Monday, May 28, 2012

Potential Effects of New Zealand Limiting Government Subsidies of Post-Secondary Education

New Zealand Ministry of Education: Statement of Intent 2012 – 2017
Otagio Daily Times: Reining in student debt

The New Zealand government is implementing changes in the upcoming year  to the funding of post-secondary education as a way meet the challenges of balancing rising educational costs with managing the government’s finances. In New Zealand, all post-secondary education is called tertiary education, which includes both degree-granting and non-degree-granting education. A degree granting program includes programs that result in degrees such as a bachelor’s, master’s, or a Ph.D., while non-degree-granting programs include adult education or continuing education programs. Because New Zealand places a high value on tertiary education as a means of creating both greater opportunity and greater equality, the government provides a large amount of funding for students.
Under the current system, the government provides financial benefits for students who need financial support. Students who demonstrate a financial need, based on the incomes of both students and their parents, are provided a weekly allowance to help cover education costs. Currently, this allowance provides for four years of financial assistance, with the option to extend four additional years for post-graduate education. Besides this allowance, students who need further financial assistance are given the option of government loans that bear no interest. To pay back the loans, borrowers who earn an annual income of more than NZ$19,084 (US$14,395.45) are required to pay 10% of their earnings.
Starting next year, the New Zealand government will reduce the amount of government financial aid. It will do this by keeping the four-year allowances for students with financial need, but no longer allow students to apply for the extension of four additional years. In addition, the government has implemented a four-year freeze on the parental-income threshold for allowance qualification, which is currently set at NZ$55,027.96 (US$41,508.70). As for the student loans, borrowers will now be required to repay their loans at 12% of their income if their income is more than NZ$19,084 (US$14,395.45).
The changes have raised concerns among student organizations and New Zealand newspapers. Although students have not responded with violent protests seen recently in the United States and Canada, New Zealand students are concerned that they will no longer be able to afford post-graduate education, particularly in the field of medicine. Local New Zealand newspaper editorials also raise concerns of brain-drain. Brain-drain occurs when small or less-developed countries lose their most educated individuals to larger or more developed countries where these individuals will earn a higher income. The largest perceived threat for New Zealand is Australia, where the government only requires students who are paying back education loans to pay 4% of their income if they earn more than Aus$48,000 per year (US$46,861.45).
The New Zealand government intends to address these concerns. By reducing the benefits provided to students, the government will save an estimated NZ$70 million per year, which it will reallocate within the tertiary education system to promote math, science, and engineering. In concert with this reallocation, the New Zealand government will also employ collection agencies to seek repayment of student debt for New Zealanders who have left the country to seek employment elsewhere. Both efforts seek to help the tertiary education system remain financially stable and prevent brain-drain.
In this way, New Zealand is attempting to balance financial viability in its tertiary education system by reducing student benefits while putting in place measures that will maintain an educated population.

Sunday, May 27, 2012

Despite Past Success, Africa Faces Concerns for the Future

All Africa:  Nigeria: ILO - Macroeconomic Policies, Youth Employment Will Boost Economies
Ghana Business News:  Jobs, Justice and Equity in Africa
Reuters:  Rising Inequality Threatening African Growth - Report
WSJ:  Africa Growth Isn't Meeting Needs of Young, Poor: Report
During May 9 through the 11, the World Economic Forum held an event in Addis Ababa, Ethiopia, which brought together over 700 private and public sector leaders to comment on how to improve economic growth and human development in Africa. These leaders highlighted Africa’s recent growth as well as highlighted several key factors threatening future growth, which include youth unemployment, food scarcity, and poor governance.

During the past decade, sub-Saharan African economies experienced growth averaging 4% per year. According to a report issued by the Africa Progress Panel at the World Economic Forum event, several factors sparked the region’s growth. First, developing countries such as Brazil, Russia, India, and China (collectively called BRICs) increased investment into the continent as a way to diversify—diversification is a method of investing in a variety of assets to reduce one’s overall risk so that if one asset depreciates in value, the value of the remaining assets can offset the loss. Second, Africa experienced growth due to an increase in exports of agricultural goods and natural resources. Third, the region experienced political and social development. Africa underwent political development when democratic governments emerged after autocratic regimes ended, while social development occurred greatly due to the improvements in the population’s overall health. For instance, deaths due to malaria decreased by 33% since the 1990s—indicating an increase in overall health.

However, Africa’s past success was not felt evenly throughout the population. Only 4% of Africans are middle class—to be considered middle class, one must earn more than $10 per day. Also, more than half of the population lives in poverty—to be considered in poverty, one must earn less than $1.25 per day. According to the Africa Progress Panel, the ratio of Africa’s population in poverty compared to the world’s poverty population increased from 21% to 28% over the past decade. Likewise, the ratio of Africa’s middle class compared to the world’s middle class is 2%, which is quite small considering Africa’s population is over 850 million. Moreover, according to the International Labour Organisation (ILO), more than 70% of the working-age population in Africa do not have jobs or are have vulnerable jobs—employed workers that are statistically most likely to fall into unemployment, such as unpaid family workers and self-employed workers that have not hired employees to work for them on a continuous basis. This unemployment statistic is especially troubling as statisticians predict that the youth population will double within the next ten years, thus creating a demand for 74 million new jobs.

The Africa Progress Panel suggested three main factors to address Africa’s poverty conditions and continue growth in the future. The first factor is for African nations to address youth unemployment. Former Nigerian President Olusegun Obasanjo warned that civil uprisings would occur if African nations did not address youth unemployment. He based his warning on past civil uprisings in the Middle East, which occurred because of economic and demographic imbalances that were similar to Africa’s imbalanced success and high unemployment rate. The panel emphasized improving education and skills in the youth population to increase labor productivity as well as focusing on industries that have the highest potential to produce employment. These industries include small-scale farming as well as manufacturing. The panel also suggested investing more resources in developing infrastructure, such as access to electricity, to create employment opportunities.

The second factor for increasing growth in Africa is combating food scarcity in the region. This is especially concerning because some of Africa’s largest aid donors recently reduced their assistance. Countries like France and Italy decreased their donations to focus on their own domestic problems. Similar to the panel’s suggestions to reduce youth unemployment, the panel suggested that Africa focus on small-scale farming to reduce food scarcity. The panel suggested small-scale farming as a solution because of the potential for food productivity.

The third factor for future growth in Africa is continuing to improve governance and leadership. Due to Africa’s abundance of natural resources, the potential for corrupt practices exists in the region. For instance, some African governments take bribes from foreign investors in exchange for rights to the country’s natural resources. African governments also take bribes from foreign companies in exchange for exemptions from paying taxes. With greater governmental responsibility, Africa’s resources could be more effectively used to improve imbalances among the population as well as improve employment opportunities. By tackling these factors, Africa will hopefully continue on its past trend of growth and begin to balance its success throughout the entire population.

Tuesday, May 22, 2012

Canada Seeks to Diversify its Financial Future

The Globe and Mail: Canadian Firms Should Focus on Latin America: UN Envoy
HuffPost: Welcome to the G-Zero Era
Reuters: Foreign Direct Investment in Canada Rose in 2011
Stats Canada: Foreign Direct Investment, 2011
WSJ: Resource-Rich Canada Looks to China for Growth

In a time of financial uncertainty, Canada seeks to reduce its dependence on the United States by broadening its sources and recipients of foreign direct investment. Foreign direct investment involves financial investment in physical assets abroad, such as a manufacturing plant or a financial management company, through either purchasing or starting a new company in a foreign country.

Ever since the United States became Canada’s largest source of investment financing in the early 1920’s, Canada has made many efforts to reduce its dependency on its southern neighbor. However, these efforts have not been successful. This is mainly due to Canada’s close proximity to one of the world’s largest economies, the United States, as well as the North American Free Trade Agreement, which makes access to the U.S. market easier as trade barriers (such as tariffs) are relaxed. As a result of its dependency on the United States, Canada’s financial success rose and fell along with the United States.

As a result of the recent crises, however, the United States has seen its financial stability and supremacy reduced. The financial crisis of 2008, caused by the subprime mortgage crash and followed by the European sovereign debt crisis, has led to a negative shift in global perceptions of U.S. financial viability. In effect, the financial crises have hardened the resolve of many countries to avoid placing their entire financial future in the hands of the United States and Europe so that they can have more control over their own success and stability. These countries, including Canada, have been encouraged to take advantage of the current financial climate by seeking broader investment opportunities amongst a wider variety of countries.

Due to the perceived reduction in U.S. financial supremacy, financial diversification efforts within Canada to expand sources and recipients of foreign direct investment have seen greater success. Canada’s investments in the United States have followed a downward trend for several years, currently accounting for only 40.3% of Canada’s total investments abroad. The region receiving the largest increase of investment from Canada is the Caribbean, with Barbados alone accounting for 7.8% of all of Canada’s foreign investment. Similar increases in Canadian investments were seen in Asia and the Pacific Rim. Along with these successes in the Caribbean and Asia, there are calls for stronger financial ties with Latin America, which only received 1.5% of Canadian exports last year. The push for greater investment in this region would allow Canadian companies to take advantage of the proximity and diversity of resources found in Latin America.

Canada has also increased its efforts to attract foreign investment from other countries. Since the year 2000, the U.S. share of total direct investment in Canada has fallen annually. According to data released by Statistics Canada, while foreign direct investment in Canada from the United States increased in the past year by 2.4%, the overall share of investments from the United States continued its pattern of gradual reduction, falling from 64.4% of total direct investment in Canada in 2001 to 53.7% in 2011. This trend has been accompanied by a steep increase in investments from Asia. For instance, investments from Asia accounted for 11.4% of total direct investment in 2011, compared to a mere 4.5% in 2001. A large portion of investment from Asia has come from China, which invested merely $219 million in Canada in 2001 but increased this figure to $10.9 billion in 2011. Much of this investment focused on the mining sector, but also included real estate and manufacturing.

Canada is finally seeing success in its efforts to reduce financial dependency on the United States. Although, this success has come on the declining financial dominance of the United States brought on by the recent financial crises; Canada continues to seek growth.

Monday, May 21, 2012

Spain Introduces New Reforms to Clean Up Its Banking Sector

On Friday May 11, 2012, the Spanish government introduced new reforms to clean up its banking sector. The Spanish government has struggled to correct its banking crisis, which occurred in 2008 with a property bubble burst—rapid increases in the value of real estate properties to the point of unsustainable levels and ultimately lead to a drastic drop in value. These new reforms mark Spain’s fourth attempt to correct its banking crisis in the past three years and come only a few days after the government part-nationalized the country’s fourth largest bank, Bankia, by claiming a 45% stake. The country’s past reform attempts were likely unsuccessful because Spain’s approach of making gradual changes to its banking sector was not enough to offset the receding economy and falling property values.

The Spanish government imposed two main reforms. First, banks must set aside an additional 30 billion in provisions to cover potential bad loans—provisions, also known as loan loss reserves, require banks to increase their capital. Banks must meet certain capital/asset ratios (also known as capital requirements). For instance, if a bank needs to write-off unpaid loans (assets), then the bank must increase its capital in order to meet the specified capital requirements. Thus, Spain increased the bank's capital requirements to ensure that the banks would have sufficient capital in the event of loan write-offs.

Spain’s provisions cover 45% of a bank’s real estate assets when added to the 54 billion provision increase mandated this past February. The Spanish government decided to allow banks one month to develop a plan to meet the extra provisions. The government also decided to offer five-year loans with a 10% interest rate to those banks struggling to find capital. If a bank fails to pay back these five-year loans, then the loan converts into shares. Therefore, if the bank fails to pay, the government becomes a part owner of the bank.

The second reform is to hire two independent auditors to value the banking sector’s assets. The Spanish government agreed to hire independent auditors after its recent takeover of Bankia. This is because past auditors refused to sign off on Bankia’s accounts when they discovered discrepancies over the value of foreclosed properties and the value of junk loans—loans with a high risk of default. Thus, Spain likely hired independent auditors in hopes that their outside perspective will reveal other discrepancies similar to those discovered in Bankia’s accounts. While the auditors have not yet been identified, Spain’s Economy Minister Luis de Guindos ensured that the auditors have “maximum international prestige.” The hiring of independent auditors with such “international prestige” ensures credibility and confidence in Spain’s banking reform efforts.

Although the International Monetary Fund (IMF) managing director Christine Lagarde welcomed and praised these reforms, others remain skeptical. Many economists, including Columbia University’s Xavier Sala-i-Martín, believe that the 30 billion increase is not enough. Instead, some economists propose that an increase of  50 billion is necessary.  Other economists worry that the reforms and the nationalization of banks like Bankia will leave Spain with greater debt in the future. This is because the five-year loans Spain offered to banks to finance the required provisions as well as Spain’s nationalization of Bankia could leave the country without reimbursement of its loans to banks and with a large ownership share in failing banks that have little hope of turning a profit. Even investors are skeptical as shares in Spain’s top three banks, which include Banco Santander, BBVA, and Banco Popular, all fell in response to the announcement of the new reforms.

The European Commission recently forecasted that Spain would fail to meet its imposed budget deficit target next year, which is 5.3% of its gross domestic product (GDP). Instead, the European Commission projects Spain’s budget deficit to be 6.4% of its GDP. This suggests that Spain’s austerity measures—policies of drastic cuts on government spending and/or increases in taxes—are not as effective as originally thought. However, these projections do not account for Spain’s newly introduced banking reforms. The Spanish government views the banking sector as a key component to the country’s overall economic recovery and is hopeful that these reforms will help the country meet its future targets as well as restore the banking sector that has continued to struggle since 2008.