get success overn. He has to work and act continuously and we have to wait to see whether Obama will able to make a second term.

Picture Courtesy: http://www. thecurrent.theatlantic.com

Game Theory: Are we bound with the dualism game?

Game Theory is quite interesting subject that takes our attention towards Russell Crowe’s movie  ‘A beautiful mind’ based on biography of American Mathematician J.F. Nash who got Nobel prize in 1994. The Movie shows that how every competition does not lead to Pareto efficient. We are all bounded with dualism of game. There is a James Bond movie, how a man finally agrees to offer his wife to James Bond for a night for $1m. Though he first refuses and says go to hell, but next day when James Bond comes with money to persuade again to sleep with his wife, money makes him blind and he finally changed his mind to offer his wife to James Bond for a night. It’s only game.

Nash has proved that Adam Smith’s Invisible hand does not work with all situation. When everybody competes to get the attention of the blonde girl, but nobody will end up with that girl. As Nash Equilibrium shows only one player can reach at equilibrium while others will end up with nothing. So, it’s better to go for a brunette than to end up with nothing, Nash argues.

It’s clear that we all are bounded over dualism. We are often undecided/indifference to make choices. But, Economics is powerful by defining all complexities  that affects our daily life. And Game theory is well defined to help us.

Photo Courtesy: http://www. wethinkyoushould.blogspot.com

Why Economics is efficient

I often heard Economics is a royal subject during my college days. But, all my friends were afraid to accept Economics as part of their course curriculum because Economics is very hard and full of mathematics. I might be persuaded  by a live stock inspector to purse economics during my teaching to his son.  And It was probably a coincidence that his friend is an economics lecture on same college where he taught me somehow ‘What Economics is all about’.

I’m a curious economist but I would like to rant today on an article Economics Does Not Lie by GUY SORMAN. He has beautiful defined how Economics is right or getting right to predict the future.

Guy Sorman has lightly focused on bad economic policies as dangerous as incurable epidemic  that deprived the millions of peasants getting their land right in Russia, China and Tanzania during twentieth century. He also focused on currency inflation and new policies that played an obstacle to the society at the beginning as people were unfamiliar.

No longer does economics lie; no longer would Baudelaire be able to write that “economics is a horror.” For the mass of mankind, on the contrary, it has become a source of hope.

If economics is finally a science, what, exactly, does it teach? With the help of Columbia University economist Pierre-André Chiappori, I have synthesized its findings into ten propositions. Almost all top economists—those who are recognized as such by their peers and who publish in the leading scientific journals—would endorse them (the exceptions are those like Joseph Stiglitz and Jeffrey Sachs, whose public pronouncements are more political than scientific). The more the public understands and embraces these propositions, the more prosperous the world will become.

1. The market economy is the most efficient of all economic systems.

Adam Smith’s eighteenth-century take on market efficiency was metaphorical, nearly metaphysical: he said that it seemed to be guided by an “invisible hand” that produced outcomes beneficial to society. In the mid-twentieth century, Friedrich Hayek observed that no central-planning institution could possibly manage the huge quantity of information that the market organized automatically and spontaneously by pricing resources.

Market mechanisms are so efficient that they can manage threats to long-term development, such as the exhaustion of natural resources, far better than states can. If global warming does become a real problem, for example, price mechanisms or a carbon tax would easily encourage a more efficient use of energy.

Some economists favor free markets not only for their efficiency in allocating resources but for political reasons as well, fearing that central planning or excessive bureaucratic controls could, in the guise of rationality, stifle individual freedom. Markets leave us “free to choose,” wrote Rose and Milton Friedman, and society is the better off for it—though not all economists embrace their libertarian political vision.

2. Free trade helps economic development.

As Smith observed when his native Scotland began to benefit from free trade, it is through access to the world market that poor nations become rich. …….Free trade not only generates the greatest possible growth; it tends to distribute it widely, both within nations and among them. For evidence, consider the emergence of vast middle classes in all free-market societies, as well as the economic convergence among nations that have embraced capitalist economics. After less than 20 years of market-driven growth, Brazil, China, and India—whatever their injustices—are closer to the Western level of development than they were before that growth got under way.

Today, most economists believe Adam Smith’s century old idea of free trade. Economic Think Tank like Adam Smith Institute is an advocate of free trade. There are numerous think tanks that urge how free economies help countries in mutual growth.

3. Good institutions help development.

Economics argue the importance of institution and organizational structures. Above all, our economy, society and the world is based on institutions and without good institutions, development is like a wild castle. Without an independent legal system, we can find many clashes among economic and social entities.

Institutions that improve market transparency are particularly important, since they counter what Nobel laureate George Akerlof calls “asymmetrical information.”

4. The best measure of a good economy is its growth

Growth is undoubtedly a currency to the economy. If there is no growth, economics is like a value less currency that the society does not require.

The Anglo-Bengali economist Amartya Sen, another Nobel laureate, has distinguished—usefully, to my mind—growth that takes place under democratic conditions from that which occurs under tyranny.

5. Creative destruction is the engine of economic growth.

Austrian economist Joseph Schumpeter argued in his book Capitalism, Socialism and Democracy (New York: Harper, 1975) about creative destruction (innovation) that “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

6. Monetary stability, too, is necessary for growth; inflation is always harmful.

We are governed by fool politicians who does not understand economics wisely. But, economics understand wisely if it is applied correctly by an independent financial body, central bank. Why Economics is so important, monetary stabilization and right economic policies to stabilize money supply and inflation are  core issues of the country.

The best way to restrain inflation, economists now understand, is to transfer money management from governments to independent central banks like the Federal Reserve and the European Bank, which—monetarists all, these days—try to create only enough credit to provide liquidity and prevent the financial panic that often accompanies credit crunches, resisting vocal politicians who believe that printing more would generate new jobs. Even in a slowdown, the banks seek to keep money stable in order to stimulate investment.

7. Unemployment among unskilled workers is largely determined by how much labor costs.

This year noble prize in economics goes to theory on unemployment. Management of unemployment plays an important role. If there is unemployment, economy can reach at equilibrium which simultaneously affects production, consumption and distribution pattern.

8. While the welfare state is necessary in some form, it isn’t always effective.

Economists recognize that government assistance always produces incentives that may affect, for good or ill, recipients’ behavior and well-being.

Indian Economist argues about welfare state. His book Capitalism beyond the crisis tells a different story.

10. Competition is usually desirable

Beyond that, there is no unanimity: some economists believe that under certain circumstances, a private or public monopoly may contribute to innovation or progress.

If economics, a human science, lacks the precision of physics, a natural one, it advances the same way—evolving from one theory to the next, each approximating a reality that eludes our complete grasp.

But if we understand the end of history in economics to mean the complete realization, in practice, of the findings of economic science, then it has not arrived. The free market still has enemies and critics, ranging from those who dream of a world more just, more spiritual, or transformed in some other utopian way to those who simply seek to defend their own narrow material interests to those legitimate researchers who try to look beyond the market.

Similarly, free trade means that some people will lose their jobs, as we all know; foreign competition can wipe out entire companies or even entire industries. We all know it because, as Friedman argued, layoffs and closings get disproportionate media coverage. Meanwhile, nobody talks about the ongoing reduction in prices for consumers and investors, scattered among a huge number of beneficiaries. That helps explain why politicians are prone to deride free trade and voters are too often ready to agree.

To help the losers in the free market, government shouldn’t back away from either free trade or creative destruction and start subsidizing doomed and obsolete activities, a protectionist course that guarantees only economic decline. Instead, it should help the losers change jobs more easily by improving educational opportunities and by facilitating new investment, which creates more employment. An essential task of democratic governments and opinion makers when confronting economic cycles and political pressure is to secure and protect the system that has served humanity so well, and not to change it for the worse on the pretext of its imperfection.

Still, this lesson is doubtless one of the hardest to translate into language that public opinion will accept. The best of all possible economic systems is indeed imperfect. Whatever the truths uncovered by economic science, the free market is finally only the reflection of human nature, itself hardly perfectible.

We can see, there is still some ineffectiveness that the world suffers like global currency crunch, depression..etc. Is it because we don’t understand it correctly or economics doesn’t understand the economist and society? It’s a tough question.

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