Bowdoin College Catalogue and Academic Handbook (2023-2024)

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The economics of austerity

The 2007/8 financial crisis has reignited the debate about austerity economics and revealed that it is a highly contested yet poorly understood idea. This article locates the debate in its historical context, tracing it from the early 18th and 19th century Classical debates, which focused mainly on the means by which fiscal deficits should be financed. As capitalism evolved, so did ideas and theories about the economics of austerity. Following World War One, concerns about high levels of government debt produced the 1920s ‘Treasury view’ – that government deficits are economically damaging and austerity is required to rein them in. During the 1930s Great Depression, when unemployment was the main concern, this perspective was challenged by the ‘Keynesian view’ – that government deficits could be economically beneficial during the slump, when the private sector was unable to generate sufficient effective demand to pull the economy out of depression. From this perspective, austerity was the policy prescription for the top of the business cycle, to prevent the economy from overheating and igniting inflation. The ‘stagflationary’ crises of the 1970s challenged this view; and during the decades preceding the 2007/8 crisis, austerity was considered to be a policy for the bottom of the business cycle, when the excesses of a bubble-inflated boom had been revealed by its collapse. In the aftermath of the 2007/8 financial crisis, however, austerity no longer has the economic objective of macroeconomic stabilization. Instead, it has become the objective itself – demanded by actors in the international financial markets as evidence that governments are serious about managing their deficits and paying back their debts, thereby protecting the financial interests of investors in sovereign debt. However, if austerity undermines economic growth – as it is doing at present – markets are unlikely to remain loyal to those countries suffering the effect. It is therefore important that policy-makers and political leaders learn the lessons of the 2007/8 financial crisis with regard to the economics of austerity – before it is too late

Hard times : the world economic crisis and emerging capacity challenges fo Africa

The world economy has changed significantly in recent times. With greater financial globalisation, there emerged a mistaken perception that 'fathomless' capital was a pattern of this 'new world'. It soon became apparent that the recent financial crisis was a result of fragility in the financial system – in turn a product of limited/lack of transparency in the system. There has been limited understanding as to how the financial markets work – not only in the developing world where skills are in short supply – but more importantly by officials in the United States of America (US), European Union (EU) and Japan despite the fact that these blocks form 80% of global gross domestic product (GDP). Many EU countries have arguably remained highly uncompetitive and not ready to deal with the consequences of the global economic downturn. For policy relevance to exist, countries need to take reforms however painful they may be socio-economically. The paper sheds light on the implications for capacity building/development in Africa given the realities of the New Economic World order – especially new finance regulation issues, new international competition, crisis exit strategies and future technologies. The paper also draws possible roles that can be played by capacity building institutions such as the African Capacity Building Foundation (ACBF) by highlighting four major areas: (a) how the Foundation sources new ideas for capacity development; (b) what approaches to use for resource mobilization and partnerships; (c)how best to organize the work of the Foundation in knowledge sharing; and (d) what aspects need to shift in the operational programs of the Foundation to handle emerging issues. The paper concludes that Africa needs to develop capacity to respond to shocks effectively. Key words: socio-economic fragility, financial globalisation, strategic partnership, capacity development, crisis exit strategies, structural reform

Japan's Problems and Emerging China: A Japanese Banker's Perspective

Mr. Yashiro drew on his experience as a senior executive in the oil and banking industries in the United States, Japan, and China, to compare economic prospects and corporate cultures in Japan and China. Mr. Yashiro began by outlining some of the key reasons behind Japan's post-bubble economic malaise. With American industry in decline in the late 1970s and early 1980s, excessive hubris among Japanese corporate leadership combined with a strengthened yen following the Plaza accords to help create a domestic economic bubble. The result has been stagnant growth and loss of competitive edge for Japan since the bubble burst in the early 1990s. Mr. Yashiro went on to explain lessons that Japan should learn from the bubble experience. Lack of international perspective, English skills, scarcity of foreigners among senior corporate leadership, the seniority-based promotion system, and risk-averse behavior continue to hinder Japanese corporations' global competitiveness and the expansion of Japan's economy. Moreover, lack of clear national goals, exemplified by former Prime Minister Abe's stated goal of a "beautiful Japan," is the most significant roadblock to renewed economic and political strength. Reflecting upon his recent experience working to reform Chinese state-owned banks, Mr. Yashiro outlined several key challenges on the path of continued growth. Chinese financial institutions, which recently had bad asset problems similar to those experienced by Japan, have largely taken care of them by transferring them to asset management companies. Moving forward, China must maintain its high rates of economic growth to avoid further nonperforming loan problems. Chinese banks must continue to develop a strong credit culture and risk management skills, prevent irregularities, and improve profitability through services other than loans and deposits. In contrast to the Japanese corporations, Mr. Yashiro described the eagerness of Chinese banks to tap into the skill and experience of foreigners. Already benefiting from infusions of Western capital, by absorbing foreign expertise Chinese financial institutions will soon be among the leading banks in the world, according to Mr. Yashiro. In Tokyo, on the other hand, it is rare to see foreigners among senior banking executives, and without fresh ideas and perspectives, Japan will struggle to compete globally