An institutional order for a globalizing world economy

The paper discusses the most important elements of an institutional order for a globalizing world economy. Rules for the exchange of goods, for factor movements, for the monetary domain and for the allocation of the environment are distinguished. It is analyzed in which direction these rules should be developed. The interdependence of the institutional order for these different areas is discussed.

German unification and its impact on net savings

The obsolete capital stock in eastern Germany has to be rebuilt. This will increase the capital demand in Germany for the next few years. In addition to the increased demand for capital, government transfers need to be financed. The macroeconomic accounting identity requires that net savings of the private sector and the government budget balance be equal to the current account. The DM150 billion swing in the current account from a surplus to a deficit between 1989 and 1991 must therefore find its counter expression in either net savings of the private sector or the budget deficit. If a narrow concept of the government budget deficit is used, there would be a government budget deficit of roughly 3-4 percent of GNP in the period 1991-1993, which is not too disturbing. In this case, however, net savings of the private sector, which would amount to 1- 2 percent of GNP, appear to be relatively low because the sums not included in the government budget deficit then show up as negative savings in the business sector. A case in point is the Treuhand's deficit. If a broader concept of the government budget deficit is applied, there would be a budget deficit reaching 7-8 percent of GNP in 1992 and 1993. In that case, savings of the private sector are artificially blown up because capital transfers to firms, for instance, the infusion of new capital into Treuhand firms, are part of savings in the private sector. The need to rebuild the capital stock in eastern Germany produces pressure for a higher longterm interest rate in Germany; this implies that the mark appreciates, which has already occurred. Only if severe policy mistakes are made will a risk premium on the German currency be required, which would imply a depreciation. --

Integrating the Eastern Länder: How long a transition?

In the 1990s, the economic policy situation in Germany will be determined by how quickly eastern Germany catches up. This will determine the extent of transfers and, consequently, Germany's fiscal policy stance, which, in turn, will influence the macroeconomic policy mix and the growth potential in western Germany. Adjustment in eastern Germany is making progress. Privatization of the enterprise sector has nearly been completed. In the privatized firms, a restructuring process is under way, thus laying the foundations for future competitiveness. The producing sector has come close to the production level of the second half of 1990. In the nontradables sector, the adjustment process is proceeding smoothly. In the tradables sector, i.e., in industry, things do not look so bright. An export basis has not yet been established. Self-sustaining growth with sufficient momentum and independent of public transfers has not yet taken place. However, investment is developing positively. The investment ratio is more than 50 percent of GDP. More than 80 percent of investment has taken place in the enterprise sector (including telecommunications, railroads, and housing); government investment is not playing the major role. GDP per capita in eastern Germany rose from 28.8 percent of the western German level in 1991 to 40.7 percent in 1993. How quickly the adjustment process will come about will depend on investment, because capital accumulation must be the engine of the catching up process. A simple formula tells us which growth differentials and how much time will be needed if eastern Germany is to reach the level of certain regions in western Germany. Assuming annual eastern German growth is 5 percent higher than western German growth, it will take eastern Germany until the year 2007 to reach an 80 percent adjustment target. Assuming a growth differential of 10 percent, this will take until the year 2000. Reunification has changed the characteristics of Germany as a whole. With an increase in the share of government in GDP from 45 to 52 percent Germany has become a little less of a market economy and a little more of a state economy. The economic system has become less efficient, and this dampens the potential growth rate of western Germany. In this situation, it is of paramount importance to reduce the budget deficit. This task will be easier if eastern Germany proceeds to catch up quickly, because, then, Germany will simply "grow" out of its fiscal policy dilemma. --

How the EU can move to a higher growth path : some considerations

In the current slowdown in Europe, the United States and Japan, policy makers are vexed by the question when a recovery will come. This is the wrong question. The issue should be how a higher growth path can be reached in the long run, i.e., how the potential growth rate of our economies can be increased from the supply side. --

On the concept of locational competition

Locational competition means that the immobile factors of production in a country compete for internationally mobile capital and technology. Locational competition influences the restraint set of national players and redefines their opportunity costs. Thus, the bargaining position of the trade unions is affected. Also the manoeuvring space of government in terms of taxation and institutional arrangements is reduced. Governments are more or less forced into an economic policy (and institutional) benchmarking. A high degree of openness means that a country is exposed more to external changes. We therefore can expect that smaller countries will be the innovators in world wide institutional competition.