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One way to keep taxation fair. Horizontal equity means that people with a similar ability to pay taxes should pay the same amount. (See equity and vertical equity. )
Industry:Economy
A Peruvian economist who advocates establishing formal property rights for the poor to help them rapidly escape from poverty. In books such as The Other Path and The Mystery of Capital, he argued that, in developing countries, capitalism will thrive in the long run only if legal systems change so that most of the people feel that the law is on their side. One of the best ways to achieve this is to give full legal protection to the de facto property rights that are observed informally by the poor, such as when a community recognizes that a certain family is entitled to occupy a particular piece of land. According to his research, carried out in several countries with his think tank, the Institute for Liberty and Democracy, such informal property rights cover assets (notably land and housing) worth many billions of dollars. Informal systems of property rights usually make such assets "dead capital", meaning that it is hard to use them as collateral for a loan, which might be used to start a business, for example. He argues with that an efficient, inclusive legal system preceded rapid development in every rich country and that bringing these rights into the formal legal system of poor, developing countries will unleash this hitherto dead capital and spur growth. His ideas have been much talked about but little acted upon.
Industry:Economy
A warning signal of possible monopoly. Antitrust economists often gauge the competitiveness of an industry by measuring the extent to which its output is concentrated among a few firms. One such measure is a Herfindahl-Hirschman index. To calculate it, take the market share of each firm in the industry, square it, then add them all up. If there are 100 equal-sized firms (a market with close to perfect competition) the index is 100. If there are four equal-sized firms (possible oligopoly) it will be 2,500. The higher the Herfindahl number, the more concentrated is market power. The main virtue of the Herfindahl is its simplicity. But it has two unfortunate shortcomings. It relies on defining correctly the industry or market for which the degree of competitiveness is open to question. This is rarely simple and can be a matter of fierce debate. Even when the scope of the market is clear, the relation between the Her findahl and market power is not. When there is a contestable market, even a firm with a Herfindahl of 10,000 (the classic definition of a monopoly) may behave as if it was in a perfectly competitive market.
Industry:Economy
These bogey-men of the financial markets are often blamed, usually unfairly, when things go wrong. There is no simple definition of a hedge fund (few of them actually hedge). But they all aim to maximize their absolute returns rather than relative ones; that is, they concentrate on making as much money as possible, not (like many mutual funds) simply on outperforming an index. Although they are often accused of disrupting financial markets by their speculation, their willingness to bet against the herd of other investors may push security prices closer to their true fundamental values, not away.
Industry:Economy
Reducing your risks. Hedging involves deliberately taking on a new risk that offsets an existing one, such as your exposure to an adverse change in an exchange rate, interest rate or commodity price. Imagine, for example, that you are British and you are to be paid $1m in three months’ time. You are worried that the dollar may have fallen in value by then, thus reducing the number of pounds you will be able to convert the $1m into. You can hedge away that currency risk by buying $1m of pounds at the current exchange rate (in effect) in the futures market. Hedging is most often done by commodity producers and traders, financial institutions and, increasingly, by non-financial firms. It used to be fashionable for firms to hedge by following a policy of diversification. More recently, firms have hedged using financial instruments and derivatives. Another popular strategy is to use “natural” hedges wherever possible. For example, if a company is setting up a factory in a particular country, it might finance it by borrowing in the currency of that country. An extension of this idea is operational hedging, for example, relocating production facilities to get a better match of costs in a given currency to revenue. Hedging sounds prudent, but some economists reckon that firms should not do it because it reduces their value to shareholders. In the 1950s, two economists, Merton Miller (1923–2000) and Franco Modigliani, argued that firms make money only if they make good investments, the kind that increase their operating cashflow. Whether these investments are financed through debt, equity or retained earnings is irrelevant. Different methods of financing simply determine how a firm’s value is divided between its various sorts of investors (for example, shareholders or bondholders), not the value itself. This surprising insight helped win each of them a Nobel Prize. If they are right, there are big implications for hedging. If methods of financing and the character of financial risks do not matter, managing them is pointless. It cannot add to the firm’s value; on the contrary, as hedging does not come free, doing it might actually lower that value. Moreover, argued Messrs Miller and Modigliani, if investors want to avoid the financial risks attached to holding shares in a firm, they can diversify their portfolio of shareholdings. Firms need not manage their financial risks; investors can do it for themselves. Few managers agree.
Industry:Economy
An ancient system of moving money based on trust. It predates western bank practices. Although it is now more associated with the Middle East, a version of hawala existed in China in the second half of the Tang dynasty (618-907), known as fei qian, or flying money. In hawala, no money moves physically between locations; nowadays it is transferred by means of a telephone call or fax between dealers in different countries. No legal contracts are involved, and recipients are given only a code number or simple token, such as a low-value banknote torn in half, to prove that money is due. Over time, transactions in opposite directions cancel each other out, so physical movement is minimized. Trust is the only capital that the dealers have. With it, the users of hawala have a worldwide money-transmission service that is cheap, fast and free of bureaucracy. From a government's point of view, however, informal money networks are threatening, since they lie outside official channels that are regulated and taxed. They fear they are used by criminals, including terrorists. Although this is probably true, by far the main users of hawala networks are overseas workers, who do not trust official money transfer methods or cannot afford them, remitting earnings to their families.
Industry:Economy
Money you can trust. A hard currency is expected to retain its value, or even benefit from appreciation, against softer currencies. This makes it a popular choice for people involved in international transactions. The dollar, D-Mark, sterling and the Swiss franc each became a hard currency, if only some of the time, during the 20th century.
Industry:Economy
What economic activity is all about, but how can it be made to happen? Economists have plenty of theories, but none of them has all the answers. Adam Smith attributed growth to the invisible hand, a view shared by most followers of classical economics. Neo-classical economics had a different theory of growth, devised by Robert Solow during the 1950s. This argued that a sustained increase in investment increases an economy's growth rate only temporarily: the ratio of capital to labor goes up, the marginal product of capital declines and the economy moves back to a long-term growth path. Output will then increase at the same rate as the growth in the workforce (quality-adjusted, in later versions) plus a factor to reflect improvements in productivity. This theory predicts specific relationships among some basic economic statistics. Yet some of these predictions fail to fit the facts. For example, income disparities between countries are greater than the differences in their savings rates would suggest. Moreover, although the model says that economic growth ultimately depends on the rate of technological change, it fails to explain exactly what determines this rate. Technological change is treated as exogenous. Some economists argued that doing this ignored the main engine of growth. They developed a new growth theory, in which improvements in productivity were endogenous, meaning that they were the result of things taking place within the economic model being used and not merely assumed to happen, as in the neo-classical models. Endogenous growth was due, in particular, to technological innovation and investments in human capital. In looking for explanations for differences in rates of growth, including between rich and developing countries, the new growth theory concentrates on what the incentives are in an economy to create additional human capital and to invent new products. Factors determining these incentives include government policies. Countries with broadly free-market policies, in particular free trade and the maintenance of secure property rights, typically have higher growth rates. Open economies have grown much faster on average than closed economies. Higher public spending relative to GDP is generally associated with slower growth. Also bad for growth are high inflation and political instability. As countries grew richer during the 20th century annual growth rates declined, as a result of diminishing returns to capital. By 1990, most developed countries reckoned to have long-term trend growth rates of 2-2. 5% a year. However, during the 1990s, growth rates started to rise, especially in the United States. Some economists said this was the result of the birth of a new economy based on a revolution in productivity, largely because of rapid technological innovation but also (perhaps directly stemming from the spread of new technology) to increases in the value of human capital.
Industry:Economy
Another measure of a country's economic performance. It is calculated by adding to GDP the income earned by residents from investments abroad, less the corresponding income sent home by foreigners who are living in the country.
Industry:Economy
Gross national income is a term now used instead of GNP in national accounts.
Industry:Economy
