By Jonathon W. Moses (auth.)
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Extra info for OPEN States in the Global Economy: The Political Economy of Small-State Macroeconomic Management
The lessons generated by this new framework are quite different from those usually ascribed to small OPEN states. Rather than expecting states to pursue expansionary, or counter-cyclical, economic policies in the aggregate, I expect them to rely heavily on targeted (that is, regional, sectoral, industrial) growth policies in a general macroeconomic environment of managed constraint. In an era of restricted capital ﬂows, I expect policy-makers in these countries to use their aggregate macroeconomic policies conservatively, as they do not allow ofﬁcials to distinguish sufﬁciently between the needs of the external and internal accounts.
18 Large tax revenues would absorb private savings (building public (forced) savings), and inhibit broad economic expansions. The large public savings could then be directed toward the most worthy (exposed) sectors. In conclusion, the lessons generated from the closed-capital external account framework are as follows: aggregate macroeconomic policies are extremely problematic, as they have potentially contradictory effects on the external balance. If there is any macroeconomic rule of thumb, it is that policy-makers must constantly worry about the competitiveness of their export sectors, and the threat to that competitiveness which emanates from price developments in the sheltered sector.
Dependence on external markets means that output prices in the exposed sector are set by the world market and the exchange rate. Thus, under ﬁxed exchange rates, industries in the exposed sector cannot compensate for cost increases by raising their prices. Instead they must absorb the loss in the form of reduced proﬁts, maybe even reduced production levels and/or increased productivity. In the sheltered sector, however, increased costs can (within a given corridor) be covered by increased output prices, as external competition does not set a rigid price ceiling on their goods.
OPEN States in the Global Economy: The Political Economy of Small-State Macroeconomic Management by Jonathon W. Moses (auth.)