SIMES January 2012 Newsletter by Editorial Team SIM Economics Society

www.simeconomicsociety.org

Get a Take on the Happenings of SIMES Economics Forums

Learn the Dynamics of Singaporeâ&#x20AC;&#x2122;s Healthcare Industry

January 2012 Issue Explore the current developments of the Eurozone Crisis

For Internal Circulation Only

contents Page 4

From The Editor

SIMES Economics Week 2011

Forum 1

Forum 2

Singapore 9

Foreign Workers: Bane or Boon?

An Analysis on the Healthcare Industry

Special Report 20

The American Road to Success

US Recession : Capitalism in Question

The Remaking of a Chinese Legend

Challenges to Chinaâ&#x20AC;&#x2122;s controlled economy

EU Debt Crisis An inevitable collapse?

Conclusion : A Reflection on Economic Ideologies

Icelandâ&#x20AC;&#x2122;s Economic Recovery

Europe

fromtheeditor Happy 2012 to All! Hope this new year brings you great happiness, and hope that we can find some stability in our rickety global economy. With the tumultuous turns experienced all around the world in the recent past, this year brings a need for reflection on the successes and failures of the management of major economies. The sinking dynamism of the West, in comparison to the rising dominance of Asia, has brought to question whether the open economic principles that have reigned thus far, are as stable as they claim. Our capable SIMES writers have tackled this very issue with a special report on US vs China. Through a series of articles, we have compared the different paths these two economies have taken to rise to their current stature and evaluated the proposed challenges with their respective ideologies. An interesting read, indeed. Covering other parts of the globe, this issue also provides a detailed account of the Eurozone crisis in the perspective of stronger economies, along with a review on the lessons to be learnt from Iceland’s rise from the ashes. Furthermore, we reflect on issues at home with intriguing economic insights on the impact of foreign workers in Singapore, as well as an analysis on the healthcare industry. This January newsletter is packed with an incredible array of articles that bring to you economic insights of fellow student economists on the rising concerns of the global economy. I would like to extend a very special thank you to all the SIMES writers and the layout designers—Zeke Lee, Liyana Othman and Liu Cai Jun for all their hard work.

Happy Reading!

Sruti Pegatraju Note: All the views and opinions reflected in the articles are the authors’ own viewpoints. Neither SIMES nor SIM are to be held accountable for the authors’ viewpoints expressed. Access our SIMES website by reading our QR code (displayed at the back of this issue ) with your smartphone. Download the QR Code reader at your App Store. 4

SIMESECONOMICS WEEK „11 Written by Hemma Nair

Held from 21st October till 28th October 2011, the Economics Week was a success with students, lecturers and staff alike. The week-long event was planned and organized by the current executive committee with valuable guidance from Dr Seet Min Kok, Senior Lecturer in SIM and Advisor of the SIM Economics Society. The aim of the event was to engage students in the awareness of economics outside the classroom environment in a fun and entertaining manner. While the previous Economics Weeks centered closer to home, this year‘s event shined the spotlight on the global economic climate with the theme being ―Global Economic Prospects and Risks‖. The event was officiated by the Assistant CEO of SIM, Ms Peggy Lim, in the presence of Dr Seet Min Kok, Dr Ravi Balakrishnan (International Monetary Fund Resident Representative), lecturers and students of SIM. After the opening ceremony, we were honoured to invite Dr. Ravi Balakrishnan, to speak at the lunch seminar with SIM students and staff. The hour-long talk by Dr. Balakrishnan provided the audience with the IMF‘s viewpoint of the current global financial and economic outlook using in-depth monetary and economic analysis.

Another major attraction at the opening ceremony was the comprehensive panel exhibition on Global Economic Prospects and Risks, which were displayed at the atrium. They showcased statistics and a guide on the economic statuses on the economy of various countries, from the ailing economy of the US to the troubled members of the Eurozone, as well as countries closer to home in Southeast Asia. The wide scope covered were very well received by professors and students alike, with praises from impressed academics visiting from the London School of Economics (LSE). Crossword puzzle and trivia quizzes were held daily throughout the week with enthusiastic responses from the students. The aim of the trivia and daily quizzes were to test students‘ understanding of the panels displayed. ‗Simconomics‘ was another highlight of the economics week. The life size board game was modeled after the board game, ―The Game of Life‖. The teams had their economics knowledge as well as their awareness of SIM‘s history put to

the test with questions posed throughout this game.

On 27th October 2011, SIMES inaugurated the Economics Forum as part of this yearâ&#x20AC;&#x2DC;s Economics Week. This event presented an excellent opportunity for students to research and demonstrate their presentation skills. The theme of the Economics Forum was the US Mortgage Crisis and the effectiveness of Quantitative Easing (QE) in stabilizing the US economy.

Four competing teams presented their analysis and were posed questions from the audience after their presentation. The audiences were treated to an engaging and informative discussion on this theme and were able to learn about a few points of evaluation on proposed solutions to this credit crisis.

The SIM Economics Society Economics Week 2011 was a great success with the plethora of events that it offered. Fellow students were able to engage in active economic discussion and learn more about the key global events that are shaping our current economic landscape.

ECONOMICSFORUM 1 US MORTGAGE CRISIS Reflections by Sruti Pegatraju As part of Economics Week 2011, SIMES organized an Economics Forum that discussed the causes and consequences of the US mortgage crisis of 2008 and the effectiveness of quantitative easing (QE) measures imposed. The forum was held in the format of a competition, with four teams of three who researched and presented arguments on the issue, in hopes of winning prizes for ‗Best Speaker‘ and ‗Best Research Team‘. Before the start of team presentations, two introductory videos were shown to introduce the issues for discussion. One video summarized the chronology of events of the credit crisis, while the second video provided a simplistic explanation on the mechanism of quantitative easing. Following these videos, the first team comprising of Lenard Ong, Edwin Wan and Yi Yu Rui, presented their views on the causes of the credit crisis, highlighting specifically the easing government policies, excessive risk taking by financial professionals and the overt innovation in financial instruments that took the economy by storm. Proceedingly, the second team of presenters, namely Kang Yong Kia, Bernard Lee and Herosh Kumar shone more light upon how the housing market was specifically effected, and how the default of subprime mortgages led bankers to lose their stream of income. This team discussed further the intention of QE in reducing long-term interest rates to encourage mortgage borrowing from consumers and boost the housing market once again. However, in assessment, key concerns of QE were explained, in that small businesses were still not attaining the credit as planned, as banks were still weary on risky lending practices. Lan Doang Hoang, Giang Quynh Phan and Liyana Othman as the third team also presented the effect of the housing crisis that led to the US recession and brought a more detailed account of the reasons behind QE1 and QE2 to the discussion. They appreciated the fact that QE1 was about Federal Reserve buying up toxic assets off the banks‘ balance sheets, while QE2 brought down the long–term interest rates, both in aims of stimulating banking and consumer activity. The final team of the forum, being Luah Xin Kai, Desmond Lee and Deborah Lim, also explained and evaluated the effects of QE and maintained the conclusion that it did not provide much of a solution to the recession as the Fed had promised. Dr Seet Min Kok was present throughout the forum and commented on the presentations at the end. He also provided an overview of the mortgage crisis and its implications on the US economy. The audience had raised questions on all the presentations, and voted at the end to crown Lenard and his team with both ‗Best Speaker‘ and ‗Best Research Team‘.

ECONOMICSFORUM 2: EUROZONE CRISIS Reflections by Matthew Tan The 2nd Forum was held on the 30th Nov 2011. This time round, the main topic was on the on-going Eurozone Crisis which has been the talk of the world lately. We started off the forum by touching upon the underlying causes of the Eurozone Crisis, the accumulation of debt of the Eurozone countries, mainly Greece, Italy, and Portugal. Since 1993, prior to joining the Eurozone, Greece has been having a budget deficit. This situation was worsened when they were hit badly in 2000s in their shipping and tourism sector. As investors have lost their confidence in Greek government, they demand higher discount rate in return for holding on to Greek sovereign bonds. The first measure that the presentation teams tackled was the bailout packages given to the troubled countries. A $112.4 billion bailout packages were given to Greece on the April 2011. We even went further to note that countries with larger GDP, such as Germany, are contributing more to the bailout package compared to the rest. Austerity measures, implemented in Greece and Italy, were also discussed. It is a form of fiscal tightening to reduce deficit by cutting down government spending especially in amount of benefits and public services provided and the increase of taxes. Examples of fiscal tightening were temporary freezing of civil sector's salaries, increase in Value-Added Taxes (VAT), increment of retirement age and privatization of companies and national property. Another key issue discussed was the role of ECB in improving the economy in the short run through their main refinancing operations (MRO) and long term refinancing operations, which is a very similar mechanism to Open Market Operations. Since 2008, the ECB has been following a different procedure temporarily, namely the fixed rate MRO with full allotment where the ECB specifies the rate but not the amount of credit made available, and banks can request as much as they wish. Dr Seet Min Kok sat in through all the presentations to guide the teams through the economic thinking process and help them improve their deliveries. He also provided an overall summary of the current issues and longer-term problems of the Eurozone,. I believe that the Economics Forum is an ideal platform for students to present and apply their economics knowledge. During lectures, lecturers might not have sufficient time to touch on current world situation in relation to what we have studied. Likewise, it serves as a means to polish our presentation skills and confidence in public speaking.

BANE OR BOON? FOREIGN WORKERS IN SINGAPORE

question: Does PM Lee speak of the truth, or has he merely presented a false dichotomy? Economic cycles have indeed become shorter and these are always harbingers of uncertainties and fluctuations ― the very bane of a stable economy. Unfortunately for mankind (and economists), these cyclical fluctuations are not so much cycles than they are fluctuations, because they follow no predictable periodic pattern. But beyond mere talk about economic cycles and Philips curves, what we‘re truly interested to know is, will easing the inflow of foreign workers be the panacea we have been seeking? We press on.

Written by Kang Yong Kia A quick look at the total population of Singapore, now and 10 years ago: Population size now ― 5.183 million (as at June 2011). Population size 10 years ago ― 4.028 million (as at June 2000). While it may seem like nothing out of the ordinary, since typically, the population growth at every 10 year interval has been in the range of 1 million, the reader should take note that the total number of Singapore residents had increased by 516 thousand in the same period, while the population of non-residents nearly doubled.

We refer to foreign workers as employment pass holders who have no intention to reside here permanently. Here we assume that these workers have a relatively small marginal propensity to consume, and reasonably so, because they make no connection to the host country except as a place of work. It is true that PM Lee mentions bringing in talents ― highly-educated or high networth individuals ― but we assume that there is a larger proportion of foreign workers to foreign talents. It is thus, logical to further our assumption that these workers will remit a large proportion of their earnings out of the host country.

This inevitably raises the question: Are there too many foreign workers in this country? Will the large number of foreign workers here have a detrimental effect on the local population? These statistics do not necessarily formulate two sides of a debate, so hold your horses. As we shall see, an increase in foreign workers on our soil does not necessarily spell doom for unemployed Singaporeans. And so, before we delve deeper, we should first examine the comments of PM Lee during the recent interview with CNBC.

The public perceives the influx of foreign workers as a ‗bad‘ ― the more foreign workers there are, the less jobs available for locals. The notion that foreign workers are willing to accept lower pay in order to be gainfully employed annually. With more applicants vying for that one job vacancy per year, the prospects of locals landing the job becomes that much tougher.

―More workers, more skills, more talent.‖ PM Lee asserts that for the economy to grow at a strong pace, more foreign workers is what the Singaporean economy needs. Now this begs the

Suppose the firm does employ a foreign worker, it would mean that one other potential applicant, a Singaporean, would be jobless. Being unemployed has its disadvantages; while not whiling the time away counting sheep, the unemployed person would be living on dissavings, greatly lowering his desire to spend money. This means that an unemployed person has a relatively low MPC, causing the IS curve to become steeper.

boutiques in the industry, and the ratio of foreign workers to locals in the industry goes northwards? We would then be facing massive unemployment (for the local population) and inadvertently, a vastly steeper IS curve than before. A steeper IS curve, as we all know, intercepts the LM curve at a lower level of real output. We assume that the net exports remain unchanged. Throw in the BP curve, and we see that now we not only have unemployment to fret about, but we would also be running a balance of payments deficit. A balance of payments deficit for an extended period of time will result in the Monetary Authority of Singapore paying out of its pocket by means of selling its reserves, because the MAS operates a managed float. However, if the country persistently runs deficits in the balance of payments, the MAS will eventually run out of foreign exchange and be unable to continue its intervention.

FIGURE 1.1 SMALLER MPC STEEPER IS CURVE A steeper IS curve intersects the LM curve at a lower level of real output LM

But while it may seem a viable argument, a little research will show that it is in fact flawed. Singapore has been running a current account surplus every year since 1988. The oversight was the assumption that the trade balance remains unchanged with the influx of foreign workers. Net exports have changed; trade balance of the latest 12 months up to July has shown an increase of US$48.3bn. Subtract that amount from the current account surplus of Q2, and we get the remainder of US$3bn. The remainder accounts for everything else other than the trade balance â&#x20AC;&#x2022; net investment income, expenditure on services, and transfer payments. It means that among the 3bn, a portion of it comprises of remittances. Conservative estimates put it at about a fifth of the figure, which amounts to US$600mil. That is just a little over 1% of the overall current account balance for Q2. A small price to pay, considering that actual GDP growth for Q3 stands at +5.9% and is protracted to grow 5.0% and 4.9% at 2011 and 2012 respectively.

BP = 0

IS (S1)

IS (S0)

To further analyze this phenomenon, we should examine the problem economically. One such way out of this dichotomy is to evoke the MundellFleming model. The model suggests that for a small open economy, a decrease in the marginal propensity to consume would give rise to a steeper IS curve. While the picture still remains rosy if we consider just one individual not being gainfully employed, what happens if there are many more ABC

Let us return to the example of ABC boutique. By employing the extra worker, albeit a foreign worker, that unit of labour doesnâ&#x20AC;&#x2DC;t just lie around being unproductive; it is put to work. An extra retail staff on the sales floor means that when a customer, letâ&#x20AC;&#x2DC;s say a tourist, walks into the store, there is help at hand to attend to the customer. When this happens, the incidence of a transaction between the tourist and the store increases. Singapore Current account balance (latest 12 mth, US$bn) Trade balance (latest 12 mth, US$bn)

accountant, for example, to take charge of its finances. It may decide to add another software engineer to its payroll to manage its network systems. Or it may even decide that the addition of a whole new marketing department fits the bill best, because it wants to aggressively expand, and so most of the newly-hired professionals on the team will be Singaporeans. We have just observed how the hiring of one lowskilled foreign worker has initiated many more specialized jobs for the well-educated

+51.3 +48.3

Gross Domestic Product Q3 2011 2012

+5.9% +5.0% +4.9%

Unemployment 2010 2011 Q3

2.1% 2.0%

LM (M0,P0)

LM (M1,P0)

A BP = 0

IS (NX1)

Source: The Economist Oct-Nov 2011 Y0

FIGURE 1.2 EXPANSION IN THE ECONOMY

And when tourists spend money here, our exports increase by that much. Again, multiplying this one transaction by the incidence of many such workers hired by many firms similar to ABC boutique, and we have a significant increase in our net exports, and hence, contributing to the trade account surplus.

Singaporean worker. This goes to show that when the inflow of foreign workers is relaxed, the economy does not contract. On the contrary, the economy will expand. Figure 1.2 is a graphical representation of the expansion in the economy. Accordingly, we shift the IS curve to the right due to the current account surplus. Then, we shift the LM curve to the right because the MAS will increase the money supply (Figure 1.3) under a managed float regime. This brings us to point A where there is external balance and an increase in real output. Point A puts the economy that much closer to the full employment output level, Y*.

Suppose ABC boutique notices that with the increase in productivity, it has increased its profits with lower overheads from hiring the foreign worker. It now decides to expand its operations to neighbouring Malaysia. Of course as with every expansion in business operation, more work has to be done, more workers have to be hired. ABC boutique may now decide to hire an extra

Money Supply (millions of dollars) 2009 2010 Sept 2011

93471.8 112,461.5 128,118.8

FIGURE 1.3 MONEY SUPPLY M1 Source: Monthly Digest of Statistics Singapore October 2011

Ergo, the Mundell-Fleming model supports the proposition in two ways. Firstly, an increase in foreign workers adds to the current account surplus. Secondly, a managed exchange rate regime (managed float) will keep inflation in check, and thus, ensure price stability. The standard complaint on foreign workers hoarding jobs for locals fails to enlighten. Should we lap up the false choice presented to us by PM Lee? Well, taking the other extreme is no more helpful. A viable alternative should be to seek professional advice from economists and turn around what we have here a thorny issue of social integration. A long drought debate that portrays foreign workers as criminals or the bane of society will only serve to cause paralysis in the local economy. References: 1MonthlyDigest of Statistics Singapore October 2011 Article: Singapore PM economy is visibly slowing down www.cnbc.com Article: Singapore PM economy is visibly slowing down 2www.cnbc.com 1www.singstat.gov.sg Article: Time series on current account balance

The basic tenets of utility theory could be used to analyze the risks and the choices a rational consumer make in the health care industry. The behaviour of a rational consumer is based on the three axioms of utility: the axiom of completeness, transitivity and selection. The axiom of completeness is the situation the consumer is aware of the list of all choices available to him and he is able to do an ordinal analysis of all the choices that is available to him. The axiom of transitivity is that the consumer prefers A to B and B to C. A rational consumer would not prefer C to A . The axiom of selection is that the consumer will always choose the best possible combination or choice available to him or being utility maximising so to speak.

AN ANALYSIS ON SINGAPORE‟S HEALTHCARE INDUSTRY Written by Edwin Wan “It

is health that is real wealth and not pieces of

gold and silver.” – Mohandas Ghandi. Health is indeed valued by all stratifications of society, from the rich multi billionaires down to the average people walking on the street. Without a healthy population girding the workforce of any country, productivity of industries will suffer, leading to a possible dip in the national income (GDP per capita). What is health? Health as defined by the World Health Organisation(WHO) is ―a state of complete physical ,mental and social well being and not merely the absence of infirmity‖. The idea of health as a state of perfect well being which shows the perpetuity in the quest for increasing the health even in highly developed countries like the US or Japan.

Based on these three axioms, the consumer will make choices about the consumption of health care goods under the circumstances of uncertainty and risk based on the utility created by Hey: )=

)

Where ) is the utility of the associated with the choice C for individual J

The perpetuity in the demand for health has caused the rise of industries that provide commodities that are ―health inducing‖ (McGuire, Henderson, & Mooney, 1988). These industries are defined as the healthcare industry.

is the probability of the state of the world i ) is the consequence of individual J making a choice in the state of the world i.

In this article, the nature of health and healthcare as an economic good will be defined in section 1.0. In section 2.0, an analysis will be done on the Healthcare industry in Singapore followed by a discussion of the stances that healthcare industry took from the pre 1980‘s till today in section 2.1. In section 3.0, problems of the Singapore health care systems will be discussed.

) is the utility associated of the consequence ) i refers to the states of the world in terms of positive real number e.g 1,2,3..... Risk is defined as the probability of state i occurring, with the assumption that the probabilities of state of the world i is known. This is the closest model that mimics the real world situation that a consumer has to be under in the considerations of risk. In this model of consumer utility under the consideration of risk, several assumptions are made : a) The consumer is able to factor in all cost, including opportunity costs.

Health and healthcare as an economic good ? Here, we differentiate between health and healthcare. Demand for health is not consumed because of the satisfaction or utility but due to the value of additional satisfaction gained by doing other activities in the state of health. (Wonderling,Gruen and Black).

customer is willing to pay more when the risk of cancer is much higher, to reduce risk of S. In the diagram shown, by lowering the probability of S the consumer will be happier off in states of the world of Z (no cancer). This diagram reflects the real world situation to a large extent, as the consumer will be willing to forgo and pay more for healthcare pertaining to reducing the risks of a fatal illness that has a high probability of happening to the consumer.

b) There is no third party subsidiary at the point of consumption c) The consumer has perfect information, rational and sovereign in making his choice. d) The consumer is able to obtain utility gains directly from consumption. e) Based on the assumptions from (a) to (d), the rational consumer has perfect knowledge and can exert sovereignty on how much to consume and of what to consume.

Health care industry of Singapore

Based on the von Nuemann-Morgenstern expected utility maximisation, the consumer is aware of the states of the world, the probability associated with it and the utility of every consequence. Thus, he is able to make a utility maximising choice.

WHO has ranked Singapore‘s health system as 6th in the world in 2000 as compared to the USA which was ranked 37th. Singapore‘s infant mortality rate is one of the lowest in the world at 2 per 1000 live deaths in the World health statistics 2010.

The sum of all possible probabilities is equal to 1. Assuming that individuals are risk adverse (meaning to say that if a individual has choice between a certain outcome t and a probable outcome s with probability p , the consumer will prefer t>ps )and the utility curve is concave throughout, it is shown below:

Ever since WHO‘s rating of the Singapore healthcare system in 2000, Singapore has been rated as ―one of the most successful healthcare systems in the world, in terms of both efficiency in financing‖ as stated by the Global consulting firm Watson Wyatt. This efficiency is shown in the level of government spending in comparison to the life expectancies of the country. Singapore‘s healthcare system is sustained through mandatory savings from compulsory payroll deductions, nationalized catastrophic insurance policies, constant government regulatory checks on the prices of healthcare and government subsidies. As mentioned by Prime Minister Goh in 1993, “No one will be denied needed health care because of lack of funds”. Singapore managed to strike equilibrium between reliance on public funding and private financing sources to provide healthcare to its citizens. The general diagram between the responsibilities shared for the upkeep of the healthcare industries between the government and the public is shown in the next figure:

Probability of Z

S represents the state of the world that the consumer wishes to reduce its possibility. Z represents the probabilities of the rest of the states of the world. In this case, based on the expected utility theory, the consumer may desire to reduce the probability of having cancer(S). Hence, the

Historical trend in the provision healthcare services by the Singapore government In the pre-1980‘s, the Singapore government was following the British system of

decided to reform the healthcare system due to rising cost of healthcare costs and inefficiencies that had occurred. The objectives of the policy makers for the health care system are to advocate consumer sovereignty, to promote self reliance rather on the reliance on the state, to introduce competition in the healthcare industry under appropriate conditions and the government should be the last resort to finance the healthcare cost of the patient. In the light of these objectives, the three pillars of healthcare known as the 3 M‘s; Medisave,Medishield and Medifund were created and implemented in 1984. Medisave using fiscal instruments to finance the Healthcare system in Singapore. Healthcare was provided to the public free or at a subsidized rate. Using taxes to finance entire healthcare system led to problems like bureaucratic red tape in the healthcare system, which led to outcomes like inefficiency. The lack of competition from private practices is attributed to public hospitals possessing a higher level of medical technology. Government hospitals on the other hand, did not have the incentive to increase their quality of service due to the lack of competition.

Medisave is a policy measure known as Medical Savings Accounts or MSAs that advocates consumer to take stock of their own healthcare costs. In contrast to an insurance policy, there is no ―risk-pooling‖ because the cost of each individual is borne by the individual savings account. Risk pooling is the process whereby individuals pay into a common collective fund in the forms of premiums. When the individual incurs cost of healthcare through inpatient services , funds will be withdrawn to pay for the costs. Under the scheme of risk-pooling, patients will tend to consume more healthcare than what the doctor deems it necessary. This will lead to flagrant use of healthcare resources, leading to waste and inefficient allocation of resources. Under the Medisave scheme, funds will drawn out from their MSAs which consist of mandatory deductions from consumer‘s payroll. The Central Provident Fund (CPF) is an account that every employed individual are obligated to have. The CPF is a central feature to Singapore social security system which acts like a safety net for Singaporeans.

In the 1980‘s, the Singapore government

Employers and employees are obligated to contribute a certain percentage of the employees CPF. Out of this sum of money, a certain percentage (6-8%) which is dependent on the age of the holder of the CPF account will be channeled into the Medisave account. Medisave could only be used to pay generally high treatment cost usually generated by inpatient visits and high cost outpatient operations.

subsidy and the control given to hospital directors on operating costs and profit sharing, led to a degree of competition among the public and the private hospitals because the government only subsidized the lower tier wards. Wards that provide a higher quality of service and medical care are not subsidized, leading the private sector to compete on quality of healthcare. Degree of profit sharing based on the system of Key Performance Indicators (KPIs) lead to a greater degree of efficiency due to the increased productivity of hospital staff. The implementation of the 3 Ms, along with Eldercare and Eldershield lead to decreased reliance on public sector funding. This is shown in Figure 2. In comparison to other developed countries, Singapore has the highest amount of private funding of health expenditure. Despite that, inflationary pressure on the cost of healthcare is managed by constant regulation of prices by the Singapore government. The lower contribution by the government translates to lower taxes on the citizens which increase their disposable income, and hence increase aggregate demand in economy.

Medishield One lacking feature of Medisave is that it is usually unable to finance the high treatment cost of patients with chronic illnesses. In the scenario whereby the patient is unable to work due to the chronic illnesses, the patient‘s Medisave account would have been exhausted in the long run due to the lack of income. In the case of such catastrophic illnesses, the Singapore government implemented a scheme similar to an insurance policy for chronic illnesses known as Medishield. The premium for the Medishield will be financed through contributions by the Medisave account.

Problems of the Singapore healthcare system Despite the relative success in curbing the cost and increasing the efficiency of the Singapore healthcare system, are there any problems? One major problem discussed will be the relationship between the doctor (the agent) and the patient (consumer). The second possible major problem of the healthcare industry is the possibility of supplier induced demand.

Medifund

Imperfect information

Medifund is an endowment fund for patients who are unable to finance their healthcare cost through their Medisave accounts. It involves a direct transfer or a subsidy on the healthcare cost of the patients with lower income.

One defining feature of the healthcare industry is the acute information asymmetry skewed towards the agent (doctor). In this relationship, patients would not possess the same level of technical knowledge as the doctor who is the agent. Doctors are much better informed about the treatments and the medical procedures as compared to the patients, and are hence, able to directly influence the patients‘ demand of healthcare. The dependence on the doctor means the patient‘s utility maximising behaviour will be compromised, and does not hold the sovereignty

The implementation of the three pillars led to greater access to healthcare. People who are not able to afford the cost of healthcare can still use facilities such as polyclinics and subsidized healthcare at public hospitals. Low cost treatments are paid by the patient‘s own money, advocating the element of self reliance. The graded ward

curve D1 and S1 respectively. The equilibrium price and quantity is (P0,Q0). Assuming there is a rightward shift in the supply curve from S1 to S2 due to new hospitals which leads to an increased supply of healthcare. This will lead to a drop in price from P0 to P1. Due to the drop in price, this will induce an increase in demand, leading to a shift from D1 to D2. In the circumstances of a presence of a third party bearing healthcare cost of the patients, the supplier (doctor) would have lesser incentive to restrict demand inducement. Another circumstance that would allow supplier induced demand is that underestimation of cost of healthcare by the doctor. This would lead to just partial amount of the cost paid by the patients. Other costs other than money cost would be the travel cost , cost of lost of leisure and anxiety costs. Since the cost of the healthcare do no internalize the cost incurred, the hospital will induce the patients to consume more health than necessary, leading to resource misallocation and wastage.

on decision making, as previously assumed. This will underplay the actual benefit gained by consumers, leading to both allocative and productive inefficiency . Supplier induced demand Another possible problem of the healthcare industry is that it could result is the phenomenon of the supplier induced demand. Supplier induced demand is sometimes referred to the Roemer‘s Law after the name of the investigator that looked into this hypothesis. Supplier induced demand is a phenomenon worth researching because it is basically theoretical because of the difficulty to support using empirical evidence. The idea of a ‗built bed is a filled bed‘ shows monopoly potential. This is shown in this graph below:

Conclusion Despite the inherent problems of the healthcare industry, there has been significant progress and success in the implementation of policies. Singapore‘s strength lies in her political stability, giving room for policy makers to explore options and make amendments to the healthcare policies. Problems like acute information asymmetry would be a long term problem with no apparent effective economic policy to solve. No policy would ever be the silver bullet to all the problems faced by the healthcare industry due one single factor: scarcity of resources. However, combined with good policy sense and the willingness to take measures to change the policy so as to attenuate the strengths of specific policies will minimize the problems faced.

The initial equilibrium condition is shown in the intersection of the demand curve and supply

References: (n.d.). Retrieved November 1, 2011, from Liberate healthcare website: http://www.liberatehealthcare.com/foreign/Singapore.htm C.Hsiao, W. (1995). Medical saving accounts:Lessons from singapore. Health Affairs Summer 1995 , 260-266. Jonas Schreyogg, L. M. (2004). Health-care reforms in SingaporeTwenty years of medical savings accounts. CESifo DICE report . McGuire, A., Henderson, J., & Mooney, G. (1988). The Economics of Health Care. London: Routledge Publishing.

Quantity of Healthcare

Cover Story â&#x20AC;&#x153;America and China. Two nations with extremely divergent economic ideals, but still share a common title of being the most powerful economies of the world. The US has been the emblem of democracy and economic liberalism, while China has represented the success of controlled economic practices. In light of recent turmoil, which model will prevail? SIMES writers take a deep dive into the strengths and weaknesses of both economies, to give us a taste of the economic power-play approaching in the future.â&#x20AC;?

AMERICA‟S A “FOUND & LOST” CASE Written by Eveline Tanaka In 1492, Christopher Columbus, was sailing under the Spanish flag, set out to find Asia, but happened to find a ―New World‖ which is now named the United States of America (U.S.A. or U.S.). The US economy, started when marginal colonial economies (from the Great Britain, Spain, France, etc.) grew into 13 small, independent farming economies, which joined together in 1776. While these foreign settlers traded amongst themselves, the Native Americans knew nothing about trading; but their never-dying-spirit pushed them to learn every bit about trading. In 230 years the United States grew to a huge, integrated, industrialized economy that makes up nearly a quarter of the world economy.

transportation. James Watt‘s invention of the first reliable steam engine, in addition to the creation of the Erie Canal created a route from the Atlantic Ocean to the Great Lakes. This helped stimulate the economy, especially in the New York and made city a great trading centre. Railroads were of supreme importance to the increase in trade throughout the United States, which connected raw materials to factories and markets. This highlights that trade has constantly been an important factor for America‘s development, and opening trade barriers once again contributed to their progress after the war.

First and Second Industrial Revolution The Industrial Revolution (1820-1870) was of great importance to the economic development of the United States. The first Industrial Revolution occurred in Great Britain and Europe during the late eighteenth century and was then centered on the United States and Germany. The Industrial Revolution itself refers to a revolution from hand and home production to machines and factory (i.e. new technological development). This helped increase America‘s growth and truly changed American society and economy into a modern urban-industrial state. The real impetus for America entering the Industrial Revolution was the passage of the Embargo Act of 1807, initiated because of an incident with Britain, and effectively halted trade in America. Eventual war with Britain in 1812 made it apparent that America needed a better transportation system and more economic independence. Therefore, manufacturing began to expand.

Secondly, electricity was effectively harnessed. Electrification in the U.S. started in 1900 and by 1930 about 80% of power used in industry was electric. Electric utilities with central generating stations using steam turbines greatly lowered the cost of power with businesses and houses in cities becoming increasingly electrified. Thirdly, improvements were made to industrial processes such as improving the refining process and accelerating production. Advances were made in agriculture which include better machines and cultivators. For example, Cyrus McCormick created the reaper which allowed quicker and cheaper harvesting of grain. John Deere created the first steel plow in 1837 helping speed up farming across the Midwest. As industries and factories arose, people moved from farms to cities. This led to other issues including overcrowding and disease.

Breakthroughs: The three important developments An important development after the war with Britain were significant developments in

Throughout the era, profit-incentives encouraged the private sector to expand their businesses, and brought them to the powerhouses they are today.

The Great Depression: 1929 - 1941 The prosperity of the U.S. economy, however sad to say, came to a downfall after the crash the Wall Street in October 1929, when the stock market crashed and financial institutions, such as banks, began to fail. The U.S. economy had then plunged into the period of Great Depression. The Federal Reserve (Fed) did not cause the depression to happen, however it made no effort to intervene by helping banks. Money supply fell by one-third and loan was hard to get. Hence, to salvage the U.S. economy, a treaty named Smoot-Hawley Tariff (also known as the Tariff Act of 1930) was signed by President H. Hoover on June 17, 1930. This act was to raise U.S. tariffs on over 20,000 imported goods to record levels, whereby the overall tariffs under the act were second-highest in U.S. history. Due to the Act, goods that were imported into the U.S.A. were now expensive for the Americans. Though the Act may result in the rise in export and a fall in import, this would result in a surplus Balance of Payment. However, this act did not help the Americans to be released from the Great Depression, but in fact, made the situation worse off. The situation of the Great Depression was cooled under the Roosevelt administration when deficit spending was recommended by some economists, most notably J.M. Keynes in Britain. The result – the economy grew 58% from 1932 to 1940 in 8 years of peacetime, and then grew another 56% from 1940 to 1945 in 5 years of wartime. The unemployment rate fell from 25.2% in 1932 to 13.9% in 1940 when the draft started.

The rise of technology and its importance in modernization further developed America‘s rise in small businesses and the robust nature of its economy. In the 1970s, familiar companies such as Apple, and Microsoft came to being. Steve Jobs and Bill Gates dropped out of college to become the biggest names globally in the technology front, because the vibrant profit-driven energy encouraged their creativity. Entrepreneurship has always been one of America‘s biggest attributes and contributes USD 951bn annually as of 2008. The capitalism that the world‘s biggest economy embraces and stands for, has been its most motivating force.

Lessons from the past Due to the repercussions faced with protectionist measures after the Great Depression, America had learnt its lesson, that open trade was imperative for the sustenance of the economy. However through this period, and the following decades America demonstrated an embrace of business entrepreneurship that allowed its private sector to boom. The roaring twenties onwards, economically speaking, gave birth to efficient consumer goods sectors, most notably in the automobile and manufacturing industries. Companies such as Ford and Chrysler, though established in the earlier 20th century, had expanded their manufacturing base because of the bustling consumer sentiment at that time.

References www.msu.edu/user/brownlow/indrev.htm Www.industrialrevolutioninamerica.com/ Www.library.thinkquest.org/26466/history_of_democracy.html

THE US RECESSION: Capitalism in

Written by Hemma Nair and Resham Nainani If you have always thought that US is an ever-standing economic superpower, you are not alone. After all, this mighty economy did always seem like a mighty ball of fire, much like the sun, with all the other economies revolving around it. In fact, the US is the world‘s largest economy with a GDP of US$14 trn in 2010. The US is also the world‘s largest investor, and they hold more than half of the world‘s reserves. Their practice of capitalism means that the US economy is a market -oriented one, where private businesses and investments play a dominant role. Capitalism has granted the firms more leniency, with the government minimizing their interference on the market. The Americans have been known to be extremely positive and optimistic about the practice of capitalism in their economy, and attribute their economic success to these very principles.

this is having an impact on the economy. How did the US recession come to be? In December of 2008, the US was faced with a financial crisis which all started in the early 2000s with the ―Information Technology Bubble‖. The IT Bubble, also known as the Dot-Com Bubble, was a speculative bubble which comprised of companies that started online (Internet start-ups). These companies engaged in daring business practices to increase their market share and market capitalisation. They were also heavily funded by investors who were intent on making the most of the high returns of these companies. Sadly for many firms, their growth proved to be illusionary as they had become the victim of various high profile court cases due to their immoral business practices. This had decreased consumer confidence in their company and share prices began to plummet. Other factors such as lower wage rates of foreign workers, led to the increase of unemployment among local computer programmers; and the terrorist attacks in the US further led to a dip in the US share prices.

However, with the recent economic crisis, things have taken a turn for the worse. What has always been perceived as an economic giant had mismanaged their economic policies and brought about a severe downfall that has brought the country‘s reputation down with it. Many Americans are now questioning the very practice of liberal economic policies that they once swore upon. What seemed to be an indestructible economy is now spiraling out of control with its foot in the dark, in a magnetic cloud of recession. Unemployment rates have risen, poverty levels have increased, income gaps had widened, and these are just some of the consequences of the calamitous effects of the recession on the US economy. With their dismal experiences in the recent past, ordinary Americans cannot be blamed for their increasing lack of faith when it comes to the policies adopted by the government and how

Due to post 9/11 and the recent tech industry stock market crash, Federal Reserve Chairman, Alan Greenspan decreased the federal funds rate from just below 3% to 1% in attempt to revive consumer spending. Following this decrease, the cost of borrowing throughout the economy declined. For example, mortgage, credit card and bond rates, which are all directly or indirectly based on the rate set by the Federal Reserve, fell to an alarmingly low rate. This fuelled an increase

in demand for all kinds of long-term credit, such as home loans, due to the extremely low interest rate. People who previously, could not qualify for a reasonable mortgage were being handed the money to buy houses, and eventually led to the increase in the prices in the housing market. This gave the people further confidence that they were increasing their wealth and therefore felt inclined to refinance their property and sell them for a bigger mortgage at a lower interest rate. Mortgage agencies would refinance these home loans to cover its capital that banks use to finance new mortgages. Investment banks took advantage of this situation to make profit. They bought these loans from the mortgage agencies and sold them as Mortgage Backed Securities (MBS) to the public. They were relying on the borrowers to pay their due to finance these securities. Investors were confident in these securities also because they were highly rated by creditable rating agencies. Furthermore, investors also had the option of insuring their investments in MBS which were known as Credit Default Swaps (CDS), which basically assured that the investor‘s initial investment would be repaid even if the MBS defaulted. They eventually began to make riskier decisions to make the most of the rise in the value of real-estate.

came to innovate profitable instruments associated to the rising property market, it was thought that America was revolutionising the financial industry to bring it to greater heights. However, in retrospect, the industry collapsed as rapidly as it rose, and brought devastating effects to the stability of the entire economy. The very profitincentive that made these giants global powerhouses as they are became their tragic flaw as it blinded them from the high risks of these wide-spread instruments. Capitalism was exploited to its core, and middle income American taxpayers were asked to pay the price. How did the US government handle this catastrophe? Many investment banks were heading towards default and on the 15th September 2008, Lehman Brothers, one of the world‘s leading investment banks, went into bankruptcy because of their exposure to the now worthless mortgage backed securities assets. Other investment banks were also left exposed, such as in the case of Merill Lynch, which had to be taken over by the Bank of America. Even insurance giant, AIG, faced an 80% takeover by the Federal Reserve because it was considered ―too big to fail‖ with their close affiliation to the average American consumer.

“People who previously, could not qualify for a reasonable mortgage were being handed the money to buy houses”

The troubled financial sector forced the government to intervene with short-term funds. On October 2008, the US government came up with a bailout program called the Troubled Asset Relief Program (TARP) which aimed to stimulate the US banking system. Other than the USD700bn provided to banks under the TARP program, the US government also committed more than USD10tn towards economic recovery packages. Current United States President, Barack Obama, lowered interest rates to near-zero levels to boost domestic consumption and investment in the market.

In early 2006, real-estate prices peaked and the rise in interest rates forced borrowers to face their loan payments that they could not afford. The sudden increase in default rate and the plummeting market confidence on the state of investment banks, led to the subsequent collapse of the finance industry.

In February of 2009, Obama signed the American Recovery and Reinvestment Act, which

During the early 2000s when financial giants

involved humongous government spending. The plan was to focus on jobs creation for the people and to cut tax rates to allow consumers to spend more. Concurrently, other consumer-driven industries, mainly the automobile industry, were facing problems and subsequently, the ―Big 3‖ (General Motors, Chrysler and Ford) needed the Federal Reserve for a bailout in June 2009.

“Occupy Wall Street protests sprawled all over the country, which are testaments to the outrage of middle class Americans of the power that is given to the financial giants of their country”

Things started looking positive by mid 2009. Mortgage rates showed a decent increase in sales in the housing market. The stock market was also starting to recover and the automakers were starting to emerge from bankruptcy. Some banks that received TARP funds could now also afford to repay the government. Despite that, the aftermath of the recession still haunts the banks and they now tend to restrict lending and this means that consumer spending is still low in the market. There were several attempts made by the Federal Reserve to stimulate the economy, with the use of Quantitative Easing measures. QE1 was implemented in October 2010 in efforts of clearing the banks‘ balance sheets of ―toxic assets‖ such as the mortgage-backed securities. Subsequently, the Fed brought QE2 in April 2011 to lower long-term interest rates and thereby stimulate American consumers to start borrowing again and revive spending in the economy.

backed up by the dwindling confidence level of the Americans regarding the capitalism approach. The recent Occupy Wall Street protests sprawled all over the country, which are testaments to the outrage of middle class Americans of the power that is given to the financial giants of their country. The chants of these protestors echoed the need for tighter regulation and control of the bigger institutions to prevent such catastrophes from happening in the future. So this brings us back to the main question - Is capitalism the way to go, or is it time the US looked at their economy from a different perspective and work on building back its increasingly tarnished reputation?

Capitalism- Embrace or extinguish? With the Americans struggling to come to terms with the fact that their capitalist economy is not as brilliant as they thought it would be, one cannot help but shed light on the question playing in many minds- is capitalism to be blamed for the economic turmoil? As part of their efforts to clean up the mess left in the wake of the financial crisis, the American government has chosen to tighten legislation and keep a closer eye on the economy rather than surrendering power to the hands of the major players in the economy; the businesses and investors. More and more protectionist policies are being implemented to help the US deficit and the local manufacturing activity. This is further

References online.wsj.com/.../ SB1000142405297020435800457703018156794… economictimes.indiatimes.com/topics.cms?query=us%20recession http://www.bloomberg.com/news/2011-10-11/bonds-showing-60chance-of-recession-with-bernanke-behind-curve-for-bofa.html www.cnbc.com/id/32478031/

gradual nature of the reforms. The convergence school believes that the successes are results of allowing the institutions to converge with non-socialist market economies. The two camps provide a theoretical framework imperative to better understand the driving forces of China‘s rise in economic status. *Here, we have broadly categorised scholars into two schools of thought for simplicity’s sake. Do not treat them as exhaustive.

THE REMAKING OF A CHINESE LEGEND THE RISE OF MODERN CHINA

By Liu Cai Jun and Liyana Othman China‘s integration into the world economy marked one of the few significant geopolitical events in recent years. It has triggered technological advances, the opening up of markets and an increase in global trade, and perhaps most significantly, the addition of 1.3 billion people into the global workforce, liberating millions of people from poverty.

Before tapping into the insights of the two camps of debate on the nature of the economic reforms and the transition from a state-controlled economy to a socialist market economy, it is necessary and helpful for us to first look at the major historical milestones of China. Here, we shall organise China‘s history into three main sections: (1)China under Mao Zedong; (2)China under Deng Xiaoping; (3)China after Deng Xiaoping.

Ranked in 2010 as the world‘s second-largest economy after the US, China has been the world‘s fastest growing economy, with consistent growth rates of around 10% over the past three decades. China is the largest exporter and second largest importer of goods in the world, highlighting the pivotal role they now play in global trade.

China‟s GDP Growth rate from 1961-2010. Data source: World Bank,

CHINA UNDER MAO ZEDONG

World Development Indicators.

Mao Zedong officially converted China into a communist state in the 1949 revolution. As an extension of the ideology, its economy was governed by apparent socialist values. A majority of economic activity in China was thus brought under state control, determining production, pricing, and distribution of goods and services.

The impressive growth rates of China, within their social capitalistic framework have long intrigued many economic scholars, given the paradoxical nature of the country‘s road to success. *Broadly speaking, two schools of thought have thus emerged to interpret the Chinese experience since 1978: the experimentalist school and the convergence school. The experimentalist school attributes China‘s successes to the evolutionary, experimental and

This new government nationalised the country's banking system and brought all currency and credit under centralised control. It regulated prices by establishing trade associations and boosted government revenues by collecting taxes from agriculture.

riots against foreigners, closing of school and colleges, left China in political upheaval. Political and social unrest made any economic improvements difficult, hence China remained fundamentally rural. The Chinese developed an aversion to the deeply flawed planned economic system which led to great popular support for economic reforms.

Great Leap Forward

Third, capable leadership by Deng Xiaoping and Zhao Ziyang was evident. The duo complemented one another with the former formulating ideas and drawing plans and the latter executing them.

Mao stepped down as State Chairman in 1959 after the 1958 Great Leap Forward (which was ironically a ‗Great Leap Backwards‘). Mao lost much support and faced popular resistance after the severe Great Leap famine.

Fourth saw the pragmatic attitude of the reformers, free from ideological restraints, which relieved China of its bitterness, and paved the way for economic reforms that followed. Together, these characteristics attributed to the smooth start of the economic reforms.

The Great Leap famine was primarily a result of failed agricultural policies, less deliberated and ambitious plans to rapidly industrialise China. Scholars estimated that a total of 18 to 46 million died, and thus characterised the famine as the deadliest in history. Political resistance towards Mao‘s apparent insanity was negligible as oppositions were purged.

CHINA UNDER DENG XIAOPING Deng Xiaoping‘s initiative was to actualise the principles of Zhou Enlai, with regards to the "Four Modernisations" of agriculture, industry, national defence, and science and technology sectors. This marked the start of major unprecedented economic reforms and transitions to a ―socialist market economy‖—a unique model of capitalism with Chinese characteristics.

Cultural Revolution In an attempt to re-assert his power, he launched the Cultural Revolution in 1966, where he and his supporters persistently criticized all liberal parties who were encouraging an elitist society. Mao wanted to reinstate his vision of a classless society where people from all walks of life, be they peasants, managers or intellectuals would work together.

Key Proposed Economic Reforms Economic reform officially began with the decision of Chinese Communist Party in December 1978 to propose and implement the various economic changes. The five key propositions were:

After the Cultural Revolution: A period of political transition Before delving straight into the period of economic novelty after Mao Zedong, it is useful to characterize the political environment surrounding the reforms. Here four characteristics of the political transition which conditioned the successful reforms can be identified.

Proposed Domestic Policy changes The adoption of the Responsibility System(RS) in Agriculture and small State Owned Enterprises(SOEs). The original objective, which was to partially liberalise and privatize these institutions, slowly extended to the large SOEs. While the system was not intended to extend to the large SOEs at the early stages, the process of reforming reached a stage where the privatisation of some state.

First, there was political stability. Even after the death of Mao Zedong in 1976, the succeeding administration adhered to his political ideology. The Chinese Communist Party (CCP) continued to rule China despite Deng Xiaoping‘s rise in 1978. Second, there was strong popular support. The extraneous measures of the Cultural Revolution, with the

enterprises were development.

necessary

for

greater

economic

This particular policy truly placed China on the world diplomatic map and preceded their joining of the World Trade Organisation(WTO) in 2001.

Proposed Domestic policy changes: 1) Gradual decontrol of prices to allow market forces determination

Successive plans were implemented to increase foreign capital for China‘s development. Foreign Direct Investments (FDIs) were permitted in several Special Economic Zones (SEZs) throughout China, many of which came from Hong Kong and Taiwan. SEZs have special economic policies and flexible governmental measures such as minimizing red tape, tax treatment and developing the needed infrastructures to make them more attractive for foreign businesses. The FDIs provided knowledge and skills towards manufacturing, resource allocation and administration which were originally unavailable to the Chinese. This greatly assisted China in the transformation from agricultural-based to an institutional and manufacturing-based economy.

2) Deregulation of the supply of consumer Goods 3) Change the government planning process to suit a more market-oriented economy Proposed Foreign policy changes: ―Open Door‖ policy to boost foreign trade and encourage foreign investments. Domestically, the adoption of Responsibility System (RS) allowed the once socialist commune to convert into family farming; each family was able to determine the output they wanted to produce. The excess output after fulfilling the quota could then be sold at market prices for profit, which was initially forbidden. The initiation of RS in the Agriculture sector did spur the short-term growth of China.

As China was relatively rural at the time, labour was widely available and at a low cost. The skills adapted from Western expertise improved their manufacturing capabilities immensely. Export-driven, foreign trade soon became the major vehicle for economic growth from the 1980s onwards. During the period, China tried to improve living standards and improve technology without increasing unemployment, budget deficits or inflation. Coupled with domestic reforms in agriculture, non-state aspects and SOEs, China's economy took off.

The gradual liberalisation of SOEs into either partial or completely privatised organisations was a more dominant source of growth. An example of partial privatisation is the Township and Village Enterprises(TVEs). The gradual complete privatisation of banks replaced government budgetary financing of businesses loans. Operational control of factories was given to factory managers, where profit incentives boosted their productivity.

Reconciling the contributions of Deng Xiaoping During Deng's reign, he instituted a variety of reforms aimed at decentralising the economy and opening up China for international trade. Deng‘s initiatives provided room for extraordinary economic improvement towards the dominant status in global trade that China holds today.

Externally, the contribution of the ―Open Door‖ policy to the transformation and transition of China‘s economy deserves to be noted and is worthy of further detailed discussion.

CHINA AFTER DENG XIAOPING: CHINA UNDER JIANG ZEMIN AND HU JINTAO

Deng‘s foresight was unparalleled. He had a ―seek truth from facts‖ ideology, and adopted successful practices from previous reigns. He realised that China needed Western technology and investment, and opened the door to foreign businesses who wanted to set up operations in China.

Consequences of „opening up‟ The rapid growth did not shield China from external turbulence as the ‗opening up‘ subjected its growth to external factors.

For instance, the Asian financial crisis in 2001 affected China mainly because of decreased FDIs and a decrease in the growth of its exports.

fastest period of economic growth around the world for four decades. By 2010 it was evident that China was poised to move from export dependency, which made it a major competitor to other Asian export-led economies such as Singapore, to development of an internal market. Chinaâ&#x20AC;&#x2DC;s growth was contributed not just by foreign trade, but from internal investment in infrastructure and private sector expansion instead of just exports. This facilitated private sector growth and drove investment into the country.

However, since it had huge reserves, a currency that was not easily convertible, and capital inflows from long term investments, it managed to remain largely insulated from the regional crisis.

Forbes Magazine has noted the global shift in the balance of power. In the December 2010 issue, it said: "As its GDP has increased, China has become more assertive regarding international issues. Those countries on its periphery have felt China's growing influence. When these states make policy decisions they now have to take China into account. There is no direct intimidation but China can punish those who are against its interests. This same pressure is being felt worldwide: The balance of power has changed."

Exports (% of GDP)

A CLOSER LOOK AT THE ONGOING DEBATE: THE CHINESE EXPERIENCE What are the true sources of rapid growth? Foreign direct investments, net inflows (BoP current US$)

According to experimentalists, the adoption of a gradualist strategy encourages experimentation of existing structures and institutions and in the process, may innovate and tailor the institutions to suit the particular economic environment of China. Institutional innovations include the development of the Responsibility System (RS), Township and Village Enterprises (TVEs) and Special Economic Zones (SEZs). Through such advances, China has indeed found a way to reconcile fast growth with its continuing political commitment to state ownership. Experimentalists believe that such institutional innovations are a source of rapid growth.

China Today: A force which cannot be ignored The economy continued to grow by 10 percent annually in the period of 1990-2001. China had the fastest growth in per capita income, with one day of Chinese exports in 2007 matching the countryâ&#x20AC;&#x2DC;s export volume for the whole of 1978. The reforms implemented over the past decades promoted individual initiative and entrepreneurship which enhanced privatisation. In 2010, there were approximately 10 million small businesses in China. 2000 to 2007 marked the

However, such views are contested by the convergence school. They question whether such institutional innovations are really a source of rapid growth or are simply imperfect substitutes for the actual capitalist institutions. In a crosscountry empirical growth model for year 19651990 estimated in Lee, Radelet, and Sachs, growth rates were found to be consistent with that of a ―normal‖ economy, not a transitional one. For the convergence theorists, rapid reforms were initiated to increase harmonisation with normal market economies, and hence led to the nation‘s economic success.

conversion to capitalism in the long-run would lead to continued sustainable growth rates. There is no doubt that globalisation has pushed the socialist market economy to assume further market-orientation; socialist values still persist as complete harmonising with normalcy would mean an abandonment of current political ideologies which is quite impossible in the meantime (with stable sustainable growth rates under Communism).

Drawing careful conclusions on the current situation, we steer towards the experimentalist view that China might actually be better off being a state capitalist, in view of existing political maturity. Convergence theorists believe that a change from gradual to rapid democratisation and liberalisation of the economy will bring China to its true potential. However, we question the idea of rapid changes. The society, though an ancient civilisation, is still healing itself of the various devastations of the past. Drawing parallels with the bold plans implemented during the Great Leap forward, we question China‘s preparedness to again embrace rapid and bold changes. Therefore the experimentalists‘ initiative of a continued gradualist strategy seems much more considerate and practical. China may not have reached its utmost potential as yet, but its rise to power now in the state capitalist setting foreshadows the successes it will present to the world in years to come.

Capitalism with socialism Since the espousal of a gradualist strategy, empirical research on the recent developments in China‘s economy points towards a unique marriage of its kind. Will the model continue to persist with increasing distinctive institutional innovation or will a convergence towards harmonising with normal market economies emerge? Whether the Chinese model will continue to persist largely depends on its successes in the future. To many, the model of state capitalism is inherently inefficient. They question efficient allocation of investments and the efficient management of SOEs. One of the most pressing issues on hand is the huge burden on government budget constructed by increasingly inefficient SOEs which are either in deficit or marginally profitable. With the backing of the Chinese government, the SOEs have no incentive to boost efficiency. Currently, the SOEs employ 70 percent of labour and produce only 40 percent of total output.

References http://www.nber.org/papsers/w5935.pdf?new_window=1 Gregory C. Chow Chinese Economic Review, Volume 4, Number 2, 1993, pages 117http://www.prospectmagazine.co.uk/2007/01/ doesthefuturereallybelongtochina/http://www.economist.com/ node/21528262

Intuitively, it is not difficult to see from the inefficiencies of state capitalism that China is still far from its full potential. They have yet to maximise their potential. Hence, high growth rates and economic successes are still predictable. The big question remains on whether the partial

LONG-TERM CHALLENGES TO By Kang Yong Kia and Dang Hoang Lan The rapid rise of China within the last thirty years has been described as the most successful case of economic advancement in the world. In less than a decade, China could be the world‘s largest economy. The Chinese government sees growth as a useful tool to maintain social stability. However, China faces a number of economic challenges that undermine its future growth, including government support of state owned firms, weak banking system, over-reliance on export for economic growth, and high inflation.

still plays a prominent role in sectors ranging from telecommunication to textile. The government obstructs free market forces, enforcing rules to control private sector rivals so that SOEs can dominate the local market. Because SOEs are supported and subsidised by the state bank, the more efficient private enterprises are starved of financial resources. As a result, private enterprises have to turn to the shadow banking system to gather funding for their operations. Shadow banking system refers to financial intermediaries, whose members are not subject to regulatory oversight, or it could also refer to unregulated activities by regulated institutions. China‘s leaders are skeptical about the burgeoning shadow banking system, hence, it is clamping down on these informal transactions for fear of a credit bubble. The credit bubble is already showing the first signs of bursting in Zhejiang, where a large number of private enterprises have gone bust. Reports suggest that most of the bankruptcies involved small and medium-sized private firms that could not service their debt or had their credit lines withdrawn by China‘s ―shadow banking system.‖ Needless to say, when the government grants relentless support to state-owned enterprises, and simultaneously imposes a straitjacket on private lending, economic growth will never attain its full potential in the country.

The economic system which is currently in operation in China is the ―socialist market economy‖, in which most of the assets of the industrial sector are owned by government but the allocation of resources are subject to free market forces. Nevertheless, the government still plays a major role in economic development. Historically, under leadership of Mao Zedong, China‘s economy was controlled by the government. State own enterprises (SOEs) were the main players in the economy which produced three quarters of industrial production in 1978. Moreover, the state set production goals, controlled prices and allocated resources, with the goal of making china‘s economy self-sufficient. Foreign trade was generally limited to obtaining only those goods that could not be made or found in China. Only a handful of countries that had good relationship with China could participate in foreign trade. Consequently, China's real GDP grew at an estimated average annual rate of about 5.3% from 1960 to 1978. In 1979, China launched several economic reforms, based on free market principles and open trade and investment in the West countries, giving rapid rise to its economic growth.

The majority of banks in China are state-owned and the presence of foreign banks in China is diminutive ― 127 foreign banks operating in China accounted for only 1.83% of the total banking assets in China in 2010 ―and hence, the

However, despite open market reforms, the state

state dictates where most of the liquidity in the economy goes. Chinese banks have lent wantonly to the SOEs in order to keep the economy booming after the financial crisis. Herein lies the hazard of a bad -debt problem that China was afflicted with in the past; SOEs may become complacent and inefficient (more than they are now) and rely too much on the government‘s willingness to splurge on them in order to keep China‘s economic indicators nice and presentable. As a result, China‘s leaders face an uphill battle in trying to readjust China‘s economy so that growth is driven by consumption rather than by exports and investment because efforts to do so will be stymied by the ever-growing clout of the SOEs.

state-owned bank, the bank now has more excess reserves. But state-owned banks do not loan the excess to private enterprises; instead, they loan them to state-owned enterprises, because they are obligated to do so. It is apparent that this routine is politically safe but not economically profitable. It is safe because no bank managers are sent to jail for making bad loans to SOEs; but unprofitable because state-owned banks lend to SOEs at regulated low rates of interest. What this entails is a loss of public welfare to SOEs, as well as a contraction in the economy due to low consumer spending. China‘s GDP growth is essentially propped up only by its high exports and investment. Without incorporating consumer spending in its long-term economic plan, China faces the risk of slow or even no growth in the future.

Besides that, interest rates are set in favor of SOEs, and offer little credit reward to households and private enterprises. A study by Hong Kong Institute for Monetary Research found that if SOEs were to pay market interest rates, their profits would be entirely wiped out, indicating the severe priority given to the public sector. On the contrary, the interest rate offered to depositors is lower than inflation rate, thereby lowering household incomes. Some economists claim that this banking system in China transfers the wealth from households to SOEs, in effect, depressing domestic consumption and creating overproduction in certain industrial sectors.

Another perennial problem that China has been grappling with is its fixed exchange rate system. As China‘s trade and current account surpluses increase, ceteris paribus, the Yuan should appreciate. However, the fixed exchange rate policy prevents that appreciation from happening. Chinese banks have been purchasing large amounts of foreign currencies to maintain its weak currency and hence the keep Chinese exports cheap and competitive. In order to maintain the competitiveness of its exports, the Chinese central bank has been artificially depressing the value of the Yuan. In doing so, China's trading partners will see an attrition of their money supply due to the bulk of Chinese goods they buy. Ceteris paribus, the subsequent purchase of their government bonds by China will result in an unchanged money supply in its trading partners. This has a detrimental effect on China's trading partners. Since none of these monies had been deposited in/loaned out from their respective banks, the money supply (of China's trading partners) had not been multiplied via the money multiplier, thus suppressing expansion in their economies. This has a detrimental impact on the economies of China‘s trading partners, like the

That being said, the acceleration of domestic output coupled with the decline in domestic consumption puts the Chinese economy in a predicament. In an ideal scenario, there exists a healthy level of consumer spending, which promotes growth in the economy. It can be said that consumer spending is essential for the economy because it is the largest part of aggregate demand at the macroeconomic level. The Chinese model of allocation of resources however, fosters the desire to save rather than spend, hence consumer spending is kept low in China. The increase in savings only serves to line the coffers of inefficient SOEs. When a Chinese person deposits a large proportion of his earnings in a

US, Japan, and Singapore, while China receives an unfair boost. During the most recent Asia-Pacific Economic Cooperation meeting held in Honolulu, Hawaii, US president Barack Obama issued an ultimatum to Chinese Premier Wen Jiabao to allow China‘s currency to appreciate naturally and level the playing field, or risk facing punitive taxes on Chinese exports to the US. But it is not just China‘s trading partners who are feeling the pinch; the effects are felt on home soil too. The excess liquidity growth has had its side effects: creating distortions in the asset market and inciting inflation.

foreign direct investment since its ascension to the World Trade Organisation in December 2001, it imposes tough regulations on foreign firms setting up operations in China. This is most apparent in the retail banking sector. Foreign banks are required to incorporate a foreign-owned enterprise if they wish to enter China‘s market, and must have a registered capital of no less than RMB 1 billion in a freely convertible currency. This policy serves to prevent unmitigated free trading of China‘s currency, so that the government is wholly in control of the inflexible Yuan. The arduousness faced by foreign firms even extends to the web-based industry, where austere internet censorship saw the exit of Google from China, and effectively blocked the entry of many others, such as Twitter and Facebook. The omission of these new media not only represents the opportunity cost of foreign investment, but more egregiously, it eschews innovation, a vital driver of growth in the 21st century.

Inflation in China will lead to even lower levels of domestic consumption than it is already. China has continually struggled with a stubbornly high inflation rate throughout the years. One such instance of inflation can be observed in the increase in food prices in China. Majority of the population spend a significant proportion of their income on food, and therefore rising food prices will have a knock-on effect on wages, and instill further inflation. Without an effective remedy to the problem of inflation, China could well go down the vicious cycle of increasing prices: rising food prices lead to a higher consumer price index, and ultimately, decreased domestic consumption, which points to slower growth in the future.

The lack of transparency in business regulations is just one of the many malaises that afflicts China‘s economy and makes its future look bleak. But this is not the end of China‘s worries. Inflationary pressures in all sectors of its economy, rising consumer prices, hard-line calls from world leaders to revaluate the currency, and a growing sense of discontent at home and among China‘s youth; all these are impediments to China and its ideal socialist market economy. In order to become the number one economy in the world, China would most likely have to consider an exit strategy for its currency policy and also involve a paradigm shift away from state capitalism. It does not necessarily have to be changed now, but in contemplation of future growth, it has to be done sometime soon.

It also does not help that China suffers from a lack of transparency in business procurement. In China, government connections, not market forces, determine success in business. Many foreign firms find it difficult to do business because of rules and regulations that are opaque and inconsistent, discouraging foreign competition. Although China has seen a surge in

Bibliography: 1

www.chinadaily.com.cn, Article: Official says Zhejiang resilient to debt crisis 2 www.pwccn.com, Article: Foreign Banks China Jun 2011 3 www.kpmg.com, Article: Opening Doors in China ― Incorporation of Foreign Banks

CAPITALISM & SOCIALISM

undermines the political ideology of China. With opposing forces at work, what will the future of China be like? In hope of drawing careful conclusions and predictions about the future, it is useful to be informed of the various situations shaping US and China today. We shall thus have a closer look at US and China separately.

A COMPARISON of IDEOLOGIES By Liu Cai Jun, Resham Nainani and Liyana Othman THE FUTURE OF ECONOMIC MODELS Economic models are inherently dynamic; they adjust themselves according to their strengths and weaknesses and are constantly shaped by the socio -political response to them. Since economic models are subjected to the ever-changing global environment, they are stochastic in nature. Therefore, whilst there is a need to define the present, it seems almost natural and logical that we should look into the future of both economic models as a mere understanding of current without drawing insights into the future seems pointless.

THE FUTURE OF US CAPITALISM: PROPOSED SOLUTIONS AND CURES REVISITING INITIAL CONCERNS “Is the US recession merely a systemic cyclic process?” Capitalist economies experience economic cycles, periods of oscillation between relatively unregulated capitalism and increasingly regulated capitalism. What the US is experiencing now is the period of increasing regulation in its capitalist economy, with greater state presence and interventions. Perhaps Joseph Stiglitz is the most influential macroeconomist arguing that the limitations of the market mechanism have produced cyclic crises throughout the history of capitalism. Do not yet rejoice, warn the naysayers of capitalism. The more important issue is whether this period is still part of a systemic cycle, or it has evolved and imploded, unable to return to its original proposed unregulated state. With this in mind, we shall now proceed to understanding the crisis and the various insights drawn on the future of capitalism from different perspectives.

MAJOR FORCES SHAPING US AND CHINA TODAY In particular, the major force shaping US capitalism today is the severity of the US recession. The bleak outlook of the US economy affecting Americans at the very core has caused them to question the very system which governed their 150 years of economic success. Recent movements in Oakland and the revival of interest in socialism compel us to again reassess the strengths and the weaknesses of the system and the future of US capitalism. ―Is the US recession merely a systemic cyclic process?‖, ―Or is it a result of the manifestation of years of social inequality?‖ and ―Can capitalism heal itself?‖ are some of the very important polemical debates today.

Keynesian Economics: Greater state control is necessary Keynesian Economics state that unregulated markets have limitations and imperfections and therefore experience systemic failures such as inflations, recessions or even depressions. Continued absence of state and regulation may threaten the very survival of capitalism. Keynesian economics then proposes various state interventions—mixtures of regulations, monetary

China‘s state capitalism, on the other hand, is shaped not only by the need for sustainable economic growth, but also by the necessity to search for an appropriate pace to accommodate the current maturity of the socio-political factors. Should China assume further capitalist ideals? Does sustainable growth really require further economic liberalisation? If it does, this heavily

and fiscal policies—to lift the market of its dire situations and to mitigate the threats on capitalism. Despite being a dormant and somewhat marginalised school of thought in the last 30 years, Keynesian economics is back. In particular, this US recession has given Keynesian theory a real world test. However, Obama‘s idea to spend US out of the recession does not seem to be working well. Moreover, such flooding of government spending is not without its further consequences down the road. The inflation which engulfed the economy right after the Great Depression is a historical warning. Still, proud Keynesians like Paul Krugman say that almost $900 billion in stimulus did not work because it was not big enough; we will have to wonder if an adequate Keynesian stimulus is even possible. So how much is ever enough? Summarising, the future of capitalism can only be secured with continued increases in government spending from a Keynesian perspective.

investments? Well apparently, the mixture of greed and liberalism is not a good concoction. The US government has stepped in to assume greater control in regulating and bailing out the economy. The consistencies and inconsistencies with Keynesian and Neoclassical respectively, reflect a general oscillation at work, parallel to the type of capitalism. Now Keynesian economics is once again back in the game, but no one truly knows how much longer it will be. When the economic aftermath sets in, will the Keynesian school play a bigger role? Or will history repeat itself, banishing Keynesianism once again into ideological exile with the almost immediate revival of the neoclassical? Ian Bremmer, author of The End of the Free Market (misleadingly titled), seems to tap on both schools of thought. He believes in the resilience and ultimate prevalence of capitalism. Bremmer‘s beliefs are guided by the idea that capitalism has time and again survived the crises of its own making such as the Great Depression in 1930s, and now the US recession. Nevertheless, he recognises the need for greater state intervention which is most definitely not a shifting of ideology to socialism.

Neoclassical Economics: “Can capitalism heal itself?” The neoclassical school, on the other hand, is a firm believer of unregulated capitalism with deep roots in the wisdoms of its founding father, Adam Smith. It emphasises on how and why this type of capitalism is the optimal choice and the best possible outcome, generating maximal wealth. For the neoclassical economists, if a less than optimal outcome occurs, such as the current US recession, it is best to allow the system to heal itself. They criticise the Keynesian idea of state regulation, pointing that state involvement will only cause market inefficiencies. However, Obama‘s adoption of Keynesian economics opposes the neoclassical view and places the school again back into retreat.

Despite the difference in perspectives, there is general consensus that the economic failure which discredited the West is only a systemic failure and is only transitory. The only question remains when the economy will bounce back.

Keynesian vs Neoclassical The recession happened because of the US‘s free market economy policy. Absence of state and regulation enabled hypercapitalism which cannot be contained. The lack of regulations and impositions by the government have left the economy to fend for itself and therefore, eventually, it went spiralling out of control. This just puts to question the free market policy of the US. Should they have had more regulations imposed on the banks and the high riders of the economy? Could they have predicted this if they were not all blinded by the constant high returns of their

According to Wolff, the system will continue to deteriorate unless the problem of social inequality is carefully addressed. The Marxian policy would require a complete abolition of capitalism in favour of socialist ideals. Yet despite growing Marxists sympathies, it is still a relatively secondary to Keynesian and Neoclassical alike. Therefore, even though we expect a further turn to the left by the Obama administration with increasing regulatory control, the drastic change to socialism is quite impossible; and as Wolff puts it: the time has come to acknowledge and debate whether the best solution to capitalist crises might not be the abolition of capitalism itself.

Marxism: “a result of the manifestation of years of social inequality?” The view that free markets can self-regulate is much contested by Marxists alike. While most economic and political analyst today focus on the debate about the increasing role of state in free market capitalism, Marxists offer a class-based analysis to understanding the crisis and the future of capitalism which differs from the Neoclassical and Keynesian perspectives. However, although Marxism is indisputably the greatest critic of capitalism, it has been historically marginalised and only recently resurfaced in light of the crisis to provide alternative insights and propose cures to the increasingly exploited and upset citizens of America.

STATE CAPITALISM IN CHINA TODAY

According to US Economist Richard Wolff, the current system has no way of solving the problem. Social inequality and unfairness are the inherent nature of capitalism. According to Wolff, the crisis is an explosion of many years of social inequality. Before 1970, there was rising inequality with rising real wages. Since 1970, real wages stopped rising with even greater rising inequality. The workers produce for the employers more than what the employers give them. The rich-poor gap is sharply pronounced. Real wage stopped rising whereas productivity kept rising. The working class of America has always viewed the real wage problem as a personal failure rather than social change. Hence, the average Americans try to solve the social problem by individual action which often than not is the recipe for misery. In order to sustain their current standard of living, the workers began to work more hours, borrow more money leading to exhaustion from overwork and heightened debts.

Characterising China: Where is China today? Is China capitalist or socialist? Although recent developments in the Chinese economy are unequivocal in nature, there is still no single consensus. Among those who believe that China has yet become ―fully capitalist‖, there exists three different positions and interpretations: hard-core neoliberals who view China as pre-modern and pre-capitalist; leftists who view China as still socialist with strong socialist characteristics or at most with a partial capitalist character; and those who prefer not to say anything, given ―Chinese characteristics‖. Developing on the second interpretation coincides with the idea that China has created a unique Chinese model with inherent socialist characteristics in the pursuit of capitalist reforms. We define it as state capitalism. According to Ian Bremmer, state capitalism is defined as economies in which the state is the principle actor and judge, and uses the market for political gains as opposed to the freemarket economies where multinational corporations are the

After 30 years of rising inequality, the system finally exploded. The working class today cannot seek internal resolve anymore. They turn to seek external resolve in transfer payments which is also out of the question as the US government is cutting them. The people now cannot borrow, cannot work more hours and cannot get more from the government. There is declining capacity to consume and no more internal measures to take up the slide.

principle actors. With this concrete avert from ambiguity, we can now proceed to discuss the economic situation in still a partial capitalist character, it is not spared. Drawing parallels with US, the only question is when will the system explode?

THE FUTURE OF STATE CAPTALISM Major forces shaping China: A different set of Problems

Discovering the true Chinese Style

China faces a very different problem. Unlike the Americans, whose snowballing debts are causes for the reassessment of their global hegemony, China is growing, albeit slower now, but still at comparatively high rates. Nevertheless, the seemingly cheering prospects of the Chinese character do not necessitate a non-perilous and unchallenged structure. China is stuck in the predicament of how it should conduct its policies to achieve simultaneous economic and political goals. Nonetheless, this seemingly unachievable balance that cannibalise on its own is not China‘s only concern. In our opinion, the challenges and perils of adopting state capitalism are the most pressing issues; in particular the social implications of capitalism should be foremost tackled.

China‘s contemporary economic style is imprinted by globalization. However according to German economist Carsten Herrmann-Pillath, central features of localism, networks, culturalism, and modernism, have all found expression in both the Maoist times, the post-Mao reform period and in contemporary China. Furthermore, some of these features also captured snippets of the Imperial past. There seems to be an existence of a remarkable continuity of economic style with the past, masked by emphasis on formal institutions and official ideology. How this economic style interacts with the external and global forces, will determine the nature of the Chinese economic system in the medium and long run. This raises the important question whether and how the Chinese economic style will also impact on the global institutional structures.

Future challenges at stake China‘s economic growth has to overcome major obstacles in the future. For instance, the inefficiencies of the State Owned Enterprises (SOEs), moral implication of Guan Xi and high inflation are some of such impediments.

UNIQUENESS SURVIVES? US and China seem to be moving opposite in growth but converging in policies.

The extensive governmental support for SOEs has eaten into the resources of the non-state sectors, specifically the privatised industries. This results in allocative inefficiencies and feelings of unjust which might compromise the social stability. Guan Xi conditions corruption. Transparency International‘s 2011 Corruption Perspective Index(CPI) gave China a score of 3.6, from a scale of 0 to 10, with 0 indicating high levels of corruption and 10, low levels. There exists spiralling inflation rates which are difficult to contain. If the inflation rates remain high, domestic consumption might be compromised which in turn slows down economic growth. Social implications of state capitalism A widening income gap reflects the unresolved social issues that arose from rapid modernisation which is a source of possible social unrests. The social inequality and disparity is as suggested by Marxism above due to the inherent capitalist values. Therefore, even though China is China today. 36

Can both US and China remain unique? Although US appear to adopt seemingly socialist policies, it is still inherently capitalistic. To say otherwise, one might be criticised for being illinformed. This brings us back to our original understanding that economic models are dynamic and are constantly shaped by socio-political factors in response to their weaknesses (in the case of US). Since economic models are always shifting and oscillating in their nature, we should not be very concerned about any threats to the uniqueness of the US model. Socialist sympathies such as the Occupy movements in the US today are a direct consequence of American capitalism. Yet, the truth resides when the US economy bounces back, capitalistic values will be back and celebrated and socialist values will be irrelevant once again. Now, the only thing we have to consider is when the economy will recover, if it ever does.

We feel that there is no need to insist any best approach if the intended results are achieved. There are many forms of capitalisms. Both are economic models that are still suitable to their respective social, political and economic context. Unfortunately, there are limitations in predicting the sustainability of the economic models. We maintain that there is a need to follow closely with the immediate decisions that government make to guide our further analysis towards a more definitive direction. References: http://www.npr.org/templates/story/story.php? storyId=126835124 Free market vs. political control in China: Convenience or contradiction? http://waccglobal.org/en/19981-communication-issues-in-thecaribbean/900-.html State Capitalism Comes of Age http://proquest.umi.com/pqdlink? vinst=PROD&fmt=3&startpage=1&vname=PQD&RQT=309&did=1688945111&s

Sandwiched between the two ideologies, is it really possible for China to stay unique or allow the triumph of the liberal capitalist ideals? According to some scholars, uniqueness is possible. The experimentalist school in particular views this innovation of melding ideologies through experimentation and gradualism as a framework that would work for China in the longterm, possibly superseding the success that rapid modernization and capitalism might have brought forth. US economic and political analyst Ian Bremmer concurs with this view but preserve that state capitalism has its own weaknesses which have to be taken seriously which then threatens the sustainability of the Chinese model. Whether state capitalism will persist to the very end—a successful marriage of the two ideologies—very much depends on how ―shock proof‖ it is and how well the system can adjust and adapt itself to new challenges in the ever-changing global environment, withstanding the endless test of time.

http://www.guardian.co.uk/news/datablog/2010/oct/26/ corruption-index-2010-transparencyhttp://www.marxists.org/archive/corey/1918/revsoc/ ch10.html

http://digital.law.washington.edu/dspace-law/

EU DEBT CRISIS AN INEVITABLE COLLAPSE? By Bernard Lee and Herosh Kumar The hot topic circulating the headlines, prompting debates and discussions all around the world is none other than the Eurozone Debt Crisis. The crisis is like an economical earthquake that is creating tremors across the global economy. With the highly integrated economic landscape that we now live in, a failure in containing the crisis in Europe will have catastrophic implications on the entire world.

Debt to GDP: Italy's 2010 figure compared to some of its European peers. Source:

Unfortunately, the situation has aggravated in recent months with unspeakable threats to stronger economies of Italy and France. With two of the strongest economies facing further woes, there is an undeniable fear of whether the Eurozone would be able to survive this crisis.

The epicenter of the debt crisis exists in Greece, where uncontrollable deficit and sovereign debt have reached dangerous levels. Peripheral countries of Portugal, Ireland and Spain consecutively fell into the pit of rising debt levels in a domino fashion.

Italyâ&#x20AC;&#x;s debt woes:

These countries do not have the ability to repay their debt, and stronger Eurozone members are reluctant to pay for their mismanagement. In order to raise the funds needed to cover their deficit, they will need to borrow more, however their lagging improvement have left lenders skeptical of safety. As a result of the market uncertainty, the weaker economies in the likes of Portugal Ireland

Italy has moved to centre stage in the crisis because of rising debt levels that would be too hard to contain. Holding the third largest public debt pile in the world of â&#x201A;Ź1,900 bn (as of May 2011), the magnitude of Italian debt is making investors and Eurozone nations alike very wary. Being the third largest economy of the region,

and Spain, have been facing sky-rocketing yields on their sovereign bonds, indicating that investors are no longer confident in the capability of these governments to repay their debts.

collapse in Italian economy could well lead to the inevitable collapse of the monetary union. With this urgency in view, Italian Premier Mario Monti and his new government approved a

bitstream/handle/ 38

package of austerity and growth measures worth USD 40.53 billion aimed at helping to save the euro from collapse. The measures include immediate cuts to the costs of maintaining Italy's bulky political class as well as significant measures to fight tax evasion. The package also includes measures to spur growth and competition, while aiming to stamp out rampant nepotism. But it also raises the retirement age and the number of years of service to qualify for a full pension, steps strongly opposed by unions, and imposes new taxes on Italians' private wealth, including their homes, boats and luxury cars, measures that conservatives have protested.

defend the credit rating, the austerity measures required will be politically very difficult, especially when the France‘s presidential election is on 2012.

France at the brink:

Investors‘ concerns about France have been reflected in the bond market – where it is costing France more to borrow money – and in the credit market, where the cost of insuring against the possibility of Paris defaulting on its debts has risen.

Throughout this crisis France and Germany have been portrayed as the leaders that would save the region from the brink of disaster. However, underlying economic concerns in France have brought to question whether this stable duo is as stable as it seems. France‘s economic growth in 2011 is forecast at 2.2 percent, weaker than Germany; unemployment at nine percent is not going down as it is in Germany and public debt is also rising. Another problem is competitiveness as wages have risen sharply in recent years while productivity has not. In contrast to Germany, France – like Italy, Spain and the region as a whole, is running a large trade deficit.

To tackle the Euro problem as a whole, the German chancellor Angela Merkel and French president Nicolas Sarkozy are working together to form a deal on fiscal union that they hope will bring long-term stability to the currency zone and the blueprint will be presented to other European leaders at a Brussels summit when it‘s finalized. In the light of saving the currency, financial markets will be expecting an interest rate cut from the European Central Bank to give struggling euro economies a helping hand.

France‘s problems are likely to consume all of its economic resources as French banks are among the most vulnerable to potential losses on Greek and possibly Italian debt. As a result, shares of Société Générale, BNP Paribas and Crédit Agricole have all lost almost half of their value since March. France‘s AAA credit rating has been at risk for awhile now, and in November 2011, credit-rating agency Moody‘s warned of a possible downgrade for France. Although President Nicolas Sarkozy has firmly reiterated that he will do whatever it takes to

Nonetheless, the whole process of containing the problems of weak European economies depends on having enough financially strong countries to pay for the bailouts. With France and Italy in troubled waters, these imperative aims seem to be challenged. Other solutions under contemplation: Members of the Eurozone planned to deal with the

debt crisis by boosting the Euro bailout fund; the European Financial Stability Fund (EFSF), but that did not work, or happen fast enough to resolve the crisis before it managed to engulf Italy. One of main the reasons behind this is that while the Eurozone leaders announced at the end of October that they have agreed in principle to boost the funds from €440bn to €1 trillion, they do not actually have a concrete plan of how to do this.

References: http://en.wikipedia.org/wiki/ European_sovereign_debt_crisis http://www.bbc.co.uk/news/world-europe-16026270 http://www.dailymail.co.uk/news/article-2062258/ Eurozone-debt-crisis-French-Germans-clash-EuropeanCentral-Bank-intervention.html http://www.bbc.co.uk/news/world-europe-16024316

The current contemplation of the European Central Bank (ECB) coming into the picture with monetary policy is by using a massive dose of quantitative easing (QE), with the ECB printing funds to buy troubled governments‘ debt and to drive down the yields. However the Eurozone has so far avoided QE, fearing its potentially inflationary after-effects, and politically it remains hugely unpopular with Germany, which holds a dominance among the euro nations. After months of thickening dusk that saw the Eurozone fall closer to recession and potentially break up, a tiny ray of hope can be seen. There might be transformations of the currency union into a closer fiscal union, which provides the committee with greater centralized control over the fiscal policies of the 17 member countries. And that would seem like it might be a first step closer to the initiation of a proper solution for the EU debt crisis and calm the storms in markets. Despite these proposed solutions, the Eurozone is still in a precarious state, officially diving into further recession this year. Though the relative standing of Italy and France is still strong, the possibility of their weaknesses is still an unthinkable fear. If both these powers also fall into the traps of the crisis, who is going to save the region from collapse?

ICELAND‟S RECOVERY

achievement, given the severity and depth of the crisis that Iceland faced at the time.

CAN THE LESSONS BE APPLIED ELSEWHERE?

The exchange rate had depreciated sharply in the run-up to the crisis, and there was a deep concern that it would plummet in a disorderly way. This was why capital controls were imposed.

By Lenard Ong The 2008–2011 Icelandic financial crisis is a major ongoing economic and political crisis in Iceland that struck the chord with peril in the Eurozone. Iceland faced the collapse of all three of the country's major commercial banks following their difficulties in refinancing their short-term debt and a run on deposits of the United Kingdom. Relative to the size of its economy, Iceland‘s banking collapse is the largest suffered by any country in economic history, but its recent recovery efforts with free market principles has proven effective in bringing the country back on its feet. As the first country to experience the full force of the global economic crisis, Iceland is now held up as an example by some of how to overcome deep economic dislocation without undoing the social fabric.

The government had to use its balance sheet to recapitalize the banks and rebuild the financial system. This is equivalent to an escalation of public debt. Therefore, public finances needed to be restored. During the past couple of years, the government has taken a number of fiscal measures that have put the country‘s finances back on a sustainable path. Finally, restructuring the banking system was obviously a huge challenge. The size of the banking system debt was equivalent to about 1,000 percent of GDP before the crisis. It now stands at 200 percent of GDP, which is still significant, but nonetheless indicates enormous downsizing. The core banking system namely the central bank of Iceland, has been recapitalized using IMF‘s funds and is fully functioning, a significant achievement for the authorities. This recapitalization was in efforts to revive and store liquidity back to the banks.

Key to Iceland‘s recovery was an IMF-supported program worth US$2.1 billion that was agreed in November 2008, shortly after the country‘s three main banks collapsed in disastrous fashion. The recovery program included controversial measures such as capital controls and a decision not to tighten fiscal policy during the first year. It also sought to ensure that the restructuring of the banks would not require Icelandic taxpayers to shoulder excessive private sector losses. Joseph Stiglitz, an American economist agreed with the statement that the future generation should not be put up to bear the mistakes of today.

The authorities have developed a strategy for lifting capital controls that is conditions-based rather than time-based. As conditions fall into place, the controls will be phased out gradually. These conditions mainly relate to the stability of the financial system and the strength of Iceland‘s international reserves position. It is also essential that the government has access to international capital markets.

The program had three objectives: first to stabilize the exchange rate, second to put the public finances on a sustainable path, and last but not least, to restructure the financial system. All three of these objectives were met by the time the program expired. This was really an enormous

Iceland is well on its way to achieving the conditions necessary for stabilization of its capital markets as exhibited at the start of 2011. Earlier this year, Iceland had a successful issuance of a US$1 billion bond in June. This was very important for

two reasons - first, the government needed to roll over some maturities that were falling due and this issuance enabled them to do that with ease. Secondly, it was a clear signal that the financial markets have confidence in the economic recovery that is underway and the achievements of the past three years. This achievement will only serve to make it easier to lift the capital controls currently in place. Iceland is fortunate because it is endowed with tremendous natural resources. Fishing is a mainstay of the economy. Tourism is also increasingly becoming an important source of growth for Iceland.

The program has worked (so far) in large measure because Iceland was not subjected to the kind of austerity that you traditionally see in these kinds of programs and which is an anti-growth policy. We are seeing the negative repercussions of this in Greece. Most importantly, sovereigns should not step in and assume all of the banking sectorâ&#x20AC;&#x2DC;s liabilities. Ireland has learned this the hard way.

Iceland also has geothermal clean energy that has attracted a number of energy-intensive industries. The government is interested in diversifying the types of industries that Iceland attracts, complementing the traditional focus on aluminum production with new areas such as data storage and silica.

The downward spiral of the Greek economy and now likely that of Italy has led to calls for the European Union to step in and prevent a total collapse. Portugal, Ireland, and Spain the other three of the so-called PIIGS EU member-states are enduring their own woes, such as downgrades of sovereign debt and corresponding jumps in the interest rates on government bonds. The cumulative effect â&#x20AC;&#x201D; particularly if Italy does suffer a crisis serious enough to reduce its national credit rating to junk-bond status â&#x20AC;&#x201D; will ripple throughout Europe and across the Atlantic.

In Iceland there is a decline in unemployment; new jobs are being created as part of the wider recovery. There has been a pickup in both investment and consumption and this has created enough confidence among employers that they are reemploying workers. The government is trying to leverage on these advantages to bolster its productivity as well as the economy. For their part, the Icelandic authorities put their own stamp on the program. They took full ownership of the program policies and implemented some very difficult measures. But the Icelandic government was allowed to implement those policies in their own way. The IMF did not impose any particular set of measures but rather worked closely with the government to find the best way to achieve the goals of the program.

Analysts have noted that continental Europeans would do well to emulate the example of tiny Iceland, in how it weathered a financial crisis three years ago which stunned the placid island nation. In October 2008, its binge of bank speculation had reached a point at which the assets of the three largest Icelandic banks, Kaupthing Bank, Landsbanki and Glitnir Bank, were 11 times greater than

the entire $14 billion GDP of the nation. All three big banks defaulted on $62 billion of foreign debt, and then went belly up, not bailed out by Icelanders. Today the country's economists view that bankruptcy as a blessing in disguise. Icelandic bank analyst Jon Bjarki Bentsson put it this way:

Columbia University economics professor Joseph Stiglitz observed, ―Iceland did the right thing by making sure its payment systems continued to function while creditors, not taxpayers, shouldered the losses of the banks.‖ This international neglect turned out to be Iceland‘s saving grace. The crisis ended almost as quickly as it had begun. The Organization for Economic Co-operation and Development expects Iceland‘s economy to grow by 2 percent this year and next. That‘s not enough to replace the post2007 loss, but it‘s more than enough to return to the pre-boom trend line, it‘s much stronger than the performance of Portugal, Italy, Ireland, Greece, and Spain, known as the PIIGS economies. Iceland‘s long-term interest rate, 8 percent, compares well with a rate of over 13 percent for Greece, which is astounding when you consider that Iceland endured a default that Greece, in name at least, has so far avoided. The difference in unemployment—5.8 percent for Iceland against 16 percent for Greece—is even more striking. Iceland expects to have a balanced budget by 2013.

The lesson that could be learned from Iceland's way of handling its crisis is that it is important to shield taxpayers and government finances from bearing the cost of a financial crisis to the extent possible. Even if our way of dealing with the crisis was not by choice but due to the inability of the government to support the banks back in 2008 due to their size relative to the economy, this has turned out relatively well for us. So the ―choice‖ was, in large part, not actually a choice at all: Reykjavik could not prevent the bank failures. The impact of the financial crisis on Icelanders was immediate and painful. The value of the krona dropped 50 percent in one week; Commerce Minister Björgvin Sigurôsson went into personal bankruptcy and resigned from office; Iceland sought a $2.25 billion-bailout from the International Monetary Fund; and the government instituted stiff austerity measures.

In line with the earlier analysis from the IMF, a report from the Organisation for Economic Cooperation and Development ( OECD ) says Iceland has largely recovered from its deep slump in the wake of the global financial crisis.

Today, tiny Iceland is doing well despite the growing crisis in Europe. Beyond letting banks fail and reducing government spending, the independence of the krona from the euro has been important. Bentsson draws a contrast between Iceland's crisis and what is happening today in Europe:

Iceland, which was engulfed in economic turmoil after all its major banks collapsed at the end of 2008, has gone far in 'resolving the economic problems left by the financial crisis', the OECD said in its 2011 economic survey of the country.

The big difference between Greece, Italy, etc. at the moment and Iceland back in 2008 is that the latter was a banking crisis caused by the collapse of an oversized banking sector while the former is the result of a sovereign debt crisis that has spilled over into the European banking sector. In Iceland, the government was actually in a sound position debt-wise before the crisis.

It said Iceland's economy had exited its deep recession by the end of last year and was headed towards economic growth of 3% by 2012, while its collapsed banking system had been recapitalised by the end of 2009.

The OECD also pointed out that the country's budget deficit should this year fall below the 3% of gross domestic product limit set by the European Union's Stability and Growth Pact.

are now cheaper on the global market, thereby increasing demand. Iceland allowed its banks to fail rather than completely nationalising them. While this led to the notorious Icesave debacle, the plus side is that severe re-working of the banking system has led to Landsbanki announcing that their assets should more than cover what is owed for Icesave.

However all is not rosy as Iceland's monetary policy 'has not been very effective either in countering the credit cycle or in delivering price stability'. The OECD said Iceland's central bank 'should adopt an inflation targeting regime that places greater weight on smoothing fluctuations in the exchange rate and is supported by fiscal policy and macro-prudential regulation'.

Iceland has issued strict capital controls that forced the financial sector to do things differently. The author says that the comparison between Iceland and Ireland, "which assumed responsibility for all the liabilities of its bust banking sector, is stark. Thanks to Dublin's blanket bailout, total government debt is now more than 100 per cent of GDP, four times precrisis levels. And Ireland's reward from the markets has been a rise in the cost of insuring its sovereign bonds."

An article, published in The Independent recently takes the angle that while Iceland's economic collapse was remarkable, that "the economy that [former Prime Minister Geir H.] Haarde helped to wreck has fared surprisingly well since the bust." The latest report on Iceland by the International Monetary Fund shows that growth is resuming. GDP is expected to increase by a relatively healthy 2.5 per cent in 2011. The Icelandic public finances are on a sustainable path too with government debt projected to fall to 80 per cent of GDP by 2016.

The economic policy orthodoxy through this crisis â&#x20AC;&#x201C; pushed by ratings agencies and European politicians alike â&#x20AC;&#x201C; has demanded that national governments honour the debts of their banking sectors, protect their exchange rates, eschew capital movement restrictions, and impose massive austerity to earn back the confidence of bond markets. Much of that wisdom was ignored by the former Prime Minister of Iceland ( Reykjavik ) and the early signs are that Iceland is doing quite well as a result. Perhaps other countries can take a leaf out of Iceland's recent economic upturn in light of the upcoming global recession.

The turnaround should not be exaggerated. Iceland is still more than 10 per cent below precrisis output levels. Unemployment remains at about 6.7 per cent, considerably higher than before 2007. The standard of living of most Icelanders is well down. Access to foreign currency is tightly controlled and risks to recovery remain. Central bank interest rates are going up in order to curb inflation. This could stifle growth and yet the fact remains that the outlook for the Icelandic economy is looking rather healthier than other distressed economies in Europe such as Greece, Portugal and Ireland.

References: http://en.wikipedia.org/wiki/2008%E2%80% 932011_Icelandic_financial_crisis

Reasons for this healthier growth:

http://www.imf.org/external/np/seminars/eng/2011/isl/pdf/ fmb.pdf

The 50% chop in value that the Icelandic crown experienced after the crash did help in one oftoverlooked way: exports of aluminium and fish

http://www.signonsandiego.com/uniontrib/20081010/ news_1n10iceland.html