New-ish Country Groupings

Chapter VI in the Handbook seems out of place sometimes (someone even asked this semester if it would be tested on, since I don’t cover it much).

The thing is, when you go out and start reading the news, or researching issues, people group countries based on the similarity of their economies currently. This is a cross-sectional approach, which is why it appears before we start time series in the Handbook.

The reason for these groupings is because, while residents regard countries as similar, how different are they on the ground? For example, foreign tourists have trouble differentiating the U.S. and Canada, but not the U.S. and Mexico.

Anyway, the IMF has created some new designations that need to get in the next revision of the Handbook. Here’s a chart from Visual News:

Some of the grouping are obvious, some not so much:

• LAC is Latin American Countries
• Advanced is the 40 or so “rich” countries
• Emerging Europe is mostly eastern European countries, most of which were dominated by the Soviet Union for 50 years or so. We now recognize that they were also held back economically.
• E.D. Asia is Emerging and Developing Asia; pretty much everything along the south rim of Asia from India eastwards, and along the east rim from Vietnam northwards, that is not already classified as Advanced
• Com. Of Ind. States is the former Soviet Union
• Sub-Saharan Africa is self-explanatory, although you might want to look at a physcial map
• MENAP is Middle Eastern and North African nations, Afghanistan and Pakistan; this is not exclusively Moslem, nor do all Moslems live there, but this is what most people think of when they visualize Islamic countries. I made the modification in red after class (and yes, the acronym probably should have two A’s, but I didn’t dream it up).

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The source article is about energy subsidies. There are two big issues that are glossed over: who is subsidized, and where is it subsidized.

Who is subsidized is an issue we’ve been concerned about in the U.S. because of the large subsidies given by the Obama administration to the solar and wind industries. Most developing countries are doing the same thing.

An argument is often made by those who are in favor of subsidizing these “cleaner” energies that these subsidies are OK because other energy industries are also subsidized. Yes and no.

Subsidies to clean energy industries are typically expicit and on the supply-side. They help defray some costs, essentially shifting the supply to the right, reducing price and increasing quantity. These are labeled as “Pre-tax” in the source article. The chart above shows that most countries outside of the Middle East don’t subsidize energy production at all.

Subsidies to fossil fuel industries are typically implicit and on the demand-side. In these, buying and using those fuels creates external costs that are not internalized. If they were, demand would shift to the left, reducing both price and quantity. These are labeled as “externalities” and “foregone consumption tax revenue” in the source article.

Globally, where energy is subsidized is kind of weird. A minority of countries have significant fossil fuel industries (coal is pretty common, but oil and gas are not). In most of those countries, fossil fuels are extracted by a “company” that is actually part of the government. For political reasons, often in less-developed producers, gasoline (and other fuels) are often sold below cost. This map gives you some idea:

Believe it or not, there are differences of up to 100 to 1; in 2013, gas (if you could get it) sold for 6 cents a gallon in Venezuela. That’s a huge subsidy since supply is shifted to the right. The original source article covers this extensively, but the blog post from Visual News downplays it. The chart at the top shows that the lion’s share of the subsidization of fossil fuel use goes to consumers in Asia who don’t pay for their externalities.