Sources:
Boston Globe: Economic Downturn did not Harm Efforts at Reducing Extreme Poverty in Developing World
Business Standard: Extreme Poverty Drops Worldwide
World Bank: World Bank Sees Progress Against Extreme Poverty, But Flags Vulnerabilities
A new World Bank report finds that the number of people living in extreme poverty—defined as living on less than $1.25 a day—in the developing world has fallen every year between 2005 and 2008, the most recent year where complete data is available. Additionally, according to preliminary data from 2010, the recent global economic recession, which many experts thought would lead to an increase in extreme poverty, instead has only slowed the rate of reduction.
Global attempts at reducing extreme poverty have been notable. In 1981, 1.94 billion people in the developing world lived below $1.25 per day. However, by 2008 that number dropped to 1.29 billion, a reduction of over 600 million people. Poverty reduction has been so rapid that the United Nations Millennium Development Goal of cutting extreme poverty in half from its 1990 level has already been achieved, well before the 2015 deadline.
Progress has been especially dramatic in East Asia. In 1981, the region was the poorest in the world, with approximately 77% of the population living in extreme poverty. By 2008, the percentage had dropped to only 14%. In South Asia, the percentage of people living in extreme poverty dropped from 61% to 36% between 1981 and 2008. In Latin American and the Caribbean, the population living in extreme poverty remained relatively constant at 12% between 1981 and 2002. However, since 2002, extreme poverty has been declining rapidly. In 2005 extreme poverty fell to 9% and by 2008 the number had fallen further to 6%.
Sub-Saharan Africa is the region of the world that has made the least progress since data collection began in 1981. In 1981, 51% of Sub-Saharan Africa lived in extreme poverty, but that percentage rose to 59% in 1993. Some progress has since been made, as the percentage of people in extreme poverty fell from 56% to 52% between 2002 and 2005. In 2008, the population living in extreme poverty was 48%—the first time in the region’s history that less than half of the population was not living in extreme poverty.
Despite the significant reduction in poverty, the World Bank believes additional progress needs to be made. At the current rate of progress, over one billion people will still live in extreme poverty by 2015. Additionally, while many people have escaped extreme poverty, these people remain extremely poor by middle- and high-income country standards. For example, many of those who have escaped extreme poverty now live on less than $2 a day, as evidenced by another recent study showing there has been only a 5% reduction in the number of people living on less than $2 a day between 1981 and 2008 (from 2.59 to 2.47 billion in 1981 and 2008 respectively). This data suggests that while 600 million people have escaped extreme poverty between 1981 and 2008, many of those people remain in dire financial positions. In total, 22% of the developing world still lives in extreme poverty and 43% lives on less than $2 a day. The World Bank hopes that the current trends will continue and world poverty will continue to decline.
Tuesday, March 13, 2012
Tuesday, March 06, 2012
Portugal Meets Economic Targets
Sources:
FT: Portugal Announces More Austerity Measures
International Workers Association: About the Austerity Measures and the Last General Strike
Washington Post: International Lenders Say Portugal is Making Good Progress on Implementing Bailout Program
WSJ: Portugal Bailout Seen on Track
The European sovereign debt crisis has affected almost every corner of the globe and resulted in economic problems for many European countries. In 2010, Portugal adopted a set of austerity measures (spending cuts and tax increases) to combat its own debt problems and hopefully avoid the need for a future bailout. Unfortunately, these austerity measures were insufficient, due to the country’s large debt and slowing economy, and a bailout was necessary. The three major credit rating agencies also downgraded Portuguese debt to junk status, signaling that the ratings agencies lost confidence in Portugal’s ability to pay its debt. The rating agencies’ negative views on Portugal spread to investors, resulting in Portugal being required to pay a much higher interest rates to borrow money (higher risk makes an investor demand a higher interest rate because the increased interest income will offset the higher possibility of loss). Because Portugal was forced to pay higher interest rates on its debt, the country had difficulty making its debt payments and moved very close to default.
To fight off default, eight months ago Portugal agreed to a €78 billion ($104.5 billion) bailout with the IMF. To receive bailout funds Portugal must meet economic benchmarks and implement additional austerity measures. Thus far, Portugal has received €34.2 billion ($45 billion) of the bailout. Before the IMF disburses the next portion of the bailout, it must first complete an analysis of the country’s economic position to determine if additional austerity measures are required. The IMF recently completed its analysis and decided that the country is on track to meet the bailout’s economic benchmarks, meaning Portugal does not need to take further action now to receive the next €14.6 billion ($20 billion) of bailout funds.
Portugal’s austerity measures have included labor market reforms aimed at making it easier to hire and fire workers, along with numerous cuts to the public sector including requiring state employees to work additional hours without additional pay, eliminating some paid holidays, and forfeiting bonuses worth more than one month’s pay. The combination of these measures reduced public sector wages by an estimated 20% in 2011 as compared to 2010. Outside the labor markets, the austerity measures have also included a 25% increase in the cost of using public transportation and an increase in the value-added (sales) tax.
Based, in part, on the above austerity measures, Portugal has successfully reduced its deficit-to-GDP (gross domestic product) ratio. In 2010, the ratio was 9.8%—well above the Eurozone maximum of 3%. While exact numbers are not yet available, Portuguese officials believe the ratio will be approximately 5% in 2011—below the 5.9% target set by the IMF. The reduction in the deficit is one of the main positive factors in the IMF’s report.
Even though Portugal will likely meet IMF benchmarks, its economy is not strong. Financial experts project the country will end 2012 with an economic contraction of 3.3%—down from a previous forecast of 2.8%—and currently has an unemployment rate of 14%, which experts project will peak at 14.5% later this year. However, the IMF believes the country’s economic problems will subside in 2013 thanks to increased private investment (leading to the creation of new jobs) and increased exports (increased demand creates a need for more workers to meet that demand).
The IMF’s report is a good sign for the European Union (EU), as it shows that Portugal’s economy is moving forward. However, Portugal is still in the midst of an economic recession and may face future debt problems. If Portugal continues to meet its economic targets, it may avoid the need for a second bailout and additional austerity measures, which will hopefully lead to a faster recovery for the country.
FT: Portugal Announces More Austerity Measures
International Workers Association: About the Austerity Measures and the Last General Strike
Washington Post: International Lenders Say Portugal is Making Good Progress on Implementing Bailout Program
WSJ: Portugal Bailout Seen on Track
The European sovereign debt crisis has affected almost every corner of the globe and resulted in economic problems for many European countries. In 2010, Portugal adopted a set of austerity measures (spending cuts and tax increases) to combat its own debt problems and hopefully avoid the need for a future bailout. Unfortunately, these austerity measures were insufficient, due to the country’s large debt and slowing economy, and a bailout was necessary. The three major credit rating agencies also downgraded Portuguese debt to junk status, signaling that the ratings agencies lost confidence in Portugal’s ability to pay its debt. The rating agencies’ negative views on Portugal spread to investors, resulting in Portugal being required to pay a much higher interest rates to borrow money (higher risk makes an investor demand a higher interest rate because the increased interest income will offset the higher possibility of loss). Because Portugal was forced to pay higher interest rates on its debt, the country had difficulty making its debt payments and moved very close to default.
To fight off default, eight months ago Portugal agreed to a €78 billion ($104.5 billion) bailout with the IMF. To receive bailout funds Portugal must meet economic benchmarks and implement additional austerity measures. Thus far, Portugal has received €34.2 billion ($45 billion) of the bailout. Before the IMF disburses the next portion of the bailout, it must first complete an analysis of the country’s economic position to determine if additional austerity measures are required. The IMF recently completed its analysis and decided that the country is on track to meet the bailout’s economic benchmarks, meaning Portugal does not need to take further action now to receive the next €14.6 billion ($20 billion) of bailout funds.
Portugal’s austerity measures have included labor market reforms aimed at making it easier to hire and fire workers, along with numerous cuts to the public sector including requiring state employees to work additional hours without additional pay, eliminating some paid holidays, and forfeiting bonuses worth more than one month’s pay. The combination of these measures reduced public sector wages by an estimated 20% in 2011 as compared to 2010. Outside the labor markets, the austerity measures have also included a 25% increase in the cost of using public transportation and an increase in the value-added (sales) tax.
Based, in part, on the above austerity measures, Portugal has successfully reduced its deficit-to-GDP (gross domestic product) ratio. In 2010, the ratio was 9.8%—well above the Eurozone maximum of 3%. While exact numbers are not yet available, Portuguese officials believe the ratio will be approximately 5% in 2011—below the 5.9% target set by the IMF. The reduction in the deficit is one of the main positive factors in the IMF’s report.
Even though Portugal will likely meet IMF benchmarks, its economy is not strong. Financial experts project the country will end 2012 with an economic contraction of 3.3%—down from a previous forecast of 2.8%—and currently has an unemployment rate of 14%, which experts project will peak at 14.5% later this year. However, the IMF believes the country’s economic problems will subside in 2013 thanks to increased private investment (leading to the creation of new jobs) and increased exports (increased demand creates a need for more workers to meet that demand).
The IMF’s report is a good sign for the European Union (EU), as it shows that Portugal’s economy is moving forward. However, Portugal is still in the midst of an economic recession and may face future debt problems. If Portugal continues to meet its economic targets, it may avoid the need for a second bailout and additional austerity measures, which will hopefully lead to a faster recovery for the country.
Saturday, March 03, 2012
G-20 Officials Meet in Mexico and Postpone Decision to Increase Aid to Europe
Sources:
CBC News: G20 Fails to Reach Europe Debt Deal
Council of the Americas: Feb. 25-26: G20 Finance Ministers Meet in Mexico’s Capital, Discuss EU Crisis
FT: China and Japan Unite on IMF Resources
NYT: G-20 Meeting Focuses on Euro Firewall Fund
Reuters: Mexico Hopeful of G20 Promise on IMF Resources
WSJ: G-20 Defers Move on Aid for Europe
On February 25 and 26, the Group of Twenty (G-20) finance ministers and central bankers, representing twenty major world economies, met in Mexico. They mainly discussed whether to increase the lending capacity of Europe’s rescue funds by combining the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). Uniting the EFSF and ESM would create a $1 trillion firewall to help support struggling European economies like Spain and Italy. The EFSF is a temporary bailout fund Eurozone countries created to address the sovereign debt crisis, and the ESM will replace the EFSF when it takes effect in July 2012 as a permanent bailout fund to provide relief for EU countries in financial crises. G-20 officials also debated whether to increase the IMF’s lending capacity by $500 billion to approximately $1 trillion to provide additional protection for countries facing the effects of global financial instability.
Commentators have remarked on the irony of Mexico serving as Chair of the G-20 for 2012. Three decades after the Latin American debt crisis during which Mexico defaulted on its debt obligations, Mexico’s economy is characterized by “low debt, well-managed fiscal accounts and an inflation rate that is under control.” As Mexican President Felipe Calderón opened the summit, he emphasized Mexico’s unique position to contribute to the European crisis’ resolution considering its own recovery from crisis to emerge as a stable and growing economy. Mexico proposed that the G-20 agree to a simultaneous increase of the European bailout funds and IMF resources. Mexico argued that an increase of both funds is necessary to achieve a large enough firewall to help countries in crisis and stop the debt crisis from continuing to spread.
Contrary to Mexico’s wishes, however, G-20 officials postponed their discussion of an expanded European bailout fund to the next G-20 meeting of finance ministers and central bankers in April because of a lack of consensus on the issue. Germany does not agree that the European bailout fund should be increased, and since it would serve as the major financial contributor, an increase in the bailout fund will not occur without its agreement. Germany’s resistance stems from a belief that increasing the size of the bailout fund would mean that countries like Spain and Italy will not follow through on implementing structural changes. If additional money becomes available to help these countries during the crisis, they will be less likely to institute reforms and impose austerity measures that burden their citizens.
G-20 officials also postponed a discussion of whether to increase IMF resources. To many of these officials, expansion of IMF resources should be contingent on whether Europe’s bailout fund is increased. The United States and Canada have refused to increase their contribution to the IMF without Germany first agreeing to increase Europe’s bailout fund. They hope that if Europe’s bailout fund is substantially increased, an increase of IMF resources will prove unnecessary. China and Japan have also expressed their unwillingness to contribute additional money to the IMF unless European countries first expand their bailout fund. They argue that if the European bailout fund is not increased, an increase in IMF resources cannot cover the gap in funding necessary to stop the Eurozone crisis from spreading to other economies around the world.
CBC News: G20 Fails to Reach Europe Debt Deal
Council of the Americas: Feb. 25-26: G20 Finance Ministers Meet in Mexico’s Capital, Discuss EU Crisis
FT: China and Japan Unite on IMF Resources
NYT: G-20 Meeting Focuses on Euro Firewall Fund
Reuters: Mexico Hopeful of G20 Promise on IMF Resources
WSJ: G-20 Defers Move on Aid for Europe
On February 25 and 26, the Group of Twenty (G-20) finance ministers and central bankers, representing twenty major world economies, met in Mexico. They mainly discussed whether to increase the lending capacity of Europe’s rescue funds by combining the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). Uniting the EFSF and ESM would create a $1 trillion firewall to help support struggling European economies like Spain and Italy. The EFSF is a temporary bailout fund Eurozone countries created to address the sovereign debt crisis, and the ESM will replace the EFSF when it takes effect in July 2012 as a permanent bailout fund to provide relief for EU countries in financial crises. G-20 officials also debated whether to increase the IMF’s lending capacity by $500 billion to approximately $1 trillion to provide additional protection for countries facing the effects of global financial instability.
Commentators have remarked on the irony of Mexico serving as Chair of the G-20 for 2012. Three decades after the Latin American debt crisis during which Mexico defaulted on its debt obligations, Mexico’s economy is characterized by “low debt, well-managed fiscal accounts and an inflation rate that is under control.” As Mexican President Felipe Calderón opened the summit, he emphasized Mexico’s unique position to contribute to the European crisis’ resolution considering its own recovery from crisis to emerge as a stable and growing economy. Mexico proposed that the G-20 agree to a simultaneous increase of the European bailout funds and IMF resources. Mexico argued that an increase of both funds is necessary to achieve a large enough firewall to help countries in crisis and stop the debt crisis from continuing to spread.
Contrary to Mexico’s wishes, however, G-20 officials postponed their discussion of an expanded European bailout fund to the next G-20 meeting of finance ministers and central bankers in April because of a lack of consensus on the issue. Germany does not agree that the European bailout fund should be increased, and since it would serve as the major financial contributor, an increase in the bailout fund will not occur without its agreement. Germany’s resistance stems from a belief that increasing the size of the bailout fund would mean that countries like Spain and Italy will not follow through on implementing structural changes. If additional money becomes available to help these countries during the crisis, they will be less likely to institute reforms and impose austerity measures that burden their citizens.
G-20 officials also postponed a discussion of whether to increase IMF resources. To many of these officials, expansion of IMF resources should be contingent on whether Europe’s bailout fund is increased. The United States and Canada have refused to increase their contribution to the IMF without Germany first agreeing to increase Europe’s bailout fund. They hope that if Europe’s bailout fund is substantially increased, an increase of IMF resources will prove unnecessary. China and Japan have also expressed their unwillingness to contribute additional money to the IMF unless European countries first expand their bailout fund. They argue that if the European bailout fund is not increased, an increase in IMF resources cannot cover the gap in funding necessary to stop the Eurozone crisis from spreading to other economies around the world.
Friday, March 02, 2012
Ireland to Hold Vote on European Fiscal Pact
Sources:
FT: Ireland Calls Vote on European Fiscal Pact
Guardian: Ireland Set for Referendum on Eurozone Fiscal Treaty
Spiegel: A Decisive Moment for Ireland
WSJ: Ireland to Hold Referendum on EU Treaty
On Tuesday February 28, Ireland’s Prime Minister Enda Kenny announced that the country would hold a referendum on the recently-agreed-to European Fiscal Pact. The Pact sets tough deficit limits as well as strict enforcement mechanisms to prevent Eurozone countries from accumulating large amounts of debt. Under the Pact, member countries’ deficits must not exceed 0.5% of the country’s gross domestic product (GDP), debt must be below 60% of GDP, and countries must add balanced-budget rules to their constitutions. Within the next three months, at least twelve Eurozone countries must ratify the Pact for it to come into effect, but not all countries must follow Ireland’s lead and hold a referendum.
Under the Irish constitution, a public vote is necessary to ratify any significant transfer of decision-making power to the European Union (EU). However, Ireland’s past experiences have shown a suspicion towards further European integration. The Irish people have twice rejected EU treaties (in 2001 and 2008), only to approve them in second referendums after certain concessions in the treaties were made to appease Ireland’s voters. Thus, European leaders are concerned that the referendum will not pass. If Irish voters reject the Pact, the most immediate result would be that the Irish government would lose access to financial assistance from the European Stability Mechanism (ESM)—the Eurozone’s bailout fund, according to a provision of the Pact. Further, if Irish citizens vote “no” it could lead to uncertainty in financial markets as investors lose confidence in Ireland and the Eurozone’s ability to create more binding and enforceable fiscal rules.
Nonetheless, Prime Minister Kenny is optimistic that the Irish people will reaffirm their commitment to the Eurozone. There is a general consensus among economists and observers that Ireland still needs external assistance from the “Troika” (a group comprised of the European Commission, the European Central Bank and the International Monetary Fund in charge of monitoring the economic situation in distressed countries) and the ESM for its economic recovery. Thus, the referendum will show whether the Irish people are willing to cede additional decision-making powers to the EU or, as in the past, certain concessions in the Pact will need to be made to win their support.
FT: Ireland Calls Vote on European Fiscal Pact
Guardian: Ireland Set for Referendum on Eurozone Fiscal Treaty
Spiegel: A Decisive Moment for Ireland
WSJ: Ireland to Hold Referendum on EU Treaty
On Tuesday February 28, Ireland’s Prime Minister Enda Kenny announced that the country would hold a referendum on the recently-agreed-to European Fiscal Pact. The Pact sets tough deficit limits as well as strict enforcement mechanisms to prevent Eurozone countries from accumulating large amounts of debt. Under the Pact, member countries’ deficits must not exceed 0.5% of the country’s gross domestic product (GDP), debt must be below 60% of GDP, and countries must add balanced-budget rules to their constitutions. Within the next three months, at least twelve Eurozone countries must ratify the Pact for it to come into effect, but not all countries must follow Ireland’s lead and hold a referendum.
Under the Irish constitution, a public vote is necessary to ratify any significant transfer of decision-making power to the European Union (EU). However, Ireland’s past experiences have shown a suspicion towards further European integration. The Irish people have twice rejected EU treaties (in 2001 and 2008), only to approve them in second referendums after certain concessions in the treaties were made to appease Ireland’s voters. Thus, European leaders are concerned that the referendum will not pass. If Irish voters reject the Pact, the most immediate result would be that the Irish government would lose access to financial assistance from the European Stability Mechanism (ESM)—the Eurozone’s bailout fund, according to a provision of the Pact. Further, if Irish citizens vote “no” it could lead to uncertainty in financial markets as investors lose confidence in Ireland and the Eurozone’s ability to create more binding and enforceable fiscal rules.
Nonetheless, Prime Minister Kenny is optimistic that the Irish people will reaffirm their commitment to the Eurozone. There is a general consensus among economists and observers that Ireland still needs external assistance from the “Troika” (a group comprised of the European Commission, the European Central Bank and the International Monetary Fund in charge of monitoring the economic situation in distressed countries) and the ESM for its economic recovery. Thus, the referendum will show whether the Irish people are willing to cede additional decision-making powers to the EU or, as in the past, certain concessions in the Pact will need to be made to win their support.
India Shows Signs of a Slowing Economy
India’s economic growth rate slipped to an annualized 6.1% in the fourth quarter of 2011, the lowest growth rate in nearly three years. This growth rate marks the seventh consecutive quarterly slowdown in India and a steep drop from the 6.9% growth rate in the third quarter of 2011. In 2007, India’s economy grew 9.5%, but growth slowed to 8.4% in the last two years and is expected to fall to somewhere between 6.5% and 7% in the fiscal year ending in March.
One reason for the slower economic growth is very high interests rates in India (the official interest rate is at 8.5%), which gives businesses and consumers an incentive to save their money rather than spend it, lowering demand for goods in the economy and limiting economic growth. High interest rates have lowered corporate investment from an average of 18% of GDP in the previous five years to 14% of GDP in 2011. Furthermore, high borrowing costs have stifled the growth of the manufacturing industry, which only grew at an annualized rate of 0.4% in the fourth quarter of 2011—a three-year low.
While other Asian countries have cut their interest rates to promote economic growth in the wake of the global economic slowdown, India has not because it is struggling to rein in inflationary pressure. This inflationary pressure is due, in part, to an increasing government fiscal deficit that has pumped extra cash into the economy. Lower tax revenues due to the slowing economy, along with expensive oil subsidies and a rural worker employment-guarantee program have contributed most to the increased deficit. The money for oil subsidies and the employment-guarantee program increases demand in the economy by ensuring consumers have more money available to spend, but with the supply of goods staying stable, prices rise due to simple supply and demand principles. India’s 2011-2012 fiscal deficit has swelled to an estimated 6% of GDP, which is higher than its 4.6% target, and up from an average of 3% of GDP in the previous four years. Since the inflation rate is so high, the Reserve Bank of India has been unwilling to cut official interest rates. Lower interest rates would encourage businesses and individuals to spend rather than save (borrowing would be cheaper and saving would not provide as high a rate of return), which would further increase demand and push inflation even higher, destabilizing prices and creating a risky atmosphere for foreign investors who worry that prolonged inflation will decrease the value of their assets.
The Reserve Bank meets on March 15th and there are indications that it will cut interest rates to promote economic growth. However, this decision is far from certain. India faces a unique mix of high inflation and slowing growth, and these pressures could increase because of rising oil prices. Higher oil prices cause inflation because producers face higher costs to provide the same amount of goods (e.g., heating, gasoline, and manufacturing products) and pass the cost on to consumers in the form of higher prices.
India is in a difficult position. The Indian government has so far been unwilling to control its spending which has contributed to inflationary pressures, but with high inflation the Reserve Bank has been unwilling to cut interest rates which would increase inflation, but promote economic growth as well. Unless India can manage this problem, it may have to grow accustomed to disappointing economic growth rates in the future.
Tuesday, February 28, 2012
World Bank May Start Lending to Myanmar
Sources:
AFP: World Bank Encouraged on Myanmar
Reuters: World Bank Says Reengaging with Myanmar After 25 Years
Wall Street Journal: World Bank Supports Reforms in Myanmar
World Bank: Myanmar and the World Bank
The World Bank stopped lending to Myanmar, formerly known as Burma, in 1987 due to the country’s lack of economic and social reform, as well as failing to make payments owed on World Bank loans. The former military government recently handed power to a new civilian government that is reopening communication with the international community. The World Bank, based on Myanmar’s recent openness, has begun discussions with the country about potentially initiating developmental programs in the near future.
Myanmar, once known as the “rice bowl of Asia” due to its strong agricultural sector, had a strong economy before economic mismanagement and civil war transformed the country into one that is now deeply impoverished. For example, the World Health Organization ranks Myanmar’s health system as the worst in the world. The military government gave up power in an attempt to reverse the country’s negative economic and social trends. This new government has initiated dialog with outside countries and organizations, began speaking with the political opposition and ethnic minorities, and released some political prisoners. Additionally, to boost economic development, Myanmar is planning to offer eight-year tax-exempt status to all foreign investors.
The World Bank is satisfied with the country’s recent political and economic decisions, and is now considering new lending programs to Myanmar. However, World Bank regulations do not allow it to provide funding to any country that is behind on debt payments. Therefore, before Myanmar will be able to receive new World Bank loans, the country must first make arrangements to pay its past due debts to the World Bank. While the World Bank has not released exact numbers, financial experts estimate that Myanmar owes $700 million in arrears to the World Bank.
If Myanmar and the World Bank solve the issues surrounding Myanmar’s past debts, new World Bank projects would likely focus on improving public services (such as education and sanitation), upgrading the antiquated banking and finance sectors, and facilitating private sector job creation (for example, by promoting open communications throughout the country). World Bank programs will also support sustained peace, especially in regions where ethnic fighting has torn communities apart since the country gained independence from Britain in 1948, by developing jobs for past combatants. If the World Bank and Myanmar can agree on financial action that will improve the lives of Myanmar’s citizens, it will provide hope to the citizens of other oppressive governments that the international community is willing to help if a peaceful government can be installed.
AFP: World Bank Encouraged on Myanmar
Reuters: World Bank Says Reengaging with Myanmar After 25 Years
Wall Street Journal: World Bank Supports Reforms in Myanmar
World Bank: Myanmar and the World Bank
The World Bank stopped lending to Myanmar, formerly known as Burma, in 1987 due to the country’s lack of economic and social reform, as well as failing to make payments owed on World Bank loans. The former military government recently handed power to a new civilian government that is reopening communication with the international community. The World Bank, based on Myanmar’s recent openness, has begun discussions with the country about potentially initiating developmental programs in the near future.
Myanmar, once known as the “rice bowl of Asia” due to its strong agricultural sector, had a strong economy before economic mismanagement and civil war transformed the country into one that is now deeply impoverished. For example, the World Health Organization ranks Myanmar’s health system as the worst in the world. The military government gave up power in an attempt to reverse the country’s negative economic and social trends. This new government has initiated dialog with outside countries and organizations, began speaking with the political opposition and ethnic minorities, and released some political prisoners. Additionally, to boost economic development, Myanmar is planning to offer eight-year tax-exempt status to all foreign investors.
The World Bank is satisfied with the country’s recent political and economic decisions, and is now considering new lending programs to Myanmar. However, World Bank regulations do not allow it to provide funding to any country that is behind on debt payments. Therefore, before Myanmar will be able to receive new World Bank loans, the country must first make arrangements to pay its past due debts to the World Bank. While the World Bank has not released exact numbers, financial experts estimate that Myanmar owes $700 million in arrears to the World Bank.
If Myanmar and the World Bank solve the issues surrounding Myanmar’s past debts, new World Bank projects would likely focus on improving public services (such as education and sanitation), upgrading the antiquated banking and finance sectors, and facilitating private sector job creation (for example, by promoting open communications throughout the country). World Bank programs will also support sustained peace, especially in regions where ethnic fighting has torn communities apart since the country gained independence from Britain in 1948, by developing jobs for past combatants. If the World Bank and Myanmar can agree on financial action that will improve the lives of Myanmar’s citizens, it will provide hope to the citizens of other oppressive governments that the international community is willing to help if a peaceful government can be installed.
Monday, February 27, 2012
U.S Corporate Tax Reform on the Horizon
Sources:
Chicago Tribune: The Pros and Cons of Obama’s Corporate Tax Rate Cut
U.S. Treasury: Remarks by Timothy Geithner
For the first time in twenty-five years, it appears the U.S. business tax code will undergo significant change. President Obama proposed dropping the U.S. corporate tax rate from 35% to 28% in an effort to align America’s corporate tax structure with other developed economies and encourage economic growth in the U.S by incentivizing companies already on U.S to soil remain and making America more attractive in the global competition for business investment and development.
President Obama’s proposal seeks to eliminate subsidies and loopholes in the business tax code that give preferential treatment to certain industries and cost the U.S. government billions in lost tax dollars. The plan eliminates unfair and outdated industry-specific tax breaks and deductions for U.S. companies that relocate abroad. As an economic stimulus, the plan calls for permanent incentives in the form of tax deductions and depreciation benefits for U.S. manufacturing companies, tax credits for companies that return off-shore or overseas operations back to the U.S, and a new minimum tax for foreign earnings (currently foreign earnings are not taxed if they are kept abroad). To encourage small business growth, the proposed business tax code would simplify and reduce taxes on investment in and by small companies. Analysts estimate that the President’s current proposal will cost nearly $1 trillion; however, President Obama claims the elimination of tax breaks will pay for the plan without adding to the deficit.
Proponents of the business tax code revision note that the U.S. corporate tax rate is the second-highest in the world behind Japan and that failing to substantially revise and reduce the business tax code will hinder economic growth and competitiveness. Detractors claim that changing the corporate tax rate will dramatically reduce government revenues and increase the national deficit. Critics also claim the revisions fail to account for cheaper labor markets in other countries that play a role in luring businesses abroad.
While there is a general consensus that the business tax code should be reformed, political posturing during an election year makes it unlikely that Congress will approve President Obama’s proposal. Despite nearly a year and half of work on the proposal by the U.S. Treasury Department, critics are already demanding greater detail while also claiming the proposal is too complicated. Some observers negatively compare President Obama’s proposal to presidential candidate Newt Gingrich’s proposal of a flat corporate tax of 15% with no exemptions or deductions. While the national debate over the exact nature of U.S. corporate tax reform appears to have just begun, there is no disagreement that reform is indeed necessary.
Tuesday, February 21, 2012
China to Continue Investing in Europe
Sources:
Bloomberg: China to Get 'More Involved' in Europe Rescue, Holds Euros
China Daily: Hu Vows to Further Cooperation with EU
Forbes: China Gets on Board with Euro Bailout, Stocks Jump
Reuters: China to Keep Investing in Euro Zone Debt: China Central Bank
Europe is currently in the midst of a deep financial crisis. In the past, China (and other emerging markets such as Brazil and Russia) has contributed money to help fund the European bailouts with the hope of alleviating the European sovereign debt crisis. On the heels of new austerity measures in Greece that led to intense rioting and projections that Greece could face a prolonged and severe economic recession, China made an announcement that it plans to continue investing in Europe and contribute to future bailouts, which is positive news for Europe.
In recent international discussions, the Chinese government has indicated that it is ready to play a larger role in solving the sovereign debt crisis, which would ease the burden on the European Financial Stability Fund (EFSF) and the International Monetary Fund (IMF) to raise funds for future bailouts. China also noted its support for the measures the EFSF and IMF have taken thus far, and that it will continue coordinating with these organizations in the future.
The Chinese Central Bank, which holds approximately $800 million in euro-denominated financial instruments, recently reiterated its belief that the future prospects for the euro as a currency are strong—a statement that strongly increased market confidence in the euro. As evidence of that belief, China will not seek to reduce its exposure to changes in the euro exchange rate by selling its euro-denominated holdings.
Observers believe that China, with $3.2 trillion in foreign exchange reserves, may have the financial power to single-handedly bail out some troubled European governments. China, however, is reluctant to make economic decisions simply to help struggling economies. It is willing to invest in Europe, but only if the investments are liquid, secure, and will increase in value. For example, China currently believes that “hard assets” (buildings, businesses, inventory, etc.) are more appealing than European government bonds because hard assets can be sold in a worst case scenario to recover some of the initial investment, an option not available for government bonds.
China, however, is not suggesting that it will invest in “hard assets” to the complete exclusion of European government debt. China is committed to investing in European governments and will continue to encourage its companies to invest throughout Europe. European leaders hoping that China will use its vast foreign exchange reserves to fund a very large percentage of future European bailouts will likely be disappointed, as China views the risk associated with such a bailout greater than the potential monetary reward.
While some are disappointed in the role China has decided to play, China’s recent support of Europe is a positive sign. China’s willingness to invest in European assets and contribute some additional funds to future bailouts (if European countries send a clear message that they are working to get their finances in order) gives hope that Europe will be able to avoid a financial catastrophe. While China may not solve the European sovereign debt crisis on its own, the signal that China is prepared to work with Europe to solve the crisis should alleviate some European fears.
Bloomberg: China to Get 'More Involved' in Europe Rescue, Holds Euros
China Daily: Hu Vows to Further Cooperation with EU
Forbes: China Gets on Board with Euro Bailout, Stocks Jump
Reuters: China to Keep Investing in Euro Zone Debt: China Central Bank
Europe is currently in the midst of a deep financial crisis. In the past, China (and other emerging markets such as Brazil and Russia) has contributed money to help fund the European bailouts with the hope of alleviating the European sovereign debt crisis. On the heels of new austerity measures in Greece that led to intense rioting and projections that Greece could face a prolonged and severe economic recession, China made an announcement that it plans to continue investing in Europe and contribute to future bailouts, which is positive news for Europe.
In recent international discussions, the Chinese government has indicated that it is ready to play a larger role in solving the sovereign debt crisis, which would ease the burden on the European Financial Stability Fund (EFSF) and the International Monetary Fund (IMF) to raise funds for future bailouts. China also noted its support for the measures the EFSF and IMF have taken thus far, and that it will continue coordinating with these organizations in the future.
The Chinese Central Bank, which holds approximately $800 million in euro-denominated financial instruments, recently reiterated its belief that the future prospects for the euro as a currency are strong—a statement that strongly increased market confidence in the euro. As evidence of that belief, China will not seek to reduce its exposure to changes in the euro exchange rate by selling its euro-denominated holdings.
Observers believe that China, with $3.2 trillion in foreign exchange reserves, may have the financial power to single-handedly bail out some troubled European governments. China, however, is reluctant to make economic decisions simply to help struggling economies. It is willing to invest in Europe, but only if the investments are liquid, secure, and will increase in value. For example, China currently believes that “hard assets” (buildings, businesses, inventory, etc.) are more appealing than European government bonds because hard assets can be sold in a worst case scenario to recover some of the initial investment, an option not available for government bonds.
China, however, is not suggesting that it will invest in “hard assets” to the complete exclusion of European government debt. China is committed to investing in European governments and will continue to encourage its companies to invest throughout Europe. European leaders hoping that China will use its vast foreign exchange reserves to fund a very large percentage of future European bailouts will likely be disappointed, as China views the risk associated with such a bailout greater than the potential monetary reward.
While some are disappointed in the role China has decided to play, China’s recent support of Europe is a positive sign. China’s willingness to invest in European assets and contribute some additional funds to future bailouts (if European countries send a clear message that they are working to get their finances in order) gives hope that Europe will be able to avoid a financial catastrophe. While China may not solve the European sovereign debt crisis on its own, the signal that China is prepared to work with Europe to solve the crisis should alleviate some European fears.
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