Sources:
UNICEF: State of the World’s Children 2011 Report, “Adolescence−An Age of Opportunity”
Deccan Herald: Condition of Adolescents in India Among the Worst: UNICEF
The Times of India: World’s Teen Capital, but Raw Deal for Girls
The Hindu: Many Challenges Remain for India’s Youthful Population
A new U.N. study, UNICEF’s State of the World’s Children 2011 Report, “Adolescence−An Age of Opportunity,” reveals the challenges India faces in improving the lives of its adolescents, especially the lives of its girls. India has 243 million adolescents, which is the largest population in one country and 20% of India’s population. The study, which defines an adolescent as someone aged 10 through 19 years old, also shows that 88% of adolescents live in developing countries.
A significant part of the study focus on gender differences and the status of girls. Forty-seven percent of India’s girls are underweight, the highest percentage in the world, and 56% of girls in India are anemic. The two conditions have serious implications during pregnancy, because the mother is not as strong as she should be when delivering her baby, leading to higher miscarriage and mother mortality rates. Having children is likely for Indian girls as 30% of girls from ages 15 to 19 are married or in some sort of relationship. Indian girls are also more likely to get married in their teenage years than men. Three in five women from the ages of 20 to 49 were married as adolescents while only one in five men were married as adolescents.
In terms of nutrition and empowerment, the study shows that Indian girls are even worse off than their Sub-Saharan African counterparts. Although the government has tried to empower Indian girls with the Prohibition of Child Marriage Act of 2006 (“PCM”), the prevalence of child marriage is 29% in urban areas and 56% in rural areas. Even though the number of girls who got married before age 18 decreased from 54% in 1992-1993 to 43% in 2007-2008, India still had the eighth highest rate of childhood marriage in the world.
The PCM shows that India is taking seriously its girls’ future. D.K. Sikri, Secretary of the Ministry of Women and Child Welfare, pointed to the Rajiv Gandhi Scheme for Empowerment of Adolescent Girls (“Scheme”) as evidence of India’s continued effort to support female empowerment. The Scheme will focus on improving health, nutrition, and education by making education the rule and not the exception for girls in India. The details on how the Scheme will improve girls’ lives are still vague. India’s girls are a vast resource of human capital, and changing Indian culture and infrastructure to utilize those girls will be key for India’s development.
Discussion:
1. Pakistan’s child marriage rate is 25%, less than half India’s rural child marriage rate. Why is there such a large difference?
2. Women’s rights are correlated with GDP/person. Is this causation or correlation?
Monday, February 28, 2011
Sunday, February 27, 2011
BP Releases Raised Cost Estimate for Nabucco Pipeline
Sources:
UPI: Nabucco Will Stand Alone, Spokesman Says
AFP: Nabucco Pipeline Still in Limbo
Bloomberg: Nabucco Pipeline May Cost $19 Billion, BP Says, Guardian Reports
Asia Times Online: Nabucco Faces Cost Surge
This week BP released a cost projection for the Nabucco pipeline that estimates the project may cost twice as much as originally estimated. If completed, the Nabucco gas pipeline would diversify the European gas market by bringing in gas from the Caspian region and the Middle East to compete with the Russian production. Europe has long been eager to find alternative gas sources because repeated standoffs between Russia and Europe over price have caused Russia to suspend Europe’s main gas supply, sometimes during Europe’s cold winter. Since 80% of Europe’s gas supply runs through Ukraine, a country with frequent political flare-ups with Russia, Europe feels held hostage by Kiev and Moscow’s control of the market. The Nabucco project, created to avoid Ukranian and Russian territory, has been progressing steadily, with Azerbaijan committing to supply 31 billion cubic meters of gas per year to the pipeline.
This recent media snag in the Nabucco project may threaten the development of the pipeline project. While the Nabucco management publicized the cost at 7.9 billion euro, BP’s cost estimate comes in at 14 billion euro. BP attributes the higher estimate to a rise in steel prices since 2010, noting that the Nabucco estimate was compiled in 2008, prior to the surge in commodity prices seen this past year. The Nabucco management was immediately critical of the BP estimate, calling it “pure speculation,” since the Nabucco management estimate was based on feasibility studies.
Some have questioned the ability of the Nabucco project to remain free from Russian influence. Gazprom counter-offers may have given Nabucco management pause, but representatives assure the public that Nabucco will not merge with other projects in the region, including a competing Russian-fed pipeline, South Stream. Due to cost and production concerns, as well as hesitation from the Turkmen gas supply, the pipeline may be on hold with management putting off final investment decisions until 2012 at the earliest. However, the European incentives for progressing on a stand-alone pipeline project from the Southern Corridor are strong, and thus the project will likely continue to work though minor setbacks like the BP cost assessment to a successful result.
Discussion Questions:
1) If gas production is stalled in Azerbaijan, will the Nabucco project be forced to turn to Russia for partnership despite the project’s goal to bypass Russian gas entirely?
2) Will rising commodity prices and production hesitation from Central Asia and the Caspian region threaten the entire Nabucco project, or are investors willing to pay more for a stand-alone pipeline that would increase competition for gas in Europe?
UPI: Nabucco Will Stand Alone, Spokesman Says
AFP: Nabucco Pipeline Still in Limbo
Bloomberg: Nabucco Pipeline May Cost $19 Billion, BP Says, Guardian Reports
Asia Times Online: Nabucco Faces Cost Surge
This week BP released a cost projection for the Nabucco pipeline that estimates the project may cost twice as much as originally estimated. If completed, the Nabucco gas pipeline would diversify the European gas market by bringing in gas from the Caspian region and the Middle East to compete with the Russian production. Europe has long been eager to find alternative gas sources because repeated standoffs between Russia and Europe over price have caused Russia to suspend Europe’s main gas supply, sometimes during Europe’s cold winter. Since 80% of Europe’s gas supply runs through Ukraine, a country with frequent political flare-ups with Russia, Europe feels held hostage by Kiev and Moscow’s control of the market. The Nabucco project, created to avoid Ukranian and Russian territory, has been progressing steadily, with Azerbaijan committing to supply 31 billion cubic meters of gas per year to the pipeline.
This recent media snag in the Nabucco project may threaten the development of the pipeline project. While the Nabucco management publicized the cost at 7.9 billion euro, BP’s cost estimate comes in at 14 billion euro. BP attributes the higher estimate to a rise in steel prices since 2010, noting that the Nabucco estimate was compiled in 2008, prior to the surge in commodity prices seen this past year. The Nabucco management was immediately critical of the BP estimate, calling it “pure speculation,” since the Nabucco management estimate was based on feasibility studies.
Some have questioned the ability of the Nabucco project to remain free from Russian influence. Gazprom counter-offers may have given Nabucco management pause, but representatives assure the public that Nabucco will not merge with other projects in the region, including a competing Russian-fed pipeline, South Stream. Due to cost and production concerns, as well as hesitation from the Turkmen gas supply, the pipeline may be on hold with management putting off final investment decisions until 2012 at the earliest. However, the European incentives for progressing on a stand-alone pipeline project from the Southern Corridor are strong, and thus the project will likely continue to work though minor setbacks like the BP cost assessment to a successful result.
Discussion Questions:
1) If gas production is stalled in Azerbaijan, will the Nabucco project be forced to turn to Russia for partnership despite the project’s goal to bypass Russian gas entirely?
2) Will rising commodity prices and production hesitation from Central Asia and the Caspian region threaten the entire Nabucco project, or are investors willing to pay more for a stand-alone pipeline that would increase competition for gas in Europe?
Saturday, February 26, 2011
Greeks Protest Amid Recession
Sources:
An estimated 30,000 Greeks participated in strikes and protests in Athens on Wednesday, paralyzing the city. Government offices, schools, and banks were closed, and transportation was seriously disrupted as workers walked off the job in a 24-hour protest staged by Greece's two main labor unions, GSEE and Adedy, which have a combined 1.2 million members. Bus, trolley, tram, ferry, and subway operations were suspended, and, due to a four-hour walkout by air-traffic controllers, over 100 flights were cancelled.
The protesters were demonstrating against the government's extensive budget cuts and tax increases. The Socialist government of Prime Minister George Papandreou has been cutting government spending and raising taxes to reduce its staggering debt, which reached 15.9% of its gross domestic product in 2009. The austerity measures that the Greek government has implemented have come as part of a deal between Greece, the European Union, and the International Monetary Fund in exchange for a €110 billion ($150 billion) bailout. Greek officials recently criticized the terms of this loan, arguing that the "troika," i.e., representatives from the European Commission, IMF, and European Central Bank, are meddling in Greece's internal affairs. This criticism came after the troika proposed that Greece reduce its debt by selling off €50 billion of state assets. While some analysts have suggested that such a sell-off would make a significant difference in Greece's economic situation, many Greeks fear that some of Greece's cultural heritage could be sold to foreign investors. So far, the government has not sold any public entities, even though it pledged last year to sell stakes in public utilities and banks.
Since the economic downturn, the Greeks have been hit hard. According to the most recent data, Greece's recession has worsened. Last year, the Greek economy contracted by 4.5% and unemployment rose to 13.9%. According to one union leader, Greek workers are experiencing a "barbaric attack" on their rights. This frustration led to the protests on Wednesday, which ultimately turned violent as some protesters threw stones and firecrackers at police, who retaliated with tear gas and stun grenades. Another Greek proclaimed that workers’ anger and desperation are only increasing, and "if these harsh policies continue, so will we." This is the first Greek protest since last December, but it suggests that there may be a renewed sense of social unrest if Greece is unable to negotiate better loan terms with the troika, and according to one Greek official, it may spur a new round of protests.
Discussion Question: Does the Greek government have any choice other than to implement the changes that the troika has suggested? Are the Greeks warranted in their protest of this government action?
FT: Greek Police Clash With Anti-Austerity Protesters
FT: Greece Mends Relations With EU and IMF
BBC: Greece General Strike: Clashes Erupt
NYT: Greek Protest of Austerity Drive Erupts in Violence
WSJ: Violence Flares Amid Greek Strike
FT: Greece Mends Relations With EU and IMF
BBC: Greece General Strike: Clashes Erupt
NYT: Greek Protest of Austerity Drive Erupts in Violence
WSJ: Violence Flares Amid Greek Strike
An estimated 30,000 Greeks participated in strikes and protests in Athens on Wednesday, paralyzing the city. Government offices, schools, and banks were closed, and transportation was seriously disrupted as workers walked off the job in a 24-hour protest staged by Greece's two main labor unions, GSEE and Adedy, which have a combined 1.2 million members. Bus, trolley, tram, ferry, and subway operations were suspended, and, due to a four-hour walkout by air-traffic controllers, over 100 flights were cancelled.
The protesters were demonstrating against the government's extensive budget cuts and tax increases. The Socialist government of Prime Minister George Papandreou has been cutting government spending and raising taxes to reduce its staggering debt, which reached 15.9% of its gross domestic product in 2009. The austerity measures that the Greek government has implemented have come as part of a deal between Greece, the European Union, and the International Monetary Fund in exchange for a €110 billion ($150 billion) bailout. Greek officials recently criticized the terms of this loan, arguing that the "troika," i.e., representatives from the European Commission, IMF, and European Central Bank, are meddling in Greece's internal affairs. This criticism came after the troika proposed that Greece reduce its debt by selling off €50 billion of state assets. While some analysts have suggested that such a sell-off would make a significant difference in Greece's economic situation, many Greeks fear that some of Greece's cultural heritage could be sold to foreign investors. So far, the government has not sold any public entities, even though it pledged last year to sell stakes in public utilities and banks.
Since the economic downturn, the Greeks have been hit hard. According to the most recent data, Greece's recession has worsened. Last year, the Greek economy contracted by 4.5% and unemployment rose to 13.9%. According to one union leader, Greek workers are experiencing a "barbaric attack" on their rights. This frustration led to the protests on Wednesday, which ultimately turned violent as some protesters threw stones and firecrackers at police, who retaliated with tear gas and stun grenades. Another Greek proclaimed that workers’ anger and desperation are only increasing, and "if these harsh policies continue, so will we." This is the first Greek protest since last December, but it suggests that there may be a renewed sense of social unrest if Greece is unable to negotiate better loan terms with the troika, and according to one Greek official, it may spur a new round of protests.
Discussion Question: Does the Greek government have any choice other than to implement the changes that the troika has suggested? Are the Greeks warranted in their protest of this government action?
Thursday, February 24, 2011
San Juan River Dispute Between Costa Rica and Nicaragua Could Undermine Economic Development for Both Countries
Sources:
Scoop, World: Dredging Up an Old Issue: Dispute Over the San Juan RiverTicoTimes: Edén Pastora: "One Day They Are Going To Declare Me A Hero in Costa Rica"
NicaTimes: Private Sector: Economy Before Politics
OgleEarth: About Costa Rica, Nicaragua, Their Mutual Border, and Google
TicoTimes: Google Maps Blamed for Conflict Between Costa Rica and Nicaragua
TicoTimes: Nicaragua Claims Disputed Land on New Map
A.M. CostaRica: Leading the Nation Must Be Frustrating at Times
TicoTimes: Why Is the Cost of Living in Costa Rica So High?
Tensions between Costa Rica and Nicaragua continue over a border dispute at the mouth of the San Juan River. Dispute over this section of the border between Costa Rica and Nicaragua is nothing new. The focus of the dispute has been on a piece of territory named Isla Caleros at the mouth of the San Juan River. While Costa Rican officials do not dispute Nicaraguan sovereignty over the San Juan River, they object to Nicaraguan military presence on the island.
Despite the fact that both countries look to the same documents to determine the border—the Canas-Jerez Treaty and the Cleveland Award—the indefinite language of the treaty and the unaddressed border issues of both documents have caused the two countries to contest the last kilometers of the San Juan River border many times. Most recently, a 2005 ruling by the International Court of Justice held that Costa Rica cannot use the river to supply arms to its police posts at the border and that Nicaragua cannot demand that Costa Rican tourists traveling on the river present visas.
The cause of the current border dispute is the river dredging that Nicaragua began in October last year. The location of the dredging occurs where the San Juan River splits into a continuation of the river to the North of Isla Caleros and the beginning of the Colorado River to the South of the island. While Nicaraguan politician Eden Pastora (the initiator of the river dredging and Nicaraguan military presence on Isla Caleros) does not dispute that Isla Caleros belongs to Costa Rica, he does dispute the right of the Nicaraguan government to dredge the river. The river is undisputedly Nicaraguan territory under both the Canas-Jerez Treaty and the Cleveland Award. However, not all Nicaraguan government officials agree. Nicaraguan Foreign Minister Samuel Santos maintains that under both the treaty and the Cleveland Award, Isla Caleros is Nicaraguan territory. Yet up until February 1, of this year, official maps generated by the Nicaraguan Institute of Territorial Studies showed Isla Caleros as Costa Rican territory.
Regardless, Nicaraguan President Daniel Ortega has ignored a resolution by the Organization of American States (“OAS”) that calls for both countries to remove forces from the disputed territory. President Ortega claims the OAS has no authority to decide border disputes. In response, Costa Rican President Laura Chinchilla stated that Costa Rica will not use force in this matter and instead filed a complaint with the International Court of Justice. However, a ruling from the Court will take years and an injunction against Nicaraguan river dredging will take months.
Critics of the dispute claim the border conflict is a convenient distraction from the economic and political problems present in both countries. Many believe Costa Rican President Laura Chinchilla has failed to adequately address the country’s fast-rising violent crime, infrastructural building delays, steep national debt, and the current wage freeze in the face of increasing inflation. On the Nicaraguan side, critics claim the border dispute has helped President Ortega increase his approval rating. Last year he was the least popular Central American President, and this year he has a 45% approval rating. Critics fear Ortega may use the swell of nationalistic support to run for a third term in violation of the Nicaraguan Constitution, which only allows for two non-consecutive presidential terms. An illegitimate election could deter continued foreign investments into the country, investments which have made Nicaragua the second fastest growing economy in Central America. This growth is much needed considering Nicaragua is the second poorest country in Latin America. Pending the decision of the International Court of Justice, many believe it is in the best political and economic interests of both countries to solve this dispute through prompt and peaceful open dialogue.
Discussion:
1) Although Nicaraguan President Ortega is accused of using the border dispute to bolster potential candidacy for the next election, could any President in his position maintain public support without adamantly defending a border dispute? 2) Given the earlier 2005 ruling by the International Court of Justice which sought to resolve the border dispute between Costa Rica and Nicaragua, do you believe the Court’s ruling on the pending case will be any more successful in ending the border dispute?
3) Given the significance of establishing legitimate borders in securing trade, is the border dispute a hindrance to the economic growth of either countries, or a necessity to ensure its continued growth?
Scoop, World: Dredging Up an Old Issue: Dispute Over the San Juan RiverTicoTimes: Edén Pastora: "One Day They Are Going To Declare Me A Hero in Costa Rica"
NicaTimes: Private Sector: Economy Before Politics
OgleEarth: About Costa Rica, Nicaragua, Their Mutual Border, and Google
TicoTimes: Google Maps Blamed for Conflict Between Costa Rica and Nicaragua
TicoTimes: Nicaragua Claims Disputed Land on New Map
A.M. CostaRica: Leading the Nation Must Be Frustrating at Times
TicoTimes: Why Is the Cost of Living in Costa Rica So High?
Tensions between Costa Rica and Nicaragua continue over a border dispute at the mouth of the San Juan River. Dispute over this section of the border between Costa Rica and Nicaragua is nothing new. The focus of the dispute has been on a piece of territory named Isla Caleros at the mouth of the San Juan River. While Costa Rican officials do not dispute Nicaraguan sovereignty over the San Juan River, they object to Nicaraguan military presence on the island.
Despite the fact that both countries look to the same documents to determine the border—the Canas-Jerez Treaty and the Cleveland Award—the indefinite language of the treaty and the unaddressed border issues of both documents have caused the two countries to contest the last kilometers of the San Juan River border many times. Most recently, a 2005 ruling by the International Court of Justice held that Costa Rica cannot use the river to supply arms to its police posts at the border and that Nicaragua cannot demand that Costa Rican tourists traveling on the river present visas.
The cause of the current border dispute is the river dredging that Nicaragua began in October last year. The location of the dredging occurs where the San Juan River splits into a continuation of the river to the North of Isla Caleros and the beginning of the Colorado River to the South of the island. While Nicaraguan politician Eden Pastora (the initiator of the river dredging and Nicaraguan military presence on Isla Caleros) does not dispute that Isla Caleros belongs to Costa Rica, he does dispute the right of the Nicaraguan government to dredge the river. The river is undisputedly Nicaraguan territory under both the Canas-Jerez Treaty and the Cleveland Award. However, not all Nicaraguan government officials agree. Nicaraguan Foreign Minister Samuel Santos maintains that under both the treaty and the Cleveland Award, Isla Caleros is Nicaraguan territory. Yet up until February 1, of this year, official maps generated by the Nicaraguan Institute of Territorial Studies showed Isla Caleros as Costa Rican territory.
Regardless, Nicaraguan President Daniel Ortega has ignored a resolution by the Organization of American States (“OAS”) that calls for both countries to remove forces from the disputed territory. President Ortega claims the OAS has no authority to decide border disputes. In response, Costa Rican President Laura Chinchilla stated that Costa Rica will not use force in this matter and instead filed a complaint with the International Court of Justice. However, a ruling from the Court will take years and an injunction against Nicaraguan river dredging will take months.
Critics of the dispute claim the border conflict is a convenient distraction from the economic and political problems present in both countries. Many believe Costa Rican President Laura Chinchilla has failed to adequately address the country’s fast-rising violent crime, infrastructural building delays, steep national debt, and the current wage freeze in the face of increasing inflation. On the Nicaraguan side, critics claim the border dispute has helped President Ortega increase his approval rating. Last year he was the least popular Central American President, and this year he has a 45% approval rating. Critics fear Ortega may use the swell of nationalistic support to run for a third term in violation of the Nicaraguan Constitution, which only allows for two non-consecutive presidential terms. An illegitimate election could deter continued foreign investments into the country, investments which have made Nicaragua the second fastest growing economy in Central America. This growth is much needed considering Nicaragua is the second poorest country in Latin America. Pending the decision of the International Court of Justice, many believe it is in the best political and economic interests of both countries to solve this dispute through prompt and peaceful open dialogue.
Discussion:
1) Although Nicaraguan President Ortega is accused of using the border dispute to bolster potential candidacy for the next election, could any President in his position maintain public support without adamantly defending a border dispute? 2) Given the earlier 2005 ruling by the International Court of Justice which sought to resolve the border dispute between Costa Rica and Nicaragua, do you believe the Court’s ruling on the pending case will be any more successful in ending the border dispute?
3) Given the significance of establishing legitimate borders in securing trade, is the border dispute a hindrance to the economic growth of either countries, or a necessity to ensure its continued growth?
Fuel Prices Set Off a Chain of Protests and Strikes in the Dominican Republic
Sources:
WTO: Trade Policy Review Body - Trade Policy Review - Report by the Secretariat - The Dominican Republic – Revision (IV. Trade Policies by Sector)
EIU: Dominican Republic Regulations: Hydrocarbons Law is Finally Passed
Dominican Today: On Fare Hike Threats, Dominican Republic’s “Owners” Again Get Major Perks
Diario Libre: Gasoline Sales Will Be Suspended Today by Anadegas
Diario Libre: Government and Anadegas Sign Agreement
Dominican Today: Most Fuels Will Cost More
Dominican Today: Unions Propose Talks to Raise Minimum Wage and Beyond
El Nacional: Dicen Arreciarán Protestas el Lunes
El Nacional: Suben Todos Combustibles Menos GLP; alza 0.80 a 3.7
This week, President of the Dominican Republic, Leonel Fernandez, met with transport business and union leaders to address their resolution to increase transportation fares in response to the rising price of fuel. In an effort to dissuade transport union leaders from increasing fare prices, President Fernandez promised a bill amending the Hydrocarbons Law. The bill would identify new sources of funding for transportation workers’ benefits, including a propane gas subsidy for workers that did not already have one. Transportation leaders agreed to keep the current transportation fares if the President kept his side of the agreement.
Whether this agreement will continue to suffice for transportation unions is yet to be seen. Just days after the agreement between President Fernandez and the transportation unions, gasoline retailers (under the union “Anadegas”) began striking to protest the failure of government to raise gasoline prices. Under the Hydrocarbons Law the Minister of Industry and Commerce sets and adjusts the price for hydrocarbon fuels (including gasoline) according to the fluctuating price of oil in the international market. However, gasoline retailers contest that this formula for setting prices fails to account for domestic inflation, which may not correspond with the international price of oil. Gasoline retailers point to the number of gasoline retailers that have gone out of business in the past 10 years as an indicator of how the current prices for gasoline and other fuels are insufficient to cover their operating costs, placing them on the verge of bankruptcy.
The number of gas stations in the Dominican Republic has declined from 768 to 640 over the past 10 years. In contrast, businesses offering Liquid Petroleum Gas (“LPG”), an alternative fuel for vehicles, has grown by 200%, from 320 locations to 925. This increase for LPG providers is attributed to an increase in the number of vehicles that use LPG instead of gasoline. In response to the strike, the Ministry of Industry and Commerce agreed to meet with the gasoline retailers’ union. The following Friday, the Ministry of Industry and Commerce announced that beginning Saturday, February 12, there would be a price increases on every fuel except LPG, including diesel. Although the propane subsidy promised to the transportation unions by President Fernandez will not be affected by the price increase, since propane is an LPG fuel, the diesel subsidy already given to transport workers may be devalued by the price increase on diesel fuel.
Yet, just as President Fernandez and the Ministry of Industry and Commerce avoided a transportation price hike and the continued strike of gasoline retailers, a national strike over the country’s minimum wage seemed to loom ahead. Undoubtedly encouraged by the increase in fuel prices, peasants, bus passengers, and various union organizations say they plan to protest to demand a corresponding increase in the minimum wage.
Just days before the gasoline retailers’ strike, the National Salaries Committee (“CNS”) had refused to set a minimum wage higher than RD$8,465 (roughly US$225), although the Dominican Republic Central Bank stated RD$10,407 was the salary needed to cover the cost of basic staples. Further, labor unions proposed a wage increase larger than the amount stated by the Central Bank, to compensate for an anticipated price increase in fuel and other staples. Before an agreement could be reached, the announcement on increased fuel prices was released. It is yet to be seen whether the demands of labor unions and others for an increase in the minimum wage will be met with as much success as gas retailers achieved this past week.
Discussion:
1) Should the National Salaries Committee raise the minimum wage to the amount stated by the Central Bank? If so, should the increase go beyond the amount stated by the Central Bank to compensate for price increases and inflation?
2) Should the Central Bank be trusted to set the price for minimum wage? Likewise should the Ministry of Industry and Commerce be trusted to set the price for hydrocarbon fuels? Or should the decision for setting both the minimum wage and price require an input from affected unions?
WTO: Trade Policy Review Body - Trade Policy Review - Report by the Secretariat - The Dominican Republic – Revision (IV. Trade Policies by Sector)
EIU: Dominican Republic Regulations: Hydrocarbons Law is Finally Passed
Dominican Today: On Fare Hike Threats, Dominican Republic’s “Owners” Again Get Major Perks
Diario Libre: Gasoline Sales Will Be Suspended Today by Anadegas
Diario Libre: Government and Anadegas Sign Agreement
Dominican Today: Most Fuels Will Cost More
Dominican Today: Unions Propose Talks to Raise Minimum Wage and Beyond
El Nacional: Dicen Arreciarán Protestas el Lunes
El Nacional: Suben Todos Combustibles Menos GLP; alza 0.80 a 3.7
This week, President of the Dominican Republic, Leonel Fernandez, met with transport business and union leaders to address their resolution to increase transportation fares in response to the rising price of fuel. In an effort to dissuade transport union leaders from increasing fare prices, President Fernandez promised a bill amending the Hydrocarbons Law. The bill would identify new sources of funding for transportation workers’ benefits, including a propane gas subsidy for workers that did not already have one. Transportation leaders agreed to keep the current transportation fares if the President kept his side of the agreement.
Whether this agreement will continue to suffice for transportation unions is yet to be seen. Just days after the agreement between President Fernandez and the transportation unions, gasoline retailers (under the union “Anadegas”) began striking to protest the failure of government to raise gasoline prices. Under the Hydrocarbons Law the Minister of Industry and Commerce sets and adjusts the price for hydrocarbon fuels (including gasoline) according to the fluctuating price of oil in the international market. However, gasoline retailers contest that this formula for setting prices fails to account for domestic inflation, which may not correspond with the international price of oil. Gasoline retailers point to the number of gasoline retailers that have gone out of business in the past 10 years as an indicator of how the current prices for gasoline and other fuels are insufficient to cover their operating costs, placing them on the verge of bankruptcy.
The number of gas stations in the Dominican Republic has declined from 768 to 640 over the past 10 years. In contrast, businesses offering Liquid Petroleum Gas (“LPG”), an alternative fuel for vehicles, has grown by 200%, from 320 locations to 925. This increase for LPG providers is attributed to an increase in the number of vehicles that use LPG instead of gasoline. In response to the strike, the Ministry of Industry and Commerce agreed to meet with the gasoline retailers’ union. The following Friday, the Ministry of Industry and Commerce announced that beginning Saturday, February 12, there would be a price increases on every fuel except LPG, including diesel. Although the propane subsidy promised to the transportation unions by President Fernandez will not be affected by the price increase, since propane is an LPG fuel, the diesel subsidy already given to transport workers may be devalued by the price increase on diesel fuel.
Yet, just as President Fernandez and the Ministry of Industry and Commerce avoided a transportation price hike and the continued strike of gasoline retailers, a national strike over the country’s minimum wage seemed to loom ahead. Undoubtedly encouraged by the increase in fuel prices, peasants, bus passengers, and various union organizations say they plan to protest to demand a corresponding increase in the minimum wage.
Just days before the gasoline retailers’ strike, the National Salaries Committee (“CNS”) had refused to set a minimum wage higher than RD$8,465 (roughly US$225), although the Dominican Republic Central Bank stated RD$10,407 was the salary needed to cover the cost of basic staples. Further, labor unions proposed a wage increase larger than the amount stated by the Central Bank, to compensate for an anticipated price increase in fuel and other staples. Before an agreement could be reached, the announcement on increased fuel prices was released. It is yet to be seen whether the demands of labor unions and others for an increase in the minimum wage will be met with as much success as gas retailers achieved this past week.
Discussion:
1) Should the National Salaries Committee raise the minimum wage to the amount stated by the Central Bank? If so, should the increase go beyond the amount stated by the Central Bank to compensate for price increases and inflation?
2) Should the Central Bank be trusted to set the price for minimum wage? Likewise should the Ministry of Industry and Commerce be trusted to set the price for hydrocarbon fuels? Or should the decision for setting both the minimum wage and price require an input from affected unions?
U.S. Tax Authorities Announce a Second Tax Amnesty Program
Sources:
On February 8, 2011, the United States’ Internal Revenue Service (the “IRS”) announced a tax amnesty program for U.S. taxpayers with unreported foreign accounts. To avoid prosecution by US authorities for failing to pay taxes on unreported foreign accounts, those seeking to take advantage of this program must file all necessary paperwork and pay the required taxes, interest, and penalties by August 31, 2011. The amnesty comes about just as foreign banks are getting acquainted with a new U.S. law requiring them to disclose to the IRS certain information regarding U.S. depositors.
The current program is the sequel to the 2009 tax amnesty. During the 2009 initiative, which ran from March to October, more than 15,000 U.S. taxpayers voluntarily disclosed information regarding their secret foreign accounts. Since the Service had only anticipated around 1,000 filings, the 2009 amnesty was a huge success. Even though the IRS has closed only 2,000 of the 15,000 cases, to date the 2009 initiative has generated approximately $400 million in revenue.
The 2009 and the 2011 amnesty programs have similar provisions, but the latter dictates harsher treatment for U.S. taxpayers with undisclosed offshore accounts. While the 2009 program imposed a penalty of 20 percent on the offshore account balance, its 2011 counterpart prescribes a 25-percent penalty. Additionally, the 2011 amnesty requires that U.S. taxpayers with unreported foreign accounts file tax returns for the past eight, rather than six years, as mandated by the 2009 initiative. The current amnesty program has some distinct features, however. For example, the IRS implemented a reduced 12.5-percent penalty for accounts worth less than $75,000 and a 5-percent penalty in some limited situations, such as those involving inherited accounts.
Despite its high penalties, the 2011 amnesty benefits U.S. taxpayers with secret foreign accounts by allowing them to avoid criminal charges. Though escaping prosecution comes at a high cost, this is probably the last amnesty program before new offshore bank reporting regulations go into effect on January 1, 2013. These new regulations will make hiding offshore accounts virtually impossible. Therefore, in the words of IRS Commissioner Douglas Shulman, the 2011 amnesty program is the “last, best chance” for U.S. taxpayers with unreported offshore accounts to avoid criminal prosecution and potential prison sentences.
Discussion Questions:
1. Is there a relationship between the 2009 and 2011 tax amnesty programs and the decline in tax revenues as a result of the most recent financial crisis?
2. In 2010, Congress passed a law requiring foreign banks to provide information regarding those account holders who may owe taxes to the U.S. government. The international banking community and several foreign governments have openly criticized the law. Should the U.S. government yield to this international pressure and revise or repeal the law?
Court Orders Chevron to Pay $8.6 Billion to Ecuador
NYT: Despite $8.6B Ruling, Long Road Remains for Chevron Pollution Case
This week, an Ecuadorian court ordered Chevron Corp. to pay $8.6 billion to indigenous residents of the Amazon basin for pollution damages to the Ecuadorian jungle. However, the issue is far from resolved.
Between 1972 and 1990, while drilling oil, Texaco allegedly dumped billions of gallons of oil into the Amazon rivers in Ecuador. In 1993, indigenous residents of the area brought charges against the company and claimed the pollution damaged their health and environment. When Chevron bought Texaco in 2001, it inherited the potential liability. Chevron maintains that it has already fulfilled its responsibility to the region when Texaco cleaned up part of the area and paid $40 million to the Ecuadorian government in 1995. At that time, the Ecuadorian government released Texaco, and thus Chevron, from liability in writing. However, the lawsuit claims that the reparations and clean-up did not address faulty drilling practices which further damaged the jungle and caused widespread illness and death.
Some compare the eighteen year dispute to the 1989 Exxon Valdez oil spill in Alaska, which remained in the court system for twenty years. This week, an Ecuadorian court ruled that Chevron is responsible for additional widespread contamination in Ecuador’s Amazon basin. Even though the Ecuadorian court ruled in favor of the plaintiffs, analysts expect the litigation to continue for many years.
Because Chevron does not have assets in Ecuador, the country must depend on courts in other countries in which Chevron does have assets to enforce the judgment. However, if foreign courts agree with Chevron, there will be no international legal remedy for the plaintiffs. In fact, a federal judge in the Southern District of New York issued an order barring the plaintiffs from immediately attempting to enforce the judgment in the United States. Also, international arbitrators at the International Court of Justice ordered a temporary suspension of any judgment against Chevron. These decisions force the plaintiffs to delay any action to enforce the judgment. The Ecuadorian government responded that there will be no immediate move to enforce the judgment in any event because, under Ecuador’s law, the plaintiffs must wait until all appeals are decided before attempting to enforce the judgment, and both sides are appealing the decision.
Protecting the Ecuadorian Amazon is extremely important to the country and the world. The forest covers almost half of Ecuador’s total surface area. Many indigenous communities live along the rivers that run through the forest. The Amazon is also home to thousands of species of plants and animals. Scientists consider it to be one of the richest ecosystems in the world. Experts worry that if the Amazon is harmed, through damage like that caused by oil pollution, many plant and animal species may face extinction. Also, pollution could harm the plants and trees of the rainforest that convert millions of metric tons of carbon dioxide into breathable oxygen.
Although Ecuador’s government is concerned with the environment, it also must worry about the effect of this decision on companies looking to drill oil within its borders. Ecuador has the third largest oil reserves and is the fifth largest producer of oil in South America. Companies may see this judgment as a warning that it may not be worth drilling there if they may be subject to billion-dollar lawsuits. Also, Ecuador exports sixty percent of its oil to the United States, where Chevron has assets. The government may worry that the judgment could affect its trade relations with the United States.
In their respective appeals, Chevron seeks to overturn the decision, and the plaintiffs assert that the award is insufficient. In addition to the current litigation, Chevron has filed a civil lawsuit against the indigenous residents’ attorneys, alleging that their aim through the entire case has been to extort money from Chevron. These multiple cases and the complexity of international law make it likely that the plaintiffs and Chevron will not resolve these matters for many years to come.
Discussion: Is Ecuador’s government risking too much by suing Chevron, or is the Amazon more important than the future of oil drilling? Should foreign courts enforce the judgment against Chevron or wait for a decision from an international body like the International Court of Justice?
Tuesday, February 22, 2011
G20 Reached a Deal on Measuring Global Imbalances
Sources:
FT: G20 Strikes Compromise on Global Imbalances
WSJ: G-20 Deal Reached, but Outcome Open to Interpretation
NYT: As G20 Leaders Set Deal, Geithner Criticizes China
Reuters: G20 Ministers Fudge Deal on Imbalance Indicators
Last Saturday, finance ministers and central bank governors of the Group of 20 came to an agreement on how to measure imbalances in the global economy at the Paris Summit. The G20 did not include real effective exchange rates and foreign currency as indicators of imbalances in the communiqué due to China's opposition. Nevertheless, it was "a significant step toward better coordination of economic policies worldwide to help prevent another financial crisis," said French Finance Minister Christine Lagarde.
The agreed indicators include public debt and fiscal deficits, private savings rate and private debt, and external imbalances such as the trade balance and net investment income flows. Many countries including the United States believe China's undervalued currency, which helped it accumulate huge foreign reserves, has been contributing to global imbalances. Facing China's intense opposition, however, the G20 excluded exchange rates and foreign reserves as indicators in order to reach a deal. Instead, as a compromise, the G20 agreed that it would take "due consideration" of exchange rates in assessing imbalances.
The Paris Summit showed that a G20 negotiation process had become increasingly difficult. Any deals reached must have unanimous agreement among all G20 member countries. As some countries such as Brazil and China recover from the financial crisis faster than others, it could be more complicated for members with different positions and interests to agree on specific details.
There will be no specific numerical goals for each indicator, instead, each will "test economic policies and determine how good they are for all member states, and not only for the domestic policy of a given country," said Ms. Lagarde. By April, the G20 will prepare guidelines for the agreed indicators. The International Monetary Fund is scheduled to assess policies of the G20 countries by October.
Discussion: The global economy requires policy coordination among countries. However, as Jacob Frenkel, the Chairman of JPMorgan Chase International says, “it’s very difficult to see any government doing something in its fiscal affairs just to benefit the broader system.” How can the G20 be effective in coordinating policies and tackling the global economic problems if member countries are predominantly self-interested?
FT: G20 Strikes Compromise on Global Imbalances
WSJ: G-20 Deal Reached, but Outcome Open to Interpretation
NYT: As G20 Leaders Set Deal, Geithner Criticizes China
Reuters: G20 Ministers Fudge Deal on Imbalance Indicators
Last Saturday, finance ministers and central bank governors of the Group of 20 came to an agreement on how to measure imbalances in the global economy at the Paris Summit. The G20 did not include real effective exchange rates and foreign currency as indicators of imbalances in the communiqué due to China's opposition. Nevertheless, it was "a significant step toward better coordination of economic policies worldwide to help prevent another financial crisis," said French Finance Minister Christine Lagarde.
The agreed indicators include public debt and fiscal deficits, private savings rate and private debt, and external imbalances such as the trade balance and net investment income flows. Many countries including the United States believe China's undervalued currency, which helped it accumulate huge foreign reserves, has been contributing to global imbalances. Facing China's intense opposition, however, the G20 excluded exchange rates and foreign reserves as indicators in order to reach a deal. Instead, as a compromise, the G20 agreed that it would take "due consideration" of exchange rates in assessing imbalances.
The Paris Summit showed that a G20 negotiation process had become increasingly difficult. Any deals reached must have unanimous agreement among all G20 member countries. As some countries such as Brazil and China recover from the financial crisis faster than others, it could be more complicated for members with different positions and interests to agree on specific details.
There will be no specific numerical goals for each indicator, instead, each will "test economic policies and determine how good they are for all member states, and not only for the domestic policy of a given country," said Ms. Lagarde. By April, the G20 will prepare guidelines for the agreed indicators. The International Monetary Fund is scheduled to assess policies of the G20 countries by October.
Discussion: The global economy requires policy coordination among countries. However, as Jacob Frenkel, the Chairman of JPMorgan Chase International says, “it’s very difficult to see any government doing something in its fiscal affairs just to benefit the broader system.” How can the G20 be effective in coordinating policies and tackling the global economic problems if member countries are predominantly self-interested?
Sunday, February 20, 2011
Estonia Optimistic about Continued Recovery
Sources:
BBN: Estonian Unemployment Rate Falls to 13.6%
RTT: Estonian Unemployment Drops Amid Economic Recovery
Bloomberg: Estonia's Economy Expands Most Since 2007 on Record Exports, Industry
Reuters: Estonia Q4 GDP Leaps 6.6 Pct on Manufacturing Boost
Estonia, the newest member of the euro zone, experienced record growth in the fourth quarter and has much to be optimistic about in the coming year. The International Monetary Fund (IMF) reports that Estonia's GDP is expected to rise by 3.6% in 2011, after rising an impressive 6.6% in 2010. In 2010, the unemployment rate fell from the annual average of 16.9% to 13.6% in the fourth quarter. The drop in unemployment and economic growth was caused by a rise in manufacturing and exports. Demand for Estonian goods came largely from Swedish and Finnish companies that import Estonian electronics and machinery, including televisions and radios. Specifically, 10% of Estonia's export is in wireless network gear produced at the Estonian Ericsson unit.
The country's economy has not reached pre-crisis levels, however, making some wary of declaring the recovery complete. The small Baltic nation faces the continuing challenge of maintaining economic growth and creating jobs. The IMF worries that Estonia does not have enough skilled workers in key growth sectors, which would make the recent drop in unemployment unsustainable. Due to a small population and workforce, Estonia is still vulnerable to waves of unemployment, especially of young highly-skilled workers. Without a steadily growing business industry, for example, many recent law graduates cannot find sustainable work. These skilled young professionals may instead look abroad for employment, which could possibly deprive Estonia of its brightest workers.
Despite modest foreign investment, Estonia remains optimistic about its fiscal future. Although the country's small size holds it back from becoming a giant global economic force, it could instead focus on niche markets such as IT, biotechnology, and forestry. These new markets, as well as the stability of the recent adoption of the euro, may attract more foreign investment. Furthermore, if its manufacturing sector can continue to recover and grow, Estonia can earn a reputation for a healthy and stable economy.
Discussion Questions:
1) Estonia may look into more specialized manufacturing in technology to increase export levels. Can less-populated nations such as Estonia compete with global economic giants even in niche markets?
2) How much will the high growth potential in smaller Eastern European nations such as Estonia help push the entire EU forward on the path to fiscal recovery?
Reuters: Estonia's Economy Expected to Grow 3.6 Pct in 2011
Baltic Times: As Estonia Recovers From the Crisis, It Remains OptimisticBBN: Estonian Unemployment Rate Falls to 13.6%
RTT: Estonian Unemployment Drops Amid Economic Recovery
Bloomberg: Estonia's Economy Expands Most Since 2007 on Record Exports, Industry
Reuters: Estonia Q4 GDP Leaps 6.6 Pct on Manufacturing Boost
Estonia, the newest member of the euro zone, experienced record growth in the fourth quarter and has much to be optimistic about in the coming year. The International Monetary Fund (IMF) reports that Estonia's GDP is expected to rise by 3.6% in 2011, after rising an impressive 6.6% in 2010. In 2010, the unemployment rate fell from the annual average of 16.9% to 13.6% in the fourth quarter. The drop in unemployment and economic growth was caused by a rise in manufacturing and exports. Demand for Estonian goods came largely from Swedish and Finnish companies that import Estonian electronics and machinery, including televisions and radios. Specifically, 10% of Estonia's export is in wireless network gear produced at the Estonian Ericsson unit.
The country's economy has not reached pre-crisis levels, however, making some wary of declaring the recovery complete. The small Baltic nation faces the continuing challenge of maintaining economic growth and creating jobs. The IMF worries that Estonia does not have enough skilled workers in key growth sectors, which would make the recent drop in unemployment unsustainable. Due to a small population and workforce, Estonia is still vulnerable to waves of unemployment, especially of young highly-skilled workers. Without a steadily growing business industry, for example, many recent law graduates cannot find sustainable work. These skilled young professionals may instead look abroad for employment, which could possibly deprive Estonia of its brightest workers.
Despite modest foreign investment, Estonia remains optimistic about its fiscal future. Although the country's small size holds it back from becoming a giant global economic force, it could instead focus on niche markets such as IT, biotechnology, and forestry. These new markets, as well as the stability of the recent adoption of the euro, may attract more foreign investment. Furthermore, if its manufacturing sector can continue to recover and grow, Estonia can earn a reputation for a healthy and stable economy.
Discussion Questions:
1) Estonia may look into more specialized manufacturing in technology to increase export levels. Can less-populated nations such as Estonia compete with global economic giants even in niche markets?
2) How much will the high growth potential in smaller Eastern European nations such as Estonia help push the entire EU forward on the path to fiscal recovery?
Free Trade in Asia
Sources:
Mercury News: Malaysia and India Ink Free Trade Pact
SIFY News: Malaysia and India Sign Free Trade Agreement
Daily News and Analysis: India, Malaysia Sign Comprehensive Market Opening Pact
News Center: India Signs Trade Pacts, Wants Doha Talks Concluded in 2011
India and Malaysia signed a free trade agreement, one in a series of Comprehensive Economic Cooperation Agreements (CECA,) on Friday as India looks to develop its economic ties in Asia. The Indian Commerce Minister, Anand Sharma, and his Malaysian counterpart, Mustapa Mohamed, were the two officials to sign the treaty. The deal will expand upon a trade pact India and the Association of Southeast Asian nations (ASEAN), of which Malaysia is a member, enacted in January of last year. The Malaysia-India agreement is more extensive than the prior agreement between India and ASEAN because the new agreement will cover new services and forms of investment not in the first pact. The agreement will also reduce Indian tariffs for Malaysian palm oil exports and accelerate current plans to reduce and eliminate other tariffs between the two nations.
In 2009, trade between India and Malaysia totaled $7.3 billion, and India was Malaysia’s 13th largest trading partner in 2010. Malaysian authorities estimate that Indian investment in Malaysia reached $15.9 billion last year. Most of Indian investment in Malaysia is production oriented and related to building scientific equipment, metal products, and furniture and fixtures.
However, other economic sectors will also benefit. The CECA reduces trade barriers on a wide array of services ranging from telecommunications, research and development, transport, retail and environmental services, and even some professional services. Another way services will benefit is by decreased restrictions on movement of skilled workers and professionals in these fields.
The Consortium of Indian Industries in Malaysia (CIIM) said the CECA will open up several business opportunities in Malaysia, especially for the Small and Medium Enterprises (SME) and services sector. (SME refers to businesses whose number of employees falls below a certain number.) The SME sector of the Indian economy employs over 25% of India’s workforce, 39% of India’s manufacturing output, and 33% of India’s exports. The SME sector has also outperformed the industrial sector in India in its growth. CECA is thus a gain for a key sector of the Indian economy.
This free trade agreement with Malaysia is part of India’s Look East policy which is India’s effort to create closer economic ties with Asian nations through free trade agreements. India has signed a CECA with Thailand and has signed a Comprehensive Economic Partnership Agreement (CEPA) with Japan that has similar effects as a CECA. With China, India, and Japan all in the same region, India is seeking to make its economy as competitive as possible by lowering trade barriers while at the same time improving relations between the itself and its two powerful neighbors. Additionally, India will sign a free trade agreement with the European Union later this year that, geographically, may not be part of the Look East policy but will have the spirit of the Look East policy in it.
Discussion:
1. Does India have purely economic interests as the motivating factor in its CECA deals, or are these CECA pacts primarily a way to counter Chinese influence in Asia?
2. Why does the SME sector play such a large role in the Indian economy?
Mercury News: Malaysia and India Ink Free Trade Pact
SIFY News: Malaysia and India Sign Free Trade Agreement
Daily News and Analysis: India, Malaysia Sign Comprehensive Market Opening Pact
News Center: India Signs Trade Pacts, Wants Doha Talks Concluded in 2011
India and Malaysia signed a free trade agreement, one in a series of Comprehensive Economic Cooperation Agreements (CECA,) on Friday as India looks to develop its economic ties in Asia. The Indian Commerce Minister, Anand Sharma, and his Malaysian counterpart, Mustapa Mohamed, were the two officials to sign the treaty. The deal will expand upon a trade pact India and the Association of Southeast Asian nations (ASEAN), of which Malaysia is a member, enacted in January of last year. The Malaysia-India agreement is more extensive than the prior agreement between India and ASEAN because the new agreement will cover new services and forms of investment not in the first pact. The agreement will also reduce Indian tariffs for Malaysian palm oil exports and accelerate current plans to reduce and eliminate other tariffs between the two nations.
In 2009, trade between India and Malaysia totaled $7.3 billion, and India was Malaysia’s 13th largest trading partner in 2010. Malaysian authorities estimate that Indian investment in Malaysia reached $15.9 billion last year. Most of Indian investment in Malaysia is production oriented and related to building scientific equipment, metal products, and furniture and fixtures.
However, other economic sectors will also benefit. The CECA reduces trade barriers on a wide array of services ranging from telecommunications, research and development, transport, retail and environmental services, and even some professional services. Another way services will benefit is by decreased restrictions on movement of skilled workers and professionals in these fields.
The Consortium of Indian Industries in Malaysia (CIIM) said the CECA will open up several business opportunities in Malaysia, especially for the Small and Medium Enterprises (SME) and services sector. (SME refers to businesses whose number of employees falls below a certain number.) The SME sector of the Indian economy employs over 25% of India’s workforce, 39% of India’s manufacturing output, and 33% of India’s exports. The SME sector has also outperformed the industrial sector in India in its growth. CECA is thus a gain for a key sector of the Indian economy.
This free trade agreement with Malaysia is part of India’s Look East policy which is India’s effort to create closer economic ties with Asian nations through free trade agreements. India has signed a CECA with Thailand and has signed a Comprehensive Economic Partnership Agreement (CEPA) with Japan that has similar effects as a CECA. With China, India, and Japan all in the same region, India is seeking to make its economy as competitive as possible by lowering trade barriers while at the same time improving relations between the itself and its two powerful neighbors. Additionally, India will sign a free trade agreement with the European Union later this year that, geographically, may not be part of the Look East policy but will have the spirit of the Look East policy in it.
Discussion:
1. Does India have purely economic interests as the motivating factor in its CECA deals, or are these CECA pacts primarily a way to counter Chinese influence in Asia?
2. Why does the SME sector play such a large role in the Indian economy?
Thursday, February 17, 2011
Factors Influencing Recent Movement in Oil Prices
WSJ:
Passport Capitol Sees Oil Prices Holding
WikiLeaks Cables:
FT:
Economic Times:
AP:
Oil Price Fall on Concerns of China and Demand
Since the beginning of 2011, the price of oil under the Brent Crude classification has risen 7% to over $100 dollars a barrel (there are two major benchmarks for crude oil, Brent and WFI, both of which have risen). While several events last week have brought the price down, commentators anticipate that the price of oil will remain high, as has been the trend in recent years because of higher global demand.
High oil prices are a threat to global economic health and political stability. In countries that have high consumption—particularly emerging economies—high prices can stymie economic growth and disturb political systems. As the cost of production for goods and services increases due to escalating oil prices, so do the prices to consumers. One recent example is that the price of airlines tickets has gone up as a result of higher oil prices. But growing oil prices can have even more alarming, large-scale consequences. For example, rising oil prices were partially responsible for investors pulling out over $7 billion from emerging market equity funds. Most significantly, high oil prices pose can lead to economic instability, which can trigger political unrest.
Several events in the last month have driven the price of oil up—most notably the events in Egypt. Prices of oil rose in response to fears that Egypt might block Middle Eastern countries’ transport of oil through the Suez Canal, but prices stopped climbing when it became apparent that, despite political unrest, the Suez Canal would remain open and that oil companies could use alternative routes for shipping. Oil prices also rose in response to fears that political unrest may continue to spread through the Middle East and North Africa. Furthermore, Wikileaks reports revealed that Saudi Arabia may be reaching its production peak, meaning that oil reserves may be lower than Saudi officials have announced and that Saudi Arabia will not be able to pump supply to offset rising prices in the future. This revelation led to a jump in oil prices.
Despite turmoil in the Middle East, several offsetting events moved the price of oil down last week. First, the price of oil fell on February 8th when China announced that it was increasing its interest rate in an effort to thwart inflation. This kind of announcement sends the price of oil down because investors fear a drop in demand. The price of oil didn’t stay low, however, because investors realized that demand in for oil in China will continue to remain high due to rapid economic development that is unlikely to be affected by an interest rate increase. Second, the price of oil dropped slightly again on February 9th as the United States revealed higher-than-projected domestic oil reserves. High reserves mean that supply is readily available to meet increases in demand, thereby keeping the price down. Finally, last Friday’s announcement that Egypt’s president of 30 years, Hosni Mubarak, has stepped down lowered the price of oil as investors regained some confidence that oil supply will not be disrupted by further political upheaval in Egypt and that the Middle East and that the North Africa (MENA) region is stabilizing.
Discussion Questions
1. Does the price of oil move for justifiable reasons or does it tend to respond to unreasonable fears?
2. To what extent does political instability in the Middle East affect the price of oil? Is the price truly affected only by exporting MENA countries?
3. Should governments, international organizations and private businesses pursue strategies to keep price of oil down, and if so, what should those strategies be?
UK: Inflation Hits Four Percent
Sources:
The Guardian: Rate Rise Nears as Inflation Hits 4%
The Guardian: Inflation Pushed Up by VAT Rise
The UK government put a 2.5% increase in VAT into effect in January, bringing VAT to 20%. VAT is a kind of sales-tax in that it is passed on to consumers. However, a value-added tax is different in that it is a government levy on the value that a business adds to the price of a commodity during the production and distribution of a product. The second factor contributing to higher inflation is rising oil prices, which increased by 4.4% between December and January. The retail-price index,unlike the consumer price index, accounts for housing costs, and rose to 5.1% in January, up from 4.8% in December. This index is important because pensions and wages are often based on its measure.
Mervyn King, Governor of the Bank of England, recently stated that he believes inflation will continue to rise to 5% before dropping back down to the Bank's 2% target next year. Bank of England representatives have suggested that if commodity prices continue to rise, it will have to increase interest rates. Charles Bean, Deputy Governor of the Bank of England, believes that a rise in commodity prices is likely due to the economic boom in some emerging markets. Further, some Bank of England representatives argue that the longer an interest rate increase is delayed, the higher the risk that when the increase does come, it will have to be larger, resulting in a shock to investor confidence. However, some analysts fear that a rate increase will threaten the fragile economic recovery.
This inflation rise is hitting UK families especially hard because inflation-adjusted wages have been down over the last six years. Union leaders, arguing that workers deserve a pay increase this year, claim that there is an unprecedented attack on their standard of living. One union leader forecasts that 2011 will be particularly difficult for UK residents due to expected job losses and budget cuts.
Discussion Question: Should the Bank of England raise interest rates?
Wednesday, February 16, 2011
IMF Failed to Give Timely Warning of the Financial Crisis
Sources:
Washington Post: Watchdog: IMF's Trust in Markets, Regulators Blocked Sight of Financial Crisis
WSJ: Auditor: IMF Failed to Alert on Pre-Crisis Risks
BBC: IMF Downplayed Risks of Crisis
FT: Watchdog Says IMF Missed Crisis Risks
In its review of the International Monetary Fund’s (IMF) performance in the years leading up to the financial crisis, the IMF’s internal auditing body, the Independent Evaluation Office (IEO), concluded that the IMF was slow to detect and acknowledge the warning signs that a crisis would occur. As the organization responsible for monitoring global economic and monetary stability, the IMF’s failure to detect the oncoming of the financial crisis is a painful blow to the organization’s credibility.
The financial crisis that erupted in 2008 originated in the financial markets of developed nations, and ultimately resulted in a global recession. Among other things, bubbles in house prices and poor regulation of rapidly evolving complex financial instruments caused the crisis. According to the IEO’s report, the IMF initially paid little attention to these trends and failed to warn of the risks associated with them, even after some officials within the IMF, including its chief economist, had expressed such concerns.
The report pointed to several reasons for the IMF’s oversight. The report blamed a “groupthink” mentality, where the views of those who had warned of a crisis were overshadowed by the dominant opinion held by IMF officials that the markets of developed countries were too advanced to experience a crisis and that the financial institutions involved were big enough to withstand such a crisis if it occurred. The IEO’s report also indicated that IMF economists were in “awe” of the expertise and reputations of the financial authorities and economists from the regulatory agencies and central banks in developed countries. As a result, IMF officials would often defer to these experts and their conclusions that the financial markets in developed countries were in good health. IMF officials were further reluctant to question the stability of financial markets in developed countries due to political reasons, where criticism of developed nations would often mean criticizing the most powerful members of the IMF. The IMF distributes voting powers among its members based on their economic strength. To determine economic strength, the IMF considers a country’s GDP, openness to trade, economic variability, and amount of international reserves. Based on these factors, developed nations typically have the strongest economies. To avoid upsetting the authorities of the most powerful nations in the IMF, the IEO’s report stated that IMF staffers were told to tone down messages that were critical of those nations.
The conclusions of the report raise concerns about the IMF’s competence to perform its duties of ensuring a stable international economy. Since its creation shortly after World War II, the IMF has traditionally been responsible for ensuring stability in the international monetary system, but its role has since expanded to act as a provider of funds to economically distressed nations. Consequently, the ability of the IMF to identify crises is critical to its role in maintaining a healthy international economy. Cognizant of this, the head of the IMF, Dominique Strauss-Kahn, insisted that the IMF would pursue reforms to ensure that the IMF would not ignore the warning signs of a future crisis.
Discussion Questions:
1.)Does the fact that IMF officials were in “awe” of the expertise of officials from other countries create a cause for concern regarding the competency of the IMF and its staff?
2.)Does the IMF’s reluctance to criticize developed nations validate the argument raised by some that the IMF operates under the de facto authority of the developed world? What reforms could be implemented to ensure that the IMF acts objectively and independent of the interests of any member nations?
Washington Post: Watchdog: IMF's Trust in Markets, Regulators Blocked Sight of Financial Crisis
WSJ: Auditor: IMF Failed to Alert on Pre-Crisis Risks
BBC: IMF Downplayed Risks of Crisis
FT: Watchdog Says IMF Missed Crisis Risks
In its review of the International Monetary Fund’s (IMF) performance in the years leading up to the financial crisis, the IMF’s internal auditing body, the Independent Evaluation Office (IEO), concluded that the IMF was slow to detect and acknowledge the warning signs that a crisis would occur. As the organization responsible for monitoring global economic and monetary stability, the IMF’s failure to detect the oncoming of the financial crisis is a painful blow to the organization’s credibility.
The financial crisis that erupted in 2008 originated in the financial markets of developed nations, and ultimately resulted in a global recession. Among other things, bubbles in house prices and poor regulation of rapidly evolving complex financial instruments caused the crisis. According to the IEO’s report, the IMF initially paid little attention to these trends and failed to warn of the risks associated with them, even after some officials within the IMF, including its chief economist, had expressed such concerns.
The report pointed to several reasons for the IMF’s oversight. The report blamed a “groupthink” mentality, where the views of those who had warned of a crisis were overshadowed by the dominant opinion held by IMF officials that the markets of developed countries were too advanced to experience a crisis and that the financial institutions involved were big enough to withstand such a crisis if it occurred. The IEO’s report also indicated that IMF economists were in “awe” of the expertise and reputations of the financial authorities and economists from the regulatory agencies and central banks in developed countries. As a result, IMF officials would often defer to these experts and their conclusions that the financial markets in developed countries were in good health. IMF officials were further reluctant to question the stability of financial markets in developed countries due to political reasons, where criticism of developed nations would often mean criticizing the most powerful members of the IMF. The IMF distributes voting powers among its members based on their economic strength. To determine economic strength, the IMF considers a country’s GDP, openness to trade, economic variability, and amount of international reserves. Based on these factors, developed nations typically have the strongest economies. To avoid upsetting the authorities of the most powerful nations in the IMF, the IEO’s report stated that IMF staffers were told to tone down messages that were critical of those nations.
The conclusions of the report raise concerns about the IMF’s competence to perform its duties of ensuring a stable international economy. Since its creation shortly after World War II, the IMF has traditionally been responsible for ensuring stability in the international monetary system, but its role has since expanded to act as a provider of funds to economically distressed nations. Consequently, the ability of the IMF to identify crises is critical to its role in maintaining a healthy international economy. Cognizant of this, the head of the IMF, Dominique Strauss-Kahn, insisted that the IMF would pursue reforms to ensure that the IMF would not ignore the warning signs of a future crisis.
Discussion Questions:
1.)Does the fact that IMF officials were in “awe” of the expertise of officials from other countries create a cause for concern regarding the competency of the IMF and its staff?
2.)Does the IMF’s reluctance to criticize developed nations validate the argument raised by some that the IMF operates under the de facto authority of the developed world? What reforms could be implemented to ensure that the IMF acts objectively and independent of the interests of any member nations?
Monday, February 14, 2011
Political Uncertainty Adds to Financial Troubles in Ireland
Sources: FT: Bailout Terms Loom in Irish Elections
NYT: Ireland, Mired in Crisis, Will Dissolve Parliament
The Guardian: Ireland Faces Jobless Recovery, Says Report
On February 25, Irish voters will elect a new Parliament and will likely vote in a new Prime Minister. This vote will come one year earlier than the typical Irish political calendar requires. Brian Cowen, the current Irish Prime Minister and leader of the Fianna Fail political party, has been consistently behind in the poles. According to current polls, the Fianna Fail party, with only 20 percent support among voters, will probably lose at least half of the 72 seats it currently occupies in the 166-seat Dail, the lower house of the Irish Parliament. The Fine Gael party, led by Edna Kenny, is currently leading the polls with support in the low to mid-30s.
Cowen and his party have born the brunt of the blame for Ireland's economic collapse and subsequent € 85 billion IMF and European bailout. Ireland's dire financial situation has led the government to put an austerity plan in place that includes tax increases and significant government spending cuts. For example, lawmakers recently approved a finance bill that included a tax increase of up to 41 percent of the middle class' income. Parliament has also approved cuts in welfare benefits, a reduced minimum wage, and an increase in the retirement age.
While voters are eager to replace their current government, political uncertainty may be adding to worries over Irish banks and the economy, according to some investors. One investor noted that when a country receives financial aid from the IMF, bond yields (the return that an investor will receive from a bond) normally collapse because the risk of default decreases. In Ireland, that has not happened, partly due to political uncertainty. Michael Noonan is expected to become the new Finance Minister if Fine Gael wins the majority of votes in the upcoming election. He has called for senior bondholders (who so far have been spared) to suffer losses, and has identified €18.5 billion of debt that is not guaranteed by the Irish government that could be sacrificed. The government initially protected senior bondholders because it feared that angry investors would boycott the Irish banks and leave them in even worse shape. Noonan has also stated that he wants to see a reduction in the interest rate charged on EU bailout funds. The bailout fund was structured so that the interest rate was punitive, partially due to the insistence of Germany, leading to increased tensions between Ireland and the rest of the EU.
In light of the political instability, Standard & Poor’s downgraded the credit rating of the major Irish banks. One S&P analyst stated that S&P perceives "increased political acceptance for burden sharing" in Ireland and decreased willingness of the government to provide "extraordinary support" for financial institutions. A report on Ireland's economy out this week offered more bleak news, stating that Ireland's recovery from its financial crisis will not create any jobs, consumer spending will remain week, and Irish gross debt is predicted to rise to 113% by 2013. However, the report found one bright spot: demand for Irish exports is expected to continue to rise.
Discussion Question: How will a new government better handle the financial situation in Ireland? Should the interest rate on EU bailout funds to Ireland be lowered?
Sunday, February 13, 2011
Uruguay to Expand Its Energy Options
Bernama: Uruguay Wind Farms to Supply 25% Electricity
LAWEA: About LAWEA
MercoPress: Tenders for Three Winds Farms In Uruguay Awarded
Although it is already the third-cleanest country in South America in terms of carbon emissions, Uruguay is seeking to increase its use of clean energy.
Uruguay recently announced plans to develop wind farms in hopes of ending its dependency on oil by 2013. During the 1970s, Uruguay’s oil usage peaked at about 70 percent of its total energy production. Today, oil is used to produce about 40 percent of Uruguay’s energy. Uruguay does not produce any oil, so it must import foreign oil for its needs. To reduce imports and decrease the negative effect of biofuels on the environment, Uruguay has developed new sources of energy production.
Hydroelectric power, which now accounts for almost half of the electricity produced in Uruguay, has helped to decrease oil consumption. However, Uruguay has exhausted its resources of hydroelectric power—its rivers are used to their maximum potential. Also, Uruguay has faced problems with hydroelectric power. Uruguay’s geographical position exposes it to the Niño-Niña, which causes variations in ocean temperatures that affect rainfall and, therefore, hydroelectric capacity. For example, for several weeks in 2008, there was only enough water in Uruguay’s reservoirs to operate three percent of its hydroelectric plants. Because these climate changes occur every five to eight years and are difficult to predict, the government is seeking more reliable options for energy.
Recently, the government announced plans to begin installing as many wind farms as its electricity grid can handle. Three developers so far have contracted to sell wind power at rates 40 percent cheaper than energy produced by oil. These developers have guaranteed the cheaper price will remain fixed for the next twenty years. These lower costs will make wind energy more competitive, helping drive down the demand for oil and encouraging further development of wind power.
The director of the Ministry of Industry, Energy and Mining, Ramón Méndez, predicts that Uruguay could generate 25-28 percent of its power from wind and from biomass (energy coming from the incineration of trash). However, he also warns that wind power is difficult to control. Mendez estimates that on a “blustery, summer night” wind power could generate up to 60 percent of the country’s electricity. But if the demand at that time is low, the surge in energy could cause problems, such as blackouts in the power grid.
Energy experts consider South American countries like Uruguay an untapped resource for wind energy production, which to date has been dominated by North America, Europe, and Asia. However, investors and governments are now realizing the potential of wind power in South America’s large, open spaces. Installation of wind power turbines also may help social and economic development of South America. By purchasing previously unused land or installing turbines on farmland, more capital will flow into South American economies, encouraging development.
Nonetheless, there are disadvantages to wind power. Some find turbines noisy and unattractive to the natural landscape. Many turbines are required to produce a usable amount of energy. Also, these turbines and wind power plants are expensive to construct. Finally, as Mendez points out, the wind is uncontrollable and thus not entirely reliable. If Uruguay relies too heavily on wind power, it may face blackouts during times of little wind or during wind gusts.
While there are disadvantages to wind power, Uruguay may be a model to other countries that want to decrease their dependency on foreign oil and encourage development of clean energy sources.
Discussion: Is the combination of hydro and wind power as the two main energy sources in Uruguay only possible because of its small size and geography, or could other, larger countries look to Uruguay as an energy example?
Saturday, February 12, 2011
Agriculture Infrastructure in Rural India
Sources:
Minnesota Post: Rising Global Food Prices Squeeze the World’s Poor
NYT: As India Thrives, Its People Remain Hungry
Indian Express: Food Security, international Monetary System Reforms to be on G-20 Table
Huffington Post: Price Volatility and Food Crises
Business Standard: Agriculture Min Working Towards Cluster-Based Farming
Despite its ambitions as an emerging economic giant, India still struggles to feed its 1.1 billion people, and nearly half of Indian children 5 years old or younger are malnourished. Many families in India are part of the 1 billion worldwide who struggle to afford food. The United Nations Food and Agricultural Organization (“FAO”) food price index hit an all-time high in December. Egypt was one of the nations the FAO cited where food prices had drastically increased. While there is not enough data to show the rise in food prices was a substantial cause of the current unrest in Egypt, many people believe that extreme food prices were an aggravating factor.
There are two intertwined elements to India’s lagging agricultural system. First, most farms in India are family owned and run, and they do not take advantage of economies of scale. (Economies of scale is the concept that the cost per unit falls as output quantities increase). Indian laws make it challenging for farmers to assemble large land holdings. Thus, inefficient, small farms are still the norm. One can look to the United States as the paragon of agricultural economies of scale, where a few massive U.S. agricultural corporations have consolidating resources, to reduce food prices, making American food arguably the cheapest in the world.
The second facet of the problem in India is low investment. Farming equipment and infrastructure are scarce outside the provinces of Punjab and Haryana. Investment in agriculture has fallen inside India, and worldwide from 19% in 1980 to 5% of total investment today. Because many of the farms are so small in India, the farmers cannot afford irrigation systems that would increase productivity. Thus, some farmers are in a state more resembling the pre-industrial era than today. Small size and a low level of capital lead to lower production and inefficiency, resulting in higher costs to Indian consumers. Indian food inflation was 13.7% in December, compared to inflation of 8.4% for all commodities. Most striking to Indians, the onion, a staple of Indian food, has quadrupled in price the last few months.
However, the Indian government is taking action. In conjunction with the United States, the two nations are launching the Evergreen Revolution (“Revolution”). The Revolution will expand Indian farm production by providing American money for agricultural research and development in Indian institutions. The money will be used to create genetically engineered crops that will be introduced into target rural areas. The United States benefits by experimenting with new innovations in India before selling them to the rest of the world. The Indian government is also increasing subsidies for farming equipment and consolidating farms that grow the same crops. These reforms will help feed the nation and raise rural India out of poverty.
Discussion:
1. Why is India putting energy into internal agricultural reform when it can import more food instead?
2. What role do American and European domestic agricultural subsidies have on world food prices?
Minnesota Post: Rising Global Food Prices Squeeze the World’s Poor
NYT: As India Thrives, Its People Remain Hungry
Indian Express: Food Security, international Monetary System Reforms to be on G-20 Table
Huffington Post: Price Volatility and Food Crises
Business Standard: Agriculture Min Working Towards Cluster-Based Farming
Despite its ambitions as an emerging economic giant, India still struggles to feed its 1.1 billion people, and nearly half of Indian children 5 years old or younger are malnourished. Many families in India are part of the 1 billion worldwide who struggle to afford food. The United Nations Food and Agricultural Organization (“FAO”) food price index hit an all-time high in December. Egypt was one of the nations the FAO cited where food prices had drastically increased. While there is not enough data to show the rise in food prices was a substantial cause of the current unrest in Egypt, many people believe that extreme food prices were an aggravating factor.
There are two intertwined elements to India’s lagging agricultural system. First, most farms in India are family owned and run, and they do not take advantage of economies of scale. (Economies of scale is the concept that the cost per unit falls as output quantities increase). Indian laws make it challenging for farmers to assemble large land holdings. Thus, inefficient, small farms are still the norm. One can look to the United States as the paragon of agricultural economies of scale, where a few massive U.S. agricultural corporations have consolidating resources, to reduce food prices, making American food arguably the cheapest in the world.
The second facet of the problem in India is low investment. Farming equipment and infrastructure are scarce outside the provinces of Punjab and Haryana. Investment in agriculture has fallen inside India, and worldwide from 19% in 1980 to 5% of total investment today. Because many of the farms are so small in India, the farmers cannot afford irrigation systems that would increase productivity. Thus, some farmers are in a state more resembling the pre-industrial era than today. Small size and a low level of capital lead to lower production and inefficiency, resulting in higher costs to Indian consumers. Indian food inflation was 13.7% in December, compared to inflation of 8.4% for all commodities. Most striking to Indians, the onion, a staple of Indian food, has quadrupled in price the last few months.
However, the Indian government is taking action. In conjunction with the United States, the two nations are launching the Evergreen Revolution (“Revolution”). The Revolution will expand Indian farm production by providing American money for agricultural research and development in Indian institutions. The money will be used to create genetically engineered crops that will be introduced into target rural areas. The United States benefits by experimenting with new innovations in India before selling them to the rest of the world. The Indian government is also increasing subsidies for farming equipment and consolidating farms that grow the same crops. These reforms will help feed the nation and raise rural India out of poverty.
Discussion:
1. Why is India putting energy into internal agricultural reform when it can import more food instead?
2. What role do American and European domestic agricultural subsidies have on world food prices?
Putin Calls for Tax Reform in Energy Sector and Asks Gazprom to Share Pipelines
Sources:
Putin Reviews Performance of Fuel, Energy Complex 2010, Gives Orders
Bloomberg: Putin Seeks Fast Decision on Oil Tax Breaks, to Maintain Output
UPI: Putin Points to Russia's Energy Future
Bloomberg: Russia May Raise Oil Export Tax 5.1% in March on Urals Price
AFP: Putin Tells Gazprom to Share its Pipelines
Russian Prime Minister Vladimir Putin met with Cabinet officials from the energy sector this week to discuss the past year's successes in energy production and the government's goals for 2011. In 2010, Russian oil production was about 3.7 billion barrels and its total gas production increased by 12 percent. Russia’s goal for 2011 is to double the existing power generating facilities and to continue the current oil production level of 3.7 billion barrels a year.
Putin called for several improvements to the energy sector, including tax reform, better monitoring of problem areas in the domestic power supply network, and the creation of an exchange committee to monitor and predict changes in the domestic oil market. Most of the recommendations announced this week did not come as a surprise. Putin has repeatedly called for domestic reform of the tax provisions for the oil industry, specifically targeting lowering taxes on new fields and low-flow rate. Tax relief for the oil and gas sector would help Russia continue to meet its ambitious energy-production goals and encourage Russian oil producers to increase domestic exploration instead of investing abroad. Putin attributes last year's increase in energy production to the development of new fields and stresses that Russia must "keep up this level of production for the coming years."
Putin also advocated an overhaul of Gazprom’s monopoly status, which would bring competition to the natural gas market. Russia has allowed state-controlled Gazprom to hold a monopoly in natural gas export, which is ten percent of the nation’s GDP and, thus, a vital part of the nation’s economy. However, Putin sharply criticized Gazprom's poor performance in 2010. The company's exports dropped 1.5 percent last year, calling into question whether Gazprom should keep its monopoly on access to pipelines and transportation routes. Putin demanded his Energy Ministry and Gazprom to work together on granting independent gas producers priority access to the infrastructure. Opening access to pipelines and transportation routes would encourage competition in the gas industry and could spark a surge in gas production.
Discussion Questions:
1) Does Putin’s demand to open the pipelines to independent gas producers signal a broader willingness to increase privatization of Russia’s energy sector?
2) Russia supplies one quarter of Europe’s natural gas needs. What benefits will Europe gain from increased competition in the gas sector?
Putin Reviews Performance of Fuel, Energy Complex 2010, Gives Orders
Bloomberg: Putin Seeks Fast Decision on Oil Tax Breaks, to Maintain Output
UPI: Putin Points to Russia's Energy Future
Bloomberg: Russia May Raise Oil Export Tax 5.1% in March on Urals Price
AFP: Putin Tells Gazprom to Share its Pipelines
Russian Prime Minister Vladimir Putin met with Cabinet officials from the energy sector this week to discuss the past year's successes in energy production and the government's goals for 2011. In 2010, Russian oil production was about 3.7 billion barrels and its total gas production increased by 12 percent. Russia’s goal for 2011 is to double the existing power generating facilities and to continue the current oil production level of 3.7 billion barrels a year.
Putin called for several improvements to the energy sector, including tax reform, better monitoring of problem areas in the domestic power supply network, and the creation of an exchange committee to monitor and predict changes in the domestic oil market. Most of the recommendations announced this week did not come as a surprise. Putin has repeatedly called for domestic reform of the tax provisions for the oil industry, specifically targeting lowering taxes on new fields and low-flow rate. Tax relief for the oil and gas sector would help Russia continue to meet its ambitious energy-production goals and encourage Russian oil producers to increase domestic exploration instead of investing abroad. Putin attributes last year's increase in energy production to the development of new fields and stresses that Russia must "keep up this level of production for the coming years."
Putin also advocated an overhaul of Gazprom’s monopoly status, which would bring competition to the natural gas market. Russia has allowed state-controlled Gazprom to hold a monopoly in natural gas export, which is ten percent of the nation’s GDP and, thus, a vital part of the nation’s economy. However, Putin sharply criticized Gazprom's poor performance in 2010. The company's exports dropped 1.5 percent last year, calling into question whether Gazprom should keep its monopoly on access to pipelines and transportation routes. Putin demanded his Energy Ministry and Gazprom to work together on granting independent gas producers priority access to the infrastructure. Opening access to pipelines and transportation routes would encourage competition in the gas industry and could spark a surge in gas production.
Discussion Questions:
1) Does Putin’s demand to open the pipelines to independent gas producers signal a broader willingness to increase privatization of Russia’s energy sector?
2) Russia supplies one quarter of Europe’s natural gas needs. What benefits will Europe gain from increased competition in the gas sector?
In Sale of Coal Deposits, Mongolia Balances Need for Development with Control of State Assets
Sources:
Mining Weekly: Vale, ArcelorMittal Among 15 Bidding for Mongolia Coal Mine
Mongolia sits atop some of the world’s largest deposits of coal, uranium, gold, copper, silver, and molybdenum. Mining experts estimate that the state-owned company Erdenes-Tavan Tolgoi holds deposits of more than 6 billion metric tons of coking coal, the largest undeveloped deposits in the world. This month, the Mongolian government announced its intention to distribute roughly half of the shares of Tavan Tolgoi through an initial public offering. The offering may bring between $2 to $5 billion of foreign investment to a country that the World Bank lists as one of Asia's poorest.
The Mongolian government is attempting to condition the sale of shares on features it hopes will balance foreign investment, state ownership, and citizen participation. The Mongolian government plans to sell roughly 30 percent of Tavan Tolgoi’s shares to international investors. Meanwhile, the government has stipulated that an additional 10 percent of shares be distributed equally among the citizens of Mongolia and another 10 percent to Mongolian businesses. The government will retain at least 50 percent of Tavan Tolgoi’s shares.
The Mongolian government is currently interviewing eighteen investment banks to manage the share sale. Once the parties finalize the details, an initial public offering is expected to be held in London or Hong Kong in 2012. Bankers say that Mongolia's insistence that each citizen receives shares would be a logistical hurdle for investment banks because much of the country’s population is nomadic and the country's financial infrastructure is still in the early stages of development.
Investment banks have worked for years to develop relationships with Mongolian officials over mineral projects, but have been unsuccessful until recently. Late last year, JPMorgan and Citigroup arranged an initial public offering that raised almost $750 million for Mongolia Mining Group. Some financial newspapers have speculated that Morgan Stanley may have an advantage in becoming lead banker on the Tavan Tolgoi offering. Mongolian Prime Minister Sukhbaatar Batbold's son works for Morgan Stanley and has recently been seen in meetings in Mongolia.
Many of the world's leading mining and steelmakers are expected to bid for Tavan Tolgoi shares. Among the expected bidders are steelmaker ArcelorMittal, mining companies Vale, Xstrata, Peabody, and consortia led by South Korea, China, Japan, and India. The inclusion of state-backed bidders may complicate the sale as Mongolia attempts to retain economic independence from its neighbors.
Discussion Questions:
1. The Mongolian government has not announced how it will invest the billions of dollars that will flow into its treasury if the initial public offering succeeds. What development plans do you expect Mongolia to invest in?
2. What steps can an economically weak country take to maintain its economic independence from wealthier neighbors without scaring away foreign investors? Is economic independence linked to political independence?
Subscribe to:
Posts (Atom)