Increasing Returns and Path Dependence in the Economy - Assignment Example

QUESTION 1 1. Introduction The concept of path dependency can be understood from different perspectives. For instance, scholars such as Andrew (2006) believe that it is the tendency of relocating or moving towards a preference. This holds true especially when there are products preferred due to their historical commitments associated with it. While that is one view, path dependency has also been defined as an explicit idea that explains the continued use of a practice or a product based on historical use or preference (Olson, 2001). In a more integrating aspect, path dependency has also been defined as the idea that the decisions that human beings are faced with depend on decisions made and past knowledge trajectory, therefore limited to by the competence base of the current situation (Liebowitz and Margolis, 1995). According to this school of thought, current decision making processes depend on history and has a bearing on strategic planning. As such, the options for today’s moves are defined by the competences that have been built in the past. That is, path dependency is the tendency of a traditional or past preference or practice to continue being in use even in the presence of better alternatives. 2. Path dependence and Australian Institutional continuity and change The current economic circumstances depend on vital ways of history. All the current that are inherited and the future that are built come as a result of economic history. Institutional entrepreneurship refers to activities spearheaded by particular actors who have developed interest in certain institutional arrangement and who leverage resources to transform existing institutions or to come up with new ones(Arthur, 1994). Olson (2001) argues that “new institutions arise when actors possessing resources realize an opportunity in the interest they value most” (p. 34). As such it introduces interests, agency and power into the analyses of institutional organization. In Australia, path dependency has played a significant role in the history of the institutional change and continuity. The outstanding feature was the historic compromise between the leaders and classes of labor and capital, arbitrated through the institutions created to implement it. By 1980’s and 90’s, the Australian government had deep roots and transformed much of the institutional structure; most of which survived from the old rule to the new. Notably in Australia, the neo-liberal era of post-1983 Australia preserved vital features from the protectionism-laborist era that was its precedent, which as a result preserved the vital features of the political economy. However, the regime change and survival has little influence on rational choices in the present or past and that institutional change is a process with no progress or adaptation oriented purpose. The old Australian survived unchanged since before the Great War. Of predominance was historic compromise between leaders and classes arbitrated through state institutions like the protectionist system, agricultural marketing and state-owned banks. During this time, there was high degree of social and political consensus that was a direct result of new consensus. This was the force that aided in galvanizing ideologies, but economic forces, cultural attachments and geopolitics that had been shifting for long. Changes in ideologies in Australia, was seen as powerful and dominant in institutional change. Just like all other parts of the world, changes in economic theories and government in Australia strongly affected public policy (Olson, 2001). The government elites were influenced by intellectualism and commitment to ideologies. Powers of liberalism of 1830’s, democratic socialism of 1890’s, monetarism and neo-liberalism of 1970’s are all living testaments of ideological shifts that survived due to sufficient reception to path dependency. Path dependency also impacted on public collections or aggregations of individual choices, solely expressed through markets. Market distortion through rent impacts on sclerotic growth patterns. Agents make choices to create arrangements that will promote or hinder efficiency. As a path dependent process, behavior, rationality and choice leads to neglect of social structures constraints and imperatives. a. QWERTY keyboards This posits an exemplary scenario where path dependency process leads to inefficiency. Liebowitz etal (1995) cites the example of the QWERTY typewriter keyboards of 1989. He asserts that the QWERTY keyboard was a perfect example of market failure. Initially the keyboard was used in 1868 by Christopher Latham. Later Sholes improved on the already existing keyboard by introducing an arrangement that was meant to slow down the touch typists. In 1936 August Dvorak, introduced his Dvorak Simplified Keyboard (DSK) whose design was according to ergonomic principles. Later ergonomic studies showed that the advantages for DSK over QWERTY was non-existent or very minimal. Further QWERTY as a standard keyboard produced more touch typists compared to the rival keyboards. It is unlikely that it would have survived if it were inferior as had been alleged by the earlier studies. b. Internal combustion engines and Beta and VHS videocassette recorders According to Van Vleck, the Britain coal cars that had long been considered as a living testimony of “technical backwardness” was as a matter of fact best suited to the Britain’s coal distribution system and its topography (Bruce and William, 1999). This is also related with the history of the two video recorders. Beta was a better videotaping format but a majority of the buyers chose on VHS because it was more established. At such a time in history consumers sole concern was compatibility; and was so reluctant to buy the unusual format regardless of the numerous advantages it possessed. Beta, according to majority of the consumers was found to have low picture quality compared to the VHS. Further, the potential difference in playing time was higher in VHS than the Beta. Despite the fact that Sony presented a sophisticated competition with established production and marketing capabilities, and the fact that Beta had a two year head start they lost out. Therefore the competing Matshusita of VHS outplayed Sony in this cut-throat competition since they offered what the consumers wanted. This is a perfect illustration of how Path dependence can also lead to efficiency. 3. Conclusion Currently the neoliberal ideology in Australia reigns supreme. This stems from the propensity of the government to move and impose new regulation upon the economic system (Sinclair, 1976). There has been increased efficiency, productivity and profitability at the cost of inequality in social power and higher unemployment rates. QUESTION 2 1. Introduction A constitution is a set of rules or laws regarding the government of a nation. The sole role of a constitution is to provide a framework with the right procedures that the government must follow to create proper legislation. Commonwealth constitution is the supreme law under which the Commonwealth government of Australia operates, including how it relates to the States of Australia (Wendy, 2006). It establishes the federal form of government. This constitution is composed of separate constitutions developed by the six British colonies of Queensland, New South Wales, Tasmania, South Australia, Western Australia and Victoria. With this there was a creation of a federal system of government where powers are divided between individual states and the central government. The constitution of Australia was approved by several referendums held between1898-1900 by the people of Australian colonies. The approved draft was enacted as the Commonwealth of Australia constitution Act of 1900 and became law on 9th July 1900 and finally entered into force on 1st January 1901 (Wendy, 2006). Generally, any constitution just like the commonwealth must do the following three roles; a) Provide a series of balances and checks, so that correct procedures are followed during amendments of existing laws or enactment of new laws. b) Holds the government strictly to the law. c) Provides a separation of power between the different arms of the government. According to the Commonwealth constitution, there exist the state and territory government. Every state has its state constitution dividing the state’s government into three arms of legislature, judiciary and the executive which perform the roles of any constitution. The states are further divided into territories which handles the governmental matters by locally –elected parliament. 2. Its role in regulating transport and communication in Australia The lowest level according to this constitution is the local government (local councils) which deal with the community needs such as town planning, waste or garbage collection and public recreation facilities. Section 51(v) of Commonwealth constitution gives the Commonwealth parliament of Australia powers to legislate on telegraphic, postal, telephonic and other like services. The Australian networks were operated by the government under the colonial legislation just like the one for Britain; the UK Telegraphic Act of 1868 gave authority to the Postmaster General(PGM) to maintain telegraphs. In 1901, for instance, this section allowed the colonial mail system to merge into the Postmaster General’s Department (PGM) which was responsible for domestic telephones operations, postal mail and telegraphic services. This later gave room to the creation of Australia Post which is currently supported under the corporations power (Wendy, 2006). This sections has also been interpreted by High court to include the regulation of radio and television broadcasting even though been wireless. This, due to technological advancement has been embedded in the section 51 to capture “other like services” (p. 44). Furthermore, this section has also been used to regulate the internet services. An amendment that created the Interactive Gambling Act has been used to regulate operations of online casinos. In March 2013, Australia’s entry to the Council of Europe’s Convention on Cybercrime came into force as a result of Cybercrime Legislation Amendment Act 2012. Initially the overseas cable links to Australia solely rested in the private owners, which reflected imperialism. Due to legislations, in 1906 PGM department became responsible for international shortwave services. This boosted wireless communication between Australia and the outside world. As is evident in July 1906 the first Australian wireless messages were sent overseas between point Lonsdale and Devonport. According to McNeill (1997), federalism as is depicted in the commonwealth constitution created balance of power between different levels of government. This transfer created a base for transfer of funds to different levels of the government which supported infrastructural developments. There was a political and financial independence created within the spheres of the federal’s responsibility. Section 96 of the constitution allows grants power to the citizens of the states on grounds that they were unable to collect their own their taxes. Such loans specifically were used for development of the transport system such as roads, railways and air. Local government that forms a crucial part in this constitution, from its inception has been considerably funded by taxes from rates. Section 3 of the Nation Building Program (National Land Transport) Act 2009 points out that the aim of the act is to help social and national development by providing commonwealth funding to improve land transport infrastructure. This suggests that the legislation holds the states accountable to ensure there are proper road network and the overall development of national infrastructure. All the six states since the inception of their local government bodies have properly utilized the state grants and the local government own-source revenue to improve significantly both the railway lines and road networks across the states. Amendments to certain sections of this constitution have also introduced specific purpose funding and the general purpose financial assistance grants; all of which allow for the development and expansion of the infrastructure.AS a matter of citation, The Commonwealth Government’s Budget Paper No 3 2012-13, shows that in 20110-12, commonwealth gave financial assistance grants worth $2,722,866,000 to local governments for infrastructural development. Specific purpose funding have also been directed in several infrastructural developments such as building local and regional community infrastructure program, building better cities program, health community initiatives and road to recovery program (Andrew, 2006). 3. Conclusion As it is depicted in the structure of the commonwealth constitution, the direct funding of local government is in peril as it presents an overdependence situation (Richard, 2007). But to remediate this, the funding can still be provided to the local government using section 96 system as well as the additional funding as might be desired from the commonwealth. In Australia just like other nations, due to vulnerabilities to economic pressure, economic globalization has significantly increased the fragility hence there is need to share power with corporations to who have catapulted in construction projects. This has been made a smooth step by the Australian constitution. It has been difficult for the constitution to recognize the local governments as many campaigned that this would improve the respect and status accorded to it. QUESTION 3 1. Introduction The Global Financial Crisis (GFC) was a major surprise to the world financial system since the Great Depression whose effects were highly felt in USA and Europe. A plethora studies have shown the causes to be as summarized below. Real estate boom in USA is one of the major causes of financial crisis between 2007 to mid-2009. According to classical economic theory, any boom must be followed by a burst. Under the President Bush ‘American dream’ policy where Americans were supported by the government to own their houses, it constrained the less income earners (Wignal, 2009). The boom in real estate business compelled people to be oblivious of the dangers that were associated with it. This risk was shifted to the banks through the mortgage system, where the brokers created loans and sold to the banks with a hope that the increase in housing prices would continue sustaining the business and pay off. Sub-prime lending was also another cause to the financial crisis. Sub-prime credit is a general term that refers to loans or borrowings made to people with less than short credit or perfect credit histories (Lewis and Wallace, 1997). Sub-prime credit includes derivative products as in the securitizations based on the sub-prime loans as well as the original borrowing. Home loans granted to borrowers and mortgages to borrowers whose creditworthiness is questionable forms the largest portion of the whole market for subprime credit. On the other hand, Godfrey (2008) points out that one of the contested cons of subprime credit is based on excessive fees, high interest rates and shorter grace periods. In this aspect Australian Prudential Regulation Authority (APRA) is singled out to help analyze the effects of subprime credit (Davis, 2009). Subprime loans were inflated by increase in securitization, deregulation and under supervision of the reserve capital (APRA, 2001). Also to note, deregulation and financial innovation led to the crisis. Godfrey (2008) argues that the development of a new architecture in economic field which involved the creation of current financial practices caused the financial crisis. For instance, USA abandoned the Glass-Steagall act to adopt Basel II which allowed lesser regulation and securitization. The sprouting global saving glut that occurred in the early stages of the crisis caused financial crisis both in USA and UK. Dermot (2009) suggests that saving that created surpluses in the accounts of countries like China compelled the western world tom lower their interest rates leading to liquidity. This factor created more credit facilities thereby increasing the houses prices. 2. Wallis recommendations In 1996, the Government of Australia commissioned the Financial System Inquiry, the Wallis Inquiry. The government commissioned the Inquiry to make recommendations on regulatory arrangements that would advance to respond to the developments of the previous decade by ensuring an efficient, competitive, flexible and responsive financial system. Generally, the objectives of the Wallis Inquiry were: a. To promote efficiency through facilitated competition; and b. To maintain stability and confidence in the financial system while maintaining the ability to be adaptable to market developments and innovation. A key recommendation was a new organizational framework that was meant to regulate the financial system. This framework was based on a three peak model consisting of a single prudential regulator, an institution for payments and stability and a regulator for disclosure and conduct. According to Wallis the four regulators were replaced by three agencies; the Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA) and Australian Securities and Investment Commission (ASIC) each performing specific roles aimed at stabilizing the financial sector. Wallis also introduced several policies to be used to Shield Australia from the worst of banking excesses as taxation reform, trade and competition policy, fiscal policy, monetary policy and corporate governance. Corporate governance was introduced in 1997 when the government announced the Corporate Law Economic Reform Program that was developed to respond to the influx in globalization of capital markets and keep in pace with the Australia business law. Trade policy and competition policy allowed rationalization of industries and lowering of tariff barriers that provided a further impetus to the globalization of the economy. This increased the trade intensity in Australia from 30 percent to 43 percent by 2001.Increased international competition led to increase in export and import businesses. Fiscal policy was aimed at increasing the domestic interest rates (Bruce et al., 1999). In the 1996-97 budgets, the government implemented a “charter of budget honesty”. In the following year, the government adopted a strategy to streamline budget balance. In 2000 the goods and services tax (GST) was introduced to provide a broad base tax system to secure more revenue (Lewis et al., 1997). Monetary policy established the independence of the Reserve Bank in Australia. It was meant to help control financial deregulation since demand for money became unstable and the relationship between money and nominal income and inflation broke down. 3. Conclusion Regulation of banking sector needs to be flexible and adaptive to the innovations within the banking industry. Measure adopted to resolve the financial crisis such as conventional methods (whether monetary or fiscal) and quantitative easing can only be effective if combined with institutional restructuring. Both the building societies and credit unions have adjusted their lending policy to conform to the imperatives of the new legislation but in adopting this have moved away from the duty envisaged by the legislation. Credit unions for instance, have been able to adjust to the new prudential regulations by changing the lending policies but, in doing so, are getting away from their normal traditional base; adjustments which foreseeable cannot continue forever. Moreover, as a result of the adjustment, credit unions are starting to converge in balance sheet structures and lending policy with building societies (Dermot, 2009). These developments are driven by economic factors unlike the black letter laws as recommended by Wallis report. References Andrew, J (2006), Australian Local Government Economics .UNSW Press p 111 Arthur, W. (1994). Increasing Returns and Path Dependence in the Economy. Ann Arbor: University of Michigan Press. APRA (2001), Credit Unions and Building Societies: Issues and Trends, APRA Insight, 3rd Quarter 2001 16-17. Bruce, F and William, C (1999), Money and Finance in the Australian Economy, Sydney, Irwin, p423. Dermot, H and Mabbet, D (2009), “UK Economic policy and the Global Financial Crisis: Paradigm Lost?” Journal of Common Market Studies, 47 pp 1041-1061. Godfrey, M. (2008), “US Fiscal Stimulus Package Agreed”, Tax-News.com, 28 January, Washington. Lewis, M and Wallace, R (1997), The Australian Financial System: Evolution, Policy and Practice, Addison Wesley Longman Liebowitz, S and Margolis, E. (1995) “Path Dependence, lock-in and history” Journal of Law, Economics and Organization 11 205-226. McNeill, J (1997) ‘Local government in the Australian federal system’ in Dollery, B and Marshall, N (eds), Australian Local Government: Reform and Renewal Macmillan p 27. Olson, M. (2001), ‘Australia in the Perspective of the Rise and Decline of Nations’ Australian Economic Review,no.7.7-17. Sinclair, A (1976).The process of Economic Development in Australia, Melbourne: Longman Cheshire. Richard, W (2007), ‘Commonwealth general purpose financial assistance to local government’ Parliamentary Library Research Paper No 9, 2007-08, p 5. Wendy, L eta (2006). Events that Shaped Australia. New Holland. Wignal, P (2009), “Monetary policy and the ‘Great Crisis’: Lessons and Challenges”, Speech at the 37th Economics Conference 14 May, Vienna Read More