Sources: Guardian.co.uk: West Keeps U.N. At Bay on Financial Crisis; Reuters.com: NGOs Slam Results of U.N. Financial Crisis Meeting
Developing nations do not appear to have succeeded in increasing U.N. involvement in the world economy on Friday with the results a three-day international finance conference. The meeting was billed as a summit. However, no Western leaders showed up. Further, the majority of those presidents and prime ministers in attendance, amounting to less than a dozen, were from Latin America and the Caribbean. Other participants sent delegates of a lesser status. World Bank President Robert Zoellick and IMF Chief Dominique Stauss-Kahn did not attend the conference.
Miguel D’Escoto, president of the 192-nation U.N. General Assembly, called the “financial summit” to demand a reform of the global financial structure. He drafted a document that called for extensive changes to the existing system under the belief that the General Assembly should take the helm of the world economy from elite groups of rich countries. With the aim of “democratizing” global financial bodies, he demanded the abolishment of U.S. veto power at the IMF, where rich countries dominate the current voting system. Further, the conditions the IMF places on foreign-currency loans embitter some developing nations. The draft also demanded that the IMF unit of special drawing rights (SDRs), which is anchored in multiple currencies, replace the U.S. dollar as a reserve currency.
While the document received a positive response from many developing countries, its reception in Western capitals was less than warm, as officials feared that the non-legally binding document could send an unfavorable political message. The North-South negotiations, which delayed the meeting for three weeks, ultimately rendered the text a simple appeal for developing countries to have a greater voice in the IMF. This position has the support of the United States. The declaration also acknowledged the calls of many states for a more efficient system on the issue of currency reserves.
Even so, D’Escoto, declaring the meeting a success, stated that “the General Assembly…has now been established as the central forum for the discussion of the world financial and economic issues.” Other less optimistic advocates for the called-for changes considered the declaration deficient. Venezuela’s envoy, for instance, criticized the declaration’s failure to order a definite role for the United Nations to occupy in the world economy. Anti-poverty groups have also voiced disappointment in the declaration.
While the United States joined the consensus, it remains ambivalent about much of the document and is not prepared to give the U.N. a final voice in the global economy. The U.S. advanced its view on the floor that the U.N. lacked the authority to entangle itself in matters pertaining to the governance of the IMF and the World Bank. Further, even as the European Union held the meeting out as a break for developing nations, its delegates appeared more at home discussing development aid abroad than restructuring the IMF.
Discussion Questions:
1) Can the interests of rich and poor nations be reconciled? If the U.N. assumed a greater role in the global economy, what new problems might arise in relation to these competing interests?
2) How would the U.S. economy be affected if SDRs replaced the U.S. dollar as the currency reserve?
Monday, June 29, 2009
Thursday, June 25, 2009
Russia Faces Mixed Economic Signals
Sources: Reuters, Russia Sees Some Economic Rebound, More Rate Cuts; AP, Russia's Fiscal Hawk Reins in Currency Ambitions; Reuters, Russian Officials Send Mixed Signals on Stress Test; New York Times, Oil's Price Rise Eases Push for Reform in Russia; The Economist, BRICs, Emerging Markets, and the World Economy: Not Just Straw Men; Bloomberg, Russian Stimulus 'Delay' Means GDP to Shrink 6.8%, OECD Says; Forbes, World Bank: Russian Economy to Shrink 7.9 pct
Growth forecasts for Russia started off positive early this month, but with each new figure released the outlook seems worse and worse. Numbers released by Russian officials early in the month predicted that the economy would contract slightly less than the 6.5% forecast by the IMF in 2009, albeit with performance varying greatly across sectors and among companies. The stock market also climbed 80% in the spring after devastating performance in late 2009, leading to hopes that Russia's fate might not be so dismal after all.
The expectation was that inflation would also fall this month and that the net outflow of capital could cease. Russia could then continue the strategy of cutting interest rates in order to encourage banks to loan and focus on economic recovery. Russia has also seen some relief due to recovering oil prices, though a New York Times article suggests that this may actually be a bad thing for Russia, since economic recovery tends to halt political reforms that might otherwise.
One part of Russia's recovery strategy involves close relationships with the other BRIC countries—Brazil, India, and China. At the first BRIC summit, held in Russia, all but India agreed to start switching currency reserves from dollars to IMF bonds, decreasing dependency on the dollar. Though Finance Minister Kudrin has stopped claiming that the ruble will be the new global reserve currency, Russia does continue to push for a move away from the dollar. Kudrin recently suggested that the yuan would be the quickest possible new reserve currency, though it would probably take about ten years for China to sufficiently liberalize and make the yuan convertible.
However, despite some positive signs and the possibility of productive cooperation with other emerging economies, there are also some signs of economic and financial weakness. For example, the state of Russian banks is uncertain, with government officials sending mixed messages on whether a general stress test of the banking system occurred, or whether only some banks have been tested. It is unlikely that capital injections will be used in the future, but as many as 20% of all loans may be non-performing by 2010 and bank lending is crucial to the recovery.
Growth forecasts released this week are also significantly less optimistic than the Russian numbers. The OECD predicts a 6.8% contraction for Russia in 2009, based on the Russian government's delay in enacting a stimulus package. It cautions that the government must quickly implement reforms and also inject capital into the banks to deal with delinquent corporate loans. The OECD does, however, recognize the importance of oil price recovery and a lessening of capital outflow pressures.
The World Bank's numbers are by far the worst, with a predicted 7.9% contraction for 2009 and unemployment rate of 13%. The World Bank expects that the downward pressure from the first half of the year will overpower any significant positive impact of oil price recovery, and that poverty will rise in Russia along with the need for social spending. The World Bank is cautious in terms of forecasting how long the recovery will take in Russia, and expects 2.5% growth in 2010 as opposed to the 3.7% predicted by the OECD.
Questions:
1) Do you think that the oil price recovery can save Russia, or at least minimize the impact of the crisis and make recovery happen sooner? Do you agree with the New York Times article that the political impact of oil price recovery is bad for the country, or do you think recovery is in Russia's interest?
2) Considering the possible motivations of the Russian government, the OECD, and the World Bank in developing predictions about the Russian economic outlook, do you trust a particular institution more than the others? Do you think that Western institutions may have a tendency to downplay Russian recovery for political reasons, or conversely do you think that the Russian government is trying to put a positive spin on what is essentially a sinking ship?
3) Do you think that the crisis will lead to more dependency on Russia's part on Europe or the United States, such as was the case in the 1990s, or do you expect that Russia will pull away from these countries due to the U.S. role in the crisis and rely more heavily on BRIC countries or others? What political consequences do you expect the economic relationship between Russia and China to bring about for Europe or the United States?
Growth forecasts for Russia started off positive early this month, but with each new figure released the outlook seems worse and worse. Numbers released by Russian officials early in the month predicted that the economy would contract slightly less than the 6.5% forecast by the IMF in 2009, albeit with performance varying greatly across sectors and among companies. The stock market also climbed 80% in the spring after devastating performance in late 2009, leading to hopes that Russia's fate might not be so dismal after all.
The expectation was that inflation would also fall this month and that the net outflow of capital could cease. Russia could then continue the strategy of cutting interest rates in order to encourage banks to loan and focus on economic recovery. Russia has also seen some relief due to recovering oil prices, though a New York Times article suggests that this may actually be a bad thing for Russia, since economic recovery tends to halt political reforms that might otherwise.
One part of Russia's recovery strategy involves close relationships with the other BRIC countries—Brazil, India, and China. At the first BRIC summit, held in Russia, all but India agreed to start switching currency reserves from dollars to IMF bonds, decreasing dependency on the dollar. Though Finance Minister Kudrin has stopped claiming that the ruble will be the new global reserve currency, Russia does continue to push for a move away from the dollar. Kudrin recently suggested that the yuan would be the quickest possible new reserve currency, though it would probably take about ten years for China to sufficiently liberalize and make the yuan convertible.
However, despite some positive signs and the possibility of productive cooperation with other emerging economies, there are also some signs of economic and financial weakness. For example, the state of Russian banks is uncertain, with government officials sending mixed messages on whether a general stress test of the banking system occurred, or whether only some banks have been tested. It is unlikely that capital injections will be used in the future, but as many as 20% of all loans may be non-performing by 2010 and bank lending is crucial to the recovery.
Growth forecasts released this week are also significantly less optimistic than the Russian numbers. The OECD predicts a 6.8% contraction for Russia in 2009, based on the Russian government's delay in enacting a stimulus package. It cautions that the government must quickly implement reforms and also inject capital into the banks to deal with delinquent corporate loans. The OECD does, however, recognize the importance of oil price recovery and a lessening of capital outflow pressures.
The World Bank's numbers are by far the worst, with a predicted 7.9% contraction for 2009 and unemployment rate of 13%. The World Bank expects that the downward pressure from the first half of the year will overpower any significant positive impact of oil price recovery, and that poverty will rise in Russia along with the need for social spending. The World Bank is cautious in terms of forecasting how long the recovery will take in Russia, and expects 2.5% growth in 2010 as opposed to the 3.7% predicted by the OECD.
Questions:
1) Do you think that the oil price recovery can save Russia, or at least minimize the impact of the crisis and make recovery happen sooner? Do you agree with the New York Times article that the political impact of oil price recovery is bad for the country, or do you think recovery is in Russia's interest?
2) Considering the possible motivations of the Russian government, the OECD, and the World Bank in developing predictions about the Russian economic outlook, do you trust a particular institution more than the others? Do you think that Western institutions may have a tendency to downplay Russian recovery for political reasons, or conversely do you think that the Russian government is trying to put a positive spin on what is essentially a sinking ship?
3) Do you think that the crisis will lead to more dependency on Russia's part on Europe or the United States, such as was the case in the 1990s, or do you expect that Russia will pull away from these countries due to the U.S. role in the crisis and rely more heavily on BRIC countries or others? What political consequences do you expect the economic relationship between Russia and China to bring about for Europe or the United States?
Wednesday, June 24, 2009
Brazil Implements Crisis-Management Strategies
Sources: The Wall Street Journal: Brazil Inflation Remains Tame, Opens Door for July Rate Cut; Chinaview.cn: Brazil Acts Swiftly Against Financial Crisis
Brazil now finds itself in a technical recession after experiencing two consecutive quarters of falling GDP. The country’s GDP contracted 0.8 percent in the first quarter from the fourth quarter, and 3.6 percent in the fourth quarter from the third quarter. In response to the global downturn, Latin America’s largest economy promptly adjusted its economic policies.
The basic annual interest rate (Selic) of Brazil’s Central Bank, which was 13.75 percent in January, stands at 9.25 percent—the lowest since its inception in 1999—after the bank recently slashed it by a full percentage point. Further, President Luiz Inacio Lula da Silva signed a law in January that established a 14.2 billion reais (6.4 billion dollars) sovereign wealth fund.
Banks, automakers, airlines, and construction firms have enjoyed tax breaks. A cut in the industrialized products tax triggered a recovery of production in Brazil’s auto industry during the first quarter of 2009. Thanks to the tax break, a record 271,494 new vehicles were sold in March, 17 percent higher than the same period last year. Car sales for the first quarter of 2009 also set record numbers at 668,314 registered sales.
Brazil has also encouraged banks to lend to the agricultural sector. Farmers and agricultural enterprises are projected to receive at least 15.8 billion reais (6.79 billion dollars) in loans this year.
When central bankers meet in July, the continued signs of quite growth in consumer prices thus far in June may usher in lesser reductions in interest rates. The country’s mid-month consumer price index, or ICPA-15, rose 0.38% through mid-June. Through mid-May, this figure climbed 0.59%. Moreover, through mid-June, the 12-month IPCA-15 figure fell to 4.89 percent, as compared to 5.44 percent through mid-May. The government’s target is 4.5 percent.
The meeting next month, on the other hand, may mark the floor of the low rates as central bankers look to the future, since the effects of these rates on domestics demand will not be fully realized until 2010.
Discussion Questions:
1) What measures might the Brazilian government enact to stimulate the economy as the central bank grows more conservative? How will inflation rates in 2010 affect the decision-making process?
2) How can Brazil work with other nations to pull from the global economic slump?
Monday, June 22, 2009
Ambitious plans and lapsed commitments: challenges for development funding in wake of financial crisis
Sources
Reuters: G8 should use any stimulus easing to help Africa
Financial Times: Kenya unveils record ‘stimulus’ budget
Italy and France draw fire over aid
African bank tries to triple capital base
This year marked the end of a five-year upward trend in Kenyan economic growth. A bitter combination of drought, inflation, post-election violence, and a deepening global financial crisis ground the nation’s once accelerating growth to a halt. In response, the government has unveiled an ambitious budget that includes more than $11 billion in fiscal stimulus spending. A sizeable portion of the budget is devoted to development spending (overall, an increase of 83 percent over last year’s development budget); aimed at road improvements, irrigation, water supply and energy programs. The plan will bring Kenya’s budget deficit up to 6.6 percent of gross domestic product in the fiscal year starting in July, with national debt rising to 44.5 percent of GDP. Government leaders plan to manage the budget without increasing taxes, hoping to meet targets by reducing wasteful, non-priority government spending.
While Kenya strives to fund its own development efforts in the face of global crisis, French and Italian leaders are receiving criticism for their failure to follow through on development aid commitments. By the end of 2009, the G7 countries as a whole will have delivered only half of their 2005-2010 promise, with Italy and France responsible for 80 percent of the shortfall. Reviews of Italy’s performance are especially critical, as it has delivered only an estimated 3 percent of the increase it promised in 2005. Italy acknowledged the figures but cited financial constraints as the cause of the failure, stating that it remained “fully committed to the objectives set at Gleneagles.” While other G7 countries are still fighting to keep pace with the 2010 goals, Italy is a striking example of the financial crisis’ harmful effects on development funding.
Donald Kaberuka, president of the African Development Bank (ADB), expects African economies to be affected more deeply and to recover more slowly than the rest of the world. In remarks timed to correspond with recent G8 meeting in Italy, he called for developed economies to devote “robust and greater attention” to the challenges facing low income countries as they plan their post-crisis exit strategies. In May of 2009, the ADB announced plans to triple its capital base in response to the financial crisis. An increase on that scale will require a large boost in funds from foreign donor shareholders. The foreign donors the ADB is counting on, like the French and Italian governments failing to meet their aid commitments, may struggle to prioritize development spending in today’s economic climate. Kenyan leaders hope they’re on the right track; welcoming aid and foreign investment, but working hard domestically to push their own economy back toward an upward trajectory.
Discussion
1. Is the Kenyan budget, with the significant increase in national debt that it entails, a prudent plan for the developing nation? How would a tax increase affect the feasibility and effectiveness of the budget?
2. Jamie Drummond, co-founder and executive director of One, an anti-poverty organization, says that Italian Prime Minister Silvio Berlusconi “needs to be censured by his peers” for his country’s failure to meet African aid commitments. As developed countries plan for economic recovery, to what extent should their leaders be bound by aid commitments?
Reuters: G8 should use any stimulus easing to help Africa
Financial Times: Kenya unveils record ‘stimulus’ budget
Italy and France draw fire over aid
African bank tries to triple capital base
This year marked the end of a five-year upward trend in Kenyan economic growth. A bitter combination of drought, inflation, post-election violence, and a deepening global financial crisis ground the nation’s once accelerating growth to a halt. In response, the government has unveiled an ambitious budget that includes more than $11 billion in fiscal stimulus spending. A sizeable portion of the budget is devoted to development spending (overall, an increase of 83 percent over last year’s development budget); aimed at road improvements, irrigation, water supply and energy programs. The plan will bring Kenya’s budget deficit up to 6.6 percent of gross domestic product in the fiscal year starting in July, with national debt rising to 44.5 percent of GDP. Government leaders plan to manage the budget without increasing taxes, hoping to meet targets by reducing wasteful, non-priority government spending.
While Kenya strives to fund its own development efforts in the face of global crisis, French and Italian leaders are receiving criticism for their failure to follow through on development aid commitments. By the end of 2009, the G7 countries as a whole will have delivered only half of their 2005-2010 promise, with Italy and France responsible for 80 percent of the shortfall. Reviews of Italy’s performance are especially critical, as it has delivered only an estimated 3 percent of the increase it promised in 2005. Italy acknowledged the figures but cited financial constraints as the cause of the failure, stating that it remained “fully committed to the objectives set at Gleneagles.” While other G7 countries are still fighting to keep pace with the 2010 goals, Italy is a striking example of the financial crisis’ harmful effects on development funding.
Donald Kaberuka, president of the African Development Bank (ADB), expects African economies to be affected more deeply and to recover more slowly than the rest of the world. In remarks timed to correspond with recent G8 meeting in Italy, he called for developed economies to devote “robust and greater attention” to the challenges facing low income countries as they plan their post-crisis exit strategies. In May of 2009, the ADB announced plans to triple its capital base in response to the financial crisis. An increase on that scale will require a large boost in funds from foreign donor shareholders. The foreign donors the ADB is counting on, like the French and Italian governments failing to meet their aid commitments, may struggle to prioritize development spending in today’s economic climate. Kenyan leaders hope they’re on the right track; welcoming aid and foreign investment, but working hard domestically to push their own economy back toward an upward trajectory.
Discussion
1. Is the Kenyan budget, with the significant increase in national debt that it entails, a prudent plan for the developing nation? How would a tax increase affect the feasibility and effectiveness of the budget?
2. Jamie Drummond, co-founder and executive director of One, an anti-poverty organization, says that Italian Prime Minister Silvio Berlusconi “needs to be censured by his peers” for his country’s failure to meet African aid commitments. As developed countries plan for economic recovery, to what extent should their leaders be bound by aid commitments?
Tuesday, June 16, 2009
The G8 is Unified on Fragile Recovery, Divided over Policy Details
Sources
Bloomberg: G8 plans to reverse stimulus as rebound signs grow
Reuters: G8 says economies stabilizing, recovery uncertain
Financial Times: Measures to tackle downturn cloud G8 meeting
The Group of Eight (G8), comprised of government leaders from Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States, met in Lecce Italy last weekend to discuss the current economic outlook and monetary policy priorities. The G8 leaders took a united stance on the global economy’s tentative recovery, but remain divided on multiple important issues.
The leaders of G8 member countries disagreed on the timing of economic recovery strategies. U.S. and British leaders argued for a continued emphasis on combating the recession, saying that the recovery is still too fragile for the removal of strong federal support. Canada and Germany meanwhile, insisted that the time is right to begin scaling back mammoth government spending programs, in an effort to avoid inflationary problems. The French economic minister Christine Lagarde hesitated in the middle ground, saying that France should “anticipate” the planning of exit strategies, but that it was too soon to give up the stimulus measures.
G8 leaders also discussed the rift over European stress tests. U.S. and Canadian leaders pressed for increased transparency in European banks. They believe European countries should be doing more to test their banks, and that the results should be made public. European leaders like Germany’s Peer Steinbrück, resist disclosure, citing concern for investor confidence. The vulnerability of the Euro zone’s recovery was highlighted by the release of April’s industrial production numbers. Official figures confirm a staggering 21.6 percent drop from the previous year, the steepest year-on-year decline since Euro zone records began in 1991.
IMF managing director Dominique Strauss-Kahn didn’t sugarcoat his global recovery outlook, calling the current recovery “weak” and insisting that the social effects of the crisis aren’t going to diminish anytime soon. He predicted a recovery in average growth in the beginning of 2010 and estimated the peak in unemployment for more than one year from now, in early 2011. One thing is clear after the international debate of the Italy summit: there is not a lone, correct path out of the mire. Each country will emerge from the crisis in different shape, and at a different pace. The timing and content of recovery plans will vary as widely as the economic landscapes upon which they are based.
Discussion
1. Global financial markets are interconnected. As individual nations attempt to combat the effects of recession at home, does it make sense for leaders to strategize together? What are the benefits and the shortcomings of a global approach to recovery?
2. Who is right in the European stress test debate? Are the European leaders justified in resisting disclosure? What are the potential benefits of the increased transparency?
Bloomberg: G8 plans to reverse stimulus as rebound signs grow
Reuters: G8 says economies stabilizing, recovery uncertain
Financial Times: Measures to tackle downturn cloud G8 meeting
The Group of Eight (G8), comprised of government leaders from Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States, met in Lecce Italy last weekend to discuss the current economic outlook and monetary policy priorities. The G8 leaders took a united stance on the global economy’s tentative recovery, but remain divided on multiple important issues.
The leaders of G8 member countries disagreed on the timing of economic recovery strategies. U.S. and British leaders argued for a continued emphasis on combating the recession, saying that the recovery is still too fragile for the removal of strong federal support. Canada and Germany meanwhile, insisted that the time is right to begin scaling back mammoth government spending programs, in an effort to avoid inflationary problems. The French economic minister Christine Lagarde hesitated in the middle ground, saying that France should “anticipate” the planning of exit strategies, but that it was too soon to give up the stimulus measures.
G8 leaders also discussed the rift over European stress tests. U.S. and Canadian leaders pressed for increased transparency in European banks. They believe European countries should be doing more to test their banks, and that the results should be made public. European leaders like Germany’s Peer Steinbrück, resist disclosure, citing concern for investor confidence. The vulnerability of the Euro zone’s recovery was highlighted by the release of April’s industrial production numbers. Official figures confirm a staggering 21.6 percent drop from the previous year, the steepest year-on-year decline since Euro zone records began in 1991.
IMF managing director Dominique Strauss-Kahn didn’t sugarcoat his global recovery outlook, calling the current recovery “weak” and insisting that the social effects of the crisis aren’t going to diminish anytime soon. He predicted a recovery in average growth in the beginning of 2010 and estimated the peak in unemployment for more than one year from now, in early 2011. One thing is clear after the international debate of the Italy summit: there is not a lone, correct path out of the mire. Each country will emerge from the crisis in different shape, and at a different pace. The timing and content of recovery plans will vary as widely as the economic landscapes upon which they are based.
Discussion
1. Global financial markets are interconnected. As individual nations attempt to combat the effects of recession at home, does it make sense for leaders to strategize together? What are the benefits and the shortcomings of a global approach to recovery?
2. Who is right in the European stress test debate? Are the European leaders justified in resisting disclosure? What are the potential benefits of the increased transparency?
Monday, June 15, 2009
German Economy Still Contracting But With Some Signs of Recovery
Sources: BusinessWeek, German Economy to Shrink 6.2% in 2009; Bloomberg, German April Industrial Output Unexpectedly Declines
Following a poor showing for the first quarter of the 2009, the German economy continues to contract, though the contraction is expected to ease this year. Recovery in Germany is not expected to start until 2010, when the downward trend of growth should begin to reverse. The economy is expected to contract 6.2% in 2009, the most since World War II, which is a slightly higher rate than earlier expected. Though the trend should turn next year, there is still no positive growth in 2010, and it is not until 2013 that the 2008 growth level—a modest 1.3%—is expected to return.
The low point of growth for Germany should occur this summer, though unemployment should continue to rise, lagging behind other indicators. Unemployment is expected to peak in mid-2010 at 10.5%. Though one bank leader suggested that Germany is a better position to withstand the crisis and recover quickly than other countries due to its high savings rate and the lack of a real estate bubble, there are also some problems that will hamper recovery.
Exports, for example, may not be as great as they were before the crisis, which means that the German government will not be able to afford the kind of social security that its citizens are used to. Exports fell at a greater rate than expected in April, as did production, falling 1.9% in April contrary to the expectation of another 0.3% increase as occurred in March. Exports and investment drove the contraction in the first quarter, and the output in investment goods again declined the most in April. Production of consumer goods and energy, on the other hand, rose in April. In May, the contraction of manufacturing eased and business confidence increased in Germany, and there are indications that industrial output may soon bottom out.
Questions:
1) Do you expect that Germany's bad fortune will lead to the rise of another European economic power post-crisis, or do you think that the EU's economic power will fall as a result?
2) Do you think that some of the more positive indications mean that recovery may come quicker than expected, or do you expect that these are aberrations?
Following a poor showing for the first quarter of the 2009, the German economy continues to contract, though the contraction is expected to ease this year. Recovery in Germany is not expected to start until 2010, when the downward trend of growth should begin to reverse. The economy is expected to contract 6.2% in 2009, the most since World War II, which is a slightly higher rate than earlier expected. Though the trend should turn next year, there is still no positive growth in 2010, and it is not until 2013 that the 2008 growth level—a modest 1.3%—is expected to return.
The low point of growth for Germany should occur this summer, though unemployment should continue to rise, lagging behind other indicators. Unemployment is expected to peak in mid-2010 at 10.5%. Though one bank leader suggested that Germany is a better position to withstand the crisis and recover quickly than other countries due to its high savings rate and the lack of a real estate bubble, there are also some problems that will hamper recovery.
Exports, for example, may not be as great as they were before the crisis, which means that the German government will not be able to afford the kind of social security that its citizens are used to. Exports fell at a greater rate than expected in April, as did production, falling 1.9% in April contrary to the expectation of another 0.3% increase as occurred in March. Exports and investment drove the contraction in the first quarter, and the output in investment goods again declined the most in April. Production of consumer goods and energy, on the other hand, rose in April. In May, the contraction of manufacturing eased and business confidence increased in Germany, and there are indications that industrial output may soon bottom out.
Questions:
1) Do you expect that Germany's bad fortune will lead to the rise of another European economic power post-crisis, or do you think that the EU's economic power will fall as a result?
2) Do you think that some of the more positive indications mean that recovery may come quicker than expected, or do you expect that these are aberrations?
Sunday, June 14, 2009
Singapore Mitigating Effects of Global Crisis
Sources: Forbes.com: Singapore struggles, waiting for West to rebound; worldtrademag.com: Using the Financial Storm to Prosper
Singapore has fallen into the deepest recession it has seen since 1965 when it split from a brief federation with Malaysia. The island is home to 4.8 million people on 683 kilometers of land. The density of the population, as well as the lack of resources, has left it vulnerable to the changing tides of the global market.
With 185 percent of its gross domestic product in exports, the Southeast Asian city-state is more dependent on trade than any other Asian economy. Now that its leading customers—the U.S., Europe, and Japan—are bogged down in the global crisis, Singapore is feeling the effects of the financial shockwave. The IMF has forecasted that the GDP will contract more than any other Asian economy at 10 percent in 2009.
To weather the crisis, the government is working diligently to limit its impact. In an effort to retain container traffic in the port, Singapore is cutting port dues for smaller harbor vessels by 20 percent, and 10 percent for bigger, seafaring ships docking for less than 10 days in the port. These rate reductions will last for one year. To facilitate new business development in spite of the downturn, the government will also provide a 40 percent tax rebate in 2009 for industrial and commercial properties. Furthermore, Singapore has stricken goods and services taxes for certain shippers constructing new facilities for container cargo.
Boasting over $170 billion in foreign exchange reserves, the government is using the economic slump to make fresh investments. It also created the largest economic stimulus package of any Southeast Asian nation at $14 billion.
Despite the economic downturn, Singapore achieved record tonnage in 2008, having shipped some 1.6 billion gross tons. Moreover, 2008 saw a growth in retainer traffic in the port. Still, the large developed economies must pull from the current crisis for Singapore to realize a return of the booming growth it previously enjoyed. While 2009 will be difficult, the Southeast Asian city-state will most probably see traffic recover significantly in 2010.
Discussion Questions:
1) Does Singapore's heavy reliance on trade leave it entirely subject to the caprices of demand in global markets?
2) If the financial crisis is slow to pass, what additional measures might the Singapore government take to encourage investment and maintain traffic?
Singapore has fallen into the deepest recession it has seen since 1965 when it split from a brief federation with Malaysia. The island is home to 4.8 million people on 683 kilometers of land. The density of the population, as well as the lack of resources, has left it vulnerable to the changing tides of the global market.
With 185 percent of its gross domestic product in exports, the Southeast Asian city-state is more dependent on trade than any other Asian economy. Now that its leading customers—the U.S., Europe, and Japan—are bogged down in the global crisis, Singapore is feeling the effects of the financial shockwave. The IMF has forecasted that the GDP will contract more than any other Asian economy at 10 percent in 2009.
To weather the crisis, the government is working diligently to limit its impact. In an effort to retain container traffic in the port, Singapore is cutting port dues for smaller harbor vessels by 20 percent, and 10 percent for bigger, seafaring ships docking for less than 10 days in the port. These rate reductions will last for one year. To facilitate new business development in spite of the downturn, the government will also provide a 40 percent tax rebate in 2009 for industrial and commercial properties. Furthermore, Singapore has stricken goods and services taxes for certain shippers constructing new facilities for container cargo.
Boasting over $170 billion in foreign exchange reserves, the government is using the economic slump to make fresh investments. It also created the largest economic stimulus package of any Southeast Asian nation at $14 billion.
Despite the economic downturn, Singapore achieved record tonnage in 2008, having shipped some 1.6 billion gross tons. Moreover, 2008 saw a growth in retainer traffic in the port. Still, the large developed economies must pull from the current crisis for Singapore to realize a return of the booming growth it previously enjoyed. While 2009 will be difficult, the Southeast Asian city-state will most probably see traffic recover significantly in 2010.
Discussion Questions:
1) Does Singapore's heavy reliance on trade leave it entirely subject to the caprices of demand in global markets?
2) If the financial crisis is slow to pass, what additional measures might the Singapore government take to encourage investment and maintain traffic?
Wednesday, June 10, 2009
Economic Issues Are the Top Concern in the Iranian Election
Sources: New York Times, Candidates in Iran Split on Direction of Economy; IslamOnline, Iran: Election and Economy
As the stage is set for Iran's presidential election on Friday, Iranian voters' biggest concern is the economy. President Ahmadinejad, running for re-election, hopes to convince voters that Iran is in good shape compared with the rest of the world, and that he has done enough to improve the lot of the average Iranian. On the other hand, unemployment and inflation are rising, and according to the IMF, Iran's growth is slowing.
Much of the debate is over numbers—how to report inflation, for example. Ahmadinejad uses the year-on-year change in prices to show lower inflation than his opponents, who use the more common annualized average or projected annual rate. Opponents also are trying to focus on mismanagement of oil wealth in the years preceding the crisis, on unemployment, and on slowing overall growth. They criticize Ahmadinejad for focusing only on populist goals, rather than the need to create jobs and develop infrastructure. On the other hand, populist programs have endeared some voters to Mr. Ahmadinejad, and the numbers battle can be confusing for the average voter, with whom measures to reduce poverty and increase benefits resonate strongly.
Two of the challengers have some experience in economics, and all three have a particular focus to their economic plan. Leading challenger Mirhossein Mousavi is a former Prime Minister who brings experience to the table from his handling of the economy during the Iran-Iraq war. He is supported by those economists opposed to Ahmadinejad's policies, and he is particularly focused on unemployed youth. Mohsen Rezaei is an economist by profession who wants to bring rational economic policies to the office. Mehdi Karoubi, the second-place finisher in 2005's election, is focused on welfare and a more humane approach, including support for women who work from home. To counter these candidates' proposals, Ahmadinead's focus is on an Islamic concept of economics tied up in social justice, which served him well in the 2005 race.
Questions:
1) How important do you think social justice and programs for the poor are for a developing country in this crisis?
2) Do you think that Ahmadinejad's attempts to present the numbers in a favorable light and continue defending his economic policies is politically wise, or would it make more sense to focus on the realities of the crisis and getting through it?
As the stage is set for Iran's presidential election on Friday, Iranian voters' biggest concern is the economy. President Ahmadinejad, running for re-election, hopes to convince voters that Iran is in good shape compared with the rest of the world, and that he has done enough to improve the lot of the average Iranian. On the other hand, unemployment and inflation are rising, and according to the IMF, Iran's growth is slowing.
Much of the debate is over numbers—how to report inflation, for example. Ahmadinejad uses the year-on-year change in prices to show lower inflation than his opponents, who use the more common annualized average or projected annual rate. Opponents also are trying to focus on mismanagement of oil wealth in the years preceding the crisis, on unemployment, and on slowing overall growth. They criticize Ahmadinejad for focusing only on populist goals, rather than the need to create jobs and develop infrastructure. On the other hand, populist programs have endeared some voters to Mr. Ahmadinejad, and the numbers battle can be confusing for the average voter, with whom measures to reduce poverty and increase benefits resonate strongly.
Two of the challengers have some experience in economics, and all three have a particular focus to their economic plan. Leading challenger Mirhossein Mousavi is a former Prime Minister who brings experience to the table from his handling of the economy during the Iran-Iraq war. He is supported by those economists opposed to Ahmadinejad's policies, and he is particularly focused on unemployed youth. Mohsen Rezaei is an economist by profession who wants to bring rational economic policies to the office. Mehdi Karoubi, the second-place finisher in 2005's election, is focused on welfare and a more humane approach, including support for women who work from home. To counter these candidates' proposals, Ahmadinead's focus is on an Islamic concept of economics tied up in social justice, which served him well in the 2005 race.
Questions:
1) How important do you think social justice and programs for the poor are for a developing country in this crisis?
2) Do you think that Ahmadinejad's attempts to present the numbers in a favorable light and continue defending his economic policies is politically wise, or would it make more sense to focus on the realities of the crisis and getting through it?
Saturday, June 06, 2009
U.S. Employment Data Offers Hope amid Crisis
Sources: BusinessWeek.com: Jobs Report Is an Upside Surprise; Rueters.com: Unemployment Hits Record but Job Losses Slow; Rueters.com: Take-A-Look: World Stocks, Oil Surge After US Jobs Data
While analysts had forecasted that 550,000 jobs would be lost in May, this figure topped out at 345,000. However, the unemployment rate reached 9.4 percent, the highest since July 1983, up from 8.9 percent in April. Analysts had expected it to peak at 9.2 percent. Still, this rise was due to an increase in new entrants to the labor force, and a drop in employment rates. Last month saw an increase to the labor force of 350,000. The increase in April was only 120,000.
82,000 fewer positions were also shed during April and March than previously reported. Jobs losses in April were revised from 539,000 to 504,000, and in March from 699,000 to 652,000.
The government’s $787 billion stimulus package likely saw the dip in payrolls in construction industries up from 108,000 in April to 59,000 in May. Further, the service-providing industry, which shed 230,000 jobs in April, lost 120,000 positions last month. Health care also posted gains while government employment generally remained consistent. The rise in job losses in the manufacturing sector from 154,000 in April to 156,000 in May likely followed Chrysler’s bankruptcy filing which resulted in a string of auto plant shutdowns.
Long-term unemployment has continued to grow. 3.95 million Americans have now been unemployed for at least six months. In April, this figure was only 268,000. While jobs continue to be lost in large numbers, output may increase in the second half of the year so long as the improvement rate persists.
The better-than-expected jobs report has buttressed hopes that the worst is behind the U.S. economy. World stocks saw an increase on Friday. Bond yields also increased. Further, resource and commodity prices have escalated and the jobs data has seen oil prices reach seven-month highs.
Discussion Question:
1) How might the U.S. jobs report generate optimism about other economies?
2) In what ways will the financial crisis permanently alter the landscape of the job market in America?
While analysts had forecasted that 550,000 jobs would be lost in May, this figure topped out at 345,000. However, the unemployment rate reached 9.4 percent, the highest since July 1983, up from 8.9 percent in April. Analysts had expected it to peak at 9.2 percent. Still, this rise was due to an increase in new entrants to the labor force, and a drop in employment rates. Last month saw an increase to the labor force of 350,000. The increase in April was only 120,000.
82,000 fewer positions were also shed during April and March than previously reported. Jobs losses in April were revised from 539,000 to 504,000, and in March from 699,000 to 652,000.
The government’s $787 billion stimulus package likely saw the dip in payrolls in construction industries up from 108,000 in April to 59,000 in May. Further, the service-providing industry, which shed 230,000 jobs in April, lost 120,000 positions last month. Health care also posted gains while government employment generally remained consistent. The rise in job losses in the manufacturing sector from 154,000 in April to 156,000 in May likely followed Chrysler’s bankruptcy filing which resulted in a string of auto plant shutdowns.
Long-term unemployment has continued to grow. 3.95 million Americans have now been unemployed for at least six months. In April, this figure was only 268,000. While jobs continue to be lost in large numbers, output may increase in the second half of the year so long as the improvement rate persists.
The better-than-expected jobs report has buttressed hopes that the worst is behind the U.S. economy. World stocks saw an increase on Friday. Bond yields also increased. Further, resource and commodity prices have escalated and the jobs data has seen oil prices reach seven-month highs.
Discussion Question:
1) How might the U.S. jobs report generate optimism about other economies?
2) In what ways will the financial crisis permanently alter the landscape of the job market in America?
Tuesday, June 02, 2009
Russian Forecasts Worsen; Medvedev Criticizes Finance Minister
Sources: Reuters, Russia Reserve Fund Falls as Budget Deficit Funded; The Guardian, Russian Economy to Stagnate in 2010; LA Times, President Medvedev Takes Apparent Jab at Russia's Finance Minister over Crisis Talk; AFP, Medvedev Scolds Officials for Gloomy Forecasts
Recent IMF forecasts for Russia show worsened conditions, with the GDP contracting by 6.5% in 2009, rather than 6% as predicted earlier, and zero growth expected for 2010, where the earlier forecast had predicted a modest 0.5%. The reason for the adjustment is the lack of any indication that there will be a sustained recovery soon in oil prices, paired with the fact that it is unlikely that Russia will see the same levels of foreign capital flowing into the country as before the crisis.
Russia has been dependent on its two sovereign wealth funds, bloated with money from tax on oil revenues in the months immediately preceding the crisis, and the Reserve Fund—the one of the two that allows for shorter-term investments—shrank 12% in May alone. The government was trying to cover a deficit that was originally estimated at 7.4% GDP, but which a Russian official now admits is closer to 9%. The Fund has not shrank by quite so much in dollar terms, due to the decreasing value of the dollar, but if Russia continues to draw from it there could be cause for concern.
Both the IMF and the Bank of Russia want the ruble to eventually float freely, possibly as soon as 2010, rather than in a controlled band. President Medvedev has indicated his approval for this goal by re-appointing the Bank's chairman for a third one-year term. The IMF would also like to see a gradual relaxation of monetary policy in the coming months, and a strong response to inflation.
Meanwhile, though Medvedev acknowledges that the situation in his country is "moderately negative," he notes that Russia is not the worst-off country in this crisis, and retains some optimism. He sharply criticized his Finance Minister Alexei Kudrin, albeit without naming his name, for a prediction last month that recovery would be unlikely for Russia within the next ten, twenty, or even fifty years. Medvedev indicated that such a statement was only proof of poor performance on the part of the one saying it, and is insistent in focusing on what can be done rather than the bleak forecasts. GDP decline, for example, did slow on a monthly basis in April. Political instability, however, could result from high unemployment in Russia combined with its overall economic problems, and Medvedev is no doubt concerned about this possibility.
Questions:
1) Do you think that Medvedev's cautious optimism through this crisis has been misplaced? Is Kudrin going too far, or just being realistic?
2) Do you expect that this crisis will result in an electoral shake-up in Russia?
3) Do you think that it is a good idea to allow the ruble to float freely, or better for the central bank to maintain some control in the form of the band?
Recent IMF forecasts for Russia show worsened conditions, with the GDP contracting by 6.5% in 2009, rather than 6% as predicted earlier, and zero growth expected for 2010, where the earlier forecast had predicted a modest 0.5%. The reason for the adjustment is the lack of any indication that there will be a sustained recovery soon in oil prices, paired with the fact that it is unlikely that Russia will see the same levels of foreign capital flowing into the country as before the crisis.
Russia has been dependent on its two sovereign wealth funds, bloated with money from tax on oil revenues in the months immediately preceding the crisis, and the Reserve Fund—the one of the two that allows for shorter-term investments—shrank 12% in May alone. The government was trying to cover a deficit that was originally estimated at 7.4% GDP, but which a Russian official now admits is closer to 9%. The Fund has not shrank by quite so much in dollar terms, due to the decreasing value of the dollar, but if Russia continues to draw from it there could be cause for concern.
Both the IMF and the Bank of Russia want the ruble to eventually float freely, possibly as soon as 2010, rather than in a controlled band. President Medvedev has indicated his approval for this goal by re-appointing the Bank's chairman for a third one-year term. The IMF would also like to see a gradual relaxation of monetary policy in the coming months, and a strong response to inflation.
Meanwhile, though Medvedev acknowledges that the situation in his country is "moderately negative," he notes that Russia is not the worst-off country in this crisis, and retains some optimism. He sharply criticized his Finance Minister Alexei Kudrin, albeit without naming his name, for a prediction last month that recovery would be unlikely for Russia within the next ten, twenty, or even fifty years. Medvedev indicated that such a statement was only proof of poor performance on the part of the one saying it, and is insistent in focusing on what can be done rather than the bleak forecasts. GDP decline, for example, did slow on a monthly basis in April. Political instability, however, could result from high unemployment in Russia combined with its overall economic problems, and Medvedev is no doubt concerned about this possibility.
Questions:
1) Do you think that Medvedev's cautious optimism through this crisis has been misplaced? Is Kudrin going too far, or just being realistic?
2) Do you expect that this crisis will result in an electoral shake-up in Russia?
3) Do you think that it is a good idea to allow the ruble to float freely, or better for the central bank to maintain some control in the form of the band?
Monday, June 01, 2009
Foreign Purchase of African Agricultural Lands: Neo-colonialism or Development Aid?
Sources
Financial Times: Tokyo Aims to Halt ‘Farmland Grabbing’, Africa Almost Giving Land Away, Says UN
FAO (UN): Land Grab or Development Opportunity (Full Report)
Wealthy countries like Saudi Arabia, China and South Korea are turning to Africa to boost their food security. Not self-sufficient in food production, these countries have acquired large tracts of farmland in African nations at extremely low prices, while making indefinite promises of local jobs and infrastructure. They intend to export virtually all of the crops grown on African soil back to their home countries, for use as either food or biofuel.
A recent report by the UN’s Food and Agriculture Organization, in conjunction with the International Institute for Environment and Development, highlights the rudimentary nature of these land agreements. The farmland contracts are conspicuously short and simple, and make little mention of host country priorities like the improvement of local infrastructure, local food security and the utilization of a local labor supply.
Many are troubled by these purchases, calling them neo-colonial land grabs. Japanese leaders in particular have stepped out in opposition to inequitable land dealings in Africa. The Japanese have articulated a commitment to responsible investing and will present an initiative at the Group of Eight Summit in July. The UN, World Bank and African Union are also addressing the problem, but officials agree that a G8-backed plan would be more powerful. The Japanese plan seeks to harmonize and promote the interests of investors and host countries while promoting greater investment in agriculture overall.
Foreign involvement in agriculture undoubtedly has the potential to benefit African nations. To do so, it must be done equitably, with terms of trade favorable to the host country. Infrastructure and technological research must be grounded in the host country for foreign agribusiness to boost local productivity.
Discussion:
1. Geopolitically, is food the new oil? Are the historical lessons of natural resource exploitation in other fields relevant to the purchase of farmland in Africa today?
2. Public outcry at foreign acquisition of local lands was one of the triggering factors in Madagascar’s recent coup d’état. What are the long-term political implications, for other nations, of such large agricultural leases?
Financial Times: Tokyo Aims to Halt ‘Farmland Grabbing’, Africa Almost Giving Land Away, Says UN
FAO (UN): Land Grab or Development Opportunity (Full Report)
Wealthy countries like Saudi Arabia, China and South Korea are turning to Africa to boost their food security. Not self-sufficient in food production, these countries have acquired large tracts of farmland in African nations at extremely low prices, while making indefinite promises of local jobs and infrastructure. They intend to export virtually all of the crops grown on African soil back to their home countries, for use as either food or biofuel.
A recent report by the UN’s Food and Agriculture Organization, in conjunction with the International Institute for Environment and Development, highlights the rudimentary nature of these land agreements. The farmland contracts are conspicuously short and simple, and make little mention of host country priorities like the improvement of local infrastructure, local food security and the utilization of a local labor supply.
Many are troubled by these purchases, calling them neo-colonial land grabs. Japanese leaders in particular have stepped out in opposition to inequitable land dealings in Africa. The Japanese have articulated a commitment to responsible investing and will present an initiative at the Group of Eight Summit in July. The UN, World Bank and African Union are also addressing the problem, but officials agree that a G8-backed plan would be more powerful. The Japanese plan seeks to harmonize and promote the interests of investors and host countries while promoting greater investment in agriculture overall.
Foreign involvement in agriculture undoubtedly has the potential to benefit African nations. To do so, it must be done equitably, with terms of trade favorable to the host country. Infrastructure and technological research must be grounded in the host country for foreign agribusiness to boost local productivity.
Discussion:
1. Geopolitically, is food the new oil? Are the historical lessons of natural resource exploitation in other fields relevant to the purchase of farmland in Africa today?
2. Public outcry at foreign acquisition of local lands was one of the triggering factors in Madagascar’s recent coup d’état. What are the long-term political implications, for other nations, of such large agricultural leases?
OPEC Countries Optimistic After Meeting
Sources: Bloomberg, OPEC Holds Production Quotas Steady, Predicting Demand Recovery; Bloomberg, Saudi Arabian Oil Minister Naimi Says Oil to Reach $75 a Barrel; Forbes, OPEC Gets Overexcited; Boston Globe, OPEC News Sends Oil to Six-Month High; Financial Times, Oil-Rich Region Faces Gas Shortfall; Financial Times, Opinion: Spending Sees Gulf Through Crisis
At a meeting in Vienna on Thursday, OPEC countries decided to maintain their oil production quota at 24.845 million barrels a day, hoping for a recovery in global demand late in the year. Despite a current oversupply in oil, representatives were concerned that reducing output would disrupt the current global recovery. Saudi oil minister Ali al-Naimi noted before the meeting that his goal is to keep the price of oil between $75 and $80 a barrel, and that he expects the price to rise to $75 based on rising global demand, which is in his opinion ideal for the world economy. For this reason, he recommended maintaining the output quota.
However, despite these predictions and assurances, the production quotas appear to have limited meaning when OPEC countries are regularly exceeding them. In April, despite an earlier pledge to cut production, OPEC countries actually increased their production, moving away from their targets as global prices recovered. Saudi Arabia is the only country that complied fully with the quota. Furthermore, despite demand recovery, al-Naimi noted that at present the only significant demand is coming from Asia. Low U.S. demand means oversupply—oil being produced but not exported.
After the OPEC meeting, the price rose to a six-month high, at a little over $65 over a barrel for July delivery. OPEC is hoping for the price to maintain at $60 to $70 through the end of the year. Despite al-Naimi's hopes, analysts warn that price improvement happening too quickly could jeopardize the global recovery, and that $70 to $80 oil would particularly harm the recovery of developed economies.
The problem is that recovery leads to higher demand for oil, which then quickly leads to higher prices since supplies of oil are fixed in the short-term. However, right now there is an oversupply of oil already, and if prices pass $80 analysts expect that OPEC will increase its production quota, hoping to cash in.
Despite the plummet in oil prices during the global crisis, the Middle East is a region well-placed to withstand it. It has experienced higher growth during the crisis than other oil-exporting regions, including Latin America and Eastern Europe. Though real GDP has expanded less during the crisis than in recent years, it is still expanding, and the Middle East and North Africa have been the most productive regions in the world during the global crisis.
Reasons for their ability to weather the crisis include limited exposure to toxic assets in the banking sector, limited exposure to declining exports and withdrawal of capital, timely monetary easing, the timely provision of liquidity and capital by national governments, and a high level of government spending from the reserves built up in the years of astronomical oil prices. Spending is especially crucial to the global economy, because it helps to sustain global demand and also helps poorer neighboring countries that do not export oil, because their nationals work in the exporting countries and send home remittances. Though this level of spending will create a deficit in countries that use it to escape the crisis, the size of the deficit varies.
One of the stranger problems emerging in the region is an expected future gas shortage, caused by excessive focus on oil production without attention to the need for natural gas. Quickly growing economies need gas to run, and the Arab Gulf states will be in trouble without it. Though both Qatar and Iran have their own gas supplies, there is no guarantee that they will provide gas to their neighbors, so this will be a problem to keep an eye on as recovery occurs.
Questions:
1) Do you think that the strategy of maintaining production quotas in expectation of rising demand is wise, or should OPEC countries cut production in order to address the current supply glut?
2) Do you think that these OPEC targets have any real meaning, considering individual countries' tendency to fall short, or is significant (but not total) compliance enough?
3) What do you think the global economy will look like post-recovery? Do you expect the Middle East to take a different economic role? A different political role? A different relationship with the United States?
At a meeting in Vienna on Thursday, OPEC countries decided to maintain their oil production quota at 24.845 million barrels a day, hoping for a recovery in global demand late in the year. Despite a current oversupply in oil, representatives were concerned that reducing output would disrupt the current global recovery. Saudi oil minister Ali al-Naimi noted before the meeting that his goal is to keep the price of oil between $75 and $80 a barrel, and that he expects the price to rise to $75 based on rising global demand, which is in his opinion ideal for the world economy. For this reason, he recommended maintaining the output quota.
However, despite these predictions and assurances, the production quotas appear to have limited meaning when OPEC countries are regularly exceeding them. In April, despite an earlier pledge to cut production, OPEC countries actually increased their production, moving away from their targets as global prices recovered. Saudi Arabia is the only country that complied fully with the quota. Furthermore, despite demand recovery, al-Naimi noted that at present the only significant demand is coming from Asia. Low U.S. demand means oversupply—oil being produced but not exported.
After the OPEC meeting, the price rose to a six-month high, at a little over $65 over a barrel for July delivery. OPEC is hoping for the price to maintain at $60 to $70 through the end of the year. Despite al-Naimi's hopes, analysts warn that price improvement happening too quickly could jeopardize the global recovery, and that $70 to $80 oil would particularly harm the recovery of developed economies.
The problem is that recovery leads to higher demand for oil, which then quickly leads to higher prices since supplies of oil are fixed in the short-term. However, right now there is an oversupply of oil already, and if prices pass $80 analysts expect that OPEC will increase its production quota, hoping to cash in.
Despite the plummet in oil prices during the global crisis, the Middle East is a region well-placed to withstand it. It has experienced higher growth during the crisis than other oil-exporting regions, including Latin America and Eastern Europe. Though real GDP has expanded less during the crisis than in recent years, it is still expanding, and the Middle East and North Africa have been the most productive regions in the world during the global crisis.
Reasons for their ability to weather the crisis include limited exposure to toxic assets in the banking sector, limited exposure to declining exports and withdrawal of capital, timely monetary easing, the timely provision of liquidity and capital by national governments, and a high level of government spending from the reserves built up in the years of astronomical oil prices. Spending is especially crucial to the global economy, because it helps to sustain global demand and also helps poorer neighboring countries that do not export oil, because their nationals work in the exporting countries and send home remittances. Though this level of spending will create a deficit in countries that use it to escape the crisis, the size of the deficit varies.
One of the stranger problems emerging in the region is an expected future gas shortage, caused by excessive focus on oil production without attention to the need for natural gas. Quickly growing economies need gas to run, and the Arab Gulf states will be in trouble without it. Though both Qatar and Iran have their own gas supplies, there is no guarantee that they will provide gas to their neighbors, so this will be a problem to keep an eye on as recovery occurs.
Questions:
1) Do you think that the strategy of maintaining production quotas in expectation of rising demand is wise, or should OPEC countries cut production in order to address the current supply glut?
2) Do you think that these OPEC targets have any real meaning, considering individual countries' tendency to fall short, or is significant (but not total) compliance enough?
3) What do you think the global economy will look like post-recovery? Do you expect the Middle East to take a different economic role? A different political role? A different relationship with the United States?
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