The Wonderful Blog Which You ve Never Seen

The Good, the Bad and the Ugly Employee and Management Owned Firms

Sep 17th 2008boybermNews and Society

Margaret Thatcher started a world trend during her tenure as Prime Minister is Downing Street. It is called: Privatization. It consisted of the transfer of control of a state-owned enterprise to the Private Sector. This was done by selling the shares of the company. At times, the control itself was maintained by the state - but the economic benefits emanating from the ownership of shares was partly sold to privates. Such economic benefits are comprised of the dividend yield of the shares plus the appreciation in their value (due to the involvement of the private sector) known as capital gains.

But the privatization process was not entirely homogeneous, uniform, transparent, or, for that matter, fair.

The stock of some of the enterprises was sold to an individual, or group of individuals, by a direct, negotiated sale. A “controlling stake” (nucleus) was thus sold, ostensibly yielding to the state a premium paid by the private investors for the control of the sold firm.

This method of privatization was criticized as “crony capitalism”. For some reason, a select group of businessmen, all cronies of the ruling political elite, seemed to benefit the most. They bought the controlling stakes at unrealistically low prices, said the critics. To support their thesis, they pointed to the huge disparity between the price at which the “cronies” bought the shares - and the price at which they, later, sold it to the public through the stock exchange. The “cronies” cried foul: the difference in the prices was precisely because of privatization, better management and financial control. Maybe. But the recurrence of the same names in every major privatization deal still looked suspiciously odd.

Then there was the second version: selling the shares of the privatized firms directly to the public. This was done using either of two methods:

An offering of the shares in the stock exchange (a cash method), or
The distribution of vouchers universally, to all the adult citizens of the country, so that they could all share the wealth accumulated by the state in an equitable manner. The vouchers are convertible to baskets of shares in a prescribed list of state enterprises (a nonchash method).

But a smaller group of (smaller) countries selected a whole different way of privatizing. They chose to TRANSFORM the state-owned firm instead of subjecting them to outright privatization.

Transformation - the venue adopted by Macedonia - is the transfer of the control of a firm and / or the economic benefits accruing to its shareholders to groups which were previously - or still are - connected to the firm.

In this single respect, transformation constitutes a major departure - not to say deviation - from classical privatization.

Ownership of the transformed firm can revert to either of the following groups, or to a combination thereof:

The employees of the firm, through a process called Employee BuyOut (EBO)
The management of the firm, in the form of a Management BuyOut or Buy In (MBO / MBI)
A select group from within the firm. Such a group uses the assets - current and future - of the firm as collaterals, thus enabling them to get the credits necessary to purchase the shares of the firm. This is called a Leveraged BuyOut, because the assets of the firm itself are leveraged in order to purchase it (LBO).
Finally, the creditors of the firm can team up and agree to convert the firm’s debts to them into equity in the firm, in a Debt to Equity Swap (DES).

The Sickly State of Public Hospitals

Jun 27th 2008boybermNews and Society

There are many types of hospitals but the most well known are the Public Hospitals. What sets them apart is that they provide services to the indigent (people without means) and to minorities.

Historically, public hospitals started as correction and welfare centres. They were poorhouses run by the church and attached to medical schools. A full cycle ensued: communities established their own hospitals which were later taken over by regional authorities and governments - only to be returned to the management of communities nowadays. Between 1978 and 1995 a 25% decline ensued in the number of public hospitals and those remaining were transformed to small, rural facilities.

In the USA, less than one third of the hospitals are in cities and only 15% had more than 200 beds. The 100 largest hospitals averaged 581 beds.

A debate rages in the West: should healthcare be completely privatized - or should a segment of it be left in public hands?

Public hospitals are in dire financial straits. 65% of the patients do not pay for medical services received by them. The public hospitals have a legal obligation to treat all. Some patients are insured by national medical insurance plans (such as Medicare/Medicaid in the USA, NHS in Britain). Others are insured by community plans.

The other problem is that this kind of patients consumes less or non profitable services. The service mix is flawed: trauma care, drugs, HIV and obstetrics treatments are prevalent - long, patently loss making services.

The more lucrative ones are tackled by private healthcare providers: hi tech and specialized services (cardiac surgery, diagnostic imagery).

Public hospitals are forced to provide “culturally competent care”: social services, child welfare. These are money losing operations from which private facilities can abstain. Based on research, we can safely say that private, for profit hospitals, discriminate against publicly insured patients. They prefer young, growing, families and healthier patients. The latter gravitate out of the public system, leaving it to become an enclave of poor, chronically sick patients.

This, in turn, makes it difficult for the public system to attract human and financial resources. It is becoming more and more destitute.

Poor people are poor voters and they make for very little political power.

Public hospitals operate in an hostile environment: budget reductions, the rapid proliferation of competing healthcare alternatives with a much better image and the fashion of privatization (even of safety net institutions).

Public hospitals are heavily dependent on state funding. Governments foot the bulk of the healthcare bill. Public and private healthcare providers pursue this money. In the USA, potential consumers organized themselves in Healthcare Maintenance Organizations (HMOs). The HMO negotiates with providers (=hospitals, clinics, pharmacies) to obtain volume discounts and the best rates through negotiations. Public hospitals - underfunded as they are - are not in the position to offer them what they want. So, they lose patients to private hospitals.

But public hospitals are also to blame for their situation.

They have not implemented standards of accountability. They make no routine statistical measurements of their effectiveness and productivity: wait times, financial reporting and the extent of network development. As even governments are transformed from “dumb providers” to “smart purchasers”, public hospitals must reconfigure, change ownership (privatize, lease their facilities long term), or perish. Currently, these institutions are (often unjustly) charged with faulty financial management (the fees charged for their services are unrealistically low), substandard, inefficient care, heavy labour unionization, bloated bureaucracy and no incentives to improve performance and productivity. No wonder there is talk about abolishing the “brick and mortar” infrastructure (=closing the public hospitals) and replacing it with a virtual one (=geographically portable medical insurance).

To be sure, there are counterarguments:

The private sector is unwilling and unable to absorb the load of patients of the public sector. It is not legally obligated to do so and the marketing arms of the various HMOs are interested mainly in the healthiest patients.

These discriminatory practices wreaked havoc and chaos (not to mention corruption and irregularities) on the communities that phased out the public hospitals - and phased in the private ones.

True enough, governments perform poorly as cost conscious purchasers of medical services. It is also true that they lack the resources to reach a substantial segment of the uninsured (through subsidized expansions of insurance plans).

40,000,000 people in the USA have no medical insurance - and a million more are added annually. But, there is no data to support the contention that public hospitals provide inferior care at a higher cost - and, indisputably, they possess unique experience in caring for low income populations (both medically and socially).

So, in the absence of facts, the arguments really boil down to philosophy. Is healthcare a fundamental human right - or is it a commodity to be subjected to the invisible hand of the marketplace? Should prices serve as the mechanism of optimal allocation of healthcare resources - or are there other, less quantifiable, parameters to consider?

Whatever the philosophical predilection, a reform is a must. It should include the following elements:

Public hospitals should be governed by healthcare management experts who will emphasize clinical and fiscal considerations over political ones. This should be coupled with the vesting of authority with hospitals, taking it back from local government. Hospitals could be organized as (public benefit) corporations with enhanced autonomy to avoid today’s debilitating dual effects: politics and bureaucracy. They could organize themselves as Not for Profit Organizations with independent, self perpetuating boards of directors.

But all this can come about only with increased public accountability and with clear measuring, using clear quantitative criteria, of the use of funds dedicated to the public missions of public hospitals. Hospitals could start by revamping their compensation structures to increase both pay and financial incentives to the staff.

Current one-fits-all compensation systems deter talented people. Pay must be linked to objectively measured criteria. The Hospital’s top management should receive a bonus when the hospital is accredited by the state, when wait times are improved, when disrollment rates go down and when more services are provided.

To implement this (mainly mental) revolution, the management of public hospitals should be trained to use rigorous financial controls, to improve customer service, to re-engineer processes and to negotiate agreements and commercial transactions.

The staff must be employed through written employment contracts with clear severance provisions that will allow the management to take commercial risks.

Clear goals must be defined and met. Public hospitals must improve continuity of care, expand primary care capacity, reduce lengths of stay (=increase turnaround) and meet budgetary constraints imposed both by the state and by patient groups or their insurance companies.

All this cannot be achieved without the full collaboration of the physicians employed by the hospitals. Hospitals in the USA form business joint ventures with their own physicians (PHO - Physicians Hospital Organizations). They benefit together from the implementation of reforms and by the increase of productivity. It is estimated that productivity today is 40% less in the public sector than in the private one. This is a dubious estimate: the patient populations are different (sicker people in the public sector). But even if the figure is incorrect - the essence is: public hospitals are less efficient.

They are less efficient because of archaic scheduling of patient-doctor appointments, laboratory tests and surgeries, because of obsolete or non-existent information systems, because of long turnaround times and because of redundant lab tests and medical procedures. The support - which exists in private hospitals - from other (clinical and nonclinical) personnel is absent because of impossibly complex labour rules and job descriptions imposed by the unions. Most of the doctors have split loyalties between the medical schools in which they teach and the various hospital affiliates. They would tend to neglect the voluntary affiliates and contribute more to the prestigious ones. Public hospitals would, therefore, be well advised to hire new staff, not from medical schools, share risks with its physicians through joint ventures, sign contracts with pay based on productivity and put physicians in the governing boards. In general, the hospitals must shrink and re-engineer the workforce. About half the budget is normally spent on labour costs in private hospitals - and more than 70% in public ones. It is no good to reduce the workforce through natural attrition, mass layoffs, or severance incentives. These are “blind”, nondiscriminating measures which affect the quality of the care provided by the hospital. When compounded by work rules, seniority systems, job title structures and skewed grievance procedures - the situation can get completely out of hand.

The government must contribute its part. Public hospitals cannot comply or compete with the demands of national, publicly traded HMOs with political clout and the capacity to raise capital to finance hyper-sophisticated marketing. Public policy must be written to support “safety net” institutions. They must be allowed to organize their own MCOs (Managed Care Organizations of patients), to insure patients and to market their services directly to groups of potential consumers. This way they will save the 20% commission that they are paying HMOs currently. If they become more efficient and reduce utilization, they will absorb the full benefits, instead of ceding them to contracting groups of patients and insurance companies or even to the government’s medical insurance plans. The hospitals will thus be able to construct their own networks of suppliers and share their risks with their physicians or with the insurance companies as best suits their objectives.

An example: a Public Hospital with its own healthcare plan is likely to make use of all its specialists and facilities, increase capacity utilization and profits - whereas today only its primary care, less lucrative, services are used by independent HMOs.

The government can limit the total number of healthcare plans available, so that the one propagated by the public hospital will stand out and not be swamped by hundreds of other plans. Such a public hospital plan could also be declared the “healthcare plan of default” - anyone who has not selected a plan will be automatically referred to and included in the public hospital plan.

Not every hospital can start an HMO plan. Only the big ones can support the necessary insurance payments, the reserve requirements and the marketing and administrative costs. The paradox is that big public hospitals are already committed to HMOs, insurers, other patient groups, or government-sponsored MCOs. These resist the inclusion of hospitals which own competing healthcare plans - in their networks. This is natural: a hospital with a plan - is a direct competitor of a private provider of healthcare management and insurance. Another obstacle is that governments are very reluctant to encourage the public sector on account of the private one. This is definitely out of fashion nowadays.

So, an alternative strategy looks more viable:

Public hospitals can act as direct contracting networks. They can team up, pool their resources, exercise political lobbying, relegate administrative and audit functions (data processing, claim processing, payment system, accounting, legal services) to a common centre. This will eliminate the need for middlemen like the HMOs. These joint networks will be able to negotiate contracts with other contractors: physicians, pharmacies, specialized laboratories and so on. This will assist the public hospitals to preserve a loyal and stable (low churning) patient base.

Finally, public hospitals are large employers with political muscle. All they lack is the will to exercise it. They should do it to force governments to adopt some unpopular decisions: offer incentives to HMOs which will refer patients to public hospitals, require HMOs to use all the range of services (both primary and speciality), compensate public hospitals directly for nonpaying patients.

But the public hospitals must begin to behave as public entities: they must open their decision making processes and make them community-oriented. They must shift from relying on contractual language to relying on administrative law (regulations) - except when it comes to employment. In a nutshell: they should be business oriented, on the one hand - and publicly accountable on the other.

There is the little matter of Public Relations and advocacy. Public Hospitals have a terrible image and they are doing very little to change it. They do not even collaborate with researchers trying to establish a factual fundament concerning “safety net medical and social care”. In a world where images count more than realities this may well be the public hospitals biggest mistake.

Eight Ways to Improve the Operation of Public Hospitals

A public hospital can lease physical space or temporal slots, or computer equipment or any other equipment which suffers capacity underutilisation - to their physicians for private practice.

The lessee physicians will undertake to pay the hospital - either in the form of fixed fees or in the form of participation in the income (franchise arrangements).

They will also commit themselves to provide community-oriented, non profit services in return for the right to use what is, essentially, community property.

Another method of using the excess capacity is to sell it, rent it, or lease it to entrepreneurs who are not members of the hospital staff. There are many such possibilities: small laboratories, speciality medical services, primary care and specialist practitioners. All these would love to use the superior infrastructure of the hospital. The right to use this infrastructure can be given in the form of a concession, a franchise, a rental arrangement, or any other arm’s length mode of collaboration. Professionals are likely to jump on the bandwagon when they realize that the hospital provides them with a “captive market” of patient. This is very much like the relationship between an “anchor” in a shopping mall and the small retail shops surrounding it. The small shops benefit from the business diverted in their direction from the big “anchor” outlets.

The next logical step would be to sell products and services to the community on a commercial, competitive basis. The hospital does not have to limit itself to the sale of medical goods and services. It can also sell medical legal services, use its print shop to offer print jobs, organize its social services as a profit centre and sell them to the community or to individuals, offer medical consultancy on a fee per service basis, even sell food from the hospital kitchen through a catering service or data to researchers from its archives. A natural extension of this approach would be “internal privatization”.

A hospital is a collection of small (to medium) size businesses operating under one organizational roof. Laundry, cleaning, kitchen, the provision of television sets and telephones to patients, a business centre for the hospitalized businessmen - these are all profit or loss generating centres.

Internal privatization entails the transformation of the hospital into a holding company. This holding company will own and operate a host of corporations. Each corporation will constitute a separate contractor which will provide the hospital with a service or a product. Thus, all laundry will be done by a corporation which will charge the hospital for its services. The same will go for the kitchen, the printshop, the legal services and so on. These corporations will employ the former staff of the hospital. This way, the knowledge and experience accumulated within the hospital will not be lost. The corporations owned by the former employees will have a “right of first refusal” in the first five years following the transformation. The employee-owned corporations will be allowed to match the best offers in yearly tenders that the hospital will conduct for the services that they are offering.

These corporations will also be allowed to offer their services to other clients. Thus, they will reduce their dependence on one employer, the hospital. They will become truly entrepreneurial entities, competing for profits in a market environment.

A part of the re-engineering process is to determine which of the functions that the hospital fulfils are “core functions”, indispensable functions without which the hospital will cease to exist or will change its identity to such an extent that it will no longer will be recognizable as a hospital. All other, “noncore”, functions should be tendered out (a concept called “outsourcing”). They should be awarded in a tender to the most competitive bidders, regardless of their identity and previous allegiance. The hospital is likely to benefit from the transfer of functions, in which it has no relative competitive advantage, to outsiders whose expertise these functions are. This is somewhat akin to international (free) trade, where each nation optimizes its resources and passes the (beneficial) results of this optimization process to its trading partners.

To control this kind of transformation, medical information management systems need to be introduced. Many are available and they improve both the quality and the quantity of data available to the management of the hospital and, as a result, the decision making process. This will make it easier for the management to pinpoint which areas require doing what. For instance: the management of the hospital will be able to determine what kind of incentives should be provided to which members of the staff, where could costs be cut and where and how could productivity be improved.

Finally, a novel concept is emerging. Universities and hospitals are two important repositories of human knowledge and experience. Virtually every hospital somehow collaborates with an academic institution, or with a medical school.

There is symbiosis between hospital and medical and social researchers.

Hospitals should actively encourage this. It improves their image, it contributes to their ability to provide quality services. But should not do it for free. They should be contractual partners to the commercial exploitation of the results of research conducted within their premises or with their co-operation. There is a vast field for pharmaceutical, medical, genetic and bioengineering research - and a lot of opportunities to make money for the benefit of the entire community. By not getting commercially involved - hospitals give up money which really is not theirs to give up.

About The Author

Sam Vaknin is the author of “Malignant Self Love - Narcissism Revisited” and “After the Rain - How the West Lost the East”. He is a columnist in “Central Europe Review”, United Press International (UPI) and ebookweb.org and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor to the Government of Macedonia.

His web site: http://samvak.tripod.com

Tags: economy, hospitals, News, politics, public, sanitation, society, unemployment, workforce

God’s Diplomacy - International Trade and the Macedonian Economy

May 18th 2008boybermNews and Society

A British politician, Richard Cobden once (1857) wrote:

“Free Trade is God’s diplomacy and there is no other certain way of uniting people in the bonds of peace”

International, free trade is particularly important to developing, poor, countries (among them the “economies in transition”).

Without international trade, the local economy is limited. It does not manufacture and produce more than it can consume. If it produces excess products, commodities, or services - no one buys them, they accumulate as inventory, and they bring about losses to the producers and, often, a recession. So, in the best of cases - even assuming optimal management and unlimited availability of capital - a firm in a closed economy can expect to grow by no more than the rate of growth of the local population.

This is where exports mitigate population growth as a constraint.

An export market is equivalent to a sudden growth in the local population. Suddenly, the firm has more people to sell to, additional places to market its products in, an increasing demand which really is unlimited. No firm in the world is big enough not to be negligible in the global marketplace. With 6.2 billion people and 170 million new ones added every year - it is much cleverer to export than to limit oneself to a market with 2, 20, or even 200 million inhabitants. In sum: local firms - and, as a result, the economy as a whole, can increase their production above the level of local consumption and export the surplus.

This, obviously, has the beneficial effect of increased employment. Export oriented industries in economies in transition are labour intensive. The more the country exports - the more its industries employ. This equation led some economists to say that a country exports its unemployment when it exports products. Every product contains a component of labour. When someone buys an imported product - he really buys the labour invested in this product, among other inputs. See the Technical Appendix for more.

But free trade cuts both ways. Some products are so expensive to manufacture locally, that it is more cost effective to import them cheaply. In aggregate, the local economy benefits from this more efficient use of its (ever limited) resources.

It has been proved in numerous studies that countries benefit from certain kinds of imports no less than they benefit from exports or the resulting enhancement of local manufacturing. This is called the theory of “comparative relative advantage”.

Cheap imports (only as a replacement for expensive locally produced goods) have two additional effects: they reduce the costs of operating enterprises (and thus encourage the formation of businesses) - and, naturally, they reduce inflation. Where cheap products are available - inflation, by its very definition, is subdued.

So, instead of wasting money on purchasing expensive products, which are manufactured locally - instead of paying high interest payments on liabilities due to high inflation - the economy can optimally allocate its resources where they are at their productive best.

Free trade assists the economies of all players. It allows them to optimize the allocation of their (scarce) economic resources and, thus, maximize national incomes.

Optimal allocation frees up sizeable resources which were previously engaged in inefficient production, or dedicated to defraying financing expenses, or locked into the consumption of expensive local products. A consumer allowed to buy a cheap, imported car instead of an expensive locally manufactured one, saves the difference and invests it in a savings account in a bank. The bank, in turn, lends the money to firms - and this is the relation between free trade and high savings and, hence, high investment rates. Free trade reduces the overall price level in the economy, more money can be saved, and the savings can be lent to more businesses on better terms. Plants can, thus, be modernized, technological skills can be acquired, more comprehensive education provided, infrastructure can be improved.

Above all, those who trade do not fight. Free trade pacifies countries. It leads to the peaceful and prosperous coexistence of neighbouring nations. It yields mutual collaboration on trade, investments and infrastructure.

But free trade cannot exist in a legal and infrastructural vacuum. To achieve all these good outcomes a country must rationalize its trading activities.

First and, above all, it must gradually dismantle regulatory and tariff barriers to allow the unobstructed flows of goods, services, products, commodities, and information.

I used the word “gradually” judiciously. A poor country must make the transition from a protectionist environment, heavily isolated by regulations, customs, duties, quotas, tariffs and discriminating standards - to completely free trade in minute, well measured steps. The influence on local industries, the level of employment, the national foreign exchange reserves, interest rates, and many other parameters - economic as well as social - should be gauged regularly to prevent unnecessary shocks. But these monitoring and fine tuning should not serve as fig leaf, they should not be an excuse to prevent or delay the freeing of trade. The country must, unequivocally, announce its plans and intentions, replete with timetables and steps to be adopted. And the country must stick by its plans - and not succumb to the inevitable and forceful demands of special interest groups.

On the other hand, the country must encourage foreign investment. (Foreign Direct Investment (FDI) and even portfolio investments are a critical part of free trade. Investors build manufacturing plants, which export their products, or sell them locally, substituting for imports. Direct investors are usually connected - directly or indirectly - to trading networks. Financial (portfolio) investors usually come only much later, when the local capital markets have matured and have become much safer. A country can encourage the inflow of foreign investment by providing investors with tax incentives (tax holidays, tax breaks, even outright grants and subsidized loans). It can provide other incentives - there are too many to enumerate here. Above all, though, it must protect the property rights of investors of all kinds - domestic, as well as foreign. Investors flock to secure places and no incentive in the world can convince them to put their money, where they do not feel certain that they can always - and unconditionally - recover it. Property rights is the countries in transition’s weak point in this respect: the appropriate legislation is lacking, courts are slow, ignorant, and indecisive, law enforcement agencies are immature and uncertain of their authorities and how to exercise them. Some countries are outright xenophobic. This is not conducive to foreign investment.

But all this is not enough. A skilled, well educated workforce is a prerequisite for the development of export industries. Even low-tech industries (textiles, shoes) require the workers to be literate and to know basic arithmetic. As industries mature, the workers are required to train, retrain and re-qualify ceaselessly.

The nation must make education as a top priority. education is as much an infrastructure as roads and electricity. To think differently is to be left behind and to be left behind in today’s competitive world is to die a slow economic death.

All this will be to no avail if a country does not make an intentional, conscientious effort to identify those things that it is good at, its “relative, competitive advantages”.

But should a nation leave the forces of the marketplace to take their course, unhindered? Alternatively, should a government determine the priorities of the nation within a very long term plan?

Personally, I do not support fanatic views. The market has its flaws. It is never perfect. Governments should intervene (marginally) to fix market imperfections and failures. Otherwise, who will supply public goods like defence or education?

The same is true for trading. Japan and Israel are two prime examples of extremely successful government involvement in determining national priorities and in pursuing them (the current slump in Japan notwithstanding). The all powerful Ministry of Industry and Trade (MITI) in Japan virtually dictated what should be done, where, with whom and how for decades. Israel actively encourages the formation of hi-tech, labour-poor, high value added industries. But both governments recognized the limits of their intervention, and the difference between advice, incentives and coercion.

The government of a country should identify its relative competitive advantages and re-orient itself to materialize them.

This realization phase can be successful only if the country is an active and complying member of and participant in the international community of nations. It must peacefully and willingly adhere to international agreements on trade and investments and it must agree to resolve its conflicts within the international judicial and arbitration frameworks.

Macedonia is in a difficult economic spot - but it is by no means unique. Almost all the newly-formed countries lost almost all their previous export markets simultaneously. COMECON and the USSR disintegrated almost at the same time as Yugoslavia did. Some countries have not adapted to the new situation:

Their GDP was halved, their industrial infrastructure was demolished and they ran ever-widening trade deficits. They preferred to mourn their situation and blame the whole world for it. Others have oriented themselves to become a (geographical and mental) bridge between East (Europe) and West (Europe). They adopted the Western mentality, Western institutions and Western legislation regarding investments, banking and finance. They emphasized their roles as transit countries in the best sense of the word: having a lot to contribute within the process of transit.

What is common to all the more successful countries is that they encouraged joint ventures with foreign investors, suppressed xenophobia and ethnic discrimination, shared economic benefits with their neighbours by collaborating with them, imported mainly capital goods (instead of consumption goods), adopted sound fiscal policies and really privatized. In most of them, lively capital and money markets have developed.

This is the future that Macedonia should aspire to. It can become the Switzerland of the Balkans. It has all that it takes. Ask the financial markets: they are paying for Macedonian government securities (almost) the same price they pay for Slovenian national debt. That means that they think that Macedonia is the Slovenia of tomorrow.

And that, in my view- is not such a bad future, at all.

TECHNICAL APPENDIX

International Trade, Inflation and Stagflation

Situation I

The exporting country has:

An overvalued currency
Low inflation or deflation as prices and wages decrease to restore competitiveness

The exporting country thus exports its deflation (through the low and competitive prices of its goods and services) and its unemployment (through the labour component in its exports).

The importing country’s inflation rate is affected by the deflation embedded in imported goods and services. Cheap imports thus exert downward pressure on prices and wages in the importing country.

This, in turn, tends to increase the purchasing power of the local currency and to cause its appreciation.

In other words:

The macro-economic parameters of the importing country tend to REFLECT the macro-economic parameters of the exporting country.

If the exporting country’s currency is overvalued - the importing country’s currency will tend to appreciate as a result of the export/import transaction.

If the exporting country’s inflation is low - it will exert a downward pressure on wages and prices (on inflation) in the importing country.

Unemployment will tend to decrease in the exporting country and increase in the importing country.

Following the export transaction, the importing country will have:

An appreciating currency
Deflation or low inflation
Higher unemployment

Why would anyone import from a country with an OVERvalued currency?

Because it has a monopoly or a duopoly on knowledge, intellectual property, technology, or other endowments.

Situation II

The exporting country has:

An undervalued currency
High inflation as prices and wages increase (to restore equitable distribution of income)

The exporting country thus exports its inflation (through the higher though competitive prices of its goods and services) and its unemployment (through the labour component in its exports).

The importing country’s inflation rate is affected by the inflation embedded in imported goods and services. Expensive imports thus exert upward pressure on prices and wages in the importing country.

This, in turn, tends to decrease the purchasing power of the local currency and to cause its devaluation.

In other words:

The macro-economic parameters of the importing country tend to REFLECT the macro-economic parameters of the exporting country.

If the exporting country’s currency is undervalued - the importing country’s currency will tend to depreciate as a result of the export/import transaction.

If the exporting country’s inflation is high - it will exert an upward pressure on wages and prices (on inflation) in the importing country.

Unemployment will tend to decrease in the exporting country and increase in the importing country.

Following the export transaction, the importing country will have:

A depreciating currency (devaluation)
Higher inflation
Higher unemployment

The state of higher inflation with higher unemployment is called “stagflation”. So, in this scenario, the importing country imports stagflation as part of the goods and services it imports.

About The Author

Sam Vaknin is the author of “Malignant Self Love - Narcissism Revisited” and “After the Rain - How the West Lost the East”. He is a columnist in “Central Europe Review”, United Press International (UPI) and ebookweb.org and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor to the Government of Macedonia.

His web site: http://samvak.tripod.com

Tags: economy, global, nation, News, politics, society, trade, trade deficit, unemployment, workforce

The Wonderful Blog Which You ve Never Seen

The Good, the Bad and the Ugly Employee and Management Owned Firms

The Sickly State of Public Hospitals

God’s Diplomacy - International Trade and the Macedonian Economy

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