Views of a Nepali Economist

......there are (at least) four problems with capitalism, which the current crisis has revealed rather than caused:

1. The rise of low-wage competition from Asia, the slowdown in the rate of innovation, and the difficulty of monetizing some innovations has lead to a long-standing dearth of profitable investment opportunities and thus to slow real growth. One effect of this has been that money has flowed into malinvestments instead, creating a tendency towards speculative bubbles and slumps.

2. Top-down control of companies is inefficient, both for Hayekian reasons (bosses haven’t the knowledge or rationality to control big organizations) and because of perverse incentives and selection effects.

3. Capitalism concentrates ownership of (some) risky assets into a few hands, and thus creates greater fragility and vulnerability to crises than is technically necessary.

4. There’s a division between ownership and control. The problem of collective action, allied to the fact that the key asset in many firms is human rather than physical capital, means that shareholders are unwilling and unable to control firms. The result is that they become mechanisms whereby bosses and key workers can tunnel assets away from formal owners to those with real power.

As 2012 begins, however, investors are wondering if emerging markets may be due for a correction, triggered by a new wave of “risk off” behavior........few believe that the rapid economic growth and high trade deficits that Turkey has experienced in recent years can be sustained. Likewise, high GDP growth rates in Brazil and Argentina over the same period could soon reverse, particularly if global commodity prices fall – not a remote prospect if the Chinese economy begins to falter or global real interest rates rise this year. China, in turn, could land hard as its real-estate bubble deflates and the country’s banks are forced to work off the bad loans.

.....The empirical argument is simply historically based numerology: emerging-market crises seem to come in a 15-year cycle. The international debt crisis that erupted in mid-1982 began in Mexico, and then spread to the rest of Latin America and beyond. The East Asian crisis came 15 years later, hitting Thailand in mid-1997, and spreading from there to the rest of the region and beyond. We are now another 15 years down the road. So is 2012 the year for another emerging-markets crisis?

• Broaden the base and lower the rates
• Tax consumption, and not income
• Tax bads and not goods
• Keep it simple

Labels: brazil, capitalism, china, emerging markets, iPhone, taxation, thailand, turkey, US

# posted by Mukesh Khanal @ 3:58 PM