Increasing the potential output production by the means of relational capital

« According to macroeconomics textbooks, a fall in aggregate demand causes a recession in which output drops below potential output – the normal level of production given the economy’s resources and technology. This effect is temporary, however. A recession is followed by a recovery period in which output returns to potential, and potential itself is not affected significantly by the recession. […]Experience since the financial crisis and Great Recession of 2008–2009 has strengthened the evidence for long-term effects of recessions. It has become increasingly clear that the recession has done lasting harm – that countries around the world face a new normal with lower levels of output than anyone expected in 2007. In a recent paper (Ball 2014), I seek to quantify the damage suffered by 23 OECD countries. […]Through what mechanisms do recessions reduce potential output? This question is addressed in a number of recent papers (see Ball 2014). While the results vary, it appears that recessions sharply reduce capital accumulation, have long-term effects on employment (largely through lower labour force participation), and may slow the growth of total factor productivity. This last effect is poorly understood – one possible factor is a decrease in the formation of businesses with new technologies. A better understanding of hysteresis mechanisms is a high priority for research. Can policymakers repair the damage from the Great Recession? Once again, the answer is not clear, but I believe that hysteresis effects can work in reverse if macroeconomic policy creates a strong economic expansion. Procyclical investment would increase the capital stock, plentiful job opportunities would increase workers’ attachment to the labour force, and so on. My past research finds that expansionary policy can reduce the natural rate of unemployment (Ball 2009). Today, a strong expansion might push potential output back toward its pre-crisis path. Failing that, the expansion might at least reverse declines in the growth rate of potential, so the damage from the Great Recession does not continue to grow.»( The Great Recession’s long-term damage Laurence Ball, 1 July 2014, http://www.voxeu.org/article/great-recession-s-long-term-damage)

The reduction of potential output depends also from expectations.  Even if static expectations can be rational, it is necessary to understand that rational expectations can be different from static expectations. After a crisis investors, consumers, policy makers, entrepreneurs can suffer some shock in expectations. In particular they can reduce their ability to invest in project and to pursue their own goals. Financial crisis can destroy the ability of economic operators to realize choices.  The compression of rational expectations reduces the ability to realize choices, to promote projects and this can reduce the potential growth of the economy.  Even if a crisis destroy common goods, saving, and produce unemployment, the main destruction generated by  a financial crisis is the reduced ability to  realize rational choices. In effect unemployment can be restored if entrepreneurs realize new investments, if the policy makers produce new policy devoted to sustain economic growth, if banks manage credit in the interest of value added production.  But due to the presence of a crisis all the ability to choose the best way to use economic resources is destroyed. We can say that the economic crisis breaks the relations  among economic operators and by this way destroy the ability to produce new project, new products, new goods and services, new firms able to restore the economy. The loss  in the relational capital associated to a reduction in rational choice ability produce a reduction in potential growth. Even if the capital accumulation is crucial for the determination of the economic growth, also the ability to realize choices, to have rational expectations and to accumulate relational capital can sustain potential economic growth. The growth rate of potential output is related not only on actual output production,i.e.  static expectations, but also on future output production,i.e. rational expectations. Future output production depends also by the ability to produce relational capital able to sustain new investments also reinforcing physical capital.

To restore the potential output production is necessary to restore the ability of economic operators to realize rational choices, giving continuity to projects, and giving more attention to the production of relational capital.

Is Europe equal in the sense of Gini Index ?

« This column argues that the econometric evidence has been scant, and presents new and improved estimates of the monetary benefits countries derive from being EU members. It reports substantial and positive increases in per capita GDP after EU membership for all countries that joined in the 1980s and in 2004, with the exception of Greece. […] Henrekson et al.(1997) estimate the benefits from membership to be about 0.6 to 0.8% per year but note that such estimates are “not completely robust” (1997, p. 1551). Badinger (2005) estimates that “GDP per capita of the EU would be approximately one-fifth lower today if no integration had taken place since 1950” but cautions that these are “not completely robust” (p. 50). Crespo et al. (2008) find large growth effects from EU membership, but warn that country heterogeneity remains a severe concern [...] Let us consider the example of Spain, which became a full-fledged member of the EU in 1986 (vertical dotted line). The results suggest that per capita GDP in Spain would be considerably lower today had it not joined the EU in 1986.[…] Overall, these results show substantial increases in per capita GDP for all countries that joined the EU in the 1980s and in 2004, with one exception – Greece[…]The main finding is that of substantial and positive pay-offs, with approximately 12% gain in per capita GDP. Despite substantial differences across countries, there are clear indications that the benefits of EU membership have significantly outweighed the costs (except for Greece). An important question is to identify factors that allow countries to better exploit EU entry. Campos et al. (2014) began investigating this issue and their preliminary findings highlight the role of financial development (i.e., more financially developed countries growing significantly faster after EU membership) and, somewhat less surprisingly, trade openness.» (How much do countries benefit from membership in the European Union? Nauro F Campos, Fabrizio Coricelli, Luigi Moretti, 9 April 2014 )

In this column authors argue about the positive effect of european integration. The results show that the process of European economic integration has increased the level of Gdp per capita of approximately 12% with exception of Greece. Even if we can say that this reduction can be considered a positive element in the process of european economic  development, we must consider even the question that the increasing level of GDP per capita should be related with the level of inequality measured by Gini index.  In effect one of the main opposition to European Union is the fact that EU has an impact in the sense of increasing inequality. Even if the globalization seems to have increased economic inequality, the Great Financial Crisis seems to have had a procyclical effect in terms of inequality. What we would ask is: can the increasing level of GDP per capita for European countries be associated  with an increasing level of economic inequality ?  The answer to this question is controversial and we should try to analyze the conditions of single countries in the European context. 

If we look at the mean value of Gini index for Eurozone  we can say that the level of economic inequality  in 2012 was closed to the level of 2005, even if during the period 2005-2011 the level of Gini index was lower than that in the previous period.  We can say that the Eu has had a positive effect in the sense of reducing inequality during the period 2005- 2011 even if the level of economic inequality has been increasing in the period 2011-2012.

Even for countries that don’t have the euro the level of inequality in 2012 was lower than that in 2005.

If we consider the difference in Gini index between 2012 and 2005 in Eurozone we can observe that :

At the first place we find Portugal. Portugal has reduced its inequality of 3.6 point between 2005-2012. Other countries have increased the level of inequality  in the sense of Gini Index such as for example Germany ( +2.2), France (+ 2.2) and Spain (+2.8). Even if the mean level  of Gini index for Eurozone in the period 2005-2012 was closed to zero (+ 0.08). 

For european countries without euro the level of  Gini index was negative either for the period 2012-2005 (-0.2) either for the period 2012-2007 (-0.7).

We can say that the increasing level of GDP per capita in the european economic integration is associated to a reduction of inequality in the sense of Gini index for country with no euro while for Eurozone the level is closed to zero. It is possible that political economics can reduce inequality in Eurozone making a change in the sign of Gini index. The increasing level of Gdp per capita can be associated to a reducing level of Gini index in EU. Even if there are some countries that produce inequality such as Germany, France and Spain.
The increasing inequality in some great european countries can shed some light on the social cost of political economies either in economies devoted to exportations.

If we consider all the european countries in the sense of Gini Index we find that  the first 4 countries for the highest level of economic inequality are in the Eurozone (Latvia, Spain, Portugal, Greece) and 7 of the first 10 countries for the highest economic inequality are Eurozone countries.

We can say that reducing the level of economic inequality is problem especially in the Eurozone. But due to the fact that Eurozone countries are more industrialized that non-eurozone european coutries it is possible that the level of highest level of economic inequality in Eurozone countries shed lights on a greater problem: the change of economic system in the globalization. The increasing level of natural unemployment with the increasing level of de-localization, the highest level of global competition,  are problems that could be resolved with new economic institutions able to restore credit market, labour market and new rights for european citizenships.

The question of inequality is one of the fundamental question in the globalization age, in particular in the aftermath of the great financial crisis of 2007. But the raising of inequality can be the considered as a signal of a change in the economic conditions of western economies. New problems such as aging, reduction in the level of human , social and relational capital, credit crunch, and lower credibility of political commitments create a context in which inequality can arise. European Union has increased the level of GDP per capita of “approximately 12%”  as shown in quoted article. But it is necessary to consider the impact on inequality. European insititutions should target inequality on a country base and should  promote program to reduce the level of inequality. The economic debate has shown the limits of a GDP oriented analysis of country conditions. GDP per capita is not sufficient to rank countries. It is necessary to enlarge the analytical tools and indexes including new index able to represent either the distribution of income and the possibility for citizenships and immigrants to have access to  rights, freedom and capability to realize a full manifestation of the person.  In this sense European Union can use the tools of development economics to target new objectives, more related with  human development welfare and social happiness.  European Union in this sense can have a new role. The role of a new polis able to take together order, peace, economic growth and economic development, putting citizenships and immigrants in the condition have a full capability to realize their own person.