Monday, March 31, 2008

Potential Victory for Opposition in Zimbabwe


Voice of America—“Official Results Show Dead Heat in Zimbabwe Elections; Opposition Claims Big Lead”

BBC NEWS—“Profile: Morgan Tsvangirai”

More than forty-eight hours after polls closed, there is no announcement yet from Zimbabwe’s election commission as to the outcome of the nation’s presidential elections. The opposition party, Movement for Democratic Change (MDC), led by founder Morgan Tsvangirai, claims that it has ousted incumbent President Robert Mugabe of the ruling Zimbabwe National African Union—Patriotic Front (ZANU-PF) party. As time passes without announcement of official returns in the election, other governments have expressed concern over the possibility of “mischief.”

President Mugabe has led Zimbabwe since its independence from British rule in 1980. His tenure has been a controversial one, in no small part as a result of his “indigenisation” efforts that critics claim have played a role in wrecking the nation’s economy. Mugabe has also been accused of human rights violations.

For his part, Mr. Tsvangirai, leader of the MDC, got his start in a labor union and is seen as the voice of a younger generation of Zimbabweans. He was instrumental in defeating President Mugabe’s campaign for a constitutional amendment that would permit eviction of white farm owners without compensation and is seen as being committed to turning around Zimbabwe’s floundering economy.

Cuban Reforms

Sources: CNN-International, Reuters

Cubans can now stay at tourist hotels—if they can afford them. The average monthly wage in Cuba is less than $20 per month, while the hotels cost anywhere from $60-$200 per night. Nevertheless, it is some of the major reforms Raul Castro promised, as he opened up hotels previously inaccessible to natives. This follows other reforms in which computers, DVD players, and microwaves could be purchased by native Cubans. Furthermore, cell phones can now be purchased and used by Cubans.

Raul Castro has acted to implement reforms quickly since taking over in February 24th. He promised a series of reforms to “do away with excessive restrictions” in Cuba. The most recent reforms also respond to critics who called the hotel ban a form of “economic apartheid.” The ban was implemented after the fall of the Soviet Union in 1991, and had been a source of great consternation for many natives. Before the ban was lifted, only specially selected Cubans could stay at tourist hotels.

Question: Are these basic reforms the start of a broader democratization movement—or will it be small reforms?

North and South Korea's Icy Relationship

Sources: Financial Times, Korea Times

The relationship between the two Koreas has begun to sour under the current president. When Lee Myung Bak took over the presidency last month, he promised to hold a “tougher line” against North Korea. The two Koreas have been engaged in a “sunshine policy” over the last ten years, and while the icy relations have melted somewhat, the North still acts in a renegade fashion. President Lee has promised to hold North Korea accountable, and has threatened to not expand the inter-Korean economic zone until North Korea provides details on South Korean abductees and its secretive nuclear projects. In retaliation, North Korea has threatened to attack South Korean vessels, and have fired short-range missiles into the maritime border.

More recently, the relations between the two states took a hit when a South Korean official commented on a possible pre-emptive strike to take out North Korean nuclear armaments. North Korea has requested South Korea retract those remarks, and have called it the “gravest challenge ever in the history of the inter-Korean relations and a reckless provocation just short of a declaration of war.'' The North threatened to respond to any “slight move for a pre-emptive attack with more rapid and powerful pre-emptive attacks.” South Korea, however, appears to be puzzled at the North Korean saber-rattling. Government officials claim that``JCS Chief Kim did not use the term ``preemptive strike,'' so I don't understand what remark we should withdraw.''

Question: It appears as if the “sunshine” policy has been unable to fully melt the tensions between the two Koreas. What, if any solution, is there to more fully bring North Korea to the diplomatic discussion table?

Tuesday, March 18, 2008

Agricultural strike in Argentina a challenge for President Fernandez

SOURCE: The Guardian—“Argentine farm strike exposes stubborn conflict”

Argentine farmers have been on strike for about a week in response to government hikes on export taxes of agricultural commodities such as grains, milk, and beef. The increased export taxes were crafted to prevent the price of food staples from inflating and thus becoming unaffordable to the more than 20% of the population that lives below the poverty line.

The farmers claim that the taxes are hampering natural market flows and “killing the countryside.” The government has responded that the farmers—which are represented by four large associations—are “greedy oligarchs” and have “spun” the conflict as one between the people who need access to foodstuffs and the wealthy few. The farmers object strongly to the characterization.

The news in Argentina has been riveted on tractor blockades of major roads that have been organized by the farmers in protest of the tax hike. Latest news reports indicated that the impasse between the government and the agricultural sector remains and that the strike could continue indefinitely.

The strike is the first big challenge facing President Cristina Fernandez, who was elected in December of 2007. The agricultural sector has cried foul, stating that President Fernandez broke campaign promises to communicate with industry sectors prior to making moves like the tax hike on exports.


What role should industry have in shaping government policy?

Monday, March 17, 2008

Guatemala's economy threatened by looming energy crisis

SOURCE: La Prensa Latina—“Guatemalan Government Sees Energy Crisis”

Guatemala is facing a potential energy crisis due to outdated infrastructure that requires expansion and updating in production, transmission, and distribution, government officials report.

Currently, the nation is fueled primarily by oil combustion, which is increasingly unsustainable due to rising costs. The government seeks to attract investment to replace some of this consumption with renewable energy sources—Guatemala is rich in rivers and waterfalls—and cheaper fuels such as coal.

Romeo Rodriguez, the nation’s Energy and Mining Minister, stated that unless preventative steps are taken, it will be impossible to meet growing energy demands, resulting in “severe effects” on the national economy.

FOR DISCUSSION: Energy crises appear to be a growing problem for some developing nations and regions (see, for example, earlier posts on energy crises in South Africa, Botswana, and Nigeria) and can threaten to destabilize otherwise healthy (or at least growing) economies. What role, if any, should multinational organizations like the IMF and World Bank play in helping ensure effective investment in energy infrastructure? Should such assistance focus on sustainable and/or cleaner energy sources?

Sunday, March 16, 2008

Energy crisis means spike in gold price leaving South Africa behind

SOURCE: AFP—“South Africa unable to profit fully from gold price hike”

South Africa has been struggling through an economic slump recently, in part due to a nationwide energy crisis. The government has rationed energy consumption across the board as it works to expand infrastructure to increase production.

Gold mining, a mainstay of the South African economy has been hard-hit. Rations initially required the mining industry to operate at 90% and later 95% of typical consumption levels, but industry officials report that the move has led in production cuts of between 20% and 30%. As a result, the peak last week peak in the price of gold—which for the first time hit $1,000 per ounce—has not provided as big a boon to the South African economy as it would have were the mining industry operating at peak production levels. Paradoxically, even as the price of gold peaks, industry officials forecast having close mining shafts and cut as many as 7,000 jobs because of forced decreases in production resulting from the energy crisis.

South Africa is among the top gold producing countries in the world. It was only recently surpassed by China as top producer.

Inflation in South Africa is currently at 9%, well exceeding the country’s target of between 3 and six percent. The nation has also downgraded forecasted growth.


Should the South African government make special allowances to permit industry to operate at full capacity in efforts to pull the country out of its economic slump? Why or why not?

Saturday, March 15, 2008

World Bank & Local Bonds

SOURCES: Financial Times

The World Bank has recently cracked down on a problem in global emerging markets by building local currency bond markets to permit countries to finance long-term needs. The World Bank planned a $5 billion fund in the first public/private initiative. Rising economies pull additional investments through local currency bond markets. If countries borrow in their own currency, then this would remove the risk of dollar-denominated debt. The International Bank for Reconstruction and Development and the International Finance Corporation will be sponsored by investments sough by the fund manager. Currently, there is no designated fund manager, but should be chosen by next month.

Once elected, the fund manager will seek investments from private institutional investors, sovereign wealth funds, and central banks. The World Banks anticipates the fund manager to raise approximately $5 billion by next year. More recently, central banks and other investors hope to branch out away from dollar-denominated debt. In addition, sovereign wealth funds have risen as a new resource of liquidity. World Bank employees believe the fund has potential because of all emerging market debt, approximate 70 percent in local currencies.

However, only 10 percent of the $200 billion in market assets managed by fund managers is devoted to local currency debt. The goal of the World Bank is to change local bond markets into a mainstream asset class, according to Oliver Fratzscher, senior financial economist in the World Bank’s capital markets department. In the past five years, private sector upcoming market local currency bond funds have multiplied.

However, the bonds alone did not come from investor interest; instead, it went to derivative instruments. The World Bank believes that this approach may lead to a short-term investor perspective and may cut short the liquidity in the local currency bond markets.

Will the money put into strengthening local currency bonds gain only a short-term response from investors? Will the World Bank’s focus on local currency bonds alone be enough to help countries finance long-term needs?

Islamic Finance Expands

SOURCES: Financial Times

In the past, Islamic finance has been mostly limited to commercial banking in specific regions, like the Middle East and Malaysia. Islamic finance has been limited because the strict interpretation of the Koran forbids the utilization of interest in business dealings. However, the past few years have been a change of pace. Islamic markets have recently expanded due to the Gulf’s financial liquidity from oil and the increasing Muslims looking for only religiously endorsed products. Many have been stunned by the growth.

One Islamic scholar from the Dubai Islamic Bank called the past decade of growth extraordinary. The Islamic financial market’s innovative ideas have played a strong role in the market’s growth.

New contributors, investors around the world and large western financial institutions, have played a helpful role. The growth in the Islamic financial market has raised serious concerns. As a result, there is a heightened need for additional regulation and supervision. The UK has played a key role in Islamic finance. There are two Islamic banks currently in the UK. There, Islamic bonds are advertised to international investors.

There are $300 billion controlled through Islamic laws and 280 institutions. These institutions include commercial banks, investment banks, and investment funds that focus on providing Islamic goods. Islamic financial services used to be only part of a niche; however, now the Islamic financial services are becoming part of the mainstream markets. Currently, Islamic banking represents only 1 percent of global banking. But most expect the pace of growth to continue to increase in the next several years.

Nabeel Shoaib, global head of HSBC Amanah, the bank’s Islamic finance arm, believes that in eight to ten years the Islamic financial market could gain half the savings of the 1.6 billion Muslims worldwide. The Islamic financial market has grown not only from economic factors, but also political factors. The outcome of the September 11 attacks united the Islamic identity in the Muslim world. This unification prompted more to find ways of communicating religious conviction.

Can the Islamic financial market grow faster than it can handle? Would economic success continue if oil prices began to decrease?

Wednesday, March 12, 2008

Slowed Swedish Privatization

Source: Sweden privatization scheme faces delays

It appears that Sweden’s privatization program, a campaign promise made by the centre-right government nearly 18 months ago, is the most recent victim of the turmoil in the global financial markets. The government, led by Prime Minister Fredrik Reinfeldt, is in the process of selling interests in six separate companies by 2010, including the banking group Nordea, mortgage lender SBAB, and TeliaSonera, a telecommunications company. This plan marks a clear break from Sweden’s socialist past, which allowed the free market a greater controlling influence in the economy.

Minister for Financial Markets, Mats Odell stated that the government is “evaluating time and price,” and that “it is possible that subprime events will have repercussions on our agenda.” He maintained that he is confident that the government will reach its original goal of raising SKr200bn ($33bn, £16bn) by 2010, but admitted that it might not be able to sell all six companies as originally planned. So far, the government has raised only SKr18bn from the sale of 8% of its 45% stake in TeliaSonera and SKr2.2bn from the sale of its 6.6% interest in OMX, a stock market company.

Mr. Odell acknowledged that the current market presents particular challenges to two of its planned sales—SBAB, a mortgage lender, and Nordea, a bank. Although the government plans to sell 100% of its interest in SBAB, Mr. Odell said that this sale might need to be put on hold, because “mortgage lenders are not exactly the top of everyone’s list.” Similarly, the government intends to sell its 19.9% interest in Nordea, but, again, Mr. Odell acknowledged that the markets are not ideal for selling banks.

The program is expected to receive a boost in the next few weeks, however, when the government announces the sale of Vin & Sprit, the maker of Absolut Vodka, for up to $7bn. Additionally, the government hopes to sell its 100% interest in Vasakronan, a property company, as the property market is showing early signs of weakening.

Tuesday, March 11, 2008

IDB notes drop in remittances during 2007

SOURCE: Earthtimes—“Growth of remittances to Latin America slowed in 2007”

The Inter-American Development Bank (IDB) today released a report noting that while remittances sent to Latin America continue to increase, 2007 saw the smallest growth—only a 7% increase—over the prior year. In the past, increases in remittances has posted in double digits.

“Remittance” is the term used to indicate monies sent to friends and family in the usually impoverished home countries of ex-patriots working abroad, usually in wealthier countries. Many developing countries have come to rely on remittances as a vital part of the national economy. There is continuing debate over whether such a trend is desirable or not.

Some nations, such as Brazil and Mexico, actually saw a decrease in the receipt of remittances overall. The IDB report asserts that in Brazil’s case, the decrease is a positive result of the strengthening of the Brazilian economy. There are more jobs and more opportunities and Brazilians are returning home to take advantage of it.

On the other hand, the report states that the decrease is a negative indication for Mexico, where the economy has not improved significantly. The IDB links the decrease to the economic downturn in the United States as well as the increasingly hostile political climate with respect to immigration.


Take a look at UICIFD’s E-Book section on Remittances and Development. What do you think about this issue?

Kenyan peace results in economic upswing

SOURCE: Reuters—“Kenya parliament to speed peace deal through”

Kenya’s economy saw a dramatic downturn from late December 2007 until very recently due to continued controversy over the results of the national election. The ethnic and political violence that followed the contested election resulted in 1,000 deaths and the displacement of more than 300,000 people.

However, peace has been restored and the economy has bounced back to a great extent on the heels of a compromise recently forged between the Orange Democratic Movement (ODM) led by Raila Odinga and the Party for National Unity (PNU) led by Mwai Kibaki. Legislation to ratify the power sharing agreement between the two parties and change the nation’s constitution to permit the same are expected to become law in the next week.

While public opinion supports the return of stability in Kenya, there are growing concerns over the potential effects of the power-sharing agreement that has made that stability possible. For instance, there will no longer be an opposition party, and the agreement has resulted in the creation of new government positions as both parties struggle to ensure that their representatives hold important positions. There is also concern that the focus on the division of power and top government jobs is distracting Kenya’s leaders from problems related to ethnic strife, land distribution, rampant poverty and corruption.


Will the current Kenyan peace will last, or is the power-sharing agreement doomed to failure?

Sunday, March 09, 2008

Peru's economy booms, but is it overheating?

Economic Times—“Peru cuts taxes on fuel, food to curb inflation”
Bloomberg—“Peru’s economy expanded 9.1 percent in fourth quarter”

Reuters—“Peru to grow 6-7 percent for 20 years: finance minister"

Peru’s economy has been booming, expanding almost 9% over the whole of 2007. However, the nation’s rapid growth has fueled fears that the economy is overheating.

The government responded last week to concerns over growing inflation by further cutting tariffs on food and fuel. In October of 2007, tariffs on essential foodstuffs such as vegetables, meat and milk products, were cut by 70%. Last week's cuts reduced the taxes on many of these necessary products to zero.

Peru, which has long been considered an “economic laggard” in Latin America, has become popular with investors as a result of a number of reforms, including tariff reductions on foreign imports and a focus on public investment.

The nation’s finance minister claims that with $30 billion in the federal reserve, Peru is financially bulletproof, but it is not clear that the nation would be able to completely insulate itself from ill affects of a change in investor sentiment.


In a globalized world where much depends on attracting foreign investment, how can a nation best insulate itself from the problem of investor flight?

The developed world's cotton subsidies are crushing west African cotton.

Source: Globe and Mail—“U.S. cotton subsidies rip apart the fabric of Malian life”

Richer nations that do not rely on aid from multilateral institutions like the World Bank subsidize agricultural commodities such as cotton. The United States, for example, dominates the global cotton market as the world’s largest producer. This is made possible by the massive subsidy doled out each year by the US government, which provides domestic cotton producers with between $2- and $3-billion in subsidies each year. China and the European Union also provide sizable subsidies for their cotton producers.

On the other hand, nations like Mali, where the entire GNP (gross national product) amounts to only a fraction of the US cotton subsidy alone, large incentives for agricultural producers are simply not possible. Additionally, Mali and other developing nations that rely on financial assistance from the World Bank are prohibited from providing any subsidy for their agricultural producers.

The seriousness with which the Bank enforces this condition against borrower countries was evidenced in 2004 when the Malian government attempted to protect its farmers from plummeting cotton prices. The Bank cut off all budgetary support to the impoverished nation until the paltry subsidies extended to cotton farmers were withdrawn.

However, the negative effects of over-subsidized cotton from the developed world—in particular the US—is felt by the entire cotton-producing region of western African, not just Mali. With the support of a coalition of west African countries, Brazil challenged the legality of US cotton subsidies before the World Trade Organization (WTO) in 2003. In 2004, the WTO found that the US cotton subsidies were illegal, but the US has done almost nothing to change its policies, instead opting to engage in protracted appeals so as to continue its anti-competitive practices for as long as possible.


Do you agree with the World Bank’s condition on assistance prohibiting borrower countries from providing any subsidies to local producers?

Do you think such a policy is fair given that the Bank’s leading donors provide such heavy subsidies to their own producers?

As long as subsidies are permitted—and used—by the developed world, is it fair to prohibit the developing world from use of this tactic (given that almost all the developing world relies on assistance from the World Bank and IMF)?

Does this policy approach serve to advance the goal of poverty elimination or does it only exacerbate the problem?

Chile introduces a new pension safety net for the elderly poor.

SOURCE: Sign On San Diego—“Chile’s pioneer private pension system add public payouts for poor”

Chile’s privatized social security program will see a big change this coming Tuesday (March 11). The plan as it currently exists only has payouts for those who pay in—a situation that has left those who spend their working years either un- or underemployed with insufficient fund to draw on in old age. As one retired maid whose pension fund is about to run dry put it: “[s]ometimes old age lasts a long time.”

But the program that is to be become law on Tuesday revamps this system, setting up a universal safety net that guarantees the elderly poor a monthly income above the national urban poverty level.

Chile, which has enjoyed a prosperous economy in part due to foreign investment in its privatized pension funds and the high price of copper last year, currently has sufficient funds to support the program, but some economists have raised concerns that it is too generous and could hurt the national economy in the long run.

Others assert that the extra expense in pension payouts will be offset in part—though not full—by decreases in healthcare spending. It is suggested that if Chile’s elderly poor have enough money, they will take better care of themselves and require fewer drastic and expensive healthcare interventions.

Still other observers note that Chile has succeeded with privatization in the pension area thus far and that the expansion of the program to assist the elderly poor is an extension of this success—Chile’s program, they say, is adapting to the needs of the people.


Some critics assert that Chile’s program is too generous to the elderly poor. What is the purpose of a nation if not to serve (all of) its citizens?

“Indigenisation” for Zimabawe

SOURCE: The Guardian—“Mugabe approves Zimbabwe nationalization law”

Zimbabwe’s President Robert Mugabe this weekend approved the controversial Indigenisation and Economic Empowerment Bill, which seeks to allow members of the nation’s impoverished majority to take control of foreign-owned corporate interests, including mines and banks.

The government claims it will work with businesses to set up a timetable for the establishment of local control in an attempt to allay fears of blanket seizure. Many critics compare the indigenisation policy to a much-criticized 2000 land reform program that sought to transfer fertile farmland from British colonists to Zimbabwean natives. The plan was heavily criticized because the removals were often violent and the new landowners inexperienced at farming, resulting in poor yields.

Critics contend that this is yet another disastrous move in a long line of efforts by Mugabe, who has led Zimbabwe since the British withdrew from colonial rule in 1980. While critics point to the 100,000% inflation rate and investor flight to support their claims, they provide little to no commentary on the proper manner to remodel the Zimbabwean economy towards a structure that is inclusive of the majority indigenous population, which was oppressed an excluded from the economy during the nations colonial period, which lasted from 1890 to 1980.

Mugabe faces a re-election fight later this year and some critics claim that this move is directed at gaining popular support from the impoverished majority.


Some observers accede that the indigenisation program is an attempt to restructure Zimababwe’s economy, which still suffers from inequities that were reified during nearly a century of colonial rule.

President Mugabe is widely excoriated as a ruthless dictator, and as a result may not be the best spokesperson for the effort to heal Zimbabwe’s economic and cultural wounds in this post-colonial era. However, other countries, such as Mexico and Venezuela, have nationalized valuable natural resources in efforts to reclaim economic power that their leaders felt had wrongly been turned over to foreign interests.

How are developing nations recovering from colonial rule to establish a government that truly works for the interests of its own citizens if the economic structures and benefits established under colonialism are permitted to remain?

Saturday, March 08, 2008

US Job Report Keep Fanning Fears of Recession

Sources: Toronto Star, Financial Times

February’s US job report delivered another strike to the already frail US economy. Employers slashed 63,000 jobs in February. That is the most job cuts in five years. The national unemployment rate fell to 4.8 percent from January’s 4.9 percent. This was a product of job seekers leaving the employment force. Additionally, January’s job report was revised from 17,000 lost jobs to 22,000 lost jobs.

This job report, which was worse than predicted, is expected to force the Federal Reserve’s hand in lowering interest rates again. Experts had predicted a net gain in jobs—not a net loss. Commerce secretary Carlos Gutierrez noted, “We are disappointed any time you see a number showing lost jobs...This is consistent with a slowdown.” Those comments were consistent with Bush Administration concerns that the economy is shrinking.

There were gains in several sectors, such as education, tourism, health care, and public services. Those modest gains, however, were overshadowed by massive losses in the manufacturing, construction, and retail sectors. The loss of jobs is clear indication that the US economy is slowing down, and possibly on the way to a US recession.

The US government is attempting to tackle the recession early on. The Federal Reserve has promised $100 billion to alleviate some debt problems. This is in addition to the $160 billion already provided. Furthermore, it may be hoped that the recession may be staved off by the tax rebate checks due in May as promised by the government’s economic stimulus package.

Question: If the economy continues to falter for March and April—will May’s stimulus checks be able to stem the tide of recession?

Can China Curb Inflation

Sources: BusinessWeek, Financial Times

China has committed herself to reigning in inflation, but experts believe this will be daunting task. Controlling inflation, which stood at 7.1 percent in January, is important to prevent the economy from growing too fast and “overheating.” Wen Jiabao, the Chinese prime minister, delivered his annual report to the legislature on Wednesday, which laid out policies to control prices. The report also promoted a more conservative fiscal policy. Nevertheless, education and health spending is expected to increase dramatically. Prime Minister Wen aims to bring inflation to a more manageable 4.8%.

January’s extremely high inflation rate has been blamed on the rise in agricultural prices. The bitter winter led to expensive food products. Nevertheless, there are fears that the expensive food products will “create an inflationary spiral that would be hard to contain.” Government plans include policies that would increase agricultural commodity production, ration grain use, and more closely monitor demand needs. Inflation has hit the poor the hardest, and the government has committed to ensuring basic food supplies would not be interrupted, and subsidy increases are forthcoming.

Question: The world economy is expected to slow dramatically over the next few months—yet China’s economy is speeding along, with the government aiming for a GDP growth of 8 percent in 2008. Can China maintain the rapid growth, and—can China stem inflation in the face of the faltering world economy?

Wednesday, March 05, 2008

US Calls for IMF Reform

SOURCES: Financial Times

On February 27, 2008, the US added additional pressure on the IMF to reform for better governance. The US is requesting some changes on the executive board and additional requests including a deal to increase the weight of surfacing markets. The need for governance reform in the IMF is not new. The issue for renewed governance in the IMF began to weaken when former managing editor left the IMF. The new managing editor agrees that there needs to be more governance reform in the IMF, but has remained focused on the credit crises and budget cuts, especially a 15 percent reduction in the number of IMF employees.

There has been some additional concern that if the IMF does not reform that it will no longer be relevant to the international financial market. The undersecretary for the international affairs in the US Treasury, David McCormick, believed that the IMF needed to update its mission, governance, and financial model to be more successful. McCormick believes that exchange rates issues should be at the top of the agenda. If the IMF fails to fulfill such duties, all work done by the IMF may be questioned.

Another main responsibility of the IMF is to uphold financial stability. In order to uphold financial stability, the IMF needs to be able to predict a financial crisis. Some are skeptical on this matter. The IMF has attempted to set up structures that can face financial crisis independently. In order for this to take place, the financial market has to be able to overcome risks and losses during such a crisis. The “Group of Seven” strongest economies are now recognizing the importance of the IMF’s role, which has an international membership beyond the strongest and most stable economies.


Do the Group of Seven need to collectively put pressure on the IMF to see any change take place? What specific changes need to be met to reach the expectations of the IMF’s members?

Tuesday, March 04, 2008

US Recession

US Recession Fears Grow

Sources: Financial Times, British Telegraph

Newly released economic data increased fears of a US recession. Some individuals, such as Warren Buffett, already claim that the US is already in a recession with the worst yet to come. Last months manufacturing report reported some contraction in the US sector, but the sector did not contract as much as originally predicted. Economists based their bleaker projection on earlier regional surveys that showed a weak manufacturing sector.

The less than expected contraction was fueled by manufacturer cutbacks due to recession fears. This is the third straight month of contraction, but nevertheless, was still better news than expected. Stocks, bonds, and the US dollar rebounded slightly. There was some additional good news. The weak dollar has led to growing exports. US exports have grown for 63 consecutive months.

Nevertheless, not all news was good. While the manufacturing sector did not contract as predicted, construction spending fell drastically—at a pace not seen in 14 years. “Activity is plunging faster than ever in the residential sector and the long-feared collapse in commercial real estate activity now appears to be materializing,” said Paul Ashworth at Capital Economics.

Despite the economic slowdown, few economists predict the bleak scenario that engulfed the US during the stagflation era of the 1970s, although some—including Buffett—believe that inflation may be on the way. Buffett warned that the Federal Reserve Chair, Ben Bernanke may have a “very tough balancing act” to right the economic ship.

Question: What actions can Mr. Bernanke take, along with the US government, to prevent the continual decline of the US economy? Can the economic stimulus package along with the housing assistance ignite the US economy?

Chinese Arms Buidup

Sources: Financial Times, Associated Press

Are the United States and China embarking upon a new arms race? Officially, China upped defense spending by 17.6%, to $58 billion. The US Department of Defense, however, claims that China’s defense spending is between 97 and 139 billion dollars. Nevertheless, according to China it is the Americans who are rolling back the world timeline to a new “Cold War.”

The Pentagon recently released a report documenting Chinese military growth, and criticized the “lack of transparency” in Chinese military growth, especially referencing China’s efforts to potentially operate beyond the Taiwan Straits. The report also noted concerns regarding nuclear weapons growth, as well as the development and acquisition of the new “Jin” class submarines. Nevertheless, China has blasted the report, claiming that this “is a serious distortion of facts and attempts to interfere in China's internal affairs and break the norms of international relations.” China further claimed that this was merely Washington attempting to isolate China by perpetuating the “China Threat Theory.” Foreign Ministry spokesman Qin Gang urged the U.S. to drop its Cold War mentality and have a correct understanding of China and China's development, correct its wrongdoing and contribute to our mutual trust and constant cooperation.”

China, in her defense, has claimed that the growth in the defense spending has nothing to do with an arms race. China contends that defense spending is not excessive, and is only used to modernize an aging military, pay salaries, and meet the basic funding needs of the People’s Liberation Army.

Question: At what point will the US lose its “lone superpower” status? And, if China acquires the ability to conduct operations beyond Taiwan, what ramifications may this have internationally?

UN Sanctions Iran Again

SOURCES: Financial Times

On March 3, 2008, the United Nations Security Council enforced sanctions against Iran for the third time. The sanctions were aimed at individuals that had a close connection with the nuclear weapons agenda. In addition, the sanctions also penalized banks that may have funded the agenda. The permanent members of the council agreed on the sanction in January. However, some non-permanent members, including South Africa, Indonesia, Libya, and Vietnam, inquired on the need for further sanctions after previous penalties were unsuccessful.

The UN’s five powers and Germany are encouraging proposals for a negotiation. They suggest that such negotiation may give Iran the opportunity for political and economic benefits. However, the same proposals were offered approximately 2 years ago. The sanctions include travel restrictions on Iranian citizens suspected of being involved in the nuclear weapons agenda and the sanctions also require increased caution on the Iranian banks’ activities, specifically Bank Melli and Bank Saderat.

The Iranian envoy to the United Nations called the sanctions “unjust and irrational.” Some Western diplomats claim that the sanctions were actually weakened to get more support with the other members of the council. European sponsors revised the text to include a welcomed agreement with Iran on determining a resolution on Iran’s nuclear intentions. However, after the IAEA presented evidence that Iran maintained nuclear weapons research up to 2004, the western point of view was definitely reinforced.


Will a third set of sanctions accomplish the UN’s goals? Did the IAEA evidence influence the UN members’ decisions on what types of sanctions to enforce?

Sunday, March 02, 2008

Bahrain as the Financial Capital

Sources: Economic Development of Bahrain (EDB)

Bahrain is solidifying its reputation as the financial capital of the Middle East by the unyielding formation of the Central Bank of Bahrain (CBB). In Bahrain alone, there are 340 financial institutions. These institutions include commercial banks, investment banks, leasing banks, insurance companies, fund managers, legal services, financial consultants, international regulatory agencies, and real estate investment trusts.

The CBB, which was formerly the Bahrain Monetary Agency, has played a major role in maintaining the reputation as the paramount banking and financial services center. It is widely recognized that the services provided by CBB surpass any other central bank in the Arab world. The CBB’s success in regulation, innovation, non-discriminatory treatment, license management, and operational excellence cannot be compared to any other financial institution in the Arab nation.

More recently, specialized agencies have been created in Bahrain. These specialized agencies make certain that the appropriate international regulations are being used and that these regulations also continue to help expand and develop the international financial industry. Some of these industries include Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the General Council for Islamic Banks and Financial Institutions, the International Islamic Financial Market, the Liquidity Management Centre, and the International Islamic Rating Agency.

In addition, Bahrain is the first country in the Gulf market to launch and establish the captive insurance market. It is also a major regional insurance and reinsurance center. Two major Islamic insurance companies are based in the center of Bahrain. Bahrain has continued to expand its solid reputation by constructing the Bahrain Financial Harbour. The construction for the project has reached $1.3 billion, but is well worth it for Bahrain to keep the position as the financial capital of the Middle East. This new development will create a unification of all financial services, including the Bahrain Stock Exchange and a new Bahrain International Insurance Centre.

Question: Are Bahrain’s financial institutions influenced by political pressure? If not—what influences affect the financial institutions?

The World Bank in the Middle East

Sources: FINANCE

Due to the World Bank’s private sector, the Middle East has became the fastest growing region for investments. The Middle East traditionally draws attention for its political instability. However, the region is now developing a different reputation with 1.2 billion dollars in investments last year. This investment amount is almost double its investment in 2005. The World Bank and the International Finance Corporation’s (IFC) investments reflect a change in the global financing trend.

The trend may have begun with the flood of petrodollars into the Middle East and North African regions. The increase in investments has sparked additional need for local banks to recycle the liquidity in the region. This is an opportunity for the Middle East to provide more financial market services, insurance, and traditional sectors (oil and gas). The IFC's investments may have more significance than it appears. Investments tend to signify a greater international private flow.

Egypt received most of the loans over the past five years. Other countries following Egypt include Oman, Algeria and Iraq. Egypt happens to be the most populous Arab country. It is rumored that the IFC is making new investment opportunity tied to the World Bank and International Monetary Fund. Some of these new investments projects include banking, electricity and telecommunication sectors.

The Middle East region has always only received a small proportion of the international finance investments worldwide. However, it has grown considerably in recent years. The World Bank, for example, has increased its lending three times more in the last five years.

Question: Will Egypt’s greater share of investments add to the political tension in the Middle East? How will the increase in investments affect poverty, inequality, and unemployment in the region?

Saturday, March 01, 2008

France, Africa reestablish defense relationship

Source: Sarkozy seeks new Africa defence ties

France intends to renegotiate all defense agreements with its former colonies in Africa, signaling that President Sarkozy intends to make good on his promise to transform his country’s attitude towards the African continent. France has maintained military bases in several countries in west and central Africa since the early 1960s, frequently intervening in African politics in support of autocratic leaders with which France had close ties. However, in an address to South Africa’s parliament in Cape Town, Sarkozy indicated that such agreements are “obsolete,” and that new agreements must reflect “Africa as it is today, and not as it was yesterday.”

Currently, the details of the replacement agreements are unknown. French officials indicate that the two countries will negotiate the new agreements in the next few months. It is expected that one of the new emphases for the French military in Africa will be on training missions. France has an estimated 26 military accords with its former African colonies. These accords allow for varying levels of involvement, ranging from complete military intervention to cooperation on training and arms sales. Currently, France has 9,000 troops deployed in five countries, with three permanent bases in Senegal, Gabon, and Djibouti. It is expected that the biggest changes will be in the Ivory Coast, where approximately 2,400 peacekeeping soldiers are stationed.

Questions for Discussion
1. Critics of Sarkozy suggest that whereas this action seems consistent with his promise to break the tradition of post-colonial policies towards Africa that real change is slow to materialize. Is this a fair critique?