Tradable Prosperity

In such economies, that pattern not only typically depended on leverage it also enlarged the non tradable side of the economy and shrank the tradable side. And yet, given that the non tradable sector is constrained by its reliance on domestic demand, recovery if it comes will depend on the tradable sector s growth potential.

Rising incomes require rising productivity. That means increasing capital and human capital intensity across both the tradable and non tradable sectors of the economy.

(4) As regards tradable financial assets, it is required to separately list the beginning of period and end of period fair value of tradable bond investment, tradable equity instrument investment, financial assets which are specified to be measured on fair value and whose fluctuations are included in the current profits and losses, derivative financial assets and other tradable financial assets.

But, for individual economies, relative productivity versus income levels determines the share of global tradable aggregate demand that is accessible. Unlike the non tradable side of the economy, the domestic component of global tradable demand is not an absolute constraint on growth nor is the rate of growth of global tradable demand an absolute constraint, given the possibility of increasing share.

To be effective and properly targeted, policies need to include an accurate diagnosis of growth potential and impediments in both the tradable and non tradable parts of the economy. Focusing on one (say, the competitiveness problem in the tradable sector) to the exclusion of the other (perhaps a serious non tradable demand shortfall or stagnant absolute productivity) will not be enough.

This scheme implements tradable quotas among the EU States.

In the short run, the non tradable sector is, by definition, subject to domestic demand constraints. A shortfall in non tradable demand inevitably limits growth on that side of the economy.

(13) As regards tradable financial liabilities, it is required to separately list the beginning of period and end of period fair value of offered tradable bonds, financial liabilities which are specified to be measured on fair value and whose fluctuations are included in the current profits and losses, derivative financial liabilities and other tradable financial liabilities.

Once the monetary rules of the game incorporate the real exchange rate, and assuming that fiscal policy remains supportive, investors can look forward to a less volatile and more competitive currency. This will mean more investment in tradable industries, more employment overall, and faster growth.

For several decades, that tendency has been offset by ever more intensive trading of tradable goods, often passing through many countries in complex supply chains. In the future, however, the shift to non tradable consumption may dominate.

The challenge is to apply these insights in a world characterized by global economic interdependence, major imbalances, and a worsening growth and employment problem. It is a world in which economies are connected directly in the tradable sector of the global economy, and indirectly through the demand and employment linkages between the tradable and non tradable sectors of individual economies.

Non tradable activities are akin to a country s sports leagues different people like different teams.

A less noticed form of resource misallocation stems from the fact that only sellers of foreign exchange gain liquidity, but the whole economy feels the effects. As a result, small and medium size enterprises that produce non tradable products are denied much needed funds and suffer from sterilization s negative externalities.

But structured deposits for example, deposits whose rate of return is linked to the performance of the New York Stock Exchange are becoming increasingly popular. Securities investment funds now account for roughly 30 of tradable stock market capitalization, although this represents only 0.9 of GDP, compared to more than 5 in India.

The speed of structural adjustment is also strongly influenced by how easily employment can shift from an economy s non tradable to its tradable side and across segments of global supply chains. Countries degree of labor market flexibility varies considerably, and the reforms that increase it are critically important.

In fact, the employment generated by the tradable sector has been in services at the upper end of the distributions of value added per person, education, and income. As a result, growth and employment in the tradable sector have gone separate ways, with healthy growth and stagnant employment.

In principle, Germany could try to boost domestic demand by leveraging up but, unless the exchange rate adjusts upward to shrink the tradable sector at the margin, doing so would be inflationary. The European Central Bank would then have to intervene to maintain the credibility of its commitment to price stability, which is its primary mandate.

Finally, an inadequate understanding of structural inflation (the growth in prices for non tradable assets) has generated the false belief that China can maintain similar levels of inflation and exchange rate stability as the OECD economies. As a result, over the last decade, the Chinese authorities implicit target for annual inflation and currency appreciation has been only about 3 .

The main point is that restoring growth requires a careful analysis of structural balance, attention to demand constraints in the non tradable sector, and a focus on the impediments to expanding the tradable sector. Some of those impediments are supply side rigidities others have more to do with bloated domestic demand.

Market fragmentation in the more diversified economies is often due to intraregional investment priorities in non tradable sectors, particularly real estate.

This is because most services are not tradable and they need to be produced when and where they are consumed (UNCTAD 2004b).

These trends reflect a combination of technological and global market forces that have been operating over the last two decades. On the technology side, labor saving innovations in network based information processing and transactions automation have helped to drive a wedge between growth and employment generation in both the tradable and non tradable sectors.

In the non tradable sector (60 70 of the economy in advanced countries), the main growth inhibitors are weak demand, as in the United States following the financial crisis, and structural and competitive impediments to productivity, as in Japan. In the tradable sector, growth depends on a country s productivity relative to incomes and competitiveness.

Moreover, not only is the tradable sector of Japan s economy highly vulnerable to a slowdown in China, but the recent conflict over the Senkaku Diaoyu Islands raises the prospect of economic decoupling. Apart from that, Japanese economic performance is set to remain weak, because the non tradable side is not a strong growth engine.

Unfortunately for advanced economies, the gains in per capita value added in the tradable sector were not large enough to overcome the effect of moving labor from manufacturing jobs to non tradable service jobs (many of which existed only because of credit fueled domestic demand in the halcyon days before 2008). Hence the muted overall productivity gains.

An undervalued currency also tends to produce an unbalanced growth model of the opposite kind an outsize tradable sector and insufficient domestic aggregate demand. Because the non tradable sector in advanced economies tends to create more jobs, this model can lead to an employment problem (even if it is partly masked by cutting hours rather than workers).

As China becomes richer, its middle class citizens will not just buy more tradable goods like cars, electronics, and appliances they will buy housing and a host of non tradable services, too. An efficient supply side response to this large and growing source of demand requires regulatory reform in many services, including finance, product safety, transport, and logistics.

Foreign exchange brokerage and activities relating to the foreign exchange market

Information exchange

But there is more to the productivity conundrum than the 2008 crisis. In the two decades that preceded the crisis, the sector of the US economy that produces internationally tradable goods and services one third of overall output failed to generate any increase in jobs, even though it was growing faster than the non tradable sector in terms of value added.

The alternative is muted wage and income growth shared across the income spectrum, combined with productivity enhancing measures. This was a component of Germany s successful reform program of a decade ago, which included labor market and social security reforms, the combined effect of which was to restore competitiveness and growth potential in the tradable sector, while improving productivity on the non tradable side.

A somewhat more sensible concern might be that the dollar s reserve currency status causes it to be over valued with respect to every currency, not just the renminbi. That could create additional pressure on the tradable part of the US economy, and thus might help to explain why the US tradable sector has not generated net employment for two decades.

While this applies to many non tradable services, it may also be relevant for manufactured goods that need adapting to local conditions (UNCTAD 2005 9 10).

Normally, short run and long run exchange rate trends point in the same direction. Indeed, a huge body of research shows that for most major currencies, the best forecast of next week s exchange rate, next month s exchange rate, or even next year s exchange rate is simply today s exchange rate.

Currency exchange rate

Exchange of information

Currency exchange rate

Information exchange provisions

Exchange rate fluctuation

(f) Exchange rate

Exchange of currencies

Developing the service sector could also diversify the production base, thereby enhancing economic resilience and boosting growth momentum. Modern services are becoming increasingly tradable, providing new export opportunities.

The poor quality of infrastructure imposes heavy costs on the producers of tradable goods and on the rest of the population, given the low population density in Africa.

What happens when you cut people off from exchange, from the ability to exchange and specialize?