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.

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.

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.

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.

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).

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.

This applies to many services that are non tradable , but may also be relevant for manufactured goods that need adaptation to local conditions. In such situations, outward FDI is

Over the next decade, for example, China will replace much of its labor intensive assembly employment with higher value added employment in manufacturing and services, not only in the tradable sector, but also even more noticeably in the rapidly growing non tradable part of its economy. The expanding scope and diminishing costs of automation and additive manufacturing may affect labor intensive functions globally, including in earlier stage developing countries.

In some European countries, where income inequality has remained in check, this has been a component of a deliberate strategy to maintain employment growth and competitiveness in the tradable part of the economy, with wage restraint partly shared across the income distribution. In the United States, income inequality has risen as the upper end of the income and education spectrum benefits from globalization, while the rest experience declining employment opportunities in the tradable sector.

They have focused on non tradable goods and services those that cannot be imported or exported and have eschewed international competition. They have focused on banking, construction, distribution, retail, and television broadcasting.

With few options for fighting deflation, countries have resorted to competitive devaluations. But this is not an effective strategy for capturing a larger share of tradable global demand if everyone is doing it.

On the tradable side, competitiveness depends not only on human capital, but also on a host of other factors infrastructure, tax systems, regulatory efficiency, policy induced uncertainty, and energy and health care costs.

But there is a much better strategy than tradable permits. Each region of the world should introduce a tax on CO2 emissions that starts low today and increases gradually and predictably in the future.

For starters, technology is making even many service jobs tradable, enabling them to be offshored to Asia and other emerging markets. And, eventually, technology will replace manufacturing and service jobs in emerging markets as well.

Worse still, labor has been displaced from more productive tradable activities (in manufacturing) to less productive informal activities (services). In most Latin American countries, structural change has served to reduce rather than promote economic growth.

Two things make services different from manufacturing. First, while some segments of services are tradable and are becoming more important in global commerce, these typically are highly skill intensive sectors that employ comparatively few ordinary workers.

The US is adjusting structurally and generating real (inflation adjusted) GDP growth (though well below its potential annual rate of 3 3.5 ). The tradable sector is expanding and is not dependent on leverage to generate aggregate demand.

When costs for labor intensive goods and services became too high in these countries, production was shifted elsewhere. This relocation of manufacturing has since been accompanied by the off shoring of services whose information intensive components have become tradable.

When costs for labor intensive goods and services became too high in these countries, production was shifted elsewhere. This relocation of manufacturing has since been accompanied by the off shoring of services whose information intensive components have become tradable.

But improved governance and human capital do not necessarily translate into economic dynamism. What Rwanda and other African countries lack are the modern, tradable industries that can turn the potential into reality by acting as the domestic engine of productivity growth.

Services are not tradable to the same extent as manufactured goods, and for the most part do not exhibit the same technological dynamism. As a result, services have proved to be a poor substitute to export oriented industrialization so far.

When the deleveraging cycle begins, the private sector starts to adjust structurally a pattern clearly seen in the data on growth in the tradable side of the US economy. Muted wage growth increases competitiveness, and underutilized labor and capital are redeployed.