US, EU reach deal on Internet Gambling

Sources: InformationWeek, Financial Times

On Monday, December 17 the EU and the US entered into a new bilateral deal includes opening up opportunities for research and development, storage, warehousing, and postal sectors. This American offer was in compensation for the closing of the US market to online gambling companies. The United States has also reached similar agreements with Canada and Japan.

The agreement was met with mixed reviews—primarily negative from the gambling sector. Clive Harkswood, the chief executive of the gambling trade association, says that the companies will be losing approximately US$ 4 billion in revenue per year.

Several major online gambling have seen drops in their share value, and the new deal likely will not change their values. Accordingly, the Remote Gambling Association, the trade association representing gambling interests, has filed a former complaint under the EU Trade Barriers Regulation. The complaint asks the EU to "investigate discriminatory enforcement as an illegal barrier to trade." The RGA claims that the “US Unlawful Internet Gambling Enforcement Act,” or the “UIGEA,” outlaws foreign online gaming companies while allowing US companies to not suffer.

The WTO has already looked favorably on these types of claims against the United States. The WTO has already ordered the US to grant compensation after it refused to open up the sector. Furthermore, the WTO will soon rule on Antigua’s US$ 3.4 billion request for compensation.

DISCUSSION Question:

If the WTO forces the United States to pay compensation for the closing of the online gambling market, can the US renegotiate its deal with the EU? What else could happen, if the United States is slapped with a multi-billion dollar penalty?

China to Play a Greater Role as Donor at the World Bank

Source: World Bank works with Chinese on Africa; China to Play Greater Role in World Bank

On December 18, 2007, World Bank President Robert Zoellick visited Li Ruogu, the chairman of the Chinese Export-Import Bank to discuss the possibility of conducting joint development projects in the future. The visit also addressed international concerns about Chinese lending in Africa. China has distinguished itself from other donors by not attaching conditionalities to its loans; however, it has yet to provide guarantees of debt forgiveness, either.

Zoellick’s visit reflects the change in the World Bank’s approach to China. The Bank is now working to accommodate China as it transitions from recipient to donor country. As Zoellick noted at his meeting with Li, China has recently made donations to the International Development Association at the World Bank. The Bank is now seeking to recruit more Chinese staff.

Discussion:

Should the World Bank give China more voting power within the Bank as part of that country’s transition into a donor country? Why or why not?

Bank of the South Launched

Sources: Why South America wants a new bank; Bank of the South could be an ‘opportunity:’ IMF chief

Seven Latin American countries established the Bank of the South—an alternative regional development bank—on December 9, 2007. While the Bank is widely understood to be part of Venezuelan President Hugo Chavez’s anti-American political agenda, it is reflective of a general sentiment in Latin America that the World Bank and the International Monetary Fund (“the IMF”) have not been responsive to their needs. Argentina, Brazil, Bolivia, Ecuador, Paraguay, Uruguay, and Venezuela signed the founding documents. Chile, Peru, and Colombia have postponed their decisions to join the Bank.

Despite its launch on December 9, the Bank still needs to finalize the Bank’s operational procedures. The seven founding members disagree on how funds should be raised.

Some observers have dismissed the Bank as simply another outlet for Chavez’s political motivations. However, others—including former World Bank economist Joseph Stiglitz and the current IMF Managing Director Dominique Strauss-Kahn—have suggested that the Bank may assist in the international development efforts by providing competition to the more established international financial institutions.

Discussion:

How should the Bank of the South define itself in relation to the World Bank, the IMF, and the regional development banks? Given Chavez’s express dismissal of these institutions as America’s puppets, how do you think that the new bank will cooperate with the existing institutions?

A Troubled UK Economy

source: Record UK deficit heads wave of bad data
Despite government assertions that the UK economy will “weather” global financial storms, the credit squeeze continues to wreck havoc on financial health. Data from the first eight months of the financial year reveal the worst public finance deficit ever as well as an annual drop in new mortgage lending. The Office for National Statistics revealed that the current account deficit widened from £13.7 bn to a record £ 20 bn in the third quarter. This deficit is equivalent to 5.7 percent of the gross domestic product, leaving Britain with the largest current account deficit in the group of seven leading countries. Analysts suggest that the sudden and deep deterioration in public finances will result in a shortfall of tax revenues.
The rapid increase in the current account deficit is largely attributed to big revisions to foreign investment incomes. A gap the large between what Britain spends and what it produces has never proven sustainable, leading to either falling currency to boost exports or a sharp slowing in spending to curb imports.
Similar worries plague the housing market. The Council for Mortgage Lenders said that gross mortgage lending last month was 8% lower than in November 2006. This marks the first annual decline in more than two years. The Council attributed the trend to a lack of available funding.

Questions for discussion
1. Is Britain’s financial trouble likely to affect its position in the global economy? If so, in what way?

Kazakhstan’s Credit Crisis

Source: Kazakhstan's Bank Lending Frozen in Subprime Squeeze (Bloomberg)

Kazakhstan is experiencing a credit crisis as much of the $40 billion that Western Investors have brought into the country is not evaporating. As one analyst notes, international credit markets crumbled after the fallout in the United States subprime mortgage market.

Quantifying the problem, Kazakhstan banks' sales of Eurobonds and syndicated loans, dropped from $8.6 billion, in the first eight months of 2007, to $300 million in the following three months. Other metrics show a similar economic problem. Not all analysts and players are pessimistic about the present and future. The chairman and principal owner of Kazakhstan's second-biggest financial institution, Ablyazov believes “that some seven to eight months will pass, and we will cope with the situation.''

After the discovery of the Kashagan oil field in 2000, Foreign investment increased dramatically. The new wealth is transforming what had been an “economic backwater.” To fund consumer and business demand for credit, Kazakhstan's banks jumped into international markets. As a result of the influx of foreign money, the country's banks grew their assets 10-fold since 2002, to $94.7 billion as of Nov. 1.

However, the aforementioned credit crisis has caused a reversal. From August through October, $6.8 billion in foreign currency flowed out of the country—28 percent of the central bank's total. To combat the recent problems, the government pledged to support the lenders' needs with up to $4 billion on Nov. 14. Many analysis do not see a recession in Kazakhstan’s future, rather they see more moderate or flat growth in the new future.

Questions for discussion: (1) What effect will the Government’s pledge have on the economy; (2) How deep and long-lasting will the credit crisis be in Kazakhstan?

Hiatus

This blog will be on a hiatus for the holidays beginning December 24 and ending January 14. Please visit our blog in January for more news and events in the international finance and development community.

IMF’s expectations for Canada’s economic outlook take a change for the worse

Source: IMF lowers Canada's 2008 economic outlook

The IMF expects a lackluster year in 2008 for Canada, having on Wednesday decreased its projections for its economy from its original projections earlier. The IMF gives as a reason for this downward trajectory Canada’s neighbor and largest trading partner: The U.S. Unfortunately, because of the poor shape of the U.S. economy, Canada is being dragged down as well.

As recent as October, the IMF had projected that Canada could expect economic growth in the 2.3 percent range, but now says that is not going to happen—however, the Fund wouldn’t commit itself to saying exactly how much less than 2.3 percent growth would be, claiming instead that a firm figure will be published in early February.

The IMF further said that this downward trend will continue as pressure from external factors and an increasingly weakened US and Canadian dollar take their toll on the countries’ respective economies; accompanying this will be a slowing down of domestic demand in both regions.

Nevertheless, the IMF commended the Bank of Canada’s choice to cut interest rates down to 4.25 percent in early December, undoing damage done by a point hike that had occurred in July.


Question: Would a simple increase in domestic demand be enough to save Canada from this economic downturn?

China From “Prudent” to “Tightening” Stance on Monetary Policy

Sources: China Shifts to Tighter Policy

China announced this week that it will tighten its monetary policy, which analysts say indicate their concern about their economy’s growth rates. Beijing officials announced that they worry about the increasing rate of investment, which is the main factor in the acceleration of the economy. They are concerned that inflation in the food sector will soon spread into other sectors. China’s economy has grown by almost 12% already this year. A poll of investment bank economists revealed that they expect China’s economy to grow by more than ten percent again in 2008.

Question:

What are some of the social effects that are likely to result if China is unable to stabilize its growth?

Korean Leaders Meet to Implement Summit Agreements

Sources: Korea Premiers in Rare Meeting, Korean Prime Ministers Meet

North and South Korea’s prime ministers met in mid-November in a follow-up meeting to the summit held in early October. The goal of the meeting was to discuss implementing the agreements reached during the summit. One of the agreements reached was to establish a fishing area to be used by both countries. They discussed setting this area up in the Yellow Sea, near a region that has historically been a point of dispute between the two countries.

One hope held by the South Korean government is that such economic cooperation will solidify the denuclearization of North Korea. South Korea is also going to provide a large aid package to North Korea, which some estimate could cost billions of dollars.

Question:

What might be some of the social effects (positive and negative) of the efforts towards inter-Korean economic accords?

U.N. Seeks to Reduce Burden on China and India to Reduce Carbon Emissions

Sources: U.N. Focuses on Carbon Burden, U.N. Carbon Tax Advocacy Opens Old Wounds

A report by the U.N. Development Programme recommended that countries like China and India should not be required to carry the full or even equal burden in reducing carbon emissions in light of the fight against climate change. It suggested that these countries be required to reduce their emissions by 20% by 2050, while the industrialized countries, such as the U.S. aim for an 80% cut.

The White House announced that it would not sign onto any agreement that did not include China and other similar rapidly developing countries. Debates about the share of the burden of carbon emission reductions were a focal point of U.N. meetings on global warming in Bali, Indonesia. The report estimates that the world needs to spend 1.6% of gross domestic product every year until 2030 to keep carbon emissions below dangerous levels.

Questions:

1) Do you think it is fair for the U.N. to recommend that industrialized countries shoulder most of the burden in the fight against global warming?

2) What might be some alternative solutions or compromises?

Gazprom Considers Investment in Bolivian Natural Gas

Source:
Financial Times - Gazprom Eyes $2bn Gas Deal in Bolivia

After the nationalization of Bolivia's energy sector last year, the country is now the target of a potential $2 billion natural gas investment from the Russian energy giant Gazprom. Although some foreign companies still operate in Bolivia, the decision to nationalize and the rhetoric from Bolivian leader Evo Morales have made foreign investors hesitant. Bolivia has the second-largest gas reserves in Latin America, behind Venezuela.

Bolivia is not currently producing enough natural gas to meet its commitments to Brazil and Argentina. It is estimated that Bolivia will need $3.2 billion in investment in order to keep pace with their foreign export commitments, increasing production to 75 million cubic meters per day from 39 million cubic meters per day.

The Bolivian government, through its state-owned company YPFB, would prefer to partner with another state-owned entity such as Gazprom. State-owned energy companies have become more important in the past several years, as governments seek to take direct advantage of their natural resources.

The interest from Gazprom comes amidst a new $750 million investment in Bolivia from Brazil's state-run Petrobras company.

Chile Leads Region in Information-Technology Use

Source:
El Mercurio (Santiago) - Argentina desplaza a Chile en Celulares por Habitante


Chile is the most technologically-savvy country in Latin America, according to a new study released by that country's University of Navarra. In a survey of consumers in Argentina, Brazil, Chile, Colombia, and Mexico, it was Chile that had the largest number of internet users per capita as well as the most computer owners. Chileans also spent the most on information technology products each year.

However, Argentina displaced Chile as having the most cell-phone users per capita, with 977 per 1000 people compared to Chile's 828 per 1000 people. This is the result of Argentina's explosive 40% growth in cell phone usage within the past year alone.

Nevertheless, the study concluded that Chile was overall the most technologically-advanced of those countries surveyed. Chile has 360 internet users per 1000 people, and computer ownership increased to 263 per 1000 people. Chileans spend around $489 per capita annually on technology information products and services. This is in contrast to Mexicans, who spend a region-low $269 on comparable goods and services. However, even Chilean consumer spending pales in comparison to United States technological spending: $4,136 per person annually.


Discussion:
1. Does Chilean and Argentine consumer spending on technological items demonstrate a greater innate desire for these items, or is it merely a symptom of those countries' relatively high standard of living and economic success?

Investors speculate on the future of Egypt's economy as Mubarak prepares to step down

SOURCE: Voice of Bahrain: Gulf Daily News—“Succession Fears May Hit Egypt Growth”

Reports today suggest investors are nervous about what will happen to the Egyptian economy when its current leader, President Hosni Mubarak, steps down. Mubarak is seen as having been successful in keeping social pressures in the Arab country under control during his administration.

However, some analysts suggest that signs point to the transition being a smooth one, noting the nearly 45% rise in the Egyptian stock market and appreciating currency.

They also point to speculation that Mubarak is grooming his forty-three year old son Gamal to succeed him. From an economic standpoint, it is thought that he would do well as is credited with spearheading the reforms that have led to dramatic growth in the Egyptian economy.

FOR DISCUSSION:

How might a country preparing to undergo transition of political power protect its economy from nervous investors?

Africa-EU summit addresses some issues, but not Darfur.

SOURCE: Deutsche-Welle—“First Verbal Shots Fired as Leaders Gather for EU-Africa Summit

This week, representatives of nations of the European Union (EU) and the African countries met in Lisbon for a summit that is to focus on the relationship between the continents. The EU is Africa’s biggest trading partner, but China trade between China and African nations is growing rapidly.

The summit began controversially as Britain’s Prime Minister Brown boycotted the event in response to the presence of Zimbabwean President Mugabe. Additionally, Libya’s leader Moammar Ghadafi began by asserting that the European nations that carved up and colonized Africa should now pay reparations for the damages caused. Reports indicate that while the majority of African leaders may not share Ghadafi’s views, his words underscore the uneasy relationship between the continents, borne from Europe’s imperialist past.

Other issues that will be raised at the summit include African nations’ discomfort with the economic partnership agreements “EPAs” that it feels the EU is attemting to pressure them into accepting. South Africa, the continent’s largest economy has asserted that “detrimental issues” in the EPAs—which most African countries view as unfavorable to their interests—needed to be addressed.

For the Europeans, charges that Zimbabwean President Robert Mugabe has committed scores of human rights abuses and undermined that nation’s economy is high on the list of issues to address.

FOR DISCUSSION:

Do you believe that the issues to be addressed at this summit are relevant? Are there more pressing issues, such as the genocide in Darfur, that should be on the table?

UK Blocks EU efforts to broaden benefits for temporary workers

Source: UK Blocks EU Drive for temps' job rights

Gordon Brown only narrowly avoided being outvoted on a draft directive that would award temporary workers full pay after six weeks. Britain was among only a few states opposing the directive, perceiving it as an imminent threat to its flexible labor markets. Although it appeared at one point that the ministers would obtain the broad consensus necessary to pass the law with a qualified majority, Portugal, chair of the meeting, said that such an agreement was not possible and opted against a vote. This failed legislation is illustrative of the underlying divisions in Europe over social laws.
British employers praised Brown’s success. Business leaders in London argued that the law would impose extra costs on employers as well as making work less flexible. The CBI employers’ body argued that this legislation would result in the loss of a quarter of million UK jobs. A majority of British employers support an award of full pay for temporary workers after a period of six months, rather than six weeks.
The unions, however, expressed “real anger” that the UK government played such a pivotal role in blocking the progress of this proposed legislation. Currently, Britain and the unions are engaged in a long-running dispute regarding the union’s maximum 48-hour work week. It is possible that protecting Britain’s exemption to the work week maximum may require an acceptance on the proposed rights of temporary workers. However, at this point, union leaders say that such a coercive agreement would be “ a terrible way to do business.”

Questions for Discussion
1. Are the ongoing negotiations with the unions likely to force Britain to agree to increase benefits for temporary workers?

World Bank gets lackluster marks in new report released by its own Independent Evaluation Group

SOURCE: Independent Evaluation Group—“Development Results in Middle-Income Countries, An Evaluation of the World Bank’s Support

A report on the World Bank's continuing work with Middle Income Countries (MICs) was released in September of this year. There are 86 MICs across the globe, on every continent save North America, Australia and Antarctica (the first two due to the relative wealth of the nations situated there, the last because no one lives there). For example, on the African continent fourteen countries are identified as MICs. These include all the countries along the continent’s northern coast and southern region, as well as three isolated outliers: Gabon and Equatorial Guinea in the east and Djibouti in the west. Central Africa is not represented.

In general, the report, conducted by the Bank’s Independent Evaluation Group (IEG), found that while the Bank had focused efforts on bettering tailoring its programs to meet nation-specific needs, there is still room for significant improvement. While the Bank’s efforts have promoted growth in MIC countries, the cost has been rising inequality and inadequate social programming. This is particularly problematic given that MICs are home to one third of the world’s poor. Additionally the report notes that more attention needs to paid to environmental issues associated with Bank projects in these countries and that internal cooperation between the various Bank programs to realize the best outcomes in MICs has been “underwhelming.” Another area of concern is the failure to incorporate MICs in shaping global planning—this is troubling given the number of countries in this group and that at least one rising economic powerhouse, China, is an MIC.

At the same time, the IEG implies that part of the problem for the Bank is the rapidly changing needs of the MIC client population. While the report is not a glowing one—it frankly sounds as though the Bank is struggling with this sector, which is the recipient of two thirds of its assistance—it recognizes the challenging nature of the task the Bank has set itself. On a different note, the candor with which the IEG sets forth its statement of areas where the Bank has fallen short convinces one that it is in fact independent, for it is unlikely it could have published such a report otherwise.

Click here to download the full report and view interactive maps of the MICs.

FOR DISCUSSION:

How might MICs be better incorporated into global planning?

Fed Cuts, Again?

Sources: CNN Money, Financial Times, Chicago Tribune, San Francisco Chronicle

Will the United States cut interest rates again? The Federal Reserve suggested last month that it would likely not cut interest rates again, but it is expected that Federal Reserve will interest rates within the next two weeks. Ben Bernanke (Chair of the Federal Reserve) stated that the tight credit conditions, high energy prices, and housing crunch will lead the central bank to be “exceptionally alert and flexible.” Over the past week, stock markets in London, Hong Kong, Japan, and the US all gained on the Fed Chair’s comments. On Friday, London’s FTSE closed 2.7 percent higher. The Dow Jones rose 59.99 points, gaining three percent for the week.

Domestic US economic reports also led to speculation that an interest rate cut is coming. Spending and income slowed in October—and the actual growth in spending was not due to additional purchases but rather increased prices. These are signs of a slowing economy. Furthermore inflation is exactly on par with economists’ forecasts, giving the Fed Reserve a go-ahead for interest rate cuts. Some senior economists believe that, in light of the slowing economy an interest cut is recommended. According to one, it’ll “lower stresses on the banking system.” However, it could add pressure to the weakening dollar.

Question: Will interest rates drop to the lows from several years ago? And will this be the last time the Federal Reserve cuts interest rates in the near future?

World Bank reports on Thailand’s economy

Sources: Business Week: World Bank: East Asian growth robust; Bangkok Post: Thailand's economic growth lowest in region, World Bank says; China View: World Bank urges Thailand to enhance economy

The World Bank has requested the new Thai government to aggressively clarify its ambiguous state policies. The World Bank estimates Thailand’s economy is growing by 4.3% in 2007, the lowest in five years and also the lowest in the region. Thailand has suffered from waning investor confidence and a stagnant economy. The World Bank believes that private investment will greatly help Thailand’s economic recovery. The World Bank economist for Thailand stated that investors and the public are waiting to see indications of a clear direction regarding the new government’s policies which influence their confidence.

The World Bank believes that Thailand’s prospects in 2008 are better if the country can overcome its political uncertainties. Milan Bramhbhatt, author of the World Bank's East Asia Pacific Update, commented "Given that exports are going good, once the political questions are resolved, it is possible the economy could experience a sharp snapback and growth could improve quite significantly." In September 2006, Thailand experienced a military coup. Since then, it has been under an interim military-appointed government. The new government will be formed after the December general election and will likely be in place by February.

The World Bank estimated that East Asian economies are likely to remain healthy. East Asia’s economy was expected to grow 8.4% in 2007 and 8.2% in 2008. For example, the World Bank estimated that in 2007, Indonesia’s economic growth would reach 6.3%, Malaysia would reach 5.7%, the Philippines would reach 6.7%, Vietnam would reach 8.3% and China would reach 11.3%.

For discussion:
Are countries headed by military commands always subject to worldwide investment disfavor? If so, why?

A Step Toward An Economic Zone In The Caucasus

Source: Eurasia Daily Monitor “Former Soviet Republics and Turkey Back Economic Zone In Caucasus”

Turkey is making progress towards creating an economic zone in the Caucasus. The latest evidence is the November 21 launch of the Baku-Tbilisi-Kars (BTK) railroad project that will link Azerbaijan and Georgia with Turkey. However, obstacles remain. The biggest obstacle is the dispute with Armenia and Azerbaijan. Many international financial institutions have not supported the proposed economic zone because of the aforementioned dispute. As a result, Azerbaijan, Georgia, and Turkey have financed the $420 million project.

The recently completed railway, which will eventually connect Far Asia with Europe, is also open to other countries. Turkish President Abdullah Gul said, “This project is very important for the regional peace, stability, and prosperity.” The Turkish President added, “we are in fact taking a step toward the realization of a big project that will change history.” The idea for a railroad began in 1993. However, disputes and blame between the region’s countries prevented the idea from coming to fruition.

The railroad is important to the bigger picture as it demonstrates the necessary road, air, and railroad connections the joint economic zone will require. Turkish President Gul conveys Turkey’s optimism about the project and the larger economic zone. On a related note, bilateral trade between Georgia and Turkey is planned to reach to $1 billion by the end of this year, as the two countries negotiate a free-trade deal and an agreement to prevent double taxation.