H1 Case Study Question 2 Answers

Answer all questions. Question 2 Economic Priorities Extract 5: Financial crisis could turn the tide against unrestricted capital flows The theory says that free capital flows allow savings to be directed – by the invisible hand of the financial markets – to wherever they will be most profitably employed. In this way, savers get a better return on their nest egg, while underdeveloped economies receive the financial leg-up they need. Except that isn't what's been happening: instead, for the past decade and more, savings have been pouring uphill from poor c ountries to rich. Fa r from nurturing development and improving the standard of living of the poore st, these vast flows of money have created a repeated pattern of boom, bust and financial crisis. In recent years, several countries have quietly begun erecting breakwaters against the latest tidal wave of capital, driven by low interest rates in the west. Brazil, Argentina and Costa Rica have used various measures, in cluding taxes on purchases of shares and bonds and insisting that short-term invest ors deposit funds with the central bank for a year, to dampen the stop-go cycle. One unlikely recent champion of the reintro duction of regulations on capital flows is the Bank of England. The shock of being ca ught unawares by the vulnerability of the UK's financial system in 2007 and 2008 c aused soul-searching in Threadneedle Street, and recent papers and speeches have helped build the case for new thinking. Adapted from: The Observer, 8 January 2012 Extract 6: Counter-cyclical policy responses An important lesson from the se verity of the recent world financial crisis is that policy in various areas will have to be more prud ent during upswings and to build in greater safety margins to be able to react to large adverse shocks. For instance, the room for fiscal policy to react to a downturn is c onstrained by budget defic its and debt at the outset. In general, the poorer th e fiscal position the less reactive governments have been and can be in their response to adverse shocks. Adapted from: Organisation for Economic Cooperation and Development (OECD), 2010 Extract 7: IMF cuts UK economic growth forecast for 2011 to 1.75% The International Monetary Fund (IMF) has cu t its 2011 growth forecast for the UK economy to 1.75%, its third downgrade in a y ear. The cut cement s the widely held view that Britain faces a year of lo w growth and rising une mployment with little prospect of a job-creating recovery until later in 2012. The report warns that the downside risks to UK growth have increased as the potential for policy mistakes in the eurozone have risen. The cost of oil and other raw materials, which have jumped 32% over the last year according to the IMF's own index, also pose extra risks. Source: The Guardian, 11 April 2011

9732/01/IJC/Sep 12 2 Extract 8: South Korea economy One of the major threats to the Korean ec