18. Impact of Trade Deficit on crisis and drop of Industrial production in the USA and 5 European major countries: France, Germany Italy, Spain and UK

Graph 1. Real Value-Added of Industry per capita in France, Germany, Italy, Spain, the United Kingdom and the United States. Source: Elaborated by Guisan(2011) from OECD statistics.

Graph 2. Trade Balance of EU27 and industrial real value-added of EU5. Source: Elaborated by Guisan(2011) from Eurostat Statistics. Left axis for Extra-EU27 Trade Balance. Right axis for Value-Added of Industry. Source: Elaborated by Guisan(2011) from Eurostat and OECD statistics.

Industrial production in the Europea Union for 2000-2010: The lack of enough european policies of support to industrial production have led to decreasing real Value-Added of industry and increasing trade deficits in the balance of goods of EU27, as it is shown in the graph 2 above.

The impact of wrong policies on industrail development of many European countries has been very strong for the period 2008-2010, and some politicians and citizens are showing concern and disagreement with the EU policies in this regard. Diminution of industrial production implies negative consequences for the European Union such as lower production in other sectors, more unemployment and increse of international debt.

Graph 1 shows the evolution of real Value-Added of industry per capita in the 5 major European Union countries (those with highest levels of Gross Domestic Product and Population) for the period 1985-2010.

European Union problems: The European Union documents usually assumes that "The EU´s external trade policiy contributes to Europe´s competitiveness in foreign markets" and includes declaration as the following one: "The EU has a common trade policy whereby the European Commission negotiates trade agreements and represents the EU´s interest on behalf of its 27 Member States. The European Commission consults Member States through an advisory committee which discusses the full range of trade policy issues affecting the Community including multilateral, bilateral and unilateral instruments". In spite of these declarations many people think that policies for industrial development and less deficit should be addressed.

It is clear that the European public opinion and many leaders do not agree with those trade policies that have led to increase indebtness and diminution of industrial development. Some reactions are active in France and the United Kingdom, and surely in other countries, which may be of interest to recover industrial development and favor a balanced trade of the European Union with extra-UE partners, or at least to diminish the trade deficit.

Trade deficit in EU27: In fact in year 2009 the trade balance was negative in 17 countries, positive in 10, and negative for EU27 as a whole.

Countries with positive trade balance of goods in 2009: Belgium, Czec Rep., Denmark, Finland, Germany, Hungary, Ireland, Netherlands, Slovakia and Sweden.

Countries with negative trade balance of goods in 2009: Austria, Bulgaria, Cyprus, Estonia, France, Greece, Italy, Latvia, Lithuania, Luxembourg, Malta, Portugal, Romania, Slovakia, Spain and the United Kingdom.

The most positive balance in Euros per capita, more than 1000 € in year 2009, corresponded to Belgium (1194), Denmark (1465), Germany (1644), Ireland (8568), Netherlands (2380).

The most negative balance in Euros per capita, less than -1000 € in year 2009, corresponded to Cyprus (-5918), Greece (-2531), Luxembourg (-4940), Malta (-3283), Portugal (-1787), Spain (-1081) and the United Kingdom (-1513).

Crisis and solutions: The European Union should show concern about high deficits in extra-EU trade, particularly if those deficits lead to diminution of industrial production per capita, particular if dismantling EU´s industry is not accompanied by an increase in the International Investment Position or in other variables that can guarantee sustained development. European Economic Policies should be adressed to diminish deficit in extra-EU balance for the EU as a whole and to make sustainable the intra-EU imbalances among countries. Sustainability presents to options: 1) all EU countries would promote industrial development to a degree enough to guarantee real convergence with the most advanced economies. 2) European Unions would guarantee flows of credit from EU countries with superavit to EU countries with deficit, like among different regions of a single country. European Parliamente and Commission may choose a mix of both options, but they should offer to all EU countries opportunities for sustainable development.

Selected newspaper article on industrial problems in EU countries:

Telegraph: Where will Britaint´s manufacturing revival come from?, by Louisa Peacok, 2nd June 2011.

17 Crisis, Development, Voice of Good Economists in Greece, Portugal and Spain, and comparison with other OECD countries. Euro-American Association Development Report 2011.

Source: Guisan(2011) based on OECD National Accounts Statistics

Greece: beautiful Egina

The graph shows real value-added per capital in industrial sectors. One of the main causes of economic crisis in Greece, Portugal and Spain is their low level of industrial development in comparison with more advanced OECD countries. Countries with low levels of industrial production per head very often experience twin deficits: 1) unbalanced foreign trade, with more imports than exports, and 2) government deficit because, as a result of the low level of industrialization, income from taxes and other sources is below the amount needed to provide satisfactory levels of public services. The attemps to foster production in building and services without a proper development of industry per capita, like it has happened in Spain and other countries for the period 1995-2007, is usually unsustainable and lead to economic crisis as it has happened in Spain for the period 2008-2010.

There are good economists in those countries but unfortuantely policy makers usually do not listen to their good advice. People do not expend too much, but instead most people in those countries work hard and expend little. It is not fair to throw blame on citizens for the causes of the crisis when the main cause is the lack of good economic policies, at national and European Union level, in order to foster industrial development.

Here we will include references to interesting articles and Websites where good economists give useful advice to improve development and avoid economic crises in those countries.

LISTEN TO THE VOICE OF GOOD ECONOMISTS AND GET OUT OF THE CRISIS

Recommended readings about crisis and development in Greece:

"Development is the only solution. Seventeen Proposals for a New Development Stategy", Azariadis, C.(Washington Universitry, MO, USA), Ioannides, Y. (Tufts University,MD,USA), Pissarides, A. (LSE, London UK) (2010).
"Is there a strategy that can free Greece from the grip of today´s unprecedental economic and social crisis and place her on a path of sustainable development and solid prosperity? The signers of this article believe that the answer is yes if the country is willing to go beyond the measures of fiscal austerity and market reform advised by the EU-ECB.IMF "troika". We predict that market reforms will not succeed unles they are supplemented by powerful pro-growth policies. The real choice of Greece is not between solvency and default or between reform and stagnation; it is between prosperity and underdevelopment". See full article

Website on Greek Development: http://greekeconomistsforreform.com/

Recommended readings about the positive impact of manufacturing on development, through intersectoral relationships in Europe, America and other areas:

Guisan, M.C.(2006).”Industry, Foreign Trade and Development: Econometric Models of Europe and North America, 1965-2003” International Journal of Applied Econometrics and International Development, Vol.3-1. Article free on line: click on "Download"" at: http://ideas.repec.org/a/eaa/ijaeqs/v3y2006i1_1.html

Guisan, M.C.(2007).”Industry, Foreign Trade and Development: Econometric Models of Africa, Asia and Latin America, 1965-2003” International Journal of Applied Econometrics and International Development, Vol.4-1. Article free on line: click on the Abstrac page and then on "Download"" at the Web site of Journal IJAEQS.http://ideas.repec.org/s/eaa/ijaeqs.html

GUISAN, M.C. and AGUAYO, E. (2007). "Production by Sector in The European Union: Analysis of France, Germany, Italy, Spain, Poland nnd The United Kingdom, 2000-2005". Regional and Sectoral Economic Studies, Volume 7-1. On line at: http://ideas.repec.org/a/eaa/eerese/v7y2007i7_3.html

Other interesting articles at our journals AEID and RSES

16. Euro-American Association of Economic Development: Comments on poverty, world development and the book by P. Collier "The poverty bottom billion"

Table of Poverty in the World: Source Guisan and Exposito (2010) elaborated from World Bank Indicators. Pubished in journal EEDI/ESID (english version will be announced here).

Interesting book by Paul Collier(2007): "The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It" More information at: Look inside the book at Amazon
The autor: Paul Collier is a distinguish researchers in economic development. Professor of Economics, Oxford University Economics Department and Director of Centre for the Study of African Economies. More information at Oxford University

Links to other comments on the book:How the bottom billion are trapped? By Martin Wolf, Financial Times, May 13 2007.

Terry OBrien "The Bottom Billion: Why the poorest countries are failing and what can be done about it: Some insights for the Pacific?" Australian document.

Our comments on the poverty billion and what can be done:
Accordingly to World Bank data and our estimations, extreme poverty (less than 2 dollars a day per person) has evolved from 46.81% of World popublation in year 2000 to 41.70% in year 2005. It is a huge percentage of people, and surely more effective policies should help to alliviate this problem. We share the aim to help the poor to have opportunities for a better life, and accordingly to the experience of selected international development studies we insist on the convenience to improve education and labor opportunities in those countries.

In Collier’s view some countries have fallen into one or often more of four traps, and resolving their problems will require novel ways of addressing those traps.
Trap 1: Conflict.
Trap 2: Mismanaged dependency on natural resources
Trap 3: Weak quality of governance in small countries
Trap 4. Difficulties for access to large markets (for example lanlocked countries without friendly

neighbours)

Other problems are often present in the poorest countries, such as earthquakes, unhealthy climate, river floods and other ones.

Accordingly to international econometric models and other studies, improvement of the educational level of population is a great advantage to solve many of these problems, having into account that usually education has a positive role to foster peace and cooperation, to improve quality of government, to prevent nature disasters, and to get a better management of natural resources and industrialization.

Some interesting articles in this regard are, among others, the following ones published by our Association in the journal Applied Econometrics and International Development, free available by clicking on "download" at the Abstract page:

Guisan and Aguayo (2010): "Education, Gender Equality, Social Well-Being and Economic Development in American Countries, 2000-2010"

Guisan and Exposito(2007): "Education, Development And Health Expenditure In Africa: Estimation of Cross-Section Model of 39 Countries In 2000-2005"

Guisan, Aguayo and Exposito(2001). "Education and World Development in 1900-1999: A General View and Challenges for the Near Future"