Monday, June 30, 2008

Multilateral Institutions Stress Warnings Over Global Inflation

"BIS Seeks Higher World Interest Rates"
"IMF Warns of Rising Inflation Risk in Latin America"
"Eurozone Inflation Soars to New High"
"Brazil Raises Interest Rates Again"

Multilateral financial institutions have begun to express their concerns and possible solutions to the threat of global inflation. The Bank for International Settlements (BIS) announced on Monday that inflation is a clear and present threat to the global economy. The BIS oversees central banks and banking regulators around the world. The organization pointed to excessive credit growth and low interest rates over the last decade as a possible cause of the current inflation worries along with the present rising food and oil costs. To combat the inflation risks, the BIS has been pushing central banks to tighten their money supply by raising interest rates.

Last week, the International Monetary Fund (IMF) stated that the macroeconomic credibility built up in Latin America countries could be jeopardized by the rising inflation. The strong increase in domestic demand in Latin America combined with the sudden increase of global food and oil prices have contributed to the inflation concern. The IMF Managing Director, Dominique Strauss-Kahn, stated that current economic policies in Latin America tend to amplify price shocks and these countries need to act quickly and decisively to stem inflation and the high social costs of adjustment. The IMF has pledged to provide financial support to the countries most affected along with adapting lessons learned from the current credit crisis to developing countries.

The concerns over inflation have started to materialize with countries starting to report inflation numbers that greatly exceed targets. The Eurostat announced on Monday that inflation in the Eurozone has risen 4% in the last year, twice the amount of the European Central Bank’s (ECB) targeted amount. In response, the ECB is expected to raise interest rates by twenty-five basis points on July 3rd. Brazil has already taken action to prevent higher inflation by raising interest rates, starting in April, to cool down an overheated economy. Market economists expect Brazil’s inflation rate to reach 5.48% by year end, almost a full percentage point above the government’s target rate of 4%.

1) Has the systematic risk created by the globalization of the world’s financial markets been the driving force behind the current inflation crisis or rather can the crisis be blamed on the sudden increased price of staples like oil and food that every country consumes?
2) How much should the central banks of the world factor in global inflation worries when deciding whether to tighten local monetary policy by raising interest rates? Should international regulators require global inflation to be taken into account? If yes, then how should the appropriate regulations be designed?

Russia and EU to Strengthen Trade and Oil Ties

Sources: BBC, Financial Times, Bloomberg

Several changes are on the brink of bringing Russia and the European Union closer together. On July 4, the two governments will officially begin negotiations on a strategic partnership to replace the ten-year trade deal that expired in 2007. Currently, half of Russia’s exports go to the EU, making the country the EU’s third biggest trading partner. Since the EU is Russia’s largest consumer of oil and natural gas, energy naturally played a key role in talks between the countries. The European Commission said it “wants the new partnership agreement to establish a level playing field for energy relations.”

Talk of energy relations between the EU and Russia are quite punctual as Russia’s newest oil province, Timan Pechora, in Russia’s far north, recently began shipping the crude commodity from its new export terminal. Several other Russian fields are expected to begin producing oil within the next couple years to offset slowing productions in western Siberia. However, Russia’s economic growth is expected to increase domestic demand for oil thus decreasing the amount of oil available for export.

Still, the EU may not be too far from a “level playing field for energy relations.” The Russian state-owned oil company OAO Rosneft proposed the idea of a joint oil venture with European companies Royal Dutch Shell Pic and Total SA. The Russian company would provide the oil while the European companies would provide the refineries and marketing. A year ago, Rosneft and Shell signed a strategic alliance and agreed to study the possibility of an assets swap but the companies have not made further plans. European Union Energy Commissioner Andris Piebalgs said that the governments should support this kind of energy cooperation between companies. The Commissioner added, however, that the companies themselves should make the ultimate venture decision.

1. Is it possible for the strategic trade alliance between the two governments to foster a commercial relationship for oil and refining companies?
2. Will the new trade alliance have a significant impact on trade as anticipated by the governments or will the trade patterns established during the previous ten-year accord simply continue?
3. What effect would a joint oil venture have on oil prices and economic growth?

Sunday, June 22, 2008

EU Lifts Symbolic Diplomatic Sanctions on Cuba

Sources: Financial Times, BBC, CNN

In 2003, the EU imposed diplomatic sanctions against Cuba in response to the imprisonment of 70 dissidents. While Thursday’s decision to lift the sanctions will not formally take effect until Monday, it is extremely symbolic of European support for Raul Castro’s new form of government leadership. In 2005, the EU suspended the sanctions that limited government visits and EU diplomat participation in cultural events held in Cuba. Accordingly, Monday’s lift will be largely symbolic and will produce few changes in economic relations between the EU and Cuba.

Spain and other European Union member states supporting the lift hope to promote change and encourage continued social reform. Louis Michel, EU Commissioner for Development, reported positive changes in property ownership rights, access to cell phones, salaries and agriculture after a visit to the country in March. Other EU member countries, including Sweden, fall on the side of the dissidents claiming that the lift is cosmetic and not yet warranted. In response to such concerns, the EU stated that it plans to continue to monitor human rights in Cuba.

Both Castro and the EU believe the lift is necessary to facilitate open communication about critical issues including human rights and the environment. Mr. Michel expects this communication to lead to EU aid in Cuban development. The communication could also benefit the EU by distinguishing its foreign policy from that of the United States.

1. Will this symbolic change have any effect on the United States’ forty-five year embargo on Cuba?
2. Was the EU’s decision to lift sanctions appropriate despite the humanitarian concerns voiced by Sweden and the Czech Republic? Should the EU have waited for a more concrete demonstration of social reform in Cuba?

Opposition Leader Pulls out of Zimbabwe Presidential Election


New York Times Financial Times 1 Financial Times 2

After months of violence perpetrated by current Zimbabwean President, Robert Mugabe and his ruling party, Zanu-PF, Morgan Tsvangirai has announced that he will pull out of the run-off election. Morgan Tsvangirai represented the Movement for Democratic Change (“MDC”) in the March presidential elections and forced a run-off election with President Mugabe set for June 27. However, any hope of changing leadership has been extinguished now that Tsvangirai has exited the run-off election.

Robert Mugabe came into power in Zimbabwe some 28 years ago. Once viewed as a liberator who could do no wrong, Mr. Mugabe has become much more violent and tyrannical during his rule. Under Mugabe, Zimbabwe’s economy is facing dire times with record inflation and millions of people fleeing the country to go to neighboring countries like South Africa. In the March elections the MDC won big gains in Zimbabwe’s parliament, and had hoped to win the presidential run-off election. Mugabe, however, did anything he could do to stop this from happening.

Robert Mugabe and his Zanu-PF operatives jailed Morgan Tsvangirai multiple times throughout the campaign season. Zanu-PF also killed over 70 MDC supporters. As the months passed a free election soon became an impossibility. Recently, Mugabe was quoted as saying that “only God who appointed me will remove me from office.”

Many critics are calling for Zimbabwe’s African neighbors to exert pressure on Zimbabwe’s leading party to stop its flagrant human rights violations. However, Zimbabwe’s largest trading partner, South Africa, has done little to persuade Mugabe to change his ways. The United Nations Security Council is set to meet and discuss the situation in Zimbabwe on Monday, June 23. The African Union and the South African Development Community have yet to comment on the elections.

It is unclear as of yet what affect the recent actions by Mugabe will have on Zimbabwe’s standing in the international community, but many believe Zimbabwe’s already shaky reputation will take a hit. Zimbabwe economists and businessmen believe the economy will not be able to withstand the turmoil for much longer. Morgan Tsvangirai’s Presidential bid offered hope to those in Zimbabwe, but in the end the threat of further lives being taken was too great to continue in the race.


How should the African Development Bank react to these human rights violations? Should they continue to offer aid to Zimbabwe? Consider the fact that the World Bank has not given aid to Burma for over 20 years due to its military junta’s brutal regime.

Do you think that South Africa should step up its diplomacy in Zimbabwe? Surely the influx of Zimbabwean refugees in South Africa is putting a strain on the country. Is it time to move from its “quit diplomacy” and start hard talks with Zimbabwe?

Friday, June 20, 2008

Mexican Stock Market Goes Public and Proposes Trade Fee Increase

Bolsa Mexicana De Valores
"Mexico's BMV to Launch Its Own IPO"
"Mexico's Stock Exchange to Raise Trade Fees"

On June 12th, Bolsa Mexicana de Valores (BMV), the Mexican Stock Exchange launched its first public offering. The initial offering price per share was 16.5 pesos and the transaction raised around $443.8 million. The BMV followed their Latin America counterpart in Brazil when the Bovespa Stock Exchange went public in October 2007. A recent world wide trend has seen at least nine stock exchanges, over the last three years, come under public ownership including the New York Stock Exchange and Spain's Bolsas y Mercados Espanoles. This raises the total of publicly owned stock exchanges around the world to twenty-three.

The current structure of the BMV was formed in 1950 and has grown to become Latin America's second largest stock exchange behind Brazil's Bovespa. Before the public offering, Mexican banks and brokerage houses privately held the exchange. After the public float, their ownership fell to around 60%. Approximately 135 companies are currently traded on the BMV.

Following the public offering, Guillermo Prieto, BMV's exchange president, said the BMV will look to increase trade fees to follow a larger strategy of putting shareholder interests first. The board of directors of the BMV will still need to approve the proposed increase of one basis point in their next meeting. After the increase, the BMV will have an average trade fee of 1.7bp which Mr. Prieto stated will bring fees in line with European levels but still far below the Bovespa.

1) What are the benefits of public ownership that are specific to stock exchanges that could have given rise to this recent trend? Are there any drawbacks?
2) Is raising trade fees the correct strategy for the BMV to get a higher return for shareholders? Or will higher fees decrease world wide competitiveness and cause traders to look elsewhere resulting in lower volume and less profit?

Saturday, June 14, 2008

Western Countries Committed to Succeed in Afghan Development


"Donors Pledge $20bn for Afghanistan" "A War that Needs a Definition of Victory" "Helping Afghans Help Themselves" "Afghanistan's Forgotten Fields"

This past week in Paris 68 governments and 12 international organizations met to discuss financing further development in Afghanistan. Led by the US, the group of donors pledged $20 billion over the next five years. Afghan President Hamid Karzai had asked for $50 billion to implement his national development plan, but the donor countries were concerned that this level of aid was beyond the capacity of the Afghan government to spend given corruption and investment schemes that did not prioritize rural development. The recent pledge of $20 billion raises the total amount of aid to $45 billion since 2001.

It is clear that the continued development of Afghanistan is a top priority of Western countries since the internationally supported invasion of 2001. However, some critics say that there is no agreement as to what the underlying goal of Afghan development is. Are Western countries only trying to rid the area of the Taliban? Are they trying to establish a strong democracy in a Muslim country? Are they trying to stop farmers from growing poppy plants that account for 90 percent of the world’s heroin supply? Though there is no consensus of what the underlying goal is, development is a Western priority.

Many obstacles still stand in the way of successful development. First, the security of the country is perhaps the biggest concern. President Hamid Karzai said that bad governance and corruption are symptoms of security problems the country is dealing with. Next, there is no clear development strategy in place as many projects overlap and some parts of the country are neglected. For instance, the Daikundi province in central Afghanistan still has no paved roads and sorely needs funds for its fledgling agricultural base.

Some critics suggest directing funds locally for small community projects while others, such as President Hamid Karzai, call for broad funding on a national level. Whatever method is settled upon, it is clear that development is and will be a goal for the years to come. Many hope that one day Afghanistan will be a secure land bridge that connects central and east Asia. Only time will tell whether the latest investment spur will help achieve this goal.


Is a policy of broad national investment or a local investment scheme better? Is it possible to combine both approaches?

Do concerns about poppy plant production inhibit investments in the agricultural sector?

Friday, June 13, 2008

Brazil Announces Plans for Sovereign Wealth Fund

Sources: Financial Times, Financial Times

On June 9th, the Brazilian government announced plans to create a sovereign wealth fund to manage revenues from newly discovered oil fields. Finance Minister, Guido Mantega, said the fund could grow to contain as much as $200 to $300 billion over the next three to five years. The fund will increase the government's target budget surplus from 3.8% to 4.3% of gross domestic product. The oil reserves discovered in the South Atlantic are expected to produce forty to fifty billion barrels potentially making Brazil the eighth largest oil nation in the world. Mantega stated that the fund will have various functions ranging from reducing government spending to stabilizing the exchange rate.

One of the goals of the fund will be to fight inflation. The consumer price inflation in Brazil, currently at 5.25%, has outpaced the government's goal of 4.5%. Mounting concern about inflation has caused the central bank of Brazil to tighten fiscal policy in the last three months. On June 4th, the bank increased interest rates by .5% to 12.25%. After three years of loosening fiscal policy, the bank started increasing the interest rate in April to stave off inflation.

The formation of the sovereign wealth fund is one more step in the transformation of the Brazilian economy. While most of the world is gripped in the midst of a credit crisis, Brazil is starting to look much better to foreign investors. Added to the highest real interest rate in the world, major credit rating agencies have started to upgrade Brazil. Fitch's upgrade of Brazil to an investment grade rating should increase Brazil's attractiveness to foreign direct investment. Fitch's announcement, on May 29th, followed the lead of Standard and Poor's who upgraded Brazil on April 30th.

1) What are the benefits and drawbacks of having a sovereign wealth fund monitor fiscal policy instead of the traditional central bank? Can the two, like in the case of Brazil, survive together in the same economy?
2) Will Brazil's bright economic future systematically raise the rest of Latin America? Or for that matter, how much can Brazil help to relieve the world of the current credit and food crisis?

A 10 Point Plan to Extinguish the Hunger Pains Caused by the Food Crisis

Sources: Financial Times, World Bank

Recognizing the need for a coordinated policy to end the food crisis, Robert Zoellick, president of the World Bank, devised a ten-point action plan to fix what he calls a “man-made” crisis. He first proposes that leaders at the UN food summit agree to fund and support the World Food Program’s emergency needs in their entirety, support its drive to purchase local food, and ensure its free movement. The second point details the need for coordinated support of “safety nets” to help the suffering. The proposed safety nets include food for work programs and school-based food distribution centers.

The next group of steps addresses the agricultural aspect of the crisis. To fulfill the third point of the plan, world leaders and organizations need to facilitate aid during the planting season by providing seeds and fertilizer. Additionally, the World Bank and other organizations need to double research and development funding for the next five years. The fifth step of Mr. Zoellick’s plan requires additional investment in agribusiness in order to take advantage of the private sector’s ability to achieve value throughout the industry.

Finally, the World Bank president advocates the development of crop insurance and risk management programs for small farmers. The seventh point involves “action in the U.S. and Europe to “ease subsidies, mandates and tariffs on biofuels derived from corn and oilseeds” and the consideration of specific plans for even less restriction when prices increase. Mr. Zoellick believes this will promote biofuel derived from sugarcane, thereby reducing the amount of food used in biofuel development and increasing the amount of food available for consumption. The eighth and ninth steps remove export bans and “distortions” of agricultural subsidies to lower prices and promote fair trade.

The last step anticipates collective action among global leaders and organizations to counter the many factors fueling the food crisis. Mr. Zoellick and the World Bank are supporting this ten-point plan with a global food crisis response facility and $1.2bn in immediate funding, which they plan to increase to over $4bn throughout the year.

1. Will this plan be effective in organizing global organizations’ efforts to combat the food crisis?
2. Is this plan truly comprehensive in remedying the current crisis and preventing future price increases? Is there anything to add to the list?

Tuesday, June 10, 2008

Private Sector Investment After Sichuan Earthquake

Financial Times

Taiwan has been quick to offer aid to China in the wake of the massive earthquake that killed 70,000 people and left 5 million homeless. As much as the aid has helped China rebuild its Sichuan province, some experts think that Taiwan has more to offer than just monetary aid.

Taiwan suffered a large earthquake on September 21, 1999 that mirrors the recent earthquake in China, but on a smaller scale. The Taiwanese earthquake killed 2,500 people and left 50,000 people homeless. Like the recent earthquake in China, the 1999 earthquake in Taiwan hit rural, mountainous regions of the country that rely on agriculture and tourism for livelihood.

In the aftermath of its 1999 earthquake, Taiwan was quick to set up plans for reconstruction. Taiwan collected private donations and created the 921 Earthquake Relief Foundation, which was run by private sector investors. Allowing private investors to work directly with local citizens in the damaged parts of Taiwan increased efficiency, removed bureaucratic hurdles, and encouraged citizens to actively participate in the rebuilding process.

Officials in Taiwan are unsure how much of their country’s success can be applied to the rebuilding problems China faces. They are, however, optimistic and are asking Chinese officials to review and apply the successful strategies of the 921 Earthquake Relief Foundation.


Given the Chinese government’s history of strict control over its citizens, how likely is it that China would allow private investors to call the shots?

Will the difference in scale between the Taiwanese and Chinese earthquakes affect the effectiveness of private sector investment?

Sunday, June 08, 2008

The World Bank Pledges Funds to Help Alleviate the Global Food Crisis

Sources: Financial Times, The World Bank

On May 29th, the World Bank Group announced plans for a $1.2 billion rapid financing facility to address the immediate needs of the global food crisis. The facility will accelerate the financing of many safety net programs such as food for work, conditional cash transfers, and school feeding programs. It will also support higher food production by supplying small-scale farmers with the seeds and fertilizer necessary for the upcoming planting season. A multi-donor trust fund set up to facilitate coordination among the financial supporters is another element of the facility.

The World Bank has pledged to increase total spending for global agriculture and food from $4 billion to $6 billion next year. In addition to the immediate food needs to be provided to poor countries, some of the funds will be used to support long term growth with a goal of doubling global food production over the next thirty years. To accomplish this goal, World Bank President Robert Zoellick said that it is imperative to make modern technology available to the world's poor farmers. By using high-yielding seeds, fertilizers, and irrigation systems, experts have concluded that yields per hectare could be increased by more than two tons easing dependence on food imports.

Zoellick also stated that another priority will be to persuade countries to remove food export bans. Twenty-eight countries have enacted food export bans since the crisis began to prevent food from leaving their country. This has led to hoarding and has only increased food prices therefore hurting the countries that do not have the resources to produce enough to feed themselves. Argentina's export tariffs have led to a massive farmers strike, creating a large loss in production and contributing to the global food crisis.

1) Should the World Bank focus efforts on importing food to the world's poor countries which could possibly lower the prices that local farmers can get for their crops or pour more money into sustainable agriculture development that will lead to increased production in the long run? Can the World Bank accomplish both?
2) Should the World Bank be involved in the campaign to get countries to reduce or eliminate export tariffs or is this better left to the world's political and trade powers like the WTO?

Friday, June 06, 2008

UN Food Summit - Food for Vehicles or People?

Source: Financial Times

Emotions ran high at the United Nation’s food summit in Rome this week. The summit was the first held to specifically address the significant rise in food prices over the last two years. Jacques Diouf, director-general of the UN’s Food and Agriculture Organization, charged biofuel producers with causing, in significant part, the food crisis. Biofuel is used to produce ethanol as an alternative to fossil-based fuels using the energy contained in crops like sugarcane and corn. Thus valuable land and crops are being diverted from human consumption to fuel production.

At the summit, Diouf asserted that “nobody understands how $11bn to $12bn a year on subsidies and protective tariff policies had the effect of diverting 100m tons of cereals from human consumption, mostly to satisfy a thirst to fuel vehicles.” He further added, “nobody understands how the rich countries have created a distortion of the world market with the $272bn spent on supporting their agriculture.” The director-general found it difficult to understand why these rich countries with abundant financial and agricultural resources could not provide the $30bn per year to feed the 862m hungry people across the globe.

These emotional humanitarian charges put the “rich countries” on the defensive with respect to their biofuel priorities. The U.S., Brazil and the E.U. lead the world in biofuel development and claim that biofuels are not the reason behind the food crisis. Ed Shafer, the U.S. agricultural secretary, claims that biofuels are only responsible for three percent of the inflation of food prices. Other estimates range as high as thirty to sixty percent. While biofuels clearly play some role in the food crisis, Brazil’s president, Luiz Inacio Lula da Silva, attributes most of the price increase to oil prices, climate changes, and growing consumption, among other things.

Already, France and the U.K. are considering altering their biofuel policies in accordance with Diouf’s humanitarian concerns, while the U.S. and Brazil defend their policies.
1. Is this an all or nothing battle?
2. Will the UN will be able to develop a plan to balance biofuel production endeavors with stable food prices?
3. Could the summit mark an end, perhaps only temporary, to biofuel development?