A Level Economics Essay 12: Current Account Evaluation

 Evaluate the view that a current account surplus is always beneficial to an economy.

The view that a current account surplus is always beneficial to an economy may not be valid and depends on various factors. While a current account surplus can bring certain advantages, it is not necessarily always beneficial. Let's evaluate this view by considering both the advantages and potential drawbacks:

Advantages of a current account surplus:

1. Increased savings and investment: Germany, known for its current account surplus, has a high savings rate. This surplus of savings allows Germany to invest in research and development, infrastructure projects, and education, which contributes to its strong economic performance and technological advancements.

2. Foreign investment and capital inflows: China has experienced significant capital inflows as a result of its current account surplus. Foreign investors have been attracted to China's growing economy and have invested in various sectors, such as manufacturing, technology, and services, contributing to China's rapid economic expansion.

3. Strengthened financial position: Japan has historically maintained a current account surplus and accumulated substantial foreign reserves. These reserves have helped Japan weather economic downturns, provide stability to its financial system, and enhance its reputation as a reliable borrower in international markets.

Drawbacks of a current account surplus:

1. Currency appreciation and reduced competitiveness: Switzerland's persistent current account surplus has led to significant appreciation of the Swiss franc. This has made Swiss exports more expensive and challenged the competitiveness of industries like manufacturing, tourism, and watchmaking.

2. Declining domestic demand: Germany's heavy reliance on exports and its current account surplus have resulted in relatively low levels of domestic investment and consumption. This has led to criticisms that Germany's surplus comes at the expense of its domestic economy, limiting domestic demand and hindering the development of certain industries.

3. Imbalance in trade relationships: China's large current account surplus has triggered concerns from its trading partners, particularly the United States. The perceived unfair trade practices, such as intellectual property theft and currency manipulation, have strained trade relationships and prompted trade disputes between the two countries.

4. Missed investment opportunities: Japan's persistent current account surplus has been accompanied by relatively low levels of domestic investment. Critics argue that Japan should allocate more resources toward domestic sectors like innovation, entrepreneurship, and renewable energy to enhance long-term growth prospects.

These real-world examples demonstrate that while current account surpluses can bring benefits, they also present challenges. It is crucial for policymakers to carefully manage and address the implications of sustained surpluses to ensure a balanced approach to economic growth and development.

A Level Economics Essay 11: Current Account

"Germany runs permanent current account surplus" - Explain why some countries have long-term current account surpluses on their balance of payments.

In simple terms, the balance of payments is a record of all economic transactions between a country and the rest of the world over a specific period. It consists of two main components: the current account and the capital account.

The current account is one of the main components of the balance of payments. It records the flows of goods, services, income, and transfers between a country and the rest of the world.

1. Goods: The current account includes the balance of trade, which represents the exports and imports of goods. For example, Germany's current account includes the value of goods it exports, such as automobiles, machinery, and chemicals, as well as the value of goods it imports, such as raw materials or consumer products.

2. Services: The current account also incorporates the balance of services, which includes income generated from services provided internationally. This includes items such as transportation, tourism, financial services, and consulting. For example, Germany's current account considers the income it earns from providing services like engineering consulting or financial services to other countries.

3. Income: The income component of the current account accounts for the net income earned from investments abroad and investments made by foreigners within the country. It includes items like dividends, interest payments, and profits. For example, if German companies have investments in foreign countries and receive income from those investments, it contributes to Germany's current account surplus.

4. Transfers: The current account also incorporates net transfers, which involve flows of money between countries that are not directly linked to the exchange of goods, services, or income. Transfers can include items like foreign aid, remittances from overseas workers, and grants. These transfers can either contribute to or reduce the current account balance.

The current account balance is determined by the sum of these components. When a country's exports and income from abroad exceed its imports and outward income flows, it results in a current account surplus. This surplus represents a net inflow of funds into the country and indicates that the country is a net lender to the rest of the world.

Germany is known for consistently running a current account surplus, which means its exports and income from abroad exceed its imports and outward income flows. There are several reasons why Germany has been able to maintain this long-term current account surplus:

1. Export-oriented economy: Germany has a strong export sector and is known for its high-quality manufactured goods, such as automobiles, machinery, and chemicals. Its products are in high demand globally, allowing Germany to generate significant export revenue.

2. Competitive advantage: Germany has a competitive advantage in various industries. It has a highly skilled labor force, advanced technology, and a reputation for precision engineering, which makes its products highly sought after. This competitive advantage enables Germany to maintain a strong position in international markets and contribute to its current account surplus.

3. Savings and investment patterns: Germany has a culture of high savings and a focus on investment. Germans tend to have a high savings rate and exhibit a preference for financial security. This leads to lower domestic consumption and a surplus of savings available for investment, both domestically and abroad. The returns on these investments, such as profits and interest payments from foreign assets, contribute to Germany's current account surplus.

4. Strong industrial base: Germany has a well-developed industrial base that supports its export-oriented economy. It has a diverse range of industries, including automotive, machinery, chemicals, and pharmaceuticals, which provide a solid foundation for sustained export performance.

The current account surplus of Germany indicates its success in exporting goods and services, generating income from abroad, and maintaining a competitive position in the global market. However, it is important to note that persistent surpluses can have implications, such as currency appreciation, which can make German exports relatively more expensive and affect the competitiveness of other countries' exports.

Is India a colony of China? The answer is rude, looking at trade data

 

For the sake of life on Earth, we must put a limit on wealth

It’s not just the megarich: increased spending power leads us all to inflict environmental damage. It’s time for a radical plan writes George Monbiot in The Guardian

It is not quite true that behind every great fortune lies a great crime. Musicians and novelists, for example, can become extremely rich by giving other people pleasure. But it does appear to be universally true that in front of every great fortune lies a great crime. Immense wealth translates automatically into immense environmental impacts, regardless of the intentions of those who possess it. The very wealthy, almost as a matter of definition, are committing ecocide.

Greta Thunberg to Congress: ‘You’re not trying hard enough. Sorry’


A few weeks ago, I received a letter from a worker at a British private airport. “I see things that really shouldn’t be happening in 2019,” he wrote. Every day he sees Global 7000 jets, Gulfstream G650s and even Boeing 737s take off from the airport carrying a single passenger, mostly flying to Russia and the US. The private Boeing 737s, built to take 174 passengers, are filled at the airport with around 25,000 litres of fuel. That’s as much fossil energy as a small African town might use in a year.

Where are these single passengers going? Perhaps to visit one of their superhomes, constructed and run at vast environmental cost, or to take a trip on their superyacht, which might burn 500 litres of diesel an hour just ticking over, and which is built and furnished with rare materials extracted at the expense of beautiful places. The most expensive yacht in the world, costing £3bn, is a preposterous slab of floating bling called History Supreme. It carries 100 tonnes of gold and platinum wrapped around almost every surface, even the anchor.

Perhaps we shouldn’t be surprised to learn that when Google convened a meeting of the rich and famous at the Verdura resort in Sicily in July to discuss climate breakdown, its delegates arrived in 114 private jets and a fleet of megayachts, and drove around the island in supercars. Even when they mean well, the ultrarich cannot help trashing the living world.

‘Superyachts, built and furnished with rare materials, can burn 500 litres of diesel per hour just ticking over.’ The superyacht Aviva off the Cornish coast. Photograph: Simon Maycock/Alamy Stock Photo

A series of research papers shows that income is by far the most important determinant of environmental impact. It doesn’t matter how green you think you are; if you have surplus money, you spend it. The only form of consumption that’s clearly and positively correlated with good environmental intentions is diet: people who see themselves as green tend to eat less meat and more organic vegetables. But attitudes have little bearing on the amount of transport fuel, home energy and other materials you consume. Money conquers all.

The disastrous effects of spending power are compounded by the psychological impacts of being wealthy. Plenty of studies show that the richer you are, the less you are able to connect with other people. Wealth suppresses empathy. One paper reveals that drivers in expensive cars are less likely to stop for people using pedestrian crossings than drivers in cheap cars. Another revealed that rich people were less able than poorer people to feel compassion towards children with cancer. Though they are disproportionately responsible for our environmental crises, the rich will be hurt least and last by planetary disaster, while the poor are hurt first and worst. The richer people are, the research suggests, the less such knowledge is likely to trouble them.

Another issue is that wealth limits the perspectives of even the best-intentioned people. This week, Bill Gates argued in an interview with the Financial Times that divesting (ditching stocks) from fossil fuels is a waste of time. It would be better, he claimed, to pour money into disruptive new technologies with lower emissions. Of course we need new technologies. But he has missed the crucial point: in seeking to prevent climate breakdown, what counts is not what you do but what you stop doing. It doesn’t matter how many solar panels you install if you don’t simultaneously shut down coal and gas burners. Unless existing fossil fuel plants are retired before the end of their lives, and all exploration and development of new fossil fuel reserves is cancelled, there is little chance of preventing more than 1.5C of global heating.

But this requires structural change, which involves political intervention as well as technological innovation: anathema to Silicon Valley billionaires. It demands an acknowledgement that money is not a magic wand that makes all the bad stuff go away.

Tomorrow, I’ll be joining the global climate strike, in which adults will stand with the young people whose call to action has resonated around the world. As a freelancer, I’ve been wondering who I’m striking against. Myself? Yes: one aspect of myself, at least. Perhaps the most radical thing we can now do is to limit our material aspirations. The assumption on which governments and economists operate is that everyone strives to maximise their wealth. If we succeed in this task, we inevitably demolish our life support systems. Were the poor to live like the rich, and the rich to live like the oligarchs, we would destroy everything. The continued pursuit of wealth in a world that has enough already (albeit very poorly distributed) is a formula for mass destitution.

A meaningful strike in defence of the living world is, in part, a strike against the desire to raise our incomes and accumulate wealth: a desire shaped, more than we are probably aware, by dominant social and economic narratives. I see myself as striking in support of a radical and disturbing concept: enough. Individually and collectively, it is time to decide what “enough” looks like, and how to know when we’ve achieved it.

There’s a name for this approach, coined by the Belgian philosopher Ingrid Robeyns: limitarianism. Robeyns argues that there should be an upper limit to the amount of income and wealth a person can amass. Just as we recognise a poverty line, below which no one should fall, we should recognise a riches line, above which no one should rise. This call for a levelling down is perhaps the most blasphemous idea in contemporary discourse.

But her arguments are sound. Surplus money allows some people to exercise inordinate power over others: in the workplace; in politics; and above all in the capture, use and destruction of the planet’s natural wealth. If everyone is to flourish, we cannot afford the rich. Nor can we afford our own aspirations, which the culture of wealth maximisation encourages.

The grim truth is that the rich are able to live as they do only because others are poor: there is neither the physical nor ecological space for everyone to pursue private luxury. Instead we should strive for private sufficiency, public luxury. Life on Earth depends on moderation.

Yanis Varoufakis: How Capitalism Works--and How It Fails

Europe and the Austerity Fallacy

Yanis Varoufakis

Where Cruelty Is Kindness

Those who promoted laissez-faire economics required an explanation when the magic of the markets failed to deliver their promised utopia. Malthus gave them the answer they needed.

GEORGE MONBIOT in Outlook India

Kindness is cruelty; cruelty is kindness: this is the core belief of compassionate conservatism. If the state makes excessive provision for the poor, it traps them in a culture of dependency, destroying their self-respect, locking them into unemployment. Cuts and coercion are a moral duty, to be pursued with the holy fervour of Inquisitors overseeing an auto da fé.

This belief persists despite reams of countervailing evidence, showing that severity does nothing to cure the structural causes of unemployment. In Britain it is used to justify a £12 billion reduction of a social security system already so harsh that it drives some recipients to suicide. The belief arises from a deep and dearly-held fallacy, that has persisted for over 200 years.

Poverty was once widely understood as a social condition: it described the fate of those who did not possess property. England's Old Poor Law, introduced in 1597 and 1601, had its own cruelties, some of which were extreme. But as the US academics Fred Block and Margaret Somers explain in their fascinating book The Power of Market Fundamentalism, those who implemented it seemed to recognise that occasional unemployment was an intrinsic feature of working life.

But in 1786, as economic crises threw rising numbers onto the mercy of their parishes, the clergyman Joseph Townsend sought to recast poverty as a moral or even biological condition. "The poor know little of the motives which stimulate the higher ranks to action — pride, honour, and ambition", he argued in his Dissertation on the Poor Laws. "In general it is only hunger which can spur and goad them onto labour; yet our laws have said, they shall never hunger."

Thomas Malthus expands on this theme in his Essay on the Principle of Population, published in 1798. Poor relief, he maintained, causes poverty. It destroys the work ethic, reducing productivity. It also creates an incentive to reproduce, as payments rise with every family member. The higher the population, the hungrier the poor became: kindness resulted in cruelty.

Poverty, he argued, should be tackled through shame ("dependent poverty ought to be held disgraceful") and the withdrawal of assistance from all able-bodied workers. Nature should be allowed to take its course: if people were left to starve to death, the balance between population and food supply would be restored. Malthus ignored the means by which people limit their reproduction or increase their food supply, characterising the poor, in effect, as unthinking beasts.

His argument was highly controversial, but support grew rapidly among the propertied classes. In 1832, the franchise was extended to include more property owners: in other words, those who paid the poor rate. The poor, of course, were not entitled to vote. In the same year, the government launched a Royal Commission into the Operation of the Poor Laws.

Like Malthus, the commissioners blamed the problems of the rural poor not on structural factors but on immorality, improvidence and low productivity, all caused by the system of poor relief, which had "educated a new generation in idleness, ignorance and dishonesty". It called for the abolition of "outdoor relief" for able-bodied people. Help should be offered only in circumstances so shameful, degrading and punitive that anyone would seek to avoid them: namely the workhouse. The government responded with the 1834 Poor Law Amendment Act, which instituted, for the sake of the poor, a regime of the utmost cruelty. Destitute families were broken up and, in effect, imprisoned.

The commission was a fraud. It began with fixed conclusions and sought evidence to support them. Its interviews were conducted with like-minded members of the propertied classes, who were helped towards the right replies with leading questions. Anecdote took the place of data.

In reality, poverty in the countryside had risen as a result of structural forces over which the poor had no control. After the Napoleonic wars, the price of wheat slumped, triggering the collapse of rural banks and a severe credit crunch. Swayed by the arguments of David Ricardo, the government re-established the gold standard, that locked in austerity and aggravated hardship, much as George Osborne's legal enforcement of a permanent budget surplus will do. Threshing machines reduced the need for labour in the autumn and winter, when employment was most precarious. Cottage industries were undercut by urban factories, while enclosure prevented the poor from producing their own food.

Far from undermining employment, poor relief sustained rural workers during the winter months, ensuring that they remained available for hire when they were needed by farms in the spring and summer. By contrast to the loss of agricultural productivity that Malthus predicted and the commission reported, between 1790 and 1834 wheat production more than doubled.

As Block and Somers point out, the rise in unemployment and extreme poverty in the 1820s and 1830s represented the first great failure of Ricardian, laissez-faire economics. But Malthus's doctrines allowed this failure to be imputed to something quite different: the turpitude of the poor. Macroeconomic policy mistakes were blamed on the victims. Does that sound familiar?

This helps to explain the persistence of the fallacy. Those who promoted laissez-faire economics required an explanation when the magic of the markets failed to deliver their promised utopia. Malthus gave them the answer they needed.

And still does. People are poor and unemployed, George Osborne and Iain Duncan Smith claimed in this week's Sunday Times, because of "the damaging culture of welfare dependency". Earlier this month, Duncan Smith, in a burst of Malthusiasm, sought to restrict child benefit to two children per family, to discourage the poor from reproducing. A new analysis by the Wellcome Trust suggests that the government, which is about to place 350 psychologists in job centres, now treats unemployment as a mental health disorder.

The media's campaign of vilification associates social security with disgrace, and proposes even more humiliation, exhortation, intrusion, bullying and sanctions. This Thursday, the new household income figures are likely to show a sharp rise in child poverty, after sustained reductions under the Labour government. Doubtless the poor will be blamed for improvidence and feckless procreation, and urged to overcome their moral failings through aspiration.

For 230 years, this convenient myth has resisted all falsification. Expect that to persist.

George Osborne got away with his Big Lie.

William Keegan in the Guardian

What's now in the box? Osborne outside 11 Downing Street before delivering his last budget speech ahead of May's general election. Photograph: Dominic Lipinski/PA

The inquest on Labour’s electoral defeat will run and run, and the recriminations will no doubt persist throughout the party’s inordinately long timetable for selecting a new leader. But there is a limit to which candidates should surrender to the Big Lie that George Osborne, more than anyone else, has managed to get away with.

Take a report in the Times’s recent “investigation” into Labour’s “disastrous campaign”. We are told that “as early as 2010, Labour’s pollsters sent a memo saying the party should argue ‘the deficit is the number one challenge facing the country’ and back ‘tough spending cuts’.”

The truth is that the deficit was not the problem: it was the solution. What the much-maligned government of Gordon Brown did was to recognise this, and act accordingly. One of the principal beneficiaries of this sensible Keynesian response was George Osborne, who inherited the economy in which the prospect of a 1930s depression had been warded off. He proceeded to make wholly misleading analogies with the state of the benighted Greek economy and embark on a programme of austerity which Ed Balls rightly warned would stop the recovery in its tracks.

 It is not for me to join the chorus maintaining that Labour should have admitted that all the extra spending on schools and hospitals was a mistake. The most serious mistake was not to get across with sufficient emphasis that by far the biggest contribution to a rise in public sector debt was caused by the banking crisis. Moreover, as my old mentor, the Nobel laureate Professor Amartya Sen, pointed out recently in a lecture reproduced in the New Statesman: “Even if we want to reduce public debt quickly, austerity is not a particularly effective way of achieving this (which the European and British experiences confirm)”.

It is tragic that the Big Lie was not dealt with by Ed Miliband. Apparently he dismissed advice from Alastair Campbell, way back, that he should commission an independent report, by a respected figure, on Labour’s past spending plans – plans that had been supported at the time by Messrs Cameron and Osborne. Even the Times reflects that such a report “would almost certainly have cleared Labour of blame, with a minor dispute around whether the party could have spent less in 2007”.

But the deficit story was allowed to run and run, and poor Miliband failed to scotch it on at least two prominent occasions. Yet, as Sir Nicholas Macpherson, the Treasury’s top civil servant, has stated: “The 2008 crisis was a banking crisis pure and simple.”

That crisis was a cataclysm. It demanded a short-term approach to warding off catastrophic consequences, and a long-term approach to reducing a national debt that, notwithstanding the impact of the crisis, remained, as Sen emphasises, remarkably low by historical standards. As he says, put quite simply, for reducing the debt, “we need economic growth; and austerity, as Keynes noted, is essentially anti-growth”.

But such wisdom will cut no ice with a cocky chancellor who can hardly believe his luck at how Labour played into his hands. By winning a mere 37% of votes cast, he thinks he now has the support of the country for a renewal of austerity. He plans a budget which – by not treating capital expenditure as something to be financed over the lifetime of the project, but from a single year’s revenue – is going to place huge burdens on the public services. Just brace yourselves for the real cuts.

Osborne’s first austerity programme brought us reductions in capital expenditure when borrowing costs for much-needed projects were negligible. In the past year or so, he has finally woken up to this country’s infrastructure problems and – who knows? – before long may even find himself reinventing the National Economic Development Office.

As Sen points out, had the British public been frightened after the second world war by the debt ratio, which was more than twice what it has been in recent years, “the NHS would never have been born, and the great experiment of having a welfare state in Europe (from which the whole world from China, Korea and Singapore to Brazil and Mexico would learn) would not have found a foothold”.

We were helped after the war by a loan from the US (mainly) and Canada, which was finally paid off in 2006. And a war loan dating from the first world war was finally redeemed earlier this year!

Osborne has rightly attracted ridicule, even from friendly commentators, for his absurd plan to try to bind all future governments to a law that demands not just budget balance but budget surpluses during “normal times” – a phrase that opens up great scope for debate. Apart from anything else, it is evident from the frequent revisions to statistics, and therefore analysis made by the Office for National Statistics and the Office for Budget Responsibility, that it is often not obvious at the time whether one is indeed living in “normal times”.

Rather like his distinguished predecessor, Lord Lawson, Osborne has become obsessed by “rules”. But as one of Macpherson’s distinguished predecessors, Sir Douglas Allen, used to say, what matters is not budget balance, let alone budget surplus, but a balanced economy. That is not what is on offer from the present chancellor.

UK's first 'social supermarket' opens to help fight food poverty

Community Shop in Goldthorpe gives local shoppers access to surplus food from supermarkets for up to 70% less

• Rebecca Smithers
• The Guardian, Monday 9 December 2013

Community Shop customers will not only get access to cheaper food, but will also be offered social and financial support. Photograph: Murdo Macleod

Britain's first "social supermarket" opens its doors on Monday, offering shoppers on the verge of food poverty the chance to buy food and drink for up to 70% less than normal high-street prices.

If successful, the Community Shop, in Goldthorpe, near Barnsley, south Yorkshire, which is backed by large retailers and supermarkets, could be replicated elsewhere in Britain.

Community Shop is a subsidiary of Company Shop, Britain's largest commercial re-distributor of surplus food and goods, which works with retailers and manufacturers to tackle their surpluses sustainably and securely.

It sells on residual products, such as those with damaged packaging or incorrect labelling, to membership-only staff shops in factories. The new project goes one step further, located in the community for the first time and also matching surplus food with social need.

Membership of the pilot store – in Goldthorpe, an area of social deprivation – will be restricted to people living in a specific local postcode area who also get welfare support.

Individuals who shop at Community Shop will not only get access to cheaper food, but will also be offered programmes of wider social and financial support, such as debt advice, cookery skills and home budgeting.

The scheme is being supported by retailers, brands and manufacturers, including Asda, Morrisons, Co-operative Food, M&S, Tesco, Mondelez, Ocado, Tetley, Young's and Müller. All are diverting surpluses to the pilot.

Company Shop hopes to open Community Shops in London and beyond next year should the pilot prove successful and sustainable.

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Gurdwaras-turned-food banks: Sikh temples are catering for rise in Britain’s hungry

Each week across the UK, around 5,000 vegetarian meals are served to the needy

It is lunchtime at the Karamsar Gurdwara, where worshippers are tucking into the free food. But Sikhs are not the only ones enjoying the temple meals. Religious leaders report that an increasing number of non-believers are visiting their place of worship to eat, treating them as food banks while the effects of austerity and economic slump bite.

The Sikh Federation UK estimates that around 5,000 meals are now served to non-Sikhs by Britain’s 250 gurdwaras each week. They say the meals have been a lifeline for homeless people and overseas students swamped in debt.

Harmander Singh, who worships at the Karamsar Gurdwara in east London and is a spokesman for the Sikhs In England think-tank, said: “It’s noticeable: more people coming in and more people coming frequently. Some are working in low-paid jobs, cannot afford lunch and come here to subsidise living costs. They are also women with kids.”

He said that Sikhs welcome anyone into the gurdwara as long as they are not drunk, they remove their shoes and cover their head, adding: “It’s not a free buffet, it’s a way of serving the community.”

In the Karamsar Gurdwara’s dining area, most people sit on the floor while eating. The food is made round the clock by volunteers and funded by donations. In Sikhism, only vegetarian food is served in the gurdwara so the cuisine includes lentils, roti Indian bread, vegetables, yoghurt and Indian sweets.

Foodbanks fed 346,992 people across Britain in the UK last year, according to the Trussell Trust. The Sikh temples cannot help that many people, but the service is welcomed.

Among the 6,000 visitors a week lunching at the Karamsar Gurdwara was a group of overseas medical students.

One student from China, who wished to remain anonymous, said: “My friend brought me here. I found it very welcoming and peaceful. People were very friendly. They are taking care of me. I like the variety of the food. I haven’t seen this before I came to England. People seem to be very nice.”

Another student from India, who is Catholic, said: “For the last 10 days we have come here regularly. They have a welcoming attitude. People don’t discriminate. I was surprised to see a mini Punjab here. The food is like home-cooked.”

Amrick Singh Ubhi of the Nishkam Centre in Birmingham and vice-chair of the Council of Sikh Gurdwoaras, explained how their local community group does outreach work for people worried about visiting a place of worship.

“Nishkam Help is one example of a project to help feed people in the centre of Birmingham which has had to extend its provision to three nights a week and we have supported the initiation of similar programmes with gurdwaras in Leeds and Glasgow.

“The Birmingham Community Support Network has been set up to deal with the increase in demand especially as a result of the welfare reforms.

“We are hearing and seeing an increase of other nationalities frequenting gurdwaras specifically for langar.

“We have to realise that while we see our respective places of worship as a sanctuary, not all people will.  We see that people of other faiths and none do mix, but there is always that apprehension of “the other” and until we break down those barriers and start working together that will remain so.”

In praise of Public Sector Banks

Black sheep of finance
By Ellen Brown in Asia Times Online

Once the black sheep of high finance, government owned banks can reassure depositors about the safety of their savings and can help maintain a focus on productive investment in a world in which effective financial regulation remains more of an aspiration than a reality. - Centre for Economic Policy Research, VoxEU.org (January 2010). [1]

Public sector banking is a concept that is relatively unknown in the United States. Only one state - North Dakota - owns its own bank. North Dakota is also the only state to escape the credit crisis of 2008, sporting a budget surplus every year since; but skeptics write this off to coincidence or other factors.

The common perception is that government bureaucrats are bad businessmen. To determine whether government-owned banks are assets or liabilities, then, we need to look farther afield.

When we remove our myopic US blinders, it turns out that globally, not only are publicly owned banks quite common but that countries with strong public banking sectors generally have strong, stable economies.

According to an Inter-American Development Bank paper presented in 2005, the percentage of state ownership in the banking industry globally by the mid-nineties was over 40%. [2] The BRIC countries - Brazil, Russia, India, and China - contain nearly three billion of the world’s seven billion people, or 40% of the global population. The BRICs all make heavy use of public sector banks, which compose about 75% of the banks in India, 69% or more in China, 45% in Brazil, and 60% in Russia.

The BRICs have been the main locus of world economic growth in the last decade. China Daily reports, "Between 2000 and 2010, BRIC's GDP grew by an incredible 92.7%, compared to a global GDP growth of just 32%, with industrialized economies having a very modest 15.5%."

All the leading banks in the BRIC half of the globe are state-owned. [3] In fact the largest banks globally are state-owned, including:

The two largest banks by market capitalization (ICBC and China Construction Bank); The largest bank by deposits (Japan Post Bank); The largest bank by assets (Royal Bank of Scotland, now nationalized); The world's largest development bank (BNDES in Brazil). [4] A May 2010 article in The Economist noted that the strong and stable publicly owned banks of India, China and Brazil helped those countries weather the banking crisis afflicting most of the rest of the world in the last few years. [5] According to Professor Kurt von Mettenheim of the Sao Paulo Business School of Brazil: Government banks provided counter cyclical credit and policy options to counter the effects of the recent financial crisis, while realizing competitive advantage over private and foreign banks. Greater client confidence and official deposits reinforced liability base and lending capacity. The credit policies of BRIC government banks help explain why these countries experienced shorter and milder economic downturns during 2007-2008. [6] Surprising findings In a 2010 research paper summarized on VoxEU.org, economists Svetlana Andrianova, et al, wrote that the post-2008 nationalization of a number of very large banks, including the Royal Bank of Scotland, "offers an opportune moment to reduce the political power of bankers and to carry out much needed financial reforms." [7] But "there are concerns that governments may be unable to run nationalized banks efficiently." Not to worry, say the authors: Follow-on research we have carried out (Andrianova et al, 2009) ... shows that government ownership of banks has, if anything, been robustly associated with higher long run growth rates. Using data from a large number of countries for 1995-2007, we find that, other things equal, countries with high degrees of government ownership of banking have grown faster than countries with little government ownership of banks. We show that this finding is robust to a battery of econometric tests. Expanding on this theme in their research paper, the authors write: While many countries in continental Europe, including Germany and France, have had a fair amount of experience with government-owned banks, the UK and the USA have found themselves in unfamiliar territory. It is therefore perhaps not surprising that there is deeply ingrained hostility in these countries towards the notion that governments can run banks effectively. ... Hostility towards government-owned banks reflects the hypothesis ... that these banks are established by politicians who use them to shore up their power by instructing them to lend to political supporters and government-owned enterprises. In return, politicians receive votes and other favours. This hypothesis also postulates that politically motivated banks make bad lending decisions, resulting in non-performing loans, financial fragility and slower growth. But that is not what the data of these researchers showed: [W]e have found that ... countries with government-owned banks have, on average, grown faster than countries with no or little government ownership of banks. ... This is, of course, a surprising result, especially in light of the widespread belief - typically supported by anecdotal evidence - that " ... bureaucrats are generally bad bankers" ... What accounts for their surprising findings? The authors provide a novel explanation: We suggest that politicians may actually prefer banks not to be in the public sector. ... Conditions of weak corporate governance in banks provide fertile ground for quick enrichment for both bankers and politicians - at the expense ultimately of the taxpayer. In such circumstances politicians can offer bankers a system of weak regulation in exchange for party political contributions, positions on the boards of banks or lucrative consultancies. Activities that are more likely to provide both sides with quick returns are the more speculative ones, especially if they are sufficiently opaque as not to be well understood by the shareholders such as complex derivatives trading. Government-owned banks, on the other hand, have less freedom to engage in speculative strategies that result in quick enrichment for bank insiders and politicians. Moreover, politicians tend to be held accountable for wrongdoings or bad management in the public sector but are typically only indirectly blamed, if at all, for the misdemeanors of private banks. It is the shareholders who are expected to prevent these but lack of transparency and weak governance stops them from doing so in practice. On the other hand, when it comes to banks that are in the public sector, democratic accountability of politicians is more likely to discourage them from engaging in speculation. In such banks, top managers are more likely to be compelled to focus on the more mundane job of financing real businesses and economic growth. The BRICs as a global power Focusing on the financing of real businesses and economic growth seems to be the secret of the BRICs, which are leading the world in economic development today. But the BRIC phenomenon is more than just a growth trend identified by an economist. It is now an international organization, an alliance of countries representing the common interests and goals of its members. The first BRIC meeting, held in 2008, was called a triumph for Russian leader Vladimir Putin's policy of promoting multilateral arrangements that would challenge the United States' concept of a unipolar world. [8] The BRIC countries had their first official summit and became a formal organization in Yekaterinburg, Russia, in 2009. They met in Brazil in 2010 and in China in 2011, and they will meet in India in 2012. In 2010, at China's invitation, South Africa joined the group, making it "BRICS" and adding a strategic presence on the African continent. The BRICS seek more voice in the United Nations, the International Monetary Fund, and the World Bank. They are even discussing their own multicultural bank to fund projects within their own nations, in direct competition with the IMF. They oppose the dollar as global reserve currency. After the Yekaterinburg summit, they called for a new global reserve currency, one that was diversified, stable and predictable; and they have the clout to get it. [9] According to Liam Halligan, writing in The UK's Telegraph: The BRICs account for ... around three-quarters of total currency reserves. They have few serious fiscal issues and all are net external creditors. [10] Western financial interests have long fought to maintain the dollar as global reserve currency, but they are losing that battle, despite economic and military coercion. Russia, China and India are now nuclear powers. The BRICS will have to be negotiated with, and the first step to forming a working relationship is to understand how their economies work.