Shakeups Loom for European Airlines

Source: Spanish Airline Receives Takeover Offer

European airlines are positioning themselves to take advantage of the “open skies” agreement that will deregulate transatlantic air transportation. See EU battles US over airline restrictions. One of the expected effects of the increased competition on transatlantic routes is airline consolidation across Europe.

Iberia Lineas Aéreas de España, a carrier with a number of lucrative transatlantic routes, and BMI, a largely domestic airline in Britian, are two of the prime consolidation targets. Iberia recently indicated that it was willing to talk with potential suitors. A US private equity group, Texas Pacific Group, responded with a $4.55 billion buyout offer, which may set off a bidding war with other European carriers. British Airways and Virgin Atlantic, the top two British carriers, are both interested in BMI because it owns about 12 percent of the coveted takeoff and landing slots at London’s Heathrow Airport. These slots, which sell for up to $19 million each, are increasingly important under the open skies agreement, because, in March 2008, Heathrow will be open to competition by all airlines for the first time in 30 years.

Separately, Europe’s Competition Commission is reviewing the ownership of several British airports, including Heathrow. Heathrow’s owner, BAA, owns seven airports in the UK and is under investigation for anti-competitive practices. Depending on its findings, the Competition Commission could order BAA to sell off one or more of its airports.

An OECD for the Americas?

Bank of Canada's Dodge Says Americas Need an OECD-Like Forum
Greg Quinn and Alexandre Deslongchamps
March 29, 2007

Bank of Canada Governor David Dodge stated earlier this week that the Americas should have an organization modeled after the Organization of Economic Cooperation and Development, where nations can meet and exchange ideas. Dodge believes that in recent times, the U.S. and Canada have focused their attention on China and other Asian nations instead of promoting economic growth and development at home. Dodge envisages the role of his proposed organization as encouraging sound monetary, financial and fiscal policies. Also, his proposed organization would have a mandate of advocating countries such as the United States and Canada to open their markets to products from Latin American nations and push for the resumption of the Doha round of global trade talks.

Questions
1. Do the Americas need an organization similar to the OECD? What role would such an organization play that is not already played by other multilateral institutions such as the IMF and the World Bank? Would there be any risk of institutional overlap?
2. What would be the voting structure of such an institution? Would the developing nations in the Americas support the creation of such an organization?
3. What would be the major impediments to the creation of such an organization?

South Korea, US Trade Talks Still Not Completed

Sources: US Says S Korea Talks 'Not Going Well,' Agricultural Obstacle to US, Korea Trade Deal

Following almost a year of negotiations, South Korea and the U.S. were still unable to reach a successful compromise on almost all of the areas of the enormous bilateral trade agreement. The trade agreement would be the largest that the U.S. has entered into since the Nafta Accord with Canada and Mexico. Both countries aim to increase trade between them by up to $20 billion per year.

One area that has been particularly prickly involves U.S. beef imports to South Korea. Since the outbreak of mad cow disease in 2003, South Korea has imposed a 40% tariff on beef imports, which hit the U.S. hard since American beef had previously made up almost 70% of the beef imported into Korea. South Korea refuses to decrease the tariff until the U.S. is granted a "controlled risk country" classification by the World Organization for Animal Health. The WOAH is expected to re-classify the U.S. as such in May. Several other areas remain disputed, such as textiles, labor, the environment, financial services, autos, and other trade services.

Question: What may be the largest benefits to both the U.S. and South Korea if they are successful in this bilateral trade agreement?

Angola Stops IMF Negotiations

Source: Angola calls a halt to IMF talks - BBC.com

Angola and the IMF had been negotiating regarding the implementation of a program for Angola. The advisor in the Africa Department of the IMf and the mission chief for Angola, Calvin McDonald, stated that Angola had been offered the possibility of having an IMF-supported program, which would likely not have involved borrowing.

However, during the past few years the Angolan economy has gone through a great deal of growth. In the past three years alone, the economy has grown by 13%,and this month oil production for the country is expected to at 1.3 million barrels per day.

Because of this wave of prosperity, Angola's finance minister told the IMf that they were no longer interested in any kind of program and negotiations therefore ended. The finance minister also recognized that the country's growing economy has opened up financial opportunities with new partners.

Question:

Should Angola reconsider negotiations with the IMF considering the fact the country owes an estimated $2.3 billion to the Paris Club?

Low Cost Vaccine for Africa

Source - New low-cost vaccine for Africa: BBC.com

GSK, Europe's largest drug company, has begun the registration process for a vaccine from which it will likely never make a profit.

The vaccine, Globorix, will be for meningitis. Meningitis is a big problem in Africa. Millions of people are at risk for getting this disease, which can kill a child in less than six hours. Globorix, which is only to be sold and used in Africa, will cost more than $400 million to develop, and is aimed at meningitis A and C.

GSK's chief executive Jean-Pierre Garnier said the development of this new drug represents a new way of doing business, and not just a shot at some good PR.

However, it has been recognized that this act might not be the result of a good conscience. In the past, this drug giant attempted to sue the South African government for trying to obtain generic drugs to combat HIV and various other diseases. The company found itself in the middle of a PR nightmare and finally backed off. This resulted in GSK paying more attention to diseases that are typically overlooked, such as meningitis.

United States' Basel II Implementation Controversy

Sources:

U.S. Banks Reiterate Basel II/IA Concerns as Deadline Nears

FDIC’s Bair Fears Basel II Impasse; Fed’s Bies Urges Forward Movement, Says Market Risk Timetable Could be Pushed Back

Today was the deadline for comments regarding two notices for proposed rulemaking (NPRs): one for U.S.’s version of Basel II and one for Basel IA. Basel II is the Bank for International Settlement’s (BIS) revised capital adequacy framework for internationally active banks. U.S. banks did not warmly welcome the more strict capital requirements of BIS’s proposed Basel II, so the U.S. regulators adjusted the framework into a more conservative version. Only the largest U.S. banks would adopt Basel II, which calls for more stringent capital adequacy guidelines and gives banks an option to measure their capital adequacy requirements using a much more complicated, and costly, formula.

In contrast, Basel IA is the United State’s answer for smaller banks, those that would not be able to afford to implement the more complicated capital adequacy formulas of Basel II. Using the more risk-sensitive goals of Basel II, Basel IA adjusts the original capital adequacy regulations (known as Basel I) into a small-bank friendly framework.

The U.S. federal banking supervisory agencies—the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board of Governors (the Fed), the Office of the Comptroller of the Currency, and the Office of Thrift Supervision—issued the two NPRs over the past six months, but dissention, particularly over Basel II, in the industry is still prevalent as the commenting session has come to a close. On one side of the argument is the FDIC, which fears that the new framework will have adverse impacts on bank capital levels. FDIC Chairman Sheila C. Bair hopes that the comments on the NPR will be “some fresh thinking to bear on these issues, so we can ensure our decisions in this high-stakes process will be in the public interest.”

On the other side of the argument is the Fed, which is arguing to meet the current timetable (2009) of Basel II Implementation in the U.S. However, U.S. lawmakers concerned with the drop in the levels of capital in U.S. banks asked Federal Reserve Chairman Ben Bernanke to analyze whether the timetable is still feasible.

Question: The Government Accountability Office issued a report that raised transparency and ambiguity issues in the Basel II requirements. The supervisory agencies have vowed to address these and other concerns raised in the comments to both NPRs. How likely is it that the implementation timeline will remain intact if the agencies remain dedicated to address each issue?

China and Venezuela Agree to oil deals

Sources: Xinhua, China Daily

China and Venezuela reached agreements this weekend on a series of oil deals. Venezuela has been seeking alternative buyers of her petroleum to break the dependence upon US purchases. China is now the second-biggest oil consumer, and Venezuela is the world’s fifth largest oil exporter. This new deal is consummated with the hopes that Venezuela will eventually export 1 million barrels per day to China by 2012. This is nearly one-third of its current output at 2.7 million barrels per day. Currently, Venezuela exports 160,000 barrels per day to China, while 1.5 million barrels per day are exported to the United States.

In addition to the increased exports, China and Venezuela are agreeing to pursue joint ventures in the oil sectors of both states. The Chinese National Petroleum Corporation (CNPC) also has agreed to invest a 40% stake in various oil projects in Venezuela. There will also be mutual investments in China-based oil refineries. Finally, Venezuela is likely to build tankers to ship the crude oil to China. The CNPC has been involved with a the Venezuelan oil enterprises since 1997.

Questions: How will US influence wane in Latin America as a result of lessened dependence on US oil purchases? Also, how does this play into the larger Sino-US economic competition?

Rivers in Asia in Dire Straits

Sources: Asia's River Systems Face Collapse, Asian Rivers Top WWF Risk List From Pollution, Asian Rivers in Most Risk of Pollution and Climate Change Effects

The rush in many Asian countries to go from Third World to industrialized status has threatened the survival of many of its rivers. A study released by the World Wide Fund for Nature (WWF) revealed that 21 of the world's major river systems are facing a near total collapse due to pollution and man-made diversion of water through irrigation and dams. One fresh-water officer at the WWF claimed that the circumstances are extreme. Some of the dying rivers include the Yangtze, Mekong, Indus, and Ganges.
These river systems and their basins support the lives of hundreds of millions of people in Asia. Many fear that the destruction of this important resource could lead to dire economic consequences in the emerging markets of Asia, such as the loss of food supplies, jobs, and social stability. These rivers support rice basins, fishing industries, and farming in this region.
The pollution has also resulted in thousands of freshwater fish and plant species to enter the endangered or extinct list. This is significant because many of the livelihoods connected with the rivers are dependent on these species. For instance, annual fish catches in the Yangtze river declined in volume by over one-half since the 1950s.
The WWF cites overdevelopment as the primary cause of the destruction of the river systems in Asia. It states that 60% of the world's largest rivers have been highly fragmented by dams. The WWF has been warning the governments of these countries about the potential negative consequences that fast development could have on the rivers, but government officials have been reluctant to respond in ways that would compromise the growth of industry.

Questions:
1) What types of international problems may result as water resources become depleted?
2) What can be done to change the attitudes of governments to get them to act before the river systems can no longer be used as resources?
3) How can Asian governments approach the problem without sacrificing the growing strength of their markets?

EU battles US over airline restrictions

Source: EU-US collision in "open skies" -FT.com

The EU proved its determination to not yield to US control of transatlantic air travel on Thursday night as it stood steadfast by its idea of reforms for the liberalization of air travel. The US had earlier proposed a more modest “open skies” agreement. The EU reforms would be completely free of restrictions on airline ownership and control.

The UK warned the US that if it failed to agree to the more liberalizing and radical reforms, that current rights granted to the US could be revoked, including traffic rights. Nevertheless, Congress shot down the European demands that the current cap of foreign ownership of US airlines be removed. Currently, the cap prevents foreigners from owning more than 25% of any given US airline.

Meanwhile, airlines on both sides of the Atlantic are looking to increase services between the US and Europe, including services from Ireland to San Francisco. Additionally, both sides have agreed to additional rights for European and US airlines that will, in the near future, potentially lead to lower airfares between the two regions.

Question:

- What detrimental consequences would foreign ownership of US-based airlines have for US consumers? Would such detriments be outweighed by potential benefits in any consideration?

UK and S Africa Working on Development and Climate Change

Source: Uk and South Africa agree to joint working on sustainable development and climate change - Media-Newswire.com.


The UK and South Africa have agreed to team up to tackle the issues of sustainable development and climate change.

The agreement is meant to strengthen bilateral ties on many development and environmental issues in addition to providing leadership on the issue of development in South Africa. One of the first initiatives provided for by the agreement will include a Foreign and Commonwealth Office funded water governance project, to be implemented by the England and Wales Environment Agency. This project will help to ensure that the poor and disadvantaged will have access to water resources.

Some of the main themes that will be addressed by the agreement are environmental enforcement, sustainable consumption and production, energy for sustainable development, the impact of and adaption to climate change, and longer-term global action on climate change.

This agreement represents the fifth in a series of partnerships that the UK has formed with developing countries to help ensure sustainable development. These other countries include China, Mexico, Brazil, and India.

Question:

How can other developed nations be encouraged to enter into agreements such as these?

North Korea Funds to be Released

Sources: Reuters, Bloomberg Asia, Associated Press

It appears that the United States and North Korea have reached an agreement to release frozen NK funds from a Macau bank. U.S. Treasury official Daniel Glaser announced the move which is aimed at ending the NK nuclear weapons program. The frozen funds were released per the February deal, and had threatened to dismantle the agreements reached during the first round of meetings. NK had demanded that the $25 million, which had been frozen for 19 months at Banco Delta Asia to be moved to an account with the Bank of China in Beijing. The United States froze the money because of allegations of money laundering and counterfeiting. The February deal had called for North Korea to shut down all nuclear facilities in an exchange for foreign aid. North Korea had called for a return of all the money frozen at Banco Delta Asia before it would comply with the February agreements. At this point, North Korea has until April 13th to shut down the nuclear plants in return for aid equivalent to 50,000 tons of oil. It will receive an additional 950,000 tons of fuel oil upon the permanent disabling of the nuclear reactor. The money is expected to be used for humanitarian purposes and educational purposes

Question: With the previous Clinton Administration agreement similar to the current one, how can the world powers ensure that North Korea does not renege on this current agreement?

Angola Cancels Negotiations with IMF

Angola Calls a Halt to IMF Talks, BBC News

Angola has cancelled all negotiations with the International Monetary Fund (IMF), on the grounds that it is quite able to maintain economic stability on its own.

During the past few years, the Angolan economy has gone through massive growth and inflation has been brought under control. Finance Minister Jose Pedro de Morais said the government had successfully implemented its own macro-economic stabilization program while relying exclusively on its own resources.

The finance minister has told the IMF that this wave of prosperity has opened up opportunities with what he called "new partners" and on this basis, consultations with the IMF have been cancelled.

This year alone, Angola expects to produce 585 million barrels of oil, worth over $30 billion - more than the entire Organization for Economic Co-operation and Development aid to the whole of Africa in 2006.

The IMF expects to continue a dialogue with Angola, through which it would give advice to the government. The IMF has, for several years, harbored misgivings about how the country accounts for its oil revenues.

It remains unclear whether the decision not to pursue an IMF agreement will affect Angola's estimated debt of $2.3 billion to Paris Club creditors.

Question: Was this a smart move for Angola?

Africa experiencing robust growth rates

Africa needs 15 years of steady growth -IMF's Rato
Reuters
March 16, 2007

The International Monetary Fund Managing Director, Rodrigo Rato recently speaking to a conference of parliamentarians in Cape Town stated that Africa would need between 15 and 20 years of sustained economic growth to achieve its goal of drastically reducing poverty. While Rato believes that Africa is in its “most promising” shape and countries such as Tanzania and Ghana are enjoying particularly impressive growth rates, he believes that Africa must sustain its momentum. One way according to the IMF to ensure sustainable growth is through the removal of regional trade barriers which depress trade between African nations and reduce the potential for growth. Rato also stated that developed countries, most notably, the USA should increase their debt relief budgets to provide a stimulus to Africa’s growth march.

According to the IMF, the emergence of new donors such as China was very beneficial for the world economy as they could help meet shortfalls between the level of aid required by Africa and that currently being provided to it.

Questions:
1. What can multilateral institutions such as the IMF and World Bank do to ensure that Africa continues to experience robust levels of economic growth?

Hungary Decries EU Pipeline Proposal, Supports Russian Proposal

Source: Hungary Breaks Ranks with the EU and Its Neighbors on the Nabucco Project-Eurasia Daily Monitor

Wary of dependence on Russia for its energy demands, the EU last week reconfirmed its commitment to the high priority Nabucco pipeline that would provide gas to the EU from the Caspian region. The European Bank for Reconstruction and Development is prepared to finance seventy percent of the pipeline costs, and the US has played an important role in securing commitments from Azerbaijan and Kazakhstan to supply gas for the pipeline’s initial phase.

Despite the EU’s emphasis on the Nabucco pipeline, actions by Hungary—a critical country to the Nabucco pipeline—might kill the project. Hungarian Prime Minister Ferenc Gyurcsany announced this week that his country supports a competing Russian pipeline proposal that would extend Russian supplies into Central Europe through Hungary. Russia is promising that Hungary would become a hub country for gas distribution, and the Prime Minister suggested that the Russian proposal would provide greater volumes of gas and could come online more quickly than the Nabucco pipeline. The proposed extension of the Russian pipeline into Central Europe would jeopardize the feasibility of the Nabucco pipeline, scaring off potential investors.

Questions:

Considering recent aggressive tactics by Russia regarding energy exports (Prime Minister Gyurcsany conceded that reliance on Russia for gas supplies is risky), should Hungary be more reluctant to support expansion of the Russian pipeline? If Hungary would be economically better off as a hub country for Russian gas than as a transit country for the Nabucco pipeline, should it be allowed to pursue its best interest ahead of EU interests?

South Korea to Adopt IFRS

Sources: Korea Moves to Adopt IFRS, Adopting International Financial Standards, Reports on the International Financial Architecture

On March 15, South Korea's financial minister revealed a plan that entails the adoption of the International Financial Reporting Standards. This is a set of "best practice" standards in financial regulation, supervision, corporate governance, accounting, data transparency, etc., that is established by the International Accounting Standards Board. The adoption of these standards was a move by South Korea towards increasing transparency in its corporate sector and to enhance the confidence of foreign investors. Many foreign investors would like to see more transparency in South Korea's corporate culture, especially in light of the 1997 Asian financial crisis and recent large accounting scandals.
The new standards will add more burdens on domestic corporations in Korea, but the country's financial regulators are convinced that this move will greatly benefit the Korean economy at large. For example, the government hopes that its sovereign credit rating will increase if there is more transparency. To help corporations ease into the new regime, the government has given them a two year grace period to correct any inaccuracies in their accounting.

Questions:
1) Who else might benefit from greater transparency in Korea's corporate culture?
2) Will increased transparency be enough to buttress foreign investor confidence, or will it take something more? What else might Korea do to boost investor confidence?
3) Are the International Financial Reporting Standards effective in creating the desired transparency?

Inflation in Europe raises fears

Sources:

“Fears over rising eurozone inflation” - FT.com

“Euro inflation brushes off VAT effect” RTE.com

The European Central Bank (ECB) is worried as Eurozone “core” inflation continues on an upward path, according to official figures; inflation in the 13-country Eurozone region has increased to an annual rate of 1.9 percent (the highest since 2004), up from the 1.8 percent the previous month.

The inflation rate, despite being in line with the ECB’s objective of keeping the annual rate below 2 percent, has had an adverse effect on interest rates, pushing them higher. Further, borrowing costs are expected to increase in reaction to the inflation rates upward trend.

The rise to 1.9 percent comes after experts believed the rate would continue to hold stead at 1.8 percent, as it had throughout the month of February. However, some economists were expecting such a rise to accompany an increase in German VAT (Value Added Tax—tax on exchanges) that occurred throughout January.

Nevertheless, the ECB forecasts that the rate will lower during the spring and summer before rising once more around year’s end.

Question:

- Is it possible for inflation to surpass the ECB’s target rate of 2% during the rest of 2007?

Halliburton to move headquarters from Houston to Dubai.

SOURCES:

Finance 24: Halliburton Enrages Democrats

Washington Post: Halliburton Chief’s Move to Dubai Provokes Warnings on Hill

Oil services giant Halliburton—a corporation headed by U.S. Vice President Dick Cheney from 1995-2000—has announced plans to move its corporate headquarters from Houston, Texas to Dubai, in the United Arab Emirates. This move comes in the wake of heavy criticism of Halliburton’s acceptance of a no-bid contracts to provide service to the U.S. military in Iraq, and amid ongoing investigations of company practices, including overcharging. The announcement met with ire from Democratic Congressional leaders in Washington, D.C.—who now constitute the majority in Congress—promising hearings on this development.

Halliburton officials say the decision to move corporate headquarters to Dubai from Houston is motivated only by business judgment. They tout the fact that locating in Dubai will help the company in establishing a better position in the international energy market, which they claim is increasingly situated in the eastern hemisphere. However, U.S. lawmakers counter that the company, which has profited considerably from contracts with the U.S. government, is simply trying to avoid paying federal taxes and complying with U.S. laws banning financial dealings with particular countries, notably Iran.

Lawyers commenting on the issue asserted that because Halliburton plans to maintain its corporate status under U.S. laws, is publicly traded, and owned by U.S. investor, it will still have to comply with U.S. laws such as the Foreign Corrupt Practices Act. However, they add that as a foreign-based company, Halliburton will avoid having to pay U.S. taxes on income earned abroad, which could well be a considerable portion of the company’s multi-billion dollar revenues.

FOR DISCUSSION:

The United States has long-touted its corporate-friendly laws. Halliburton appears to have taken full advantage of the benefits they offer, much to the chagrin of some U.S. lawmakers.

Should the U.S. consider changing its laws to require foreign-based companies who choose to be legally incorporated in the U.S. to pay federal taxes on all their revenue? What might be the negative and positive implications of such a move?

Angola Expecting $50 billion from Oil Investment

Angola Eyes $50 Billion Oil Investment,BBC News

Manual Vicente, chairman of the state-owned oil company Sonangol, announced that Angola expects foreign oil investors to pour $50 billion into its oil industry over the next six years. Mr. Vicente expected oil investment in areas including infrastructure construction and maintenance services.

The prediction comes despite reports that a $3 billion Chinese investment in a key Angolan refinery recently fell through.

After a 27 year civil war, Angola emerged as sub-Saharan Africa’s second largest oil producer after Nigeria. Unfortunately, Angola remains one of the poorest countries in the world, with the vast majority of its population living on less than $1 per day.

Mr. Vicente said that the growth in the oil industry was fueling an economic boom in Angola.

Question: Will the presence of oil in Angola lead to the development of a strong economy or is it a "curse" that will lead to government corruption and violent conflict?

Keeping track of the billionaires...and the living-on-airs.

Sources:
Guardian Unlimited: Super-Rich Get Richer
Forbes: World's Billionare List
Hindustan Times: U.S. Faulted for Cutting Aid to India
UN World Food Programme: South Africa Braces for Poor Harvests
UN Office for the Coordination of Humanitarian Affairs: Humanitarian Appeal 2007

When Forbes, a business and financial news magazine based in the United States issues its annual tally of the world’s richest, people everywhere take notice. Whether this results from actual interest on the part of the public or only reflects the interest the media expects the public to have is unclear. What is beyond dispute is the saturation this particular news item has achieved, having been featured prominently in hundreds of periodicals from almost every continent. Many reports from around the globe trumpet the inclusion of one—or several—of their own on the list. Africa, the globe’s poorest continent, and Antarctica, the least populated, were comparatively quiet with respect to the billionaire list.

That aside, 2007 is according to Forbes, the “richest year” ever. In addition to the predictable appearance of Microsoft mogul Bill Gates, the list included more women than ever before, as well as unexpectedly large showings by countries like India, Russia, and Turkey. Less surprisingly, the United States boasts the "richest of the mega-rich" by a wide margin. Germany is a distant second, and Russia a surprising third.

Eight hundred and ninety-one people "made" the “World’s Billionaires” list. The top three each boast a net worth exceeding the 2007 UN Humanitarian Appeals Goal of $3.9 billion by more than $35 billion.

For purposes of perspective, it is useful to note other current reports:

***The United Nations’ Office for the Coordination of Humanitarian Affairs issued Humanitarian Appeals 2007 in November of 2006, requesting a total of $3.9 billion to help 27 million people in 29 countries.

***UN reports that the countries of Southern Africa are bracing for poor harvests and another year of widespread food shortages.

***U.S. President Bush’s announcement that he will propose a 35% cut in humanitarian aid to India in his budget for FY 2008.

For discussion:

1. What does an individual’s billionaire status reflect? Is it: A) a testament to his or her ability and luck or, B) is the resulting concentration of capital in one individual a symptom of problems with the market or the economic system as a whole?
2. Does billionaire status matter? Is it newsworthy? Why or why not?
3. How do billionaires affect global markets?
4. Billionaires may in many cases be richer than entire nations in the developing world. Do billionaires have a responsibility to the rest of the globe?

Haitian Remittance Estimates for 2006

Sources: Inter-American Development Bank, Remittances to Haiti Topped $1.65 Billion in 2006; World Bank, Understanding the Remittance Economy in Haiti.

According to the Inter-American Development Bank’s Multilateral Investment Fund (MIF), the approximately 1.5 millions Haitians living abroad sent more than $1.65 billion back to Haiti in 2006. These remittances, or the transfer of money from one country to another, constitute more than one-third of the country’s gross national product. Haitians living in the United States were the largest source of the remittances, accounting for $1.7 million, while Haitians living in other countries such as Canada, France, and the Dominican Republic also contributed to the total quantity of remittances.

The MIF estimates believe that “about 1.1 million adults in Haiti receive remittances, typically 10 times a year, at an average of $150 at a time.” The money most frequently is sent to low-income families that use it to cover basic expenses. There is, however, some evidence that families are increasingly able to save the money for investments in education and small businesses. In 2006, the World Bank commissioned a paper titled Understanding the Remittance Economy in Haiti. That study indicated that the majority of the people who sent remittances back to Haiti were young females with college degrees or some level of college education.

For an excellent explanation of the basics of remittance transfers see UICIFD Briefing No.3: Remittances.

Question:

(1) Remittances obviously have a financial impact in Haiti. What are some of the impacts that remittances can have in a country outside of the financial realm? For example, what role, if any, do remittances play in social identity within a receiving country?

(2) What are some of the risks that a country runs if it depends too much on remittances?

India-EU Trade Talks Suffer Set-Backs

Sources: EU-India Trade Pact Stumbles; India, US, EU Must be Flexible in Trade Talks; EU, US, India Try to Advance Global Trade Talks

Over the weekend, Ministers and negotiators of the European Union (EU) and India held bilateral discussions to push forward contracts that aim to enhance global commerce and combat poverty. However, the talks suffered serious set-backs, particularly India's objections to the "human rights and democracy" provision in a proposed free trade agreement with the E. India's commerce minister, Kamal Nath, indicated the significance of this clause by calling it a "deal-breaker." India's objection is based on the fact that this is supposed to be a trade and investment agreement only, and that this clause injects elements into the agreement that lie outside the relevant subject matter of the contracts. India has a longstanding policy of preferring economic agreements that did not come with political contingencies.
The groups are under pressure to reach a deal - and soon. Some of the negotiators claim that a deal must be reached this year or else the increased risk of long-term delay would undermine confidence in the global trading system. The talks were part of the discussions entered into after the 9/11 attacks on the U.S. in 2001 as an effort to take a rare opportunity to bind the global community in a united effort to lift millions out of poverty and boost the global economy. India is one of the EU's largest trading partners.
The clause in question is what the European Commission refers to as part of the "essential elements" clause that is standard in all its bilateral trade agreements. This clause is in agreements between the EU and over 120 countries. India has been suspicious of such clauses because of the protectionist bent they convey.

Questions:
1) What could be some reasons that motivate the EU's inclusion of its "essential elements" clause in trade agreements?
2) What does India stand to lose if it signs the agreement with the clause intact? What does it stand to gain by having the clause striken from the agreement?
3) What does the EU stand to lose if the clause is striken from the agreement?
4) Who else might gain or lose if the clause remains in the agreement?

"Open Skies" over the Atlantic

Sources: Houston Chronicle; The Mercury News; RTE.ie; IHT.com; Yahoo.com

The EU and the US tentatively agreed to a new “open skies” arrangement that would remove many of the existing restrictions on intercontinental flights. Transatlantic flights, 60% of global air travel, would be opened for all European carriers to fly non-stop routes from any EU city—even outside the airline’s home country—to any US destination and vice-versa. This arrangement would also remove price restrictions on transatlantic flights. The US would permit European airlines to obtain more than 50% capital interest in American airlines, previously barred in the interest of national security, but would continue to cap ownership of voting rights to 25% of the American airline.

European and American lawmakers must still approve the agreement before it goes into effect. If adopted, it is forecast to increase transatlantic traffic by 50% within 5 years to nearly 76 million passengers annually and to create 80,000 EU and US jobs. Consumers will enjoy more flight options and more competitive prices. The airlines generally should benefit from the increased travel, but individual airlines, like British Airways, might suffer from low-fare competition on lucrative transatlantic routes. In fact, British Airways opposes the agreement. The EU predicts that the deal could be worth almost $16 billion, with benefits also extending to cargo transporters who could take advantage of increased routing options and competitive pricing.

Questions:

Should the US approve the “open skies” agreement? Will the increased competition on transatlantic routes deepen the financial problems of American airlines, or will benefits of increased access throughout Europe offset the losses?

Basel II Implementation in the United States Possibly Delayed another Year

Sources:
US Banks May Get Another Year to Implement Basel II Accord, Fed Official Says
Basel II – Federal Reserve Happy with US Conservative Approach

Basel II, the revised standards for capital adequacy standards for banks promulgated by the Bank for International Settlements (the BIS), has not received a warm welcome in the United States. The new accord, which is more risk-sensitive than its predecessor, Basel I, will regulate the amount of capital a bank must set aside to cover risks. Since the BIS published the revised guidelines in June 2006, only a handful of nations have implemented Basel II, with the United States being the most hesitant nation.

One of Basel II’s biggest supporters in the United States is Susan Schmidt Bies, a member of the Board of Directors of the U.S. Federal Reserve (the Fed). During her farewell speech to the Fed (Bies announced that she will step down from the Fed next month), Bies responded to banks and Congress members who asked U.S. regulators to delay Basel II implementation. Due to the concerns some have raised regarding the necessity of Basel II and the fact that the new guidelines may lead to disadvantages for smaller banks, Bies stated that the Fed is “carefully considering the request that implementation of the market risk proposals be pushed back one year to January 2009.”

Bies’ announcement of another possible delay in Basel II implementation comes on the heels of the U.S. Government Accountability Office (the GAO) issuing a report noting that “any further delay in the U.S. implementation of Basel II creates potential competitive disadvantages for U.S. banks when they are compared with foreign banks.”

Question: In our global environment, should the U.S. ignore the possible risks Basel II poses for smaller U.S. banks and stick to the previous implementation timetable in order to maintain competitiveness with foreign banks who already have implemented Basel II?

Japan Boost Ethanol Production

Sources: MSNBC, The Standard, BusinessWeek

In June 2006, Japan had announced that it would fight global warming by requiring all vehicles to run on a gasoline-ethanol blend by 2030. It also required that all new cars, starting in 2010, to run on a 90-10 gasoline-ethanol blend. These ethanol blends are used widely in Brazil as well as the United States, and while Japan allows a 3% ethanol blend, there are no cars running on gasoline-ethanol.

In meeting this new created demand for ethanol, Japan has begun to increase ethanol production in southern Japan, where there is a plentiful supply of the biomass required. There is enough indigenous biomass on the southern island of Miyako to power 20,000 cars. However, this appeared to insufficient. Japan will likely require 1.8 – 6 billion liters of ethanol fuel per year. Therefore, Brazil and Japan has announced a project where Japan would purchase as much as $8 billion in Brazilian sugarcane ethanol. Japanese company Mitsui and Petrobras, the Brazilian state-run oil company, would set up a Brazil-based subsidiary to ensure supply. Currently, Brazil only exports 225.4 million liters to Japan per year. The money is to be used to purchase stakes in 40 ethanol distilleries, and investment may reach $200 million per distillery to ensure a fifteen year stable supply. Japan’s National Development Bank will provide the necessary financing for the project.

Question: What benefits do you see with the increase ethanol trade between Japan and Brazil? What benefits may the local sugarcane farmer see from this increased trade? What possible consequences do you envision?

Poland’s economic growth is cause of concern

Sources:
“Concerns over pace of growth in Poland” - FT.com
“Economic growth surprises analysts” - Templetonthorp.com
“The Soaring Eagle: Poland’s Economic performance and challenges” - OECD.org

At the end of last year, Poland, once referred to as the “soaring eagle of Europe” regarding its economy, experienced accelerated growth of 6.4%--while polish businesses rejoiced in such strong growth, experts warned that it is unsustainable; the chief economist for the Polish Business Roundtable has said “[Poland] is an economy driving with the warning lights on.”

For the entirety of 2006, exports grew by 22.6%, imports by 23% and overall GDP growth was 5.8%. As a particular example, one of Poland’s meat producers more than doubled their profits last year. The primary problem with such sudden and drastic growth is the resulting labour shortages—there is a limited pool of new workers to service the demands of the market. This lack of workers is a result of hundreds of thousands having migrated to western Europe, while a lot of workers who remain are older and untrained. Recent statistics suggest that 52% of Polish companies have problems finding workers.

The pace of Poland’s economic growth came as a surprise to analysts at the end of 2006, despite that fact that, since the country joined the OECD (Organization for Economic Cooperation and Development), it has, on average, had over 4% GDP growth per annum, against the OECD member’s overall average of barely over 2%. Additionally, income per capita in the country rose from below 40% of the OECD average in the 1990s to nearly 50% today.

Question:
- will filling the need for more workers allow Poland to sustain such growth indefinitely?

Merill Lynch to Take on Nigerian Debt

Sources: Nigeria to end bulk of $500m debt - BBC.com, Nigeria to repay most its debt in Merrill deal - FT - Reuters.com.

Nigeria currently owes $500 million to the London Club, a group of creditor nations. However, the country has recently entered into a deal with the United States based investment bank Merrill Lynch, in which the bank will take on the debt.

Nigeria's finance minister, Nenadi Usman, said that the reasoning behind the deal was to give Nigeria a "fresh start." Additionally, the government hopes that the deal will encourage credit rating agencies to improve Nigeria's investment rating, therefore making Nigeria more attractive to investors.

After receiving $18 billion in debt relief from another group of creditors (the Paris Club), and using $12 billion in oil revenues to pay off other debts, the only debts that Nigeria will owe are those owed to multilateral institutions in addition to some bilateral loans.

Questions:

1. In what ways will this deal give Nigeria a "fresh start"?

2. Nigeria's current president has prioritized the reduction of debt for the country. How will the country's development be affected if the next Nigerian president does not have the same priorities?

Steel Co. Looks to Senegal

Source: Steel giant targets Senegal mine - BBC.com

The very large steel company, Arcelor Mittal, plans to invest over $2.2 billion in a Senegal mining project. The project is aimed developing an iron ore mine in the Faleme region. The company also hopes to set up a new port near Dakar. The projects will also include a rail line which will run between the Faleme region and Dakar.

The production of the new mine will begin in 2011. Arcelor Mittal says that the site holds more than 750 million tonnes of iron ore and that the company hopes to mine about 15 to 20 million tonnes per year.

The company also stated that the prospective mine will be an important provider of iron for the company's European plants. In addition, the company hopes to make the West African region a central mining hub for other plants around the world.

Questions:

1. How will the establishment of a new iron ore mine effect the people of the West African region?

2. Are there any potential development concerns that may arise due to the development of the new plant?

World Bank to begin lending to Iraq?

Wolfowitz May bring Bank Back to Iraq
Emad Mekay

World Bank President Paul Wolfowitz is planning on appointing a resident director for Iraq soon. The Bank has not had any presence in Iraq since August 2003, when a Bank staffer died in a bombing. This move could signal the beginning of World Bank loans to the conflict-stricken nation, despite the poor security situation and recent disclosures of widespread corruption in reconstruction efforts. However, a Washington based watchdog group, Government Accountability Project, is extremely critical of Wolfowitz’s policies in this regard. According to the Government Accountability Project, Wolfowitz is using the World Bank’s funds to supplement American military goals in the Middle East, which represents an unacceptable distortion of the Bank’s mission. It is worthwhile noting that Wolfowitz was one of the architects of the U.S. military initiative against Iraq.

At this early stage, it is apparent that World Bank officials are far from unanimous in their support for Wolfowitz’s stance regarding Iraq. World Bank veteran of 30 years, Christiaan Poortman, Vice President of the Bank’s Middle East operations, resigned last year because he opposed Wolfowitz’s ideas about increasing lending and adding staff in Iraq. Further, others contend that in the absence of a functional banking system and governmental control, there can be absolutely no guarantees of loan repayment. Critics believe that development projects in Iraq at this stage should be funded by donors’ grants not World Bank loans.

Questions
1. How can the World Bank best assist Iraq in its developmental efforts, or is it too early to even think of World Bank intervention in this regard?

World Bank Refuses to Finance India's Purchase of Condoms

Sources: India in Dispute Over the Price of Condoms, HIV/AIDS - India, South Asia - AIDS in South Asia Report

India is the site of more than 60% of Asia's HIV infections. UNAIDS approximates that, as of 2005, 5.7 million Indians could be carriers of HIV. In response to the first reported AIDS case in India in 1986, the government established a National AIDS Control Program, whose primary goals include monitoring HIV infection rates and prevention. In a recent effort to keep the epidemic under control, the Indian government has made a bid for aid from international financial institutions to fight the epidemic; however, the request was subsequently denied. The World Bank and the UK's Deptartment for International Development rejected India's request for financing the Indian government's purchase of condoms, citing a lack of transparency in procurement procedures as the reason behind the refusal.
The Indian government purchases condoms from state-owned latex manufacturers. The complaints harbored by many HIV prevention organizations is that the government of India is giving prefernce to domestic manufacturers - a preference that translates into the government's paying 25-40% more for condoms than the average world market price. The director-general of the National Aids Control Organization, K. Sujatha Rao, defends the multi-million dollar contracts with domestic companies by claiming that the quality of condoms from international manufacturers have questionable quality.
Although the World Bank has refused to provide financing for this leg of India's program to fight the HIV/AIDS epidemic, it has provided aid to India to help control the infectious disease. For instance, it credited the government of India with $84 million to help launch the first National AIDS Control Project. The World Bank later financed India with $191 million for the second National HIV/AIDS Control Project.

Questions:
1) Should the World Bank and other international financial institutions deny India financing in this situation?
2) Should India assign some of its contracts for condoms to international manufacturers?
3) What would be the major benefits and disadvantages if India chose to keep the contracts with domestic manufacturers?

Little gains for European stocks

Source: "European stocks surrender gains" - CNN

After days of sharp decline, stocks in Europe lossed what had been early gains as investors remained cautious. The stocks hovered around their opening 2007 levels. Europe is just one of several regions where the stock markets have seen incredible losses the past week.

Experts believe there is yet a ways to go before the markets are “out of the woods,” but believe that some confidence is beginning to return to investors: the FTSEurofirst 300 infex was up by about 0.1 percent at 1,483.6 points, having lowered from its midday high of 1,495.2.

All of this follows a tumble in global equity markets on Tuesday as investors feared a plunge in Chinese stocks, coupled with continuing concerns over Iran’s position on nuclear development and the U.S. mortgage market.

Despite all of this, OIL companies in the region continue to prosper: BP and Shell were both up 1% as crude prices climbed above $62 a barrel.

Question:

- Are current market conditions going to persist indefinitely?