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Economy

Lessons from the Particular Trade Relationship between Canada and the US

Enrique Muñoz-Salido

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Canada is the US’ 1st trading partner (US Department of Commerce, 2015). In fact, US export and import values to/from Canada was $242 and $331 billion, respectively, in 2014 and $337.3 and $325.4 billion, respectively, in 2015 (OEC, 2016; Office of the United States Representative, 2016). Features of the US-Canada special trade relationship, such as invoicing in US dollar their trade flows, their similar real income and the fact that US borders Canada by land, seem to be boosting factors for their bilateral trade flows over the decades.

However, is this trade relationship stable? In an economy, periods of high volatility follow periods of low volatility and so on. Are those country-specific factors always advantageous in all scenarios? How does the instability of the economy—the instability of the relative prices between the two countries—affect international trade flows between US and Canada?

Relying on the theoretical and empirical heritage of the literature on consumer behaviour under risk, we may know that individuals are risk-averse, and so traders are. Indeed, as individuals care a lot about changes in their wealth, negative changes on the latter tend to impact more significantly upon their decisions than those positive. The rationale behind this can be understood as losses lead individuals to be worse-off if they are compared with a reference point they come from, while not achieving a potential gain does not move them from that point—which is Tversky and Kahneman’s (1979, 1991) proposed ‘risk aversion’ and ‘endowment effect’. In effect, under these theoretical predictions, almost twice painful might be the profit loss for a trader—making a trader to move from her reference point—than those from gaining additional profits in light of attractive business opportunities of the trade activity (Fig. 1). Subsequently, US and Canadian traders might rise their expected utility of profits from trading every time that the volatility of the US/Canada relative price rises, leading them to trade more in order to escape from losing profits by investing more in the tradable sector and escaping from profit loss as they care more about the worst scenario than potential gains.

FIG. 1
Loss-Aversion

LossAversion

Source (Tversky & Kahneman, 1979, p.279)

Under risk aversion, theoretical predictions and empirical literature point to a positive impact of relative price instability on trade flows; however, why does this impact in the case of Canada and the US seem to be robustly negative in the empirics?

The key point relies on the fact that exporters who do not invoice their exports in their own currency have to absorb appreciations by reducing profit margins (Mckinnon, 1979). As a consequence, this might force (1) Canadian importers to pass the appreciation onto their final consumers—likely Canadian citizens—resulting in a price increase and subsequent reduce in the final consumers’ demand, and (2) Canadian exporters to cut down on their export activity to the US as they might also be forced to absorb an appreciation in view of the impossibility of passing it onto US importers.

When an increased volatility of the relative price results in such profit loss for Canadian traders, led by such invoicing ‘advantage’ of US traders over the former, Canadian traders might cut down on their trade flows with the US as the magnitude of this economic loss likely makes it too costly to be afforded. Consequently, this ‘augmented’ profit loss might come from either (1) a reduction on their final consumers’ demand (for importers), as a consequence of increasing prices in light of absorbing the appreciation, or (2) cutting down Canadian exports supply to the US because of the high cost of absorbing such appreciation, as a consequence of the impossibility to pass it onto US traders (Muñoz-Salido, 2016).

This augmented dimension might reduce Canadian imports of goods from the US and Canadian export supply of goods to the US as it would be too costly to be afforded by Canadian traders and too strong to fight against, leading them to consider another allocation for their products abler to cut down on their profit loss. This fact wouldn’t give Canadian traders a chance to invest more in the tradable sector (as predicts De Grauwe, 1988) with the US as the invoicing feature would always impede them to recover from losses.

Then here, my proposed ‘bilateral factor’ might work as follows. The resulting cut down on the reduction on the Canadian demand for goods from the US and Canadian supply of goods for the US would decrease US exports to Canada and US imports from Canada, which is quite consistent with the aforesaid features. Finally, the unilateral reduction on trade by Canada would impede the risk-aversion factor explained above to work for US traders as they wouldn’t have the chance to trade with Canada as the used to, in view of the cut-down on trading of the Canadian traders (leading US traders to also reduce their trade flows with the latter), which would be a consequence of the invoicing feature that might impede the aforementioned theoretical predictions to hold.

Enrique is an MSc Candidate in Social Anthropology at Regent’s Park College, University of Oxford. His research interests lie at the intersection of human behaviour and social interactions and his top analytical skills comprise macro and micro data analysis and statistical methods. Prior to joining Oxford, Enrique completed his MSc in Economics (distinction) at the University of Brighton, UK, where he was a Santander Scholar, and his undergraduate degree at the Autonomous University of Barcelona, Spain.

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Economy

Côte d’Ivoire: Robust growth under the looming threat of climate change impacts

MD Staff

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According to the Economic Update for Côte d’Ivoire, published today, the short- and medium-term outlook for the Ivorian economy remains positive. The economy is expected to maintain a steady trajectory, with GDP growth of 7 to 7.5% in the coming years. Titled “So Tomorrow Never Dies: Côte d’Ivoire and Climate Change,” the report highlights the urgent need to implement measures to ensure that climate change impacts do not imperil this economic progress and plunge millions of Ivorians into poverty.

“The solid performance of the Ivorian economy, which registered growth of almost 8% in 2017, is essentially due to the agricultural sector, which experienced positive climate conditions. The economy also benefited from a period of calm after the political and social instability of the first half of 2017 and from more favorable conditions on international markets,” said Jacques Morisset, Program Leader for Côte d’Ivoire and Lead Author of the report. “The Government also successfully managed its accounts, with a lower-than-expected deficit of 4.2% of GDP, while continuing its ambitious investment policy, partly financed by a judicious debt policy on financial markets.

However, the report notes that private sector activity slowed in 2017 compared with 2016 and especially 2015, which may curb the pace of growth of the Ivorian economy in the coming years. Against the backdrop of fiscal adjustment projected for 2018 and 2019, it is critical that the private sector remain dynamic and become the main driver of growth. This is particularly important in light of the uncertainty associated with the upcoming elections in 2020, which could prompt investors to adopt a wait-and-see approach.

As economic growth in Côte d’Ivoire relies in part on use of its natural resource base, the authors of the report devote a chapter to the impact of climate change on the economy. They raise an alarming point: the stock of natural resources is believed to have diminished by 26% between 1990 and 2014. Several visible phenomena attest to this degradation, such as deforestation, the depletion of water reserves, and coastal erosion. According to the Intergovernmental Panel on Climate Change (IPCC), climate change could reduce GDP across Africa by 2% to 4% by 2040 and by 10% to 25% by 2100. For Côte d’Ivoire, this would correspond to a loss of some CFAF 380 billion to 770 billion in 2040.

This report sounds an alarm in order to spark a rapid and collective wake-up call,” said Pierre Laporte, World Bank Country Director for Côte d’Ivoire. “Combating climate change will require prompt decisions and must become a priority for the country to maintain accelerated and sustainable growth over time.”

The report pays special attention to coastal erosion and to the cocoa sector, which represents one third of the country’s exports and directly affects over 5 million people. With 566 km of coast, Côte d’Ivoire now boasts a coastal population of almost 7.5 million people, who produce close to 80% of the national GDP. Two thirds of this coast is affected by coastal erosion, with severe consequences for the communities and the country’s economy.

The Ivorian Government, which is already aware of this challenge and has prepared a strategy to confront it, must expedite its implementation. This would have the two-fold effect of developing a “green” economy and creating new jobs.

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Economy

A future of work based on sustainable production and employment

Simel Esim

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On the first Saturday of July each year, the international community celebrates the International Day of Cooperatives. This year’s theme, Sustainable consumption and production of goods and services is timely, as the ILO works towards a future of work that is based on sustainable production and employment models.

As head of the ILO’s Cooperative Unit, I have witnessed firsthand the positive impact of cooperatives’ commitment to sustainable consumption and production.

In Northern Sri Lanka, for instance, after years of civil war, I saw how cooperatives helped build the resilience of local communities.

A rapid assessment at the start of the ILO’s Local Empowerment through Economic Development project (LEED) indicated that cooperatives were the only “stable” structures present in Northern Sri Lanka before, during, and after the conflict. Since 2010, the project has been supporting agriculture and fishery cooperatives by securing fair trade certification for their products and helping them establish market links.

I’ve also listened to inspiring stories from other parts of the world of how cooperatives have joined forces to contribute to sustainable consumption, production and decent work – often through cooperative-to-cooperative trade.

Some of these stories were shared at a recent meeting in Geneva of cooperative and ethical trade movements.

We heard how Kenyan producer cooperatives’ coffee has found its way on the shelves of Coop Denmark and how biological pineapples from a Togolese youth cooperative are being sold in retail cooperatives across Italy. We heard how consumer cooperatives in East Asia have developed organic and ecolabel products, while educating their members about the working conditions of producers and workers, as well as on reducing food waste and plastic consumption. We also shared ILO experiences in supporting constituents in the field.

The emerging consensus from the meeting was that cooperative-to-cooperative trade can help lower the costs of trade, while ensuring fairer prices and better incomes for cooperative members and their communities. Opportunities exist not only in agricultural supply chains, but also in ready-made garments and other sectors.

Cooperatives at both ends of the supply chain have been joining forces to shorten value chains, improve product traceability and adopt environmentally-friendly practices. At the ILO we have been working with our constituents to improve the social and environmental footprint of cooperatives around the world.

As the ILO continues to promote a future of work that is based on sustainable production and employment models, a priority for us in the coming years is to facilitate the development of linkages between ILO constituents and cooperatives. The aim is to encourage joint action towards responsible production and consumption practices, the advancement of green and circular economies and the promotion of decent work across supply chains.

Source: ILO

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Economy

Mongolia’s Growth Prospects Remain Positive but More Efficient Public Investment Needed

MD Staff

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Mongolia’s economic performance has improved dramatically with GDP growth increasing from 1.2 percent in 2016 to 5.1 percent in 2017 and 6.1 percent in the first quarter of 2018. While short- and medium-term economic prospects remain positive, Mongolia faces core structural vulnerabilities that hinder its potential, according to Mongolia Economic Update, the latest World Bank report on Mongolia’s economy launched here today. The report also highlights the importance of improving efficiency of its public investment programs given extensive consequences from the overambitious and unrealistic investment programs implemented in the past.

“Last year was a good year for Mongolia with favorable commodities prices and the successful implementation of the government’s economic recovery program,” said Dr. Jean-Pascal N. Nganou, World Bank Senior Economist for Mongolia and Team Leader of the report. “This resulted in improved fiscal and external balances, triggering a slight decline of the country’s public debt.

The recovery is expected to accelerate with a GDP growth rate averaging more than 6 percent between 2019 and 2020, driven by large foreign direct investments in mining. Other than agriculture, which was severely affected by harsh weather conditions during the winter, most major sectors including manufacturing, trade, and transport are expected to expand significantly. On the back of increasing exports and higher commodity prices, economic growth will continue to have a strong positive impact on government revenue, contributing to the reduction of the fiscal deficit.

The unemployment rate dropped to 7.3 percent in the last quarter of 2017, compared to 8.6 percent a year earlier. Still, it increased to 9.7 percent in the first quarter of this year, reflecting Mongolia’s highly seasonal employment patterns due to difficult working conditions in the winter, especially in construction, agriculture, and mining.

The report highlights possible short- and medium-term risks including political risks, regional instability, climate shocks, and natural disasters. The most critical risk identified is a sudden relaxation of the government’s commitment to full implementation of its economic adjustment program supported by development partners.

In addition, the economy remains vulnerable to fluctuations in global commodity prices and a productivity gap. The best long-term protection against these two vulnerabilities is the diversification of the Mongolian economy.

To create a strong buffer against economic vulnerabilities, the government and donors should give a high priority to economic diversification that helps counter the ups and downs of the mining sector. Investing in human capital and strengthening the country’s institutions are the best way to support diversification, together with sound investments in crucial infrastructure,” said James Anderson, World Bank Country Manager for Mongolia.

The report takes a closer look at public investment programs implemented over the past five years, which surged until 2015, contributing to large increases in public finance deficits and the public debt. Mongolia needs to review and reshape its public investment policies and decision-making processes to improve efficiency of public spending, including clear project selection and prioritization criteria, as well as proper maintenance of existing assets.

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