Center for International Finance & Development

IMF Urges More Drastic Action in Europe

2012-01-30T19:52:00.002-06:00

FT: Lagarde Calls for Bigger Eurozone Firewall
IMF: Lagarde Calls For Urgent Action So 2012 Can Be ‘Year of Healing'
WSJ: Lagarde Says Europe Must Boost Firewall

On Monday, IMF Managing Director Christine Lagarde called for quick action on the part of Eurozone leaders to implement policies designed to promote growth, increase the size of Europe’s bailout fund, and further integrate the Eurozone. The warning comes as the region faces a depression similar to the one that occurred in the United States during the 1930s if the crisis is not contained.

Lagarde stated that, with the Eurozone economy slowing down drastically, there is a risk that growth in the region will fall by 1.6% in 2012. This downturn could make it more burdensome for already distressed European economies to meet their debt obligations. Less economic growth means governments collect less tax revenue (as consumer demand decreases, companies lay off workers leading to less available income to be taxed) which in turn cuts the government revenue necessary to repay debt. For this reason, Lagarde urged the
the European Central Bank (ECB)—the entity in charge of monetary policy for the Eurozone—to take stronger measures to stimulate economic activity, such as lowering interest rates. Lower interest rates stimulate business investment by making investment projects more profitable to start as the cost of financing such investments is cheaper. With a reduced cost of investment, businesses purchase more goods, build new factories and warehouses, and employ more people. All this new activity creates more income for both businesses and people, which stimulates the economy. Likewise, banks need to establish guidelines aimed at preventing a dramatic worsening of the crisis. For example, implementing better regulatory oversight systems will ensure that banks always have enough capital reserves to be able to sustain themselves when risky investments fail. This change will ensure that banks have enough money to continue to continue lending to consumers and businesses even if they sustain losses. Finally, Lagarde urged countries to tighten their finances quickly by implementing policies directed at reducing government spending and raising taxes.

Additionally, Lagarde stressed the importance of European leaders increasing the bailout fund currently in place—the European Financial Stability Fund (EFSF). Without a larger fund, countries such as Italy and Spain that are currently solvent (capable of repaying their debt) would not be able to continue meeting their financial obligations if the crisis worsens and these countries need a bailout. Lagarde suggested merging the EFSF into the European Stability Mechanism (ESM) as well as doubling the ESM’s resources to approximately €1 trillion. Doing so would help prevent defaults and the negative consequences that may go along with them. Also, by boosting this “firewall” fund, Europe will be able to help banks in the region raise their cash levels without cutting down on lending since the fund can provide financing to banks as well.

Lastly, Lagarde called for greater fiscal integration in the Eurozone. Currently, member countries retain complete control over their fiscal (taxing and spending) policies, while the European Central Bank is in charge of monetary policy for the entire region. However, the current crisis has exposed the ineffectiveness of this system. Although European leaders are currently in talks to implement a “fiscal compact” to limit countries’ budget deficits, Lagarde believes there also needs to be a more cohesive fiscal policy among the countries. To achieve this goal, she calls for the creation of euro bonds---bonds that are backed by all by all the countries in the Eurozone. The euro bonds would make nations’ debt a shared burden while at the same time giving investors more confidence in the region as there is a lower risk on bonds guaranteed by the entire Eurozone.

Drought in South America Impacts Soybean Production

2012-01-29T14:52:00.001-06:00

Sources:
The Argentina Independent: Is Argentina’s Economy Overheating?
Bloomberg: South America Soybean Crop to Slide on Drought, Oil World Says
FT: Drought Raises Fears for Brazil Food Crops
IDB: How Will the Food Price Shock Affect Inflation in Latin America and the Caribbean?
IMF: Rising Prices on the Menu
LA Times: Soybeans Now Rule the Range on Argentina Plains
NYT: To Fortify China, Soybean Harvest Grows in Brazil

A drought that began in June in Latin America has impacted agricultural production throughout the region, especially soybean production in South America. Experts estimate that the drought could lead to a decline in total output for Brazil, Argentina, Paraguay, Uruguay, and Bolivia from 136.7 million tons last year to 132.7 million tons this year. South America grows most of the crop for the global market, and Brazil and Argentina produce almost half of the world’s soybeans alone. Experts believe that Brazilian production could decrease from 75.3 million tons last year to 71 million tons this year. Argentine production, however, is expected to rise to 51 million tons this year from 49.4 million tons the year before. This figure is still 1 million tons less than what was expected prior to the drought. Even with rainfall, Brazil’s and Paraguay’s crops cannot be saved because they are almost fully grown, meaning those countries are already facing irreversible losses.

Over the last decade, the global demand for soybeans has increased dramatically, largely fueled by China. China requires soybeans not just to make tofu, a staple of the Chinese diet, but also to feed the livestock consumed by its growing population. China turned to South America as the major source of its soybeans, in particular Brazil, because it lacks the land and water supply necessary to meet its own agricultural needs.

Growing soy has contributed to economic prosperity for many South American countries. For example, it was instrumental in leading Argentina out of its financial crisis following the economic crash in 2001. The Argentine economy has benefitted from a tripling of soybean prices since 2002 because of high global demand. Because of growing global demand and the low risk of loss from this industry, many Argentine cattle farmers have turned in recent years to soybean farming and away from cattle-growing. Soybeans are inexpensive to grow and yield at least two harvests per year. Raising newborn cattle and bringing them to market requires a commitment of three years, carries greater risk, and results in lower profits than cultivating soybeans.

Economists fear, however, that the drought will drive prices too high as the supply of soybeans declines and global demand remains high. Rising prices have concerned the global community even before the South American drought, especially emerging and developing economies. The increased costs of importing and buying soybeans will affect developing countries more than developed ones because a larger percentage of the money developing countries spend goes to buying food. Although economists predict that the surge in food prices will eventually stabilize, they warn that an increase in food prices will take time to reverse because the supply of food must catch up with the demand.

The Right to Work in America

2012-01-28T09:55:00.002-06:00

Sources:

National Right to Work Legal Defense Foundation

NY Times: Right-to-Work Laws

NY Times: Some Good Economic News, But Will it Last?

Reuters: Europe Searches for Mythical Jobs and Growth Formula

WSJ: Indiana Moves Closer to Right-to-Work Law

For the first time in over half a century there is a heated debate in the United States over right-to-work laws. This issue appears to be a result of the global economic crisis, as similar debates are being waged across Europe regarding the proper scope of labor protections and ways to create new jobs in ailing economies through labor market reform. U.S. right-to-work laws, which currently exist in twenty-two states, prohibit employers and labor unions from requiring—as a condition of employment—workers to join unions or pay union dues without joining the union. The laws are directed at protecting a person’s ability to secure a job without being bound by labor contracts or union membership. Most of the twenty-two states that have right-to-work laws on the books are states with limited labor union involvement, and it has been over a decade since any state enacted such legislation.

Proposed legislation in Indiana stands to change all that. Indiana—a state with significant union membership—is on the verge of enacting right-to-work legislation that would ban contracts requiring all employees to pay union dues, irrespective of membership. The debate in Indiana has developed along party lines, with Republican lawmakers standing firmly behind the bill, while democrats are attempting to delay its likely passage. In light of the economic recession, high unemployment rates, and fierce competition between states to lure employers within their borders, the debate in Indiana has prompted national interest as states look for ways to stem job losses and stimulate economic growth.

Proponents of Indiana’s right-to-work laws base their argument on the idea of employment liberty—the ability of a laborer to independently negotiate the terms of his or her employment. They also argue that the law will provide a greater incentive for businesses to relocate to Indiana, as non-union wages are generally significantly lower than similar union-negotiated positions, thus the cost of doing business in Indiana would be lower than in states with stronger union presences. Employers in favor of the legislation point to the fact that without right-to-work laws, unions drive up wages through collective bargaining and reduce the number of jobs available. Opponents of the legislation claim it would lead to lower wages, sub-standard working conditions, weaker unions, and negatively impact the economy. Lower wages limit consumer purchasing power and drive down demand for goods and services. When demand for goods and services declines, employers cut jobs as a result of reduced manufacturing and service outputs. Opponents further argue that right-to-work laws negate the labor relations laws enacted in the U.S. in the 1930’s, which protect the rights of workers, their ability to form unions, and place laborers on more equal footing with their employers.

While the debate in Indiana continues, the issue of national right-to-work legislation has taken hold and will likely become a topic for debate among presidential candidates as the upcoming election draws closer. Although Europe finds itself grappling with similar labor reform issues, no clear solution has emerged that would assist U.S. policy-makers. Ultimately, the economics of labor relations may matter more than the argument over workers’ rights. With many states facing significant budget deficits and slow economies, right-to-work legislation may offer a much needed economic stimulus.

New Zealand Reserve Bank Holds Interest Rates Steady

2012-01-26T20:10:00.004-06:00

Sources:

Bloomberg Businessweek: Bollard Signals Longer N.Z. Rate Pause with Inflation Contained

National Business Review: Bollard Holds OCR at 2.5%, Signals Higher Bank Funding Costs

New Zealand Herald: Bollard’s Arms Stay Folded on OCR

Reserve Bank of New Zealand: What is the Official Cash Rate?

Reserve Bank of New Zealand: Official Cash Rate (OCR) Decisions and Current Rate

On Wednesday, the governor of New Zealand’s Central Bank, Alan Bollard, announced that the Central Bank will hold the Official Cash Rate (New Zealand’s base interest rate) at a record-low of 2.5%, the rate it has been at since March 2011. Mr. Ballard cited weak economic growth due to worsening global economic conditions and lower than expected inflation in the fourth quarter of 2011 as reasons to keep the OCR at 2.5%.

In New Zealand, commercial banks hold accounts at the Central Bank which they use to pay the money they owe to other commercial banks after exchanging assets throughout a business day. The Central Bank pays commercial banks the OCR—currently 2.5% interest—on the amount of money a commercial bank has in its account, and charges the OCR if a commercial bank needs to borrow money to pay other commercial banks it traded with throughout the day. For example, if Bank A sold Bank B $200,000 worth of bonds, Bank B may have to borrow money from the Central Bank to pay back Bank A; the Central Bank would charge the OCR, or 2.5%, on this borrowing.

Although the OCR does not dictate market interest rates in the New Zealand economy, it has a strong influence. As an illustration, commercial banks may find it difficult to lend money at interest rates higher than 2.5% because other banks, which can cheaply borrow money from the Central Bank at a 2.5% interest rate, will quickly undercut an interest rate higher than 2.5%. Alternatively, a commercial bank is not likely to lend money at an interest rate lower than 2.5% because it could receive 2.5% interest by keeping its assets in its account at the Central Bank. Therefore, market rates tend to settle around the OCR.

In December, analysts expected the Central Bank to raise the OCR in early 2012 to encourage commercial banks to hold money in their accounts with the Central Bank, which would slow inflationary pressures by encouraging banks to save money, thereby decreasing demand which would lower prices and decrease inflation. However, a January 19th report revealed that the consumer price index (a measure of how much money it costs to buy certain goods and, therefore, a measure of inflation) rose only 1.8%, below the midpoint of the 1% to 3% inflation rate that the Central Bank has targeted in accordance with a Parliamentary mandate to set an inflation target. Since inflation was lower than expected and the economy is still growing at a slow rate, the Central Bank decided not to raise the OCR. By keeping the OCR low, the Central Bank hopes to encourage banks and consumers to continue to spend, rather than save, thereby increasing economic growth and inflation (higher demand will push prices up) to the target level of 2%.

According to Mr. Ballard, inflation will naturally settle at the target level of 2% and economic growth will increase due to the ongoing reconstruction effort in the region of Canterbury. Canterbury has been struck by a series of earthquakes since September 2010, including a February 2011 earthquake that killed 181 people. A large-scale reconstruction effort is scheduled to begin in early 2012, and the additional demand for commodities will likely increase inflation to the 2% target and increase economic activity.

The IFC Invests $9.7 Million in Tunisia

2012-01-24T21:46:00.002-06:00

Sources:

Canada Newswire: IFC Invests in Candax Energy, Supporting Economic Development in Tunisia
IFC: IFC Organization; Summary of Proposed Investment
NASDAQ: World Bank Group Member, IFC, C$9.8 Million in Candax Energy
Scandinavian Oil & Gas Magazine: Candax Signs Investment Agreement for $11 Million Private Placement

The International Financial Corporation (IFC), a member of the World Bank Group, agreed this week to invest $9.8 million Canadian dollars ($9.7 million U.S. dollars) in Candax Energy to help the country expand its operations in Tunisia. In addition to the IFC investment, certain Candax’s directors and senior management will personally invest approximately two million U.S. dollars into the project. The investment is intended to help Candax increase its oil production in Tunisia while strengthening the local communities and protecting the environment.

The IFC is the largest global development institution focused exclusively on the private sector, with U.S.$68 billion in assets as of 2011. The IFC’s investment in Tunisia is intended to advance Candax’s facilities in the country, especially those in the Robbana oil fields. Candax currently produces 320 barrels of oil per day in Tunisia, but production is projected to increase to 700 per day by the end of 2012 with the proposed investment. The increased production will produce benefits for Tunisian citizens. The oil fields in question are considered marginal, meaning that the amount of easily accessible oil is relatively low and without the proposed investments, extraction at these fields would soon decline significantly, possibly leading to their complete abandonment within the next few years. Candax also hopes the investment will result in the future creation of managerial and oil development positions that will be staffed by Tunisian citizens. However, at the current time, the amount and exact nature of the managerial and development positions are unclear.

Additionally, the IFC will help Candax implement policies and programs intended to minimize the project’s harm to the environment, such as developing methods to safely dispose of water contaminated during oil extraction. Additional IFC funds will be used to create a public consultation and disclosure plan intended to gather input and warn the local community of any potential harms. The investment will also serve to reassure the international community that Tunisia is a safe place to invest, especially considering the instability surrounding the political revolution that started in 2010 and the unknown policies of the recently elected democratic government.

In 2010, the GDP per capita in Tunisia was $9,400 U.S. (as opposed to $47,200 in the United States) and the unemployment rate was 13%. The Candax expansion will hopefully result in both increased economic activity, which will result in increased per capita GDP and reduced unemployment. IFC’s other projects in Tunisia also further these goals by improving the country’s infrastructure and education system, and increasing the availability of credit to start small businesses. The IFC believes the recent investment in Candax, along with its other current projects, will improve the lives of Tunisian citizens.

Eurozone’s Bailout Fund Suffers Credit Downgrade

2012-01-22T16:02:00.002-06:00

Sources:
FT: S&P Downgrades Eurozone Bail-out Fund
Reuters: Rescue Fund Downgrade Raises Pressure on Euro Zone
WSJ: S&P Cuts Rating on Europe's Bailout Fund
Telegraph: S&P cuts EFSF bail-out fund rating: statement in full

On Monday, the credit rating agency Standard & Poor’s lowered the credit rating of the Eurozone’s bailout fund, the European Financial Stability Facility’s (EFSF), one notch from its top AAA rating to AA+. The downgrade comes, in part, as a result of S&P’s decision on January 13th to lower the AAA ratings of France and Austria—two of the fund’s guarantors—as well as the Eurozone’s inability to adequately contain the region’s debt crisis. The fund still retains its AAA rating from credit agencies Moody’s and Fitch.

The EFSF’s main function is to safeguard financial stability in Europe by providing financial assistance to Eurozone countries. To do so, the EFSF issues bonds or other debt instruments on capital markets to raise the money necessary to lend to struggling Eurozone governments. The fund is backed by guarantees from Eurozone countries and derives its credit rating from the ratings of those countries. To maintain its AAA rating, the EFSF’s bonds could only be guaranteed by AAA rated countries. However, following the lowering of the ratings on France, Austria, and several other countries, the EFSF bonds are no longer fully supported by the guarantees of only AAA rated countries.

The credit downgrade of the EFSF could potentially lead to higher lending costs for countries borrowing from the EFSF. This is because the fund’s lending capacity would now have to be reduced (as there are fewer AAA guarantors) or the remaining AAA countries (such as Germany) would have to agree to increase the amount of their guarantees. However, Germany has already rejected raising its contribution to the fund, leaving the EFSF to attract investors by promising to pay higher premiums (return for the investor, but additional cost for the borrower). Nonetheless, last Tuesday, the EFSF managed to successfully sell its full target amount of €1.5 billion ($1.9 billion) of six-month bills at a yield of 0.2664% compared to a yield of 0.222% when it was rated AAA, signaling that robust demand still exists for ESFS debt.

Lastly, in an effort to increase the bailout fund’s lending capacity and effectively deal with the debt crisis, Eurozone leaders have accelerated the implementation of the European Stability Mechanism (ESM) (which will replace the EFSF as a bailout fund) to July 2012. The ESM differs from the current EFSF fund in that it is funded through paid-in capital provided by Eurozone countries, instead of just guarantees as with the EFSF. Also, the ESM would have a lending capacity of 500 billion euros—much larger than that of the EFSF. Thus, the ESM should offer lower lending costs since investors should be more willing to purchase bonds that are backed by capital rather than guarantees. In any event, the downgrade of the EFSF will make it more costly for troubled economies in the Eurozone to get financial aid and harder for the region to contain the debt crisis.

Haiti Works to Rebuild Its Economy Two Years After Earthquake and Cholera Outbreak

2012-01-21T13:27:00.001-06:00

Sources:
CFI: Investment in Haiti
FT: Haiti Struggles to Rebuild
The Guardian: Haiti Earthquake: Where has the Aid Money Gone?
The Guardian: Haiti Embarks on Economic Recovery Plan with Help from Private Sector
NYT: Haiti: Cholera Epidemic’s First Victim Identified as River Bather Who Forsook Clean Water
PBS Newshour: Two Years After Quake, Most Haitians Still Living in Disaster Zone

Two years ago, an earthquake in Haiti caused the deaths of 316,000 Haitians. An additional 1.5 million people were left homeless, and over 300,000 buildings were destroyed or badly damaged. Currently, 500,000 Haitians still live in settlement camps that were originally intended as temporary housing. A cholera epidemic also broke out two years ago, sickening 500,000 Haitians and resulting in the deaths of 7,000 more. Under the direction of the newly appointed prime minister, Garry Conille, the Haitian government has announced that foreign aid alone may not be sufficient to develop the country into a modern, industrial state. Therefore, it aims to attract private and public sector investments to help stimulate the economy through job creation, combating cholera, permanently housing displaced people, and improving the country’s infrastructure.

Experts agree that reconstruction efforts thus far have been too slow. International aid has proven insufficient to cover the costs of rebuilding. Although $4.5 billion were pledged by world leaders for the first two years of reconstruction in March 2010, only 53% of this amount has been delivered. Only 77% of the United States’ pledge of $180 million to aid Haiti during the cholera crisis has been delivered. Experts attribute dwindling donor support to concern over the stability of Haiti’s government in the last two years, especially since a disputed election in 2010 left the then newly elected Haitian president, Michel Martelly, without an effective government for several months. Experts suggest that donors seemed unwilling to contribute to recovery efforts because they feared that an ineffective government could lead to inefficient distribution of resources and aid.

By contrast, Haiti’s current government’s efforts to attract foreign investors seem successful. The government held a forum in December, inviting 1,000 potential investors to invest in Haiti, and Marriott Hotels and Digicel (a mobile phone network provider active in the Caribbean) have already agreed to collaborate in building a $45 million hotel in Port-au-Prince, which will hopefully create 175 jobs and provide a boost to the tourism industry. The government is promising initiatives to investors such as a fifteen-year tax holiday and other generous subsidies, such as a zero tax rate for up to fifteen years with a partial tax exemption that gradually decreases over an additional five years and an exemption on most import taxes.

The Haitian government is also working with the Inter-American Development Bank and USAID to develop Haiti’s manufacturing industry. For example, last November, construction began on the Caracol Industrial Park (CIP) which will house much of this industry. Sae-A, a South Korean textile company that supplies US retailers like Walmart, is looking to benefit from Haiti’s guaranteed duty-free access to US clothing markets by investing $78 million in the CIP, and plans to hire about 20,000 workers. The government anticipates that the CIP will provide many opportunities for local entrepreneurs and include a residential development with 5,000 homes.

The government is also looking to public and private investment to help improve the country’s sanitation infrastructure. It plans to implement a $700,000 health and sanitation program to help contain the spread of cholera that will include a latrine and potable water system in the south-western Grand’Anse region that will benefit about 80,000 families. In the Cite Soleil district of Port-au-Prince, it is working with USAID and the Caribbean trade group Caricom to improve access to medical supplies, toilet facilities, and hand-washing stations. Although experts have expressed optimism about the government’s projects and the international community’s support, they emphasize that the government needs to prioritize the needs of Haitians and not foreign investors to ensure the maximum development benefit for the country.

Indonesia Earns Investment-Grade Bond Rating

2012-01-21T11:03:00.002-06:00

Sources:

FT: Indonesia Makes Investment Grade at Moody’s

Jakarta Post: New Rating Upgrade Shows Faith in RI

WSJ: Indonesia Gets Ratings Boost from Moody’s

Moody’s Investor Service—one of the “big three” credit-rating agencies—raised Indonesia’s credit rating to “investment grade” with a stable outlook for the first time since 1997. The decision by Moody’s comes on the heels of a similar decision by Fitch Ratings in December, and analysts expect Standard & Poor’s will also upgrade Indonesia’s bond rating in the coming months.

In 1997, Indonesia’s bonds were downgraded to “junk” status due to the ongoing negative economic effects of the Asian financial crisis, unstable leadership, and a mounting public debt. Since then, the economy and political environment have improved drastically. Under the leadership of President Susilo Bambang, Indonesia’s economy has expanded by at least 5% in seven of the last eight years. Some of this economic growth is due to increased domestic demand from the growing middle class, but much of it is due to Indonesia being the world’s largest exporter of coal and palm oil. The country has also improved its fiscal situation. In 2000, the public debt accounted for 90% of Indonesia’s annual gross domestic product, but now that figure has been trimmed to 25%.

Despite strong economic growth, stable leadership, and less public debt, Indonesia requires infrastructure improvements if its economy is to keep pace with recent growth rates. Companies are increasingly citing congestion on roads, and at ports and airports as burdens to Indonesia’s business climate. In response, Indonesia has stated that it needs more than $400 billion over the next thirteen years to upgrade its infrastructure.

Fortunately, borrowing to fund infrastructure improvements will be less costly if Indonesia can retain its “investment grade” credit rating. Last week, 30-year Indonesian bonds reached a record-low yield of 5.375% due to investors being willing to pay higher prices (yields drop as bond prices rise). Shortly after Moody’s recent announcement, 10-year Indonesian bonds fell to a record-low yield of 5.83%–another encouraging sign. The ability to issue bonds at low yields is important because it has the effect of lowering Indonesia’s borrowing costs: rather than paying 7% annual interest on new 30-year bonds that it issues, as Italy currently does, Indonesia only has to pay 5.375% interest. Put another way, an upgrade in bond rating from credit-rating agencies signals to investors that Indonesian-government bonds are at less risk of default, and could increase much needed investment in the growing economy.

If Indonesia is able to upgrade its infrastructure, it will continue to attract foreign investment, which creates jobs and raises wages for the country’s citizens. Indonesia’s net foreign investment (foreign investment coming into the country less Indonesian investment in foreign countries) has tripled to more than $15 billion in the last three years, and improved infrastructure—funded with lower borrowing costs—will increase foreign investment. Furthermore, both Moody’s and Fitch have stated that if Indonesia is successful in improving its infrastructure, the country may see another credit-rating upgrade, which would lower borrowing costs once again. For a country that “became a poster child for emerging economies run amok” in the 1990s, these trends are encouraging developments.

Democracy and Financial Crisis Management

2012-01-20T15:41:00.003-06:00

Sources:

ABC News: Detroit Can Avoid Emergency Manager

Michigan Public Radio: 7 Things to Know About Michigan’s Emergency Manager Law

NY Times: Looking Up Detroit Faces New Crisis

State Bar of Michigan: Michigan Supreme Court Orders Briefs Filed in December on Emergency Manager Law

State of Michigan: Emergency Manager Law

WSJ: Humbled Flint Forced to Take State’s Orders

While many states in the U.S. have laws that provide for emergency management of local finances in crisis situations, Michigan is setting a controversial new standard. Michigan law allows an emergency manager to assume the responsibilities of locally elected officials when a city or school district runs out of money or experiences a financial crisis. Like many states, Michigan’s legislation was modeled after New York City’s Municipal Assistance Corporation (MAC), which was established in 1975 in response to the city’s debt crisis. In the event of a financial crisis, MAC provided for the establishment of an oversight board to control of municipal finances. What makes Michigan’s law so controversial is that, rather than an oversight board or committee consisting of several members, emergency management powers are given to a single individual. As states across the U.S. face economic difficulties, Michigan’s approach may have far reaching implications.

The State of Michigan has been hit particularly hard by the Great Recession, industrial job losses, and a declining tax base. Major employers have either slashed operations and jobs or left the state entirely. As a result, Michigan has experienced a decade of job losses and increasing unemployment rates. Currently, four Michigan cities are under emergency management: Benton Harbor, Ecorse, Flint, and Pontiac. The City of Detroit is also on the verge of financial crisis with a $196 million deficit.

In response to growing financial concerns, Michigan’s legislature expanded the emergency management system in 2011. The new legislation broadens the scope of emergency powers and allows the emergency manager to take over responsibilities normally reserved for elected officials. Voters, local officials, unions, and civil libertarians have taken issue with Michigan’s approach to emergency management, claiming it is unconstitutional and contrary to the democratic process. In addition to budgetary control, emergency managers are empowered to void or revise contracts, modify pensions and payrolls, renegotiate loans, and hire or fire local government officials. The argument in favor of a single emergency manager is based on efficiency, accountability, and responsiveness. A single manager can respond to problems quickly as meetings and board approvals are unnecessary, the manager is fully accountable for his or her decisions and cannot hide behind the guise of committee or board majority votes. In a state where multiple emergency managers are appointed, budgetary constraints can be a consideration. Emergency managers are paid officials and they also have the ability to hire a support staff. Thus, unless other jobs are cut, the emergency management team can be an additional payroll expense for the financially distressed city.

While the debate continues, Michigan’s governor has asked the Michigan Supreme Court to render an expedited opinion on the constitutionality of the emergency manager law. In the face of this financial crisis, a tug-of-war between efficient, centralized powers and the constitutional protections of democracy is being played out at the local, national, and international levels. The crisis-driven centralization of economic power and limitation of democratic process presents an issue without a clear resolution. Perhaps the Michigan Supreme Court will provide some guidance.

Hungary on Brink of Default

2012-01-17T22:59:00.003-06:00

Sources:
ISRIA: Hungary - Fellegi Started Negotiations with IMF
MarketWatch: Hungary Won't be Last to Make Bondholders Pay
WSJ: Hungary, IMF meet on Loan Conditions
WSJ: Hungarian Forint Strengthens; Euro Falls Below HUF309
Trading Economics: Government Bond Yields - 10 Year Notes - List by Country

Hungary, a country with a total population of 10 million and a GDP of less than $200 million, is not normally the focus of international investors due to its relatively small size. However, Hungary is running out of money and may, within the next few weeks, be the first country in Europe to default as a result of the sovereign debt crisis. A Hungarian default by itself would not likely be catastrophic, due to the country’s relatively small economy, but it could be a precursor to additional European defaults.

Hungary is currently facing default due to a number of factors. Before the recent financial collapse, Hungary’s government and citizens used the availability of cheap credit to grow the economy at unsustainable levels, but after the recent credit crunch the country was unable to obtain the credit necessary to continue fueling that growth. Additionally, many Hungarian citizens incurred significant amounts of debt, most notably on personal mortgages, that many can no longer afford and are unable to refinance. When the Hungarian economy slowed, the country’s debt became a large burden. For example, Hungary’s personal and corporate incomes fell, which lowered government tax revenues and decreased Hungary’s ability to pay its debts. Also, with lower personal incomes, Hungarians had to spend a larger portion of their income on mortgage payments, leaving less income for other purchases, thus lowering consumption and economic growth further. In response to these economic issues, rating agencies have reduced the country’s bond rating to junk status (as a result, the country’s ten-year bond yields are around 10%—as compared to 1.85% in Germany, 3.37% in France, and 1.96% in the United States) and the Hungarian stock market has suffered greatly.

International financial markets want the IMF to step in with a loan of approximately €20 billion, which is enough for Hungary to meet its current debt obligations while the country’s economy recovers. Without IMF assistance Hungary will likely default on its loans, resulting in losses for Hungarian debt holders. The IMF loan would prevent a default, which would assure international investors recover their investments. However, recent talks have broken down based on disagreements about the independence of the Hungarian Central Bank from the Hungarian government and the implementation of austerity measures.

Based on these disagreements, the prime minister of Hungary may decide that a deal with the IMF is not the best option and the country could instead default on its financial obligations. This belief is based, in part, on a comparison of Greece and Iceland. Greece accepted IMF assistance and saw its economy shrink by 5% in one year. Iceland entered a financial crisis in 2008, did not accept IMF assistance, and instead defaulted on certain obligations. While this resulted in a shrinking economy from 2008-2010, the economy is now growing. While defaulting may be a good decision for Hungary, investors are worried that Hungary’s example will lead other countries to reach the same conclusion. Investors fear this outcome because when a country decides to default it will result in debt holders receiving less than the full value of their original investment. Investor confidence in the region would decline, which would negatively affect the amount of money invested and increase countries’ borrowing costs, both of which would harm the European economy. Even though a Hungarian default is possible, most believe Hungary and IMF will reach an agreement.

Oil Strikes in Nigeria

2012-01-17T00:47:00.003-06:00

Sources:
CNN: Nigeria’s Oil Economics Fuel Deadly Protests
MarketWatch: Nigeria Oil Union Says Not Shutting Production Yet
NYT: Nigerians Protest Rise in Oil Prices
Reuters: Update 6- Nigerian Fuel Protests Grow, 13 Killed in Attacks

Nigeria has recently experienced a sharp increase in oil prices. The increase is the result of a government decision to discontinue funding an oil subsidy. Although Nigeria is one of the largest producers of oil in the world, its refineries are dysfunctional, forcing the government to import gasoline for its population at higher prices than what Nigeria receive from its own oil sales. The government started the subsidy to help its large poor population afford gasoline.

The government’s decision to end the oil subsidy comes after two decades worth of attempts that failed due to public resistance. President Goodluck Jonathan stated that the decision would save the government around $7 billion that it could allocate to other uses. The government’s goal is to use the money saved from the subsidies to develop roads, electricity, education, and healthcare. These areas have long been neglected, and are now substantial hindrances to economic development in Nigeria.

However, many Nigerians are angry with the government for taking away what they believe is the only help the government has ever given them. Riots and strikes have erupted as many doubt the historically corrupt government will follow its stated goal of using the saved money for the benefit of all. The riots are escalating daily and the strikes have shut down most of the country’s oil production and other economic activity.

Ongoing riots and striking and the lack of government compromise on the subsidy issue will likely make Nigeria’s economic situation worse. The escalating violence from the riots has already begun to dissuade foreign investment, which is important for encouraging economic growth. The strikes have also lowered oil production, which decreases the amount of money the government has available to spend for the benefit of the citizens. Nigeria may face a period of prolonged economic decline if the government fails to quell the escalating riots and strikes.

Germany Could Face Trouble in 2012

2012-01-16T10:56:00.002-06:00

Sources:
FT: German Economic Recovery Stalls
Spiegel: Germany Could Face Recession in 2012
WSJ: German Economy Heads Downward

On Wednesday, the German Federal Statistical Office reported that despite the country’s strong economic growth during much of 2011, Germany’s gross domestic product (GDP) contracted by 0.25 percent in the final quarter of the year. This contraction increases the chances of Germany falling into a recession—defined as two consecutive quarters of negative economic growth measured by a country’s GDP—which would make it more difficult for Eurozone leaders to contain the region’s debt crisis.

Even as the Eurozone debt crisis has escalated, Europe’s largest economy saw only a modest economic slowdown last year after 3.7 percent growth in 2010. In 2011, the German economy grew three percent and the national deficit decreased to about one percent of GDP from 3.3 percent in 2010. This growth was partly due to an increase in consumer spending, which was up by 1.6 percent from 2010 and the highest seen in the last five years.

Despite last year’s growth, many economists expect Germany’s economy to grow very little or not at all this year mainly due to the continuing Eurozone debt crisis. The Bundesbank (Germany’s central bank) is forecasting that growth will slow to 0.6 percent in the first half of 2012 before starting to recover in the second half of 2012 and reaching 1.8 percent by 2013. The slowdown in global growth and trade along with increasing doubts about the austerity measures in many Eurozone countries are the main reasons behind the possible contraction. Lower global trade negatively affects German exporters, while the Eurozone debt crisis has caused German businesses to put investment plans on hold due to economic uncertainty. Similarly, doubts about the austerity measures in other countries can affect Germany significantly. Foreign austerity measures tend to decrease the disposable income of individuals in those countries as taxes increase and wages fall. As a result of the lower income, citizens stop buying many goods and consumption declines. A downturn in the debt crisis is likely to lead to serious problems for Germany’s economy, as about 40 percent of its exports go to other European Union countries.

A recession in Germany would have negative consequences for all of Europe. In the face of a recession at home, German lawmakers and voters may refuse to support additional funding for bailouts for struggling Eurozone countries. Without a contribution from Germany, those bailout funds may disappear entirely, the consequences of which could be disastrous.

Iran’s President Ahmadinejad Travels to Latin America to Strengthen Economic Ties

2012-01-13T18:03:00.001-06:00

Sources:
ABC News: Iran’s Leader Looks to Latin America for Support
Aljazeera: Iran’s Bear Hugs and Business in S. America
Christian Science Monitor: What’s Ahmadinejad Getting Out of His Latin American Tour?
FT: Iranian President Starts Latin American Tour
Washington Post: Ahmadinejad Travels to Nicaragua After Defending Iran’s Nuclear Program in Venezuela
Yahoo!NEWS: As Sanctions Bite, Iran Feels the Pain

Iran’s president Mahmoud Ahmadinejad visited Venezuela and Nicaragua this week and plans to visit Cuba and Ecuador, as well. Experts suggest that President Ahmadinejad’s visit is motivated by the lack of economic growth in Iran that increasingly concerns Iranians who fear that the economic situation will grow worse as a result of recent U.S. sanctions imposed on the country. Experts believe that, as upcoming elections in Iran draw near, President Ahmadinejad is trying to assure Iranian constituents that Iran has friends in Latin America that also oppose U.S. policy. They argue that President Ahmadinejad will attempt to convince Iranians that economic ties to Latin American countries can help Iran face the difficult financial challenges ahead. As the United States attempts to convince other countries to seize trade with Iran (like China, which is a major importer of Iran’s oil), Iran may be looking for new markets and to strengthen economic relationships with allies.

Experts warn that Iran’s economic circumstances may grow increasingly worse because of the sanctions. Prior to the United States’ recent announcement that it would enforce tougher sanctions against Iran because of its growing concern over Iran’s nuclear program, Iran was already experiencing low growth. It had a projected economic growth rate of 2.5 percent for 2011, the lowest of any major oil producer in the region. The sanctions specifically target Iran’s banking and oil sectors to cut off funding sources for the nuclear program. Critics are concerned that these measures will continue to devastate Iran’s domestic market. For example, Iranian businessmen have already expressed concern that U.S. sanctions on the banking sector will mean that they will have to rely on cash to do business since credit will become more difficult to obtain. Iran’s economy will also suffer if it cannot benefit from the petroleum industry on which it depends.

Critics are skeptical that President Ahmadinejad’s visit to Latin America or Iran’s commercial deals with Latin America will affect Iran’s economic position since, excluding Venezuela, Iran’s Latin American allies are mostly poor countries. Iran and Venezuela share longstanding economic interests since they both rank among the leading world producers of oil and are founding members of the Organization of Petroleum Exporting Countries (OPEC). More recently, the two countries have cooperated to build low-income housing throughout Venezuela, and Iranian-designed tractors can be found throughout the Venezuelan countryside. However, Iran has not followed through with promises it has made to help with over 100 development projects in Latin America. For example, Iran promised to build a $350 million port in Nicaragua and an oil refinery in Ecuador, neither of which it has done. Critics note that President Ahmadinejad is not visiting Latin America’s strongest economies, including Brazil, and lacks their political and financial support. Although Brazil’s former president Luiz Inacio Lula da Silva invited Ahmadinejad to visit Brazil in 2009, Brazil’s current president Dilma Rousseff did not make a similar invitation and spoke out against the Iranian regime’s violation of human rights.

Will Cheap Natural Gas Alter U.S. Energy Consumption?

2012-01-13T13:42:00.005-06:00

Sources:

Americans for Energy Leadership: How Cheap and Abundant Natural Gas Affects Renewables

NPR: Solar Panels Compete with Cheap Natural Gas

Rice University The Baker Institute Energy Forum: Impact of Shale Gas Development on Global Gas Markets

WSJ: Glut Hits Natural Gas Prices

Prices for natural gas in the U.S. have fallen to their lowest levels in over two years and are expected to drop further. The dramatic decline in gas prices is attributed to several factors, including technological advances in drilling capabilities as well as climate forecasts for mild winter temperatures throughout the U.S that have driven natural gas supplies to all time highs. The decline of natural gas prices spells relief for businesses and homeowners who use gas for heat, and has spawned revived interest in natural gas as an alternative to coal and a compliment to clean energy initiatives. The surplus of natural gas has greatly impacted the energy market in the U.S. and abroad in the past decade. Compared to natural gas, the cost of wind, solar, nuclear, and even coal generated power appears much less attractive, and exportation of excess U.S. natural gas production could impact global markets as well.

Advances in drilling technology in the last decade have played a large role in creating the current surplus. The introduction of hydraulic fracturing of shale formations, known as “fracking,” and the seemingly endless supply of shale formations across the U.S. loaded with natural gas have kept reservoirs full and suppliers looking to export excess gas. Current excess reserves are so high that some companies are simply burning off the natural gas produced as a byproduct of oil and ethane extraction.

For several reasons, experts do not expect the excess natural gas supply to decline anytime soon. In addition to the extraction of natural gas through fracking, natural gas is a byproduct of oil drilling which has expanded greatly in recent years thanks to high oil prices. Most wells in the U.S. contain a mixture of oil, gas and other petroleum products, such as valuable ethanes. Since oil and ethanes are profit-makers for exploration companies, drilling will continue as long as oil prices are high. Another factor contributing to the increased supply is the fact that most energy companies have land leases that will expire unless the company performs a certain amount of drilling.

In less than a decade, the U.S has become a major source of natural gas with unforeseen surpluses. Due largely to fracking technology and an extensive pipeline infrastructure, the U.S. is exploring the possibility of replacing some nuclear and coal burning electricity generating facilities with natural gas facilities. Export opportunities are also increasing as global demand for liquefied natural gas grows. Wind and solar energy initiatives are also seeking to partner with natural gas facilities to bridge supply gaps when the sun is not shining or the wind is not blowing. Natural gas production in the past decade has altered the economics of energy consumption in North America with the potential for a global impact.

North Korea Addresses Food Assistance and Nuclear Weapons

2012-01-13T09:10:00.007-06:00

Sources:
NYT: North Korea Open to Talks on Nuclear Program
USA Today: North Korea Keeps Door Open for Food-Nuke Deal with U.S.
WSJ: North Korea Accuses U.S. of Politicizing Food Aid

In its first statement addressed to the United States since Kim Jong-il’s death on December 17th, North Korea—now headed by Jong Il’s son, Kim Jong-un—accused the US of “politicizing” the issue of food assistance. The statement condemned the United States’ insistence on North Korea halting its uranium-enrichment program as a condition to food assistance. It did, however, indicate that North Korea may be willing to engage the U.S. in future negotiations.

The U.S. first agreed to deliver food assistance to North Korea in 2008 when it promised to provide 500,000 tons of grain. The U.S. delivered 170,000 tons to North Korea in 2008, but the food-assistance program ended in 2009. Nuclear testing in North Korea was the main reason U.S. ended its aid disbursement, but the U.S. was also concerned that the government was distributing the food to the relatively well-fed military rather than North Korea’s impoverished citizens.

During the last year, North Korea and the United States have held negotiations for an aid-for-nuclear-disarmament agreement. The countries were on the verge of a deal prior to Jong-il’s December death which would have, according the U.S., provided “nutritional assistance” (vitamin supplements, nutrition bars, and snacks) to children in exchange for North Korea’s agreement to suspend its uranium-enrichment program. However, the negotiations stalled in December as North Korea began an official mourning period for Jong-il.

Currently, it is unclear whether any deal is imminent. In its statement, North Korea accused the U.S. of “drastically” changing the type of food assistance from the initially-promised grain to what the U.S. now calls “nutritional assistance.” Oddly, however, the statement also suggested that North Korea has not requested food at all, saying the “hostile forces are spreading unsavory slander” in reporting that North Korea had requested food assistance from the United States. Apparently, the “unsavory slander” is reference to recent reports in South Korean and Japanese newspapers which stated that North Korea had requested aid from the US.

Despite these mixed messages, North Korea has acknowledged that the food crisis is a “burning issue.” The United Nations (UN) World Food Program conducted an extensive survey in 2011 in North Korea that revealed that one-fourth of the country’s twenty-four million people are in need of food assistance. North Korea has gone through decades of economic mismanagement and it has very little arable land to support the nutritional needs of its people.

Given the lack of transparency in North Korea’s government, it is difficult to know what this all means for North Korea’s future. Some analysts speculate that the North Korea’s new leader, Kim Jong-un, has stepped back from his father’s deal for strategic reasons. If there are any threats to his leadership, he must gain the support of North Korea’s powerful military leaders who are resistant to limiting, much less ending, its nuclear program.

It is unclear whether North Korea’s retreat from the proposed December deal signals the continuation of a prolonged relationship of disagreement and distrust with the United States, or rather was a political maneuver meant to ensure Jong-un does not lose the support of North Korea’s military. However, if the move reflects North Korea’s long-term policy toward the United States, it is likely that North Korea will remain underdeveloped and impoverished.

Migrating Doctors Costly and Harmful to African Countries

2011-12-06T18:04:00.005-06:00

Sources:
Daily Monitor: Africa’s Doctor Brain Drain a Home-Made Problem
LA Times: South Africa Loses $1.4 Billion Training Doctors who Emigrated
Medical Express: Doctor Migration to Developed Nations Costs Sub-Saharan Africa Billions of Dollars

A recent trend of emigration to developed nations by medical doctors from underdeveloped African nations has created a big economic and social problem in Africa. The majority of the doctors leave countries with some of the highest HIV infection rates in Africa, (Ethiopia, Kenya, Malawi, Nigeria, South Africa, Tanzania, Zambia, and Zimbabwe, for example). The migrations negatively impact these countries’ economies and healthcare systems.

Though the countries are training about 600 doctors per 10,000 people (at a cost of $21,000 to $59,000 per doctor), they still only have about 8 doctors for every 10,000 people. The United States alone has hired about six percent (5,334 doctors) of the doctors trained in Sub-Saharan Africa. This means that there are only about 90,000 doctors left in the Sub-Saharan countries’ healthcare systems for a population of about 800 million people, drastically lowering the ratio of patients to medical staff.

In response, international organizations have stepped up to address the problem. The World Health Assembly published the “Code of Practice on the International Recruitment of Health Personnel” in 2010 to provide guidelines for the international recruitment of medical doctors by developed nations. The guidelines aim to reduce the number of doctors developed countries hire away from developing countries. The World Health Organization (WHO) also released a report proposing that developed countries hiring African doctors compensate the African countries for their investments in the doctors’ training. In addition, the WHO believes that the developed countries have an obligation to help finance and improve developing countries’ healthcare systems. Still other groups believe developed countries should somehow be held criminally liable for recruiting African doctors.

Scholars blame many different factors for the migrations, including inadequate wages and poor promotion opportunities. Studies conducted by one group of scholars show a 40-year trend of abuse towards doctors who are forced to work long hours, treat too many patients to provide adequate care to each, and lack the necessary medical materials and facilities. In the face of such poor conditions, the doctors seek countries that will provide them with better opportunities, and developed nations are more than willing to welcome the cheaply-trained doctors. The healthcare systems in these countries will continue to diminish and will become increasingly inadequate to treat the respective populations if something is not done to stop the migrations.

Can South Africa Meet its Development Goals?

2011-12-06T18:00:00.007-06:00

Sources:

AllAfrica: South Africa: Partnerships and Implementation Capacity Are Pre-Requisites to a Successful South African Development Path
BusinessDay: SA Needs to Raise Growth to 10% to Create 5-Million Jobs, Says DBSA
IOL: Political Leaders Key to Success, Says Bank

The Development Bank of South Africa (DBSA) released a report recently to provide South Africa a perspective on what steps it needs to take to achieve its proposed development goals. The goals aim to positively affect areas like reindustrialization, climate change, and skill development. The report found that the most difficult goal to achieve would be lowering the unemployment rate from 25% to 15% by the end of 2020. The South African government hopes to meet the goal by increasing employment by 7% each year through investing in development projects (possibly infrastructure) that require the most workers.

The steady economic growth the country has experienced in recent years is not sufficient to sustain an annual 7% increase in employment. The DBSA report states that the country will need 10% annual gross domestic product (GDP) growth to support the spending necessary to meet the goal of 7% employment growth. However, the report stresses that the South African government must resist the temptation to dismiss the goal as a failure—as it has done with past development goals—and suggests lowering the 7% target to a more feasible level. The report also contains suggestions on how to bolster employment, which mainly consist of seeking more labor-intensive government investments that will create a need for more workers.

If South Africa can successfully reduce unemployment, it stands to become a more stable country economically. Economic stability will encourage investment by reducing the risk of loss due to dramatic changes in the economic climate. It will also show that the government is committed to realizing its development goals. This commitment should entice foreign investors to provide capital investments for the development goals because they would no longer fear losing government support prior to completing a project.

Myanmar Leaders Meet with Hillary Clinton to Discuss Reform

2011-12-02T12:00:00.001-06:00

Sources:

FT: Wary Burmese Savour Taste of Reform

NYT: Greeted Quietly, Clinton Arrives in Myanmar

Reuters: Clinton Offers Myanmar First Rewards for Reform

Times of India: Hillary Clinton to Push Reform in Historic Myanmar Talks

WSJ: Firms See Myanmar as Next Frontier

On November 30th, Secretary of State Hillary Clinton arrived in Myanmar (also known as Burma) to discuss the country’s reform efforts and to assess whether these efforts warrant a change in U.S. policy toward the country. This visit marks the first time a U.S. Secretary of State has visited Myanmar since 1955, and potentially signals the first step toward improved relations between the countries.

In the 1980s and 1990s, relations between the countries soured due to the Myanmar military government’s numerous human rights violations against political dissidents and ethnic minorities. As a consequence, the U.S. and European countries imposed strict economic sanctions that prohibited new investment in Myanmar, blocked its exports to Western markets, and restricted financial transactions between the countries. Together, the military government’s economic mismanagement (it did not institute a capitalist economic system until the 1990s) and economic sanctions have resulted in Myanmar having the second-lowest gross domestic product (GDP) per capita in Asia.

In March, Than Shwe, the former President and top general, stepped down and Mr. Thein Sein (another former general, but a civilian as of April 2010) was elected President in Myanmar’s first election in over twenty years. The election was considered a sham in the U.S. and Europe, and although Myanmar is nominally a civilian government led by President Sein, it is still comprised primarily of military leaders. Since his election, President Sein’s government has released over 200 political prisoners, eased media censorship, and engaged in dialogue with Ms. Aung San Suu Kyi, the leader of Myanmar’s democracy movement who was under house arrest for most of the last twenty years before being released in November of 2010.

Although Clinton supports the reforms that President Barack Obama has called “flickers of progress,” she insists that Myanmar release the remaining 1,000 political prisoners, end ongoing violence between the Myanmar military and ethnic minorities, and cease illicit nuclear-missile-technology trade with North Korea before the U.S. will consider ending its economic sanctions on Myanmar. Clinton did, however, pledge to support International Monetary Fund (IMF) and World Bank efforts to determine whether Myanmar should receive international aid, and also suggested that the Obama administration would consider sending an ambassador to the country in the near future.

Economically, Myanmar suffers from an ineffective banking system, inadequate infrastructure, regular power outages, and extreme poverty. Despite these weaknesses, foreign investors are carefully watching Myanmar’s reform efforts because the country has vast amounts of oil, gas, timber, and gems, the availability of which would make it easy for foreign investors to earn a profit. Furthermore, wages are lower in Myanmar than its neighbors, many of its citizens speak English thanks to former British rule, and the legal system is derived from the British system, making it familiar to many potential Western investors. To attract more foreign investment, Myanmar needs to undergo more meaningful political reform to give companies the public support they believe is needed to set up business in the impoverished country. More foreign investment could promote strong economic growth and improved living conditions, much in the same way it has in other Asian countries.

Although President Sein has made progress, many analysts believe the country needs more economic results quickly. There is still a hard-line contingent in Myanmar’s military-dominated government and its patience with President Sein’s administration may run out if there are not concrete changes, such as the lifting of economic sanctions or improved economic activity. To produce these concrete changes, President Sein needs to convince the West that Myanmar has made meaningful political reform. The hard-line contingent, however, is reluctant to push political reform too quickly. Therefore, President Sein is in a difficult bind. If political reform moves too slowly, the West will not change its economic policies and there will be no concrete economic changes in Myanmar, but if political reform moves too quickly, President Sein will lose favor with the military leaders. Unless President Sein manages to find the appropriate balance, his tenure may be short and the hard-line government may return to power, potentially erasing what little progress has been made.

The IMF’s Assessment of the Chinese Financial Sector

2011-12-02T10:24:00.003-06:00

Sources:
Bloomberg: IMF Sees 'Buildup' of China Bank Risk Needing More Oversight
Hindustan Times: China's Financial System Vulnerable, Warns IMF
The Independent: IMF Alert on Banks Adds to Fears About Dangers in China
Irish Times: IMF Warns China Must Relax Grip on Banks and Rates
NYT: IMF Warns China on State Control of Banking
Xinhau Net: IMF Reports on China's Financial System "Generally Objective": PCOB

The International Monetary Fund (IMF) recently completed its inaugural evaluation of the Chinese financial sector as part of the IMF’s periodic look at the twenty-five most important economies in the world. While the report found that China’s financial sector is sound, it also noted several vulnerabilities that need to be addressed and reforms that need to occur.

The report identified many things the Chinese financial sector is doing well, including a trend towards policies the IMF favors. Among these strengths is the Chinese Government’s trend away from state-controlled economic decisions towards a regime where market forces have a greater effect on the economy’s direction. The IMF also applauded China’s increased legal regulation and additional safeguards placed on the financial market, such as interest and exchange rate reforms. Despite the positive movements, the IMF warned that additional regulations are still required.

Chief among IMF concerns is the lack of risk management and regulation in the financial sector, which makes the country vulnerable to asset bubbles, especially within the housing market. Adding to this problem is the artificially low interest rate set by the Chinese Government through the People’s Bank of China. The artificially low interest rates have resulted in increased loans to Chinese citizens giving them more access to money. The increased availability of capital has increased consumer demand, which leads to higher prices in many markets, especially the housing market. This bubble will likely burst when interest rates for consumer loans increase because fewer people will be able to afford the higher loan payments associated with higher interest. Demand for houses will then decrease based on a reduction of potential buyers, and ultimately the price of houses will fall. The IMF is also concerned that extending credit to Chinese consumers will result in loans to less credit-worthy individuals who have a higher chance of default.

The Chinese financial sector also suffers from “shadow banking,” which is unregulated and lightly supervised distributions of capital that occur outside the formal financial market. These transactions, which the Chinese Government cannot adequately track or tax, can lead to financially risky investment decisions that the Government is not aware of and, therefore, cannot prevent or later correct. China also needs to improve its financial accounting oversight system to recognize and proactively stop accounting scandals. Finally, the IMF is concerned that China’s banking system favors state-owned companies over private and foreign corporations by giving Chinese companies easier access to capital—often at lower interest rates. The sum of the above problems has led to inefficiencies in the Chinese financial market.

According to the IMF, China should address these issues by first increasing privatization of the banking system, which the IMF believes will allow the financial sector to react to market trends faster and make more efficient capital allocation decisions. China is likely to retain more state control than the IMF would prefer, however, as state control is the basis of the Chinese financial model. This belief is furthered by China’s relatively successful past operation of state-run companies.

China’s response to the IMF report stated that it believes the report is objective and generally positive, but that the suggested timelines and priorities of certain projects do not reflect the reality of the Chinese economy. As China’s economy continues to move forward, many investors and countries will be following whether China implements the IMF’s recommendations.

IMF Seeks Latin American Support to End the European Financial Crisis

2011-12-02T07:00:00.001-06:00

Sources:
Bloomberg: IMF’s Lagarde Seeks Latin America Help for Europe in “Historic About-Turn”
IMFdirect: Latin America-Taking the Helm
La República: Las dos posibles razones de la visita de Lagarde
Washington Post: Lagarde Suggests Latin America Safeguards Against Europe Crisis

Christine Lagarde, the Managing Director of the International Monetary Fund (IMF), is visiting three countries in Latin America this week, Peru, Mexico, and Brazil. Analysts believe that Ms. Lagarde has strategically chosen to visit these countries in particular to gain financial support to help Europe emerge from its debt crisis. Brazil is one of the foremost emerging economies in the world; Mexico will chair the Group of 20 (G-20) for 2012 (a group of finance ministers and central bank governors from the world’s 20 major economies); and Peru boasts one of the strongest emerging economies in Latin America. Experts think that Ms. Lagarde is travelling to Latin America and other countries holding large international reserves to secure bilateral loans to the IMF to fund loans to Europe during the crisis. Brazil, for example, has more than $350 billion in international reserves. The IMF alone, which has approximately $390 billion available for lending, may not be able to finance loans to Europe if the crisis continues.

Ms. Lagarde has emphasized that there are many ways beyond providing funds in which Latin America can help Europe, including through information sharing. Latin America’s experience in recovering from the debt crisis that led to many countries defaulting on their debt during the 1980s could serve as a model for Europe. In the past decade, Latin America has reaped financial and social benefits from becoming a model economic region that has grown because of reasonable fiscal policies implemented in the wake of its debt crisis. This year, the region experienced 4.5 percent economic growth, compared to 1.6 percent for developed nations. Although they have expressed a willingness to help Europe, Latin Americans have made it clear that Europeans should take responsibility for a problem they created and come up with specific solutions to end the debt crisis and keep it from spreading to other countries. Furthermore, Latin Americans are hesitant to help Europe and the IMF without receiving some benefit in return. Brazil, for instance, hopes that the IMF decides on a formula for calculating voting quotas that gives greater voting power to the world’s strongest emerging economies, even though the IMF already agreed to increase their voting power earlier this year.

Analysts also believe that Ms. Lagarde intends to warn Latin American countries during her visit that, despite their current economic success and stability, they may be vulnerable to the effects of the European crisis. Prior to her visit to Latin America, Ms. Lagarde suggested that Latin America could also be affected by the European financial crisis. Thus, while the crisis is currently Europe’s problem, it could become Latin America’s as well. She argued that Latin American countries must, therefore, implement preventive measures to strengthen and further stabilize their economies, such as continuing to increase domestic savings and protecting the banking sector, to guard against the effects of an economic slowdown if the financial crisis worsens.

Standard and Poor’s Changes Rating Criteria – Downgrades 15 Banking Companies

2011-12-01T20:02:00.002-06:00

Sources:

NPR: S&P Downgrades Top U.S. Banks' Credit Ratings

Reuters: S&P Cuts Ratings on Big Banks After Criteria Change

S&P: Standard & Poor's Applies its Revised Bank Criteria to 37 of the Largest Rated Banks and Certain Subsidiaries

WSJ: S&P's New Criteria Prompt Downgrades of BofA, Barclays, Citi

Standard & Poor’s (S&P), one of the ‘big three’ New York City-based credit rating agencies (Fitch and Moody’s round out the trio), announced new rating criteria for banks on November 9, 2011. This week, S&P applied the new criteria to 37 of the world’s largest financial institutions, which resulted in the downgrading of 15 major institutions including Goldman Sachs, Bank of America, UBS, JP Morgan Chase, Citigroup, Morgan Stanley, and The Royal Bank of Scotland.

S&P’s new criteria consist of two key steps. First, S&P evaluates a bank’s financial health and ability to withstand severe or extreme economic stress without reliance on external support and assigns each bank a “stand-alone credit profile.” Second, S&P assesses the degree of extraordinary government or institutional support available to a given bank. These two conclusions are then factored into the broader credit rating methodology, which includes complex risk analysis and assumptions and an overall financial evaluation.

By taking into consideration the degree of external support a bank may have available from central banks or due to its association with a parent group, S&P attempts to create a more accurate credit profile by evaluating the bank not only as an independent financial entity, but also as to the position of the bank within the financial industry as a whole. The new criteria appear promising; however, it may also extend the reach of credit rating agencies and prove controversial. The new criteria allow S&P to consider a bank’s position within the broader context of global finance, governmental support, political climate and economic conditions and to reflect that information in the credit rating. The recent bank downgrades are largely a result of the industry’s susceptibility to such factors and increasing reliance on governments and central banks worldwide.

The new criteria were designed to allow the rating agency more flexibility to respond to rapidly changing market conditions and adjust credit ratings accordingly. Prior to implementing the new criteria, S&P detailed its underlying assumptions and methodologies for rating banks in a series of reports on January 6, February 16, November 1, and November 9, 2011. According to the November 9, 2011 report, “the criteria are designed to improve transparency of bank ratings globally.”

Eurozone Crisis Worsens as Unemployment Rises in the Region

2011-12-01T18:26:00.002-06:00

Sources:
Eurostat: Euro Area Unemployment Rate
FT: Eurozone Unemployment Hits Euro-era High
Spiegel: The High Price of Abandoning the Euro
WSJ: Europe’s Crisis Gets Real as Unemployment Soars

The European debt crisis continues to worsen as borrowing costs increase, governments’ credit ratings are downgraded, and investor confidence continues to diminish. To make matters worse, the European Union’s statistical office, Eurostat, released its latest report last Wednesday on the unemployment rate in the region. The data highlights the rapidly depreciating economic outlook for the European Union (EU) and Eurozone, which many economists already say may be in a recession.

According to the report, the seasonally-adjusted unemployment rate (a rate that is adjusted to eliminate influences of predictable seasonal employment patterns) in the Eurozone was 10.3% in October 2011, compared with 10.2% just the previous month. This constitutes an increase of 126,000 unemployed workers, bringing the total to 16.3 million—the highest number since the statistical office started compiling such data in 1995. Compared with October 2010, unemployment rose by 367,000 in the region.

Among the member states, Greece and Spain saw the most significant increases in unemployment: Spain had a rate increase in one year from 20.5% to 22.8% and Greece from 12.9% to 18.3%. The lowest unemployment rates were recorded in Austria (4.1%), Luxembourg (4.7%), and the Netherlands (4.8%). Moreover, the economic crisis has especially affected the ability of young adults (under 25 years old) to find jobs. As the report highlights, as of October 2011, there were 3,338,000 youths unemployed in the Eurozone—an increase of 141,000 from the previous year. The youth unemployment rate is now 21.4% for the Eurozone. However, in countries such as Spain and Greece youth unemployment is even higher at 48.9% in Spain and 45.1% in Greece.

The rise in unemployment in the Eurozone is of particular concern for EU leaders who are trying to keep the region afloat. In addition to the suffering of the individuals who have lost their jobs and the growing discontent of the unemployed, the rise in unemployment puts an additional burden on governments trying to end the debt crisis. More unemployment means higher social security payments and lower tax revenues. These already cash-strapped governments will likely have to borrow more to support those out of work, which would only worsen the debt crisis. Also, the economic growth of the country suffers as individuals (now with lower or no income) cut back on spending, which lowers profits for businesses, which then have to lay off more workers. Thus, the increase in unemployment comes as a sign that perhaps the worst is yet to come in the European debt crisis if governments do not start taking more drastic actions.

Afghan Leaders Meet to Discuss Afghanistan’s Future

2011-11-21T10:59:00.003-06:00

Sources:

Aljazeera: Karzai Lays Out Conditions for US Partnership

Atlanta Journal—Constitution: Afghan Elders’ Grand Council Considers US Presence

CNN: Why Tribal Elites Feature in Afghanistan’s Future

International Business Times: Is Afghanistan Moving in the Wrong Direction?

Voice of America: Afghan Security Uncertain Despite Gains in Agriculture

At the invitation of President Hamid Karzai, over two thousand Afghan leaders gathered in Kabul on November 16th for a four-day meeting—or loya jirga—to discuss the future of Afghanistan, particularly regarding its relationship with the United States and the Taliban.

Among the attendees at the loya jirga were elected politicians of the national assembly and district councils, along with tribal and religious leaders. In all, there are only 250 elected officials and over 1800 non-elected tribal and religious leaders. Although the loya jirga has no official legal capacity and all its proposals must be approved by the parliament, some politicians have protested or boycotted the meeting. These politicians believe the meeting subverts the democratic political process in Afghanistan because many Afghans remain loyal to the judgment and guidance of their religious and political leaders, and many of these leaders remain loyal to Karzai. Therefore, any decision made by the loya jirga could influence Afghanis into pressuring their representatives in parliament, giving Karzai the necessary leverage to push through his plan.

In his opening remarks, Karzai stressed the need for a prolonged strategic partnership with the United States after the planned exit of foreign troops in 2014. Such a partnership could lead to the U.S. establishing temporary military bases throughout Afghanistan during the next decade, which would assist the government in fighting Taliban insurgents. Although Karzai acknowledged the need for international assistance after 2014, he stated that any long-term partnership between Afghanistan and the U.S. should not threaten Afghanistan’s national sovereignty. Specifically, he stated that such a partnership must be conditioned on foreign troops ending night time raids of Afghan homes. The U.S. contends these raids are the most effective way to kill or capture Taliban insurgents, but Karzai believes too many of these raids end up treating civilians as if they were insurgents and violating Afghans’ cherished privacy rights. The loya jirga will also discuss possible reconciliation with the Taliban. Since the U.S.-led raid in 2001, violence in Afghanistan has never been higher, and Afghans are growing weary of the persistent threat of violence. A recent poll conducted by The Asia Foundation, a non-profit, non-governmental organization, revealed that 35% of Afghanis believe their country is moving in the wrong direction—the highest level of dissatisfaction since 2004—and many Afghanis cited security and conflict as their main concerns.

Despite continued violence, political tension between elected officials and traditional Afghan leaders, and the uncertainty looming from a potential U.S. exit, there are some positive signs in Afghanistan. Afghanis are generally more satisfied with their access to education, drinking water, health services, and the role of public institutions than they were a year ago. Afghanis also are more united in their stance against the Taliban. In 2010, 40% of Afghanis sympathized with the Taliban, but only 29% of Afghans sympathize with the Taliban today. In recent years, Afghanistan has also seen a dramatic increase in the production of its agricultural sector and is close to reaching its goal of becoming a net exporter of agricultural products. This is important because the country now has enough food to feed its people, and also because this sustained growth in a key industry may convince foreigners to invest money into Afghanistan which would spur additional economic development. To sustain these perceived and real gains in economic development, it might be necessary for the loya jirga to pave a way for continued United States presence in Afghanistan. However, such a recommendation is not without risk. A continued United States presence may galvanize Taliban insurgents and lead to prolonged violence, threatening the stability of the country. Perhaps most importantly for Afghanistan’s elected leaders, a continued U.S. presence will beholden them to a foreign government and delay the true independence of the country.

Libya’s Post-Conflict Future

2011-11-17T12:55:00.002-06:00

Sources:

IDN: Huge Obstacles Impeding Libya’s Stability

NYT: Western Companies See Prospects for Business in Libya
Reuters: Update 2- Libya’s Oil Exports to Jump 350,000 bpd in Nov- Sources

Libya recently rid itself of Muammar Qaddafi’s four-decade-long dictatorship, but still faces a difficult task. Months of fighting have left the country’s infrastructure in need of repair. Fortunately, Libya has Africa’s largest oil reserves, which it can use to pay for the repairs. The potential for new investment opportunities in the oil industry also have western countries seeing Libya in a new light.

Countries like France and Britain are vying for a chance to invest in Libya’s oil development and reconstruction. Surprisingly, the United States has not yet shown the same enthusiasm. The hesitation stems from the fear that corruption from the Qaddafi era still lingers in oil contracts. Currently the issue is irrelevant since Libya’s interim government, the Transitional National Council, has said that it will not sign long-term contracts—a task it thinks is better left to a future, elected government. However, the reconstruction process has been slow because of the lack of a permanent government.

The absence of a permanent government is not the only source of instability in Libya. A large number of youths are unemployed, the oil industry is not producing at maximum capacity, and the country’s infrastructure was heavily damaged during the armed conflict. The infrastructure is of particular concern to foreign investors—a potentially large source of money and jobs. Building a good infrastructure will reduce production costs and raise profits, which will attract foreign investors. The future permanent government will have to address these issues quickly to restore stability. It will also have to work on strengthening international ties that eroded under the Qaddafi regime, but which could serve as an important source of reconstruction financing. If Libya cannot stabilize its economy, it may soon face more backlash from its citizens.

Zimbabwe’s Diamond Industry Can Boost its Economy

2011-11-17T12:47:00.005-06:00

Sources:
News 24: Zimbabwe to Get Diamond Boost
NewsDay: Is Zim any Better with Diamonds?
RadioVoP: Marange Diamonds to Generate $2 Billion Annually: Mpofu
The Zimbabwe Guardian: Zimbabwe, a New Economic Giant: Mpofu

The Kimberley Process Certification Scheme (KPCS), an organization that certifies that rough diamonds were not acquired through human rights violations, recently gave Zimbabwe permission to sell diamonds mined in the Marange district in the eastern part of the country. The KPCS’s decision lifts an international, years-long ban on exports from a portion of the country’s largest profit making industry to western countries.

The ban on Marange district diamonds started after a group of small-scale miners discovered diamonds in the region at the end of 2008. Police and military security forces forcibly removed, beat, and killed the miners to take over mining in the region. The takeover resulted in the evacuation of thousands of families who were promised, but never received, compensation.

Even with the KPCS’s ban limitation on western buyers, the mining industry in Zimbabwe has earned around $300 million by selling diamonds to Asian countries. Mines and Mining Development Minister Obert Mpofu stated that Zimbabwe stands to earn more than $2 billion without the ban. These profits would make up more than fifty percent of the nation’s total yearly earnings. The increase would drive Zimbabwe to produce more than twenty-five percent of the world’s diamonds. Many government officials believe that the increased income will allow the country to pay for its own development needs without needing foreign aid. However, analysts are concerned that the president, Robert Mugabe, will use the funds for political gain instead of to address development needs.

Experts also question whether the end of the ban will really be as lucrative as government officials claim it will be. The $2 billion in earnings depends on the industry’s growth rate and on how high-quality the diamonds are after processing in the country. Currently, Zimbabwe sells raw diamonds for less than what those diamonds would be worth if they were processed and cut. Zimbabwe currently does not refine the diamonds because there is a lack of skilled workers who could properly refine diamonds. Zimbabwe must further implement a system to track the profits it stands to make to ensure the government uses them in a productive manner. If it can manage these profits successfully, Zimbabwe could become one of the most developed African nations.

The Italian Debt Crisis and the International Monetary Fund

2011-11-15T10:20:00.003-06:00

Sources:
Reuters: Analysis: Losing Credibility, EU Seeks IMF's Embrace
Traders Magazine: G20 Summit Roundup
WSJ: UPDATE: UK: G-20 Withheld IMF Commitments, Want Euro-Zone Action

As the European sovereign debt crisis continues to worsen and many countries and investors are questioning the EU leadership’s ability to remedy the crisis, many investors are looking to the International Monetary Fund (“IMF”) to help stabilize and restore market confidence in the region. Market confidence is of upmost importance because the market’s perception of the troubled economies (Italy, for example) will significantly affect the interest rates the countries have to pay on bonds. In the case of Italy, market confidence is of extreme importance because Italy may be able to pay its debts if it is able to receive bonds at low interest rates, but if market confidence falls and Italy appears more risky investors will demand a higher risk premium on their investment in Italian bonds, which will increase Italy’s cost to borrow money and may cause the country to default.

Italy, the third-largest economy in the EU and eighth-largest in the world, is the most recent EU member to find itself in financial trouble. Because of the importance of market confidence in Italy, EU leadership recently forced the country to accept tighter oversight of the country’s economy from the IMF and European Central Bank (ECB). While the EU hoped the move would increase market confidence, some investors believe the move shows that the EU cannot maintain market confidence without outside assistance.

A large factor in market confidence is the ability and willingness of the IMF to offer a bailout to Italy, and potentially the entire EU, if the need arises. At a recent G-20 Summit in France on November 3rd and 4th, the group discussed potentially increasing the IMF’s funding to make a European bailout more plausible. However, before the G-20 will commit to additional funding it first wants to see the EU take more internal actions to control their debt. The G-20 also has specific concerns about the EU’s political structure, which makes quick or firm action almost impossible. Some developing countries that are also members of the G-20 (Brazil, China, and India) stated that they are willing to increase IMF funding if the EU can first show that it has adequate leadership, a clear vision, and the ability to respond to problems rapidly.

While at the current time it seems unlikely that the IMF will make a large loan to the EU, and will instead be involved in more intense economic monitoring, the EU is hoping the IMF’s presence will increase market confidence. However, if EU leadership cannot take concrete steps to confront the growing debt problem and market confidence continues to deteriorate, it may be necessary for the IMF and ECB to play a much more direct role to avert an economic collapse.

Italy’s Political Unrest Puts Markets on Edge

2011-11-15T09:49:00.003-06:00

Sources:

NYT: Interest Rates on Italian Bonds Pushed to New Levels
WSJ: Ailing Italy Accepts IMF Monitoring
Spiegel: Italy Becomes Next Euro Battleground
Spiegel: Why Berlusconi's Departure Is Making Markets Nervous

On Tuesday, Italian Prime Minister, Silvio Berlusconi, announced that he would resign from office once the Italian parliament passed a package of austerity measures European Union (EU) leaders demanded to reduce Italy’s vast debt and restore investor confidence in the country. The move came after a humiliating budget vote where parliament approved a plan to increase taxes and raise the retirement age, during which it became clear that the Prime Minister no longer had support from the majority of parliament.

Following the announcement, the interest rate on Italy’s 10-year bonds (which is viewed as a measure of investor anxiety) increased to 7.45%, from 6.63% just the previous day. There are also fears that the higher rates may force clearing houses (the intermediaries between buyers and sellers of bonds) to demand higher collateral payments from traders of Italian bonds to protect the clearinghouses from default, which would push interest rates even higher. Although by some measures the Italian economy is in better shape than the economies of Greece and Portugal, the economy cannot sustain paying such high rates on debt. If the interest rate rises so high that investors stop buying Italian bonds, the country will be unable to raise sufficient money on the bond market to continue paying its current debts and will have to seek a bailout like Greece and Portugal.

The developing crisis in Italy is of particular concern to European Union leaders. The Italian economy is the third-largest in the 27-member bloc and the current Eurozone bailout fund, the European Financial Stability Facility (EFSF), does not have enough money to bail out Italy. Italy’s debt is currently €1.9 trillion and accounts for 25% of all the sovereign debt in the Eurozone.

In an effort to restore market confidence in the country’s economy, the Italian parliament passed another package of austerity measures on Saturday. The austerity package includes an increase in the value-added-tax (a form of sales tax) from 20% to 21%, a freeze on public sector salaries until 2014, and an increase in the retirement age from 60 to 65 by 2026. Also, a new special tax will be imposed on the energy sector along with tougher measures to fight tax evasion. The austerity measures are expected to produce €59.8 billion in savings by the year 2014. Following the passage of such measures, Prime Minister Berlusconi stepped down, as he had promised earlier in the week, and a new Prime Minister, Mario Monti, has been appointed. The new appointment has been welcomed by EU leaders as a signal of the Italian authorities’ determination to overcome the current crisis. However, Italy is still not out of the danger zone as the country will continue to be monitored while it implements the austerity measures.

Asset Valuation: A Numbers Game?

2011-11-13T14:27:00.002-06:00

Sources:

Reuters: Goldman, Morgan Stanley Mull Reducing Mark-to-Market Accounting

TIME: Will Mark-to-Market Fix Help Save the Banks?

WSJ: Bank Quandry-Valuing the Assets

Continuing uncertainty in the global markets has led some major financial institutions to reconsider how they account for and report certain assets. This week both Morgan Stanley and Goldman Sachs announced that they are considering whether to reduce their use of “mark-to-market” accounting in favor of “historical-cost” accounting. This process, called “asset valuation,” impacts a bank’s ability to meet capital requirements, fund operational spending, and implement lending programs.

Investment banks and commercial banks are subject to different accounting requirements for different assets. As investment banks, Goldman and Morgan were required to price most assets using “fair-value accounting,” currently defined as mark-to-market accounting which requires institutions to price assets on their balance sheets according to the price they could be sold at on the open market—not the price they paid for them. However, to receive emergency federal funds during the subprime crisis, Morgan and Goldman converted to bank-holding companies which are subject to different accounting regulations. Banks are able to record certain assets based on historical-costs which means these assets are reported at their original value or purchase price. In short, Morgan and Goldman now have more flexibility in reporting certain asset values and the use of historical costs could substantially increase asset values.

Mark-to-market accounting became problematic after the 2008 U.S. financial crisis as the market for some securities collapsed and buyers disappeared. Mark-to-market accounting requirements magnified the impact of the crisis by forcing banks to show massive losses on their balance sheets, which reduced their ability to lend since banks are only allowed to lend an amount equal to a certain percentage of the total value of their assets. As a result, many banks were left holding (and still are) billions of dollars worth of toxic assets, which they have to report at very low values ranging from zero to sixty percent of their original price. Thus, some banks argue that the accounting requirements are making an already bad situation worse.

Since 2008, the financial industry has lobbied regulators to ease the mark-to-market requirement, which it argues would bolster their bottom-line, prevent additional bank failures, and help stabilize the economy. In April of 2009, the Financial Accounting Standards Board (FASB) adopted changes to accounting rules to allow banks more discretion in the use of mark-to-market accounting for “distressed” assets. Generally, distressed assets refer to securities that can only be sold by greatly reducing the price or for which there is no market at all. Critics argue that easing mark-to-market requirements allows banks to hide losses and reduces transparency.

Morgan Stanley’s and Goldman Sachs’s decisions to move away from mark-to-market valuations could dramatically affect financial results for both firms. Under historical-cost accounting rules, assets are generally reported at their original value or purchase price, a shift that would increase asset values on the firms’ balance sheets. Given the continued market volatility and sluggish economy, such balance sheet reorganizations will likely be met with a certain degree of skepticism. The accounting shifts could be viewed as an effort to disguise significant losses that belie greater financial concerns, or they may reflect prudent management decisions enabling the banks to recapitalize internally by retaining earnings or increasing capital ratios by reducing losses, which will allow them to loan more money and potentially earn more profits.

Countries in Asia Prepare for European Debt Crisis Fallout

2011-11-13T13:57:00.004-06:00

Sources:

Agence France-Presse: Asian Countries Cut Rates amid Global Economic Woe

FT: Indonesia Slashes Interest Rates by 50 Basis Points

WSJ: Asia—Pacific Economies Gird for Turbulence

WSJ: Some Asian Economies Reflect Strains

Countries throughout Asia and the South Pacific have responded to the European debt crisis and waning global demand by lowering their benchmark interest rates. Australia, China, Indonesia, Pakistan, and Thailand have all decreased benchmark interest rates in recent months, and Malaysia, New Zealand, Singapore, and South Korea are considering other policies to inject more money into their economies.

The use of monetary policy to spur spending and economic growth represents a shift in policy for many of these countries. In recent years, these countries have experienced robust economic growth and have been primarily concerned with curbing high inflation. This concern has led them to maintain high interest rates to decrease the money supply—and thereby inflation—by making saving more attractive and borrowing more expensive. However, the once-rising inflation rate is now falling in many of these countries and economic growth has also decreased. It is this reversal in growth that has convinced many of the countries to change course.

The benchmark interest rate is the rate of return on new government-issued bonds. In theory, lowering the benchmark interest rate can decrease the value of a country’s currency and spur its export industries, which is an effective way to generate economic growth. For example, if Indonesia lowers its benchmark interest rate, demand for Indonesian bonds will fall because they are not as profitable as before. Since investors use the Indonesian currency (rupiah) to buy government bonds, when demand for the bonds falls so does demand for the currency, which lowers its value in accordance with supply and demand principles. If the rupiah costs less on the foreign exchange market, it will be cheaper for businesses in the United States, for example, to buy the rupiah required to pay Indonesian manufacturers for their goods. The lower currency value will, therefore, jumpstart Indonesian export industries and generate economic growth.

A lower benchmark interest rate also has an effect domestically. When interest rates are lower, saving is less attractive and borrowing is cheaper, which encourages people to spend their money rather than save it. The additional spending increases overall demand and economic growth.

Some analysts question whether policies aimed at increasing economic growth at the risk of increased inflation are necessary. Although economic growth rates have fallen of late, a recent Asian Development Bank report indicated that Asian countries are still on pace for 7.5% growth in 2011. These analysts believe that this level of growth is appropriate given the global economic downturn, and think that preventing the potentially destabilizing effects of inflation on food and commodity prices should be the countries’ priority.

Whether this policy shift represents a temporary response to worsening conditions in Europe or a more prolonged transformation of Asian monetary policy remains to be seen. There is no doubt, however, that Asia’s path forward will be closely observed and scrutinized by the global community.

Financing Guatemala's War on Crime

2011-11-13T11:35:00.002-06:00

Sources:
AP: Ex-general Wins Guatemalan Presidential Election
Cornell: Legal Information Institute, U.S. Code
Diario de Centro América: Pérez impulsará reforma fiscal y luchará contra evasión
Estrategia & Negocios: Otto tendrá el desafío de ordenar las finanzas
The Guardian: Retired General Otto Perez Wins Guatemala Presidential Election
WSJ: New Guatemala Leader Faces Tests

Guatemala’s new president, Otto Pérez Molina, ran his presidential campaign promising voters that he would crack down on the increasing violence in the country. Guatemala’s murder rate is among the highest in the world (about eight times higher than the United States). Mexican and local drug cartels are carrying out kidnappings and extortions and taking over Guatemalan territory, using it as a smuggling route to the rest of the Americas. Analysts attribute President Pérez Molina’s win to Guatemalans’ desire to make the violence stop, but wonder if he will be able to deliver on his promise.

Although Guatemala’s economy is the largest in Central America, President Pérez Molina’s plans to combat crime will require funds in excess of what Guatemala currently has available. For example, the President wants to hire 10,000 new police officers and 2,500 more soldiers, but it is unclear where the President will find money to pay them. The President would like to raise the income tax to 14%, but previous efforts to increase the income tax have met resistance from Guatemala’s upper classes. Last year, Guatemala’s income tax rate was 10.3% (compared to between 15% to 39.6% in the United States), and economists believe that it will be very difficult for the government to equip the police force, military, and other sectors to fight crime when taxes are so low.

The tax increase is only part of the new President’s call for fiscal reform aimed at scaling back the country’s debt and providing funds for fighting crime. In addition to limited resources (its available budget is barely 10% of GDP due to the low taxes), Guatemala has a fiscal deficit of 3% of GDP and a debt of almost 25% of GDP. The President hopes to gain control over Guatemala’s debt to decrease dependence on international lenders. Experts cite mismanagement by the previous administration as a reason for the large amount of debt—for example, some programs were created without available funding, so the government had to take on more debt to pay for them. Even if Guatemala is able to reduce its debt, the government needs to address other issues that may affect its ability to pay for the fight against crime, such as roads in need of repairs, an impoverished population in need of services, and decreasing agricultural production in need of stimulus.

The World Bank and Others Suspend Funding to Malawi

2011-11-10T09:18:00.002-06:00

Sources:
CIA World Fact Book: Malawi Country Profile
Maravi Post: World Bank to Malawi: Put Your House in Order
Nyasa Times: World Bank Tells Malawi: Address Concerns to Get Aid
Reuters: Malawi Donors to Continue Withholding Aid: Paper
The Star: Malawi Abandons Tobacco for Crop Diversification, Food Security

Malawi, a small, landlocked country in southeastern Africa, currently has one of the fastest growing economies in Africa. Despite the strong growth, Malawi is still struggling with economic and political issues associated with being an underdeveloped country. Adding to these problems is the recent decision of the World Bank and a large number of other donors to withhold $500 million in aid until certain political and economic concerns are addressed. The funding issues are particularly sensitive due to recent economic problems.

Among the political policy concerns that lenders want Malawi to address are threats to media freedom, overall poor governance, deteriorating human rights, and the government’s handling of anti-government demonstrations where twenty protestors were killed. In addition to political concerns, the World Bank is concerned about an economic policy calling for the adherence to a zero-deficit budget, meaning that the country’s spending is higher than its revenues. Many economists believe running a deficit can help reverse an economic downturn. In times of financial hardship demand for goods decreases, which reduces sales and, therefore, profits, which leads to job and wage cuts, which further reduces demand. Governments, in some instances, can reverse this cycle by spending money to increase demand. To do so, however, the government may have to borrow money, and, thus, run a deficit.

If the Malawi Government addresses the above political and economic concerns, budgetary funding from the international community will resume. The funding is especially important given the country’s current economic problems. Tobacco accounts for 70% of the country’s export revenue, but a combination of the global economic recession, overproduction, and anti-tobacco campaigns have reduced its global demand and price, putting deflationary pressure on the Malawian currency. A currency’s value is affected by many factors, one of which is the number of individuals who need to purchase a currency to pay for goods purchased from that country. With the demand and price of tobacco declining, fewer people are buying tobacco from Malawi, which means fewer people need to purchase Malawian currency. This reduced demand leads to a decline in the exchange rate.

The International Monetary Fund (IMF) recognized that the decreased demand for Malawian goods has lead to its currency being overvalued because its value has remained the same even though demand has fallen due to the government’s use of a fixed exchange rate system. During the summer of 2011, the IMF suggested that the exchange rate should be lowered to encourage foreign investment (a cheaper currency means lower costs for foreigners) and align the Malawian exchange rate with what it would be if determined by the free market. The Malawi government followed the IMF’s suggestion and devalued their currency by approximately 10%. Because the Malawian currency is now worth less on the international market, the cost of importing food and oil has increased, which has lead to hardship for many of the country’s citizens, and made the need for international aid especially pressing.

Twitter and Social Networking Sites: Saving or Taking Lives in Mexico?

2011-11-07T15:27:00.002-06:00

Sources:

Mentedigital: Twitter in Mexico 2011

NYT: Mexico Turns to Social Media for Information and Survival

NYT: After a Kidnapping, Hackers Take On a Ruthless Mexican Crime Syndicate

Reuters: Mexican Social Media Boom Draws Drug Cartel Attacks

Worldwide, social media outlets have proven to be powerful tools for inspiring social and political change. Sites like Twitter and Facebook became the global command center for the Arab Spring uprisings and the current Occupy Wall Street demonstrations. Social networking has become a valuable tool for communication and the exchange of ideas across all sectors including, economic, educational and governmental entities. World leaders like Barack Obama ‘tweet’ and the White House has a Facebook page. Although social networking can be valuable to social and economic development, as evidenced by the Arab Spring movements, it can also be problematic. While citizens across the globe are using social media networks as a communication hub, in Mexico such networks are a matter of life and death.

The violence surrounding Mexico’s ongoing drug war has taken an estimated 40,000 lives in Mexico over the past five years. In an effort to further their criminal enterprises, the cartels have embarked on a brutal intimidation campaign targeted not only at rival organizations, but innocent citizens as well. The killings are often gruesome and accompanied by highly disturbing public messages threatening death to those who attempt to interfere with cartel activity. Victims have been beheaded, disemboweled, hung from bridges, or dumped in roadways. Criminal prosecutions are thwarted by governmental corruption and witnesses are often silenced by fear. The cartels have also targeted and killed reporters covering the drug wars and local media outlets have largely stopped reporting on their crimes. Because the cartels have silenced radio and news outlets, Mexicans increasingly rely on posts on Twitter, Facebook, and other sites to avoid cartel checkpoints, gang-violence, and shoot-outs as these situations are posted in real time. Unfortunately, the cartels have access to these social media sites as well.

In an effort to further silence and intimidate, the cartels have set their sights on the social media users who oppose them. Several people who allegedly posted information about cartel activities on Twitter have been brutally murdered. The most recent wave of cartel killings include three social media users described by their murderers as “snitches” on public banners found near their bodies. Although most social media users remain anonymous, some observers believe the cartels have infiltrated government and law enforcement offices that utilize advanced tracking software that can identify users.

Despite the danger, citizens continue to use social media. This week, in response to a cartel kidnapping of one of its members, the group “Anonymous” (a collaboration of international computer hackers) released a video on YouTube threatening to reveal the names of alleged cartel associates if the Anonymous member was not released. Critics claimed that Anonymous was endangering innocent lives as any names that Anonymous may have are likely tainted by corrupt officials, police, or the cartels themselves. Thus, Anonymous could actually contribute to the violence they seek to stop as rival gangs target the people named on the lists. Ultimately, the cartel released the Anonymous member, diffusing the situation. This scenario raises important issues with respect to the use and impact of social media networks. While social networks certainly can be used to empower the masses, the situation in Mexico demonstrates their capacity to spread chaos and death.

Relaxing American Travel Restrictions to Cuba

2011-11-06T17:45:00.001-06:00

Sources:
Miami Herald: The Door Opens for People-to-People Exchanges with Cuba
MSNBC.com: Florida’s Key West to Offer Cuba Flights
New American: Obama Opens Trade and Travel Relations with Communist Cuba
Tampabay.com: Obama’s New Policy Opens Way for Flights to Cuba Out of Tampa
USA Today: Obama Shows Courage by Easing Cuba Travel Ban
Voice of America: Cuban-Americans Divided Over Expanded US-Cuba Flights
WSJ: Airlines Rev Up for Flights to Cuba

On January 14, 2011, President Obama called for the relaxation of travel restrictions to Cuba. This new policy makes it easier for students, religious groups, and journalists from the United States to travel to Cuba. The ability of Cuban-Americans to travel to Cuba to visit family remains unchanged under the new policy, although the effect of the policy has made travel to Cuba more convenient for them. The President hoped to increase the flow of information between Cubans and the outside world, improve human rights in Cuba, increase humanitarian aid to Cuba, and help reunite Cuban families living in the United States and Cuba. Nearly one year later, the impact of this policy for Cubans remains unclear.

Since the president’s announcement, a number of organizations interested in running person-to-person exchanges in Cuba have applied for licenses with the U.S. Treasury department. The first of these trips began in August. The organizations plan to conduct cultural tours and activities in Cuba for Americans that qualify to travel there under the new policy, promising to provide a “purposeful travel” experience for tourists through which they can interact with Cubans and “support . . . their desire to freely determine their country’s future.” Although it is not uncommon for these organizations to charge several thousand dollars, tourists are limited in their ability to contribute to the local economy through limits on spending and buying souvenirs that are not “informational” in nature. Furthermore, although organizers claim that Americans will have “plenty of opportunities to interact with Cubans,” it is unclear how many due to the tours’ highly structured itineraries that include sharing hotel and dining accommodations with other group members. Nevertheless, American demand for the few slots available on these trips has proven high.

To accommodate the growing number of people travelling to Cuba, fifteen U.S. airports are now offering flights to Cuba. Previously, flights were only available out of Miami, Los Angeles, and New York. Airport industry officials say that the international airline industry stands to gain from the new policy. By the end of the year, American Airlines, Jet Blue, United Continental, and Delta will operate roughly twenty-five weekly flights to Cuba on behalf of charter companies. Although the charter companies that currently run the trips to Cuba are not profiting from these ventures, they and the airlines view their participation in air travel to Cuba as an “investment” in a future they hope will include unrestricted travel to Cuba.

Supporters of the new travel policy cite the possible benefits of increased interaction with Cuba, such as helping the local Cuban economy, educational exchange, and fewer obstacles for religious institutions travelling to Cuba to provide religious instruction and humanitarian aid. But some Cuban-Americans worry that the tourists’ money will only strengthen the Cuban regime. These critics also note that some Cuban academic and religious groups with which American tourists will interact support the communist regime. Critics, therefore, contend that instead of supporting the people of Cuba, American tourists will financially enrich and intellectually support the repressive regime. For these reasons, critics argue that the human rights abuses on the island will not end as a result of increased tourism.

Historic Flood Threatens Thailand’s Growth

2011-11-06T16:10:00.002-06:00

Sources:
CNN: Threat of Disease from Historic Flooding Looms in Thailand
FT: Thailand Slashes Growth Forecast After Floods
Herald Sun: Thai Authorities Warn of Electrocution
WSJ: Submerged Thailand Losing Out to Peers

On October 28th, the Bank of Thailand lowered its prediction for the country’s economic growth rate in 2011 from 4.1% to 2.6% due to ongoing flooding throughout the country. Uncharacteristically heavy rain since mid-July has caused Thailand’s worst flooding in fifty years resulting in $6 billion of damage, 427 deaths, and 2.2 million people displaced.

Although the capital city of Bangkok—accounting for 41% of the country’s $319 billion economy—has not flooded, the northern and western portions of the country are submerged in waist-high water contaminated with sewage, garbage, and dead animals. Health officials in Thailand warn that these areas will be susceptible to malaria, diarrhea, and other serious, but usually non-life threatening, diseases. Drowning and electrocution have caused most of the deaths so far, but these health risks threaten to kill many more.

The international community and the Thai government are attempting to ease the effects of the flooding by providing health safety information, mosquito nets, and money among other things. For its part, the Thai government has committed 50,000 military officers to help evacuate between 100,000 and 200,000 people to shelters across the country. The government has also pledged $25.97 billion to provide aid for those affected by the floods and to prevent future flooding.

Some submerged communities, however, believe the Thai government has not done enough to prevent damage. Villagers in one district dug ditches around a gate designed to keep floodwater in their community and out of central Bangkok. The government quickly refilled the ditches to prevent floodwater from pouring into Bangkok and assigned 100 police officers to watch over the gate 24 hours a day. The Thai government wants to keep central Bangkok dry because it is the engine of the Thai economy, but residents outside of Bangkok are understandably frustrated with the government’s priorities.

Not only have communities been devastated from the current flooding, but now some foreign investors are convinced that Thailand may no longer be a stable place to setup business. The flooding, coupled with recent political events, has distracted the Thai government from advancing necessary infrastructure projects that often attract foreign investment by lowering production costs. Foreign investors are important to the Thai economy because they create higher paying jobs and spend money in the local economy, both which increase employment and generate economic growth.

Although the economy is expected to recover to some degree due to government reconstruction and the rebuilding of major automobile plants which have been damaged by flooding, one economist believes that Thailand is at a tipping point in terms of its ability to attract foreign investors. Whether foreign investors will continue to locate in Thailand depends on whether Thailand can rebuild its infrastructure and ensure investors that it has taken important steps to prevent future flooding. The government will also face pressure from its citizens to provide immediate aid to flooded communities. Since Thailand has limited resources, the government must determine how much funding to allocate to short-term relief and long-term rebuilding. However, striking the correct balance will be difficult.

Greece’s Referendum Plan Shocks the World

2011-11-04T10:00:00.002-05:00

Sources:
CNN: Greece’s Prime Minister Optimistic Referendum Will Pass
FT: EU Suspends €8bn in Greek aid
FT: EU Leaders Battle to Save Greece Deal
Spiegel: EU Shocked and Furious at Greek Referendum Plan
WSJ: Europe's Greece Ultimatum

On Monday, Greek Prime Minister George Papandreou announced that the bailout agreement European leaders reached last week during the Eurozone Summit must go through a referendum (a popular vote) before Greece will accept its terms and conditions. The agreement calls for Greece to receive €130 billion of aid in return for drastic spending cuts that will negatively affect many Greek citizens. The bailout agreement allows for an “orderly” default, while rejecting the package would lead to an immediate (“messy”) default that may jeopardize the economic stability of the entire Eurozone. It is this fear that caused many observers to strongly question the wisdom of a referendum.

Many European leaders, including French President Sarkozy, have said that if Greece opts not to adhere to the deal reached last week, it must leave the Eurozone. After facing such criticism from European leaders and his own party, Prime Minister Papandreou backed down on the referendum plan on Thursday. Instead, the Prime Minister sought a bipartisan alliance with Greece’s conservative opposition to form a governmental consensus on the bailout, which he says would negate the need for a popular vote. Prime Minister Papandreou appeared confident that such a consensus existed after the conservative opposition promised to support the terms of the bailout.

In response to these mixed signals on Greece’s commitment to remaining part of the Eurozone, European leaders have suspended the disbursement of €8 billion from the European Union and International Monetary Fund aid package. The European leaders made it clear that Greece will not receive the funds until it agrees to the new deal. Without the next disbursement Greece will likely be unable to make to make €8 billion in bond repayments due on December 19, at which time a “messy” default would begin.

Europe Reaches Agreement on Debt Crisis Deal

2011-10-31T10:36:00.002-05:00

CNN: Finally, Europe has a Deal
FT: EU Reaches Deal on Greek Bonds
Spiegel: Euro Zone Frees Greece of Half of its Debt

In the early hours of Thursday morning, Eurozone leaders reached an agreement on the next step in dealing with the Eurozone’s debt crisis. The primary goal of the Eurozone Summit, which began October 23, 2011, was to convince private creditors holding Greek debt to accept a voluntary “haircut.” The agreement aims to resolve the Eurozone’s three main problems: Greece’s debt crisis, the instability of the banking sector, and a weak bailout fund.

Under the new plan, creditors holding Greek bonds “voluntarily” agreed to a 50% write-down (“haircut”) on the value of Greek bonds, meaning that roughly €100 billion that Greece currently owes to these bondholders will be eliminated. This measure is intended to reduce the country’s debt to 120% of gross domestic product (GDP) (from 150% currently) by the year 2020. Private investors only agreed to the new plan after Eurozone leaders offered a €30 billion guarantee on the private investors’ remaining debt owned by investors. However, many analysts believe that the 50% haircut may not be enough to lower Greece’s debt to a sustainable level.

The second issue that the plan aims to resolve is the instability of the banking sector. To do so, European banks will be required to increase their capital ratios (the amount of cash the banks hold compared to their total assets, which include outstanding loans the banks have made), from 4% to 9%. The goal of the increase is to boost confidence in the European banks’ ability to absorb losses. It is expected that after the 50% write down of Greek debts, Greek banks will need to raise an additional €30 billion to meet the new capital requirements, Spanish banks €26 billion, Italian banks €15 billion, French banks €9 billion, and German banks €5 billion.

The third aspect of the agreement deals with increasing the power of the EU bailout fund known as the European Financial Stability Facility (EFSF). Under the terms of the deal, the EFSF’s lending capacity will increase from €440 billion to over € 1 trillion through the use of “leverage”. In other words, although the actual amount of the fund will not increase, it will effectively be able to lend more to countries in crisis. For example, under one proposal the ESFS would create a financial entity that would be funded by various sources, such as hedge funds, pension funds, and government investment funds (e.g., the state-owned Chinese Investment Fund). European leaders are considering other leveraging strategies and it may take some time before they reach agreement on the details.

Three Multilateral Financial Institutions Will Collaborate to Loan Money to Help Fund the First Private Wind Farm in Pakistan

2011-10-30T22:50:00.003-05:00

Sources:
Associated Press of Pakistan: IFC Supports Landmark Wind Power Project in Pakistan
Bloomerg: Zorul Gets $111 Million Loan for Pakistan Wind-Power Project
Business Recorder: ADB Boosts Pakistan's Wind Power Capacity

The International Finance Corp (IFC), the Asian Development Bank (ADB), and the ECO Trade and Development Bank (ECO) are providing loans of $38.1 million, $36.8 million, and $20 million, respectively, to a company named Zorlu Enerji Electrik Uretim (Zorlu) to expand its wind power generation plant in the Sindh province of Pakistan, near the border with India. Zorlu will use the funding to install additional wind turbines and increase the facility’s electricity capacity from 6 megawatts (MW) to 56.4 MW. The Zorlu project will be the first internationally financed wind power facility in Pakistan and one of the first two wind power projects to operate commercially in Pakistan.

Zorlu’s total cost for the wind expansion project is $147 million. In addition to the amounts supplies by the ADB, ITC, and ECO, Zorlu will supply $35.9 million and Pakistani bank Habib will loan the remaining $16.2 million.

Increased wind power generation is important in Pakistan because the country’s demand for electricity has increased by 40% over the last five years while production has been unable to keep up. Pakistan’s lack of electricity has resulted in brownouts (the partial loss of electricity) in all major urban centers, electricity rationing, and early closing times for businesses, all of which undermine the country’s economy. To combat these problems, the Pakistani government is pushing to expand its energy resources, which includes increasing wind power generation.

The wind project will also help reduce Pakistan’s reliance on imported fossil fuel for the majority of its energy needs, which is very costly and leaves the country vulnerable to changes in global price. The ADB believes that Zorlu’s additional wind output will provide Pakistan with much needed electricity while also increasing the country’s energy security and lowering its reliance on fossil fuels. The IFC hopes that its investment in the Zorlu project will stimulate other international investors to invest in wind power within Pakistan which will stimulate and strengthen the Pakistani economy.

Re-election of Argentine President Raises Concerns about Argentina’s Financial Future

2011-10-29T12:48:00.001-05:00

Sources:
FT: Argentina: A High-Risk Recovery
FT: Argentina Restricts Foreign Trade
FT: Argentina’s Economic Recovery
FT: Fernández Wins Re-election in Argentina
La Nación: Los votos no liberan de las leyes económicas
NY Times: Argentina Nationalizes $30 Billion in Private Pensions
WSJ: Economists Quake as Argentina Votes

Cristina Fernández was re-elected as president of Argentina by the widest margin in four decades. Critics suggest that this landslide victory resulted from the general sense of financial well-being many Argentines enjoy. Despite slow growth in the U.S. and Europe, Argentina’s economy is predicted to grow about eight percent this year. Since 2007, when President Fernández was first elected to office, the economy has grown an average of 5.6 percent per year. Although the country was in an economic disaster from 2001-2002 after defaulting on nearly $100 billion in sovereign debt, Ms. Fernández and her late husband, Néstor Kirchner, increased jobs, wages, pensions, and other benefits for the Argentine people during their consecutive presidencies that have helped restore Argentina to booming economic growth.

However, experts do not believe that the financial policies President Fernández has employed to develop Argentina’s economy can sustain economic growth in the long run. For instance, the government will not have enough money to continue spending on ever-increasing subsidies for energy and transport development. Following the 2001 default, Argentina could not borrow from the international financial markets to finance economic expansion because international lenders were unwilling to lend the country out of fear that it would default a second time; therefore, to generate revenue, President Fernández championed policies that led to a trade surplus through increasing exports and limiting foreign imports. As a result, Argentina became a major global exporter of food commodities, especially soy and soy oil, which led to a trade surplus of $11.6 billion in 2010. However, this number may decrease to $8 billion this year because of continued slow global economic growth. Critics also note that China’s unending appetite for raw materials—including Argentina’s commodities—is as much to thank for the current boom as is any government policy.

Skeptics also claim that the surplus has been funded in part by governmental use of pension funds and central bank reserves to present the illusion of economic health. The government nationalized private pension funds in 2008, claiming that it was trying to protect workers’ and retirees’ pensions from the effects of the global financial crisis as stock and bond prices fell. Critics believe, however, that the government made this move to gain access to funds that would give it “breathing room” as government revenue decreased due to falling commodity prices and tax revenue from agriculture. Critics’ final worry is that although Argentina is a leading producer of food commodities, its lack of productivity in many other areas, such as the development of its large oil and natural gas reserves, may keep it from growing economically, especially if global demand for Argentine commodities or commodity prices decrease.

There are still more issues that may hurt Argentina’s economy. A number of economists report that Argentina’s inflation rate is currently over twenty percent. The government, however, says inflation is only at nine percent and refutes accusations that it is misrepresenting the inflation rate. High inflation is problematic because it reduces exports (because inflation makes Argentine goods relatively more expensive). Additionally, although it restructured its debt, Argentina still owes about $9 billion to foreign creditors, and the international finance markets may remain closed to Argentina until that debt is paid. Argentina has also lost revenue as fewer foreigners have been willing to open businesses in the country in the past four years because of heavy government regulation that makes doing business in the country more expensive. Although experts agree that Argentina does not face a risk of default, they caution that Argentina compromises its continued economic growth by not controlling its debt and inflation rate.

U.S. Cities Face Serious Challenges

2011-10-28T19:29:00.002-05:00

Sources:

ABC News: 3 Most Desperate Cities

Brookings: What America’s Cities Need

Brookings: Tracking Economic Recession and Recovery in America’s 100 Largest Metropolitan Areas

Columbia University, The American Assembly: Rebuilding America’s Legacy Cities-New Directions for the Industrial Heartland

The Economist: Smaller is More Beautiful

The Economist: The Parable of Detroit, So Cheap, There’s Hope

Across the United States, cities large and small are confronting unprecedented social and economic challenges. Although the problems many cities face are similar, including loss of industry and population to rapidly increasing crime and unemployment rates, the approaches cities have taken to address these problems and the resulting outcomes have been varied.

In America’s rustbelt, cities like Detroit, Flint, Rochester, Cleveland, Pittsburg, Harrisburg, and Buffalo watched as companies such as Kodak and General Motors slashed jobs, closed facilities, and exited the urban centers often formed around their very existence. The result is that cities across the country such as Vellejo, California, Boise County, Idaho, Jefferson, Alabama, and Harrisburg, Pennsylvania are on the verge of, or have filed for, bankruptcy protection. The causes of the economic woes are different for each city, but abandoned properties, lack of municipal services, increased drug and crime rates, high unemployment and social unrest seem to be universal outcomes. Despite the daunting obstacles, some cities have weathered the storm and found ways to reinvent themselves.

General Motors was founded in Flint, Michigan and was home to 80,000 employees in 1968. It now has 6,000 employees in Flint and, as a result, the population of Flint has fallen by nearly 50% since 1960. Abandoned properties littered with trash dotted every area of town and redevelopment appeared impossible until 2002 when Flint created a “Land Bank” with the purpose of taking control of and redeveloping vacant, abandoned, or tax-delinquent properties. Rather than selling abandoned or foreclosed property at auction to the highest bidder who may have no interest in redevelopment, the Land Bank purchases such properties. Some buildings are renovated and then sold while the worst are demolished and the land sold to nearby homeowners or developers. Lured by exceedingly cheap prices, entrepreneurs, small business owners, and local residents have purchased property from the Land Bank. Shops, bars, restaurants, farmers markets, and gardens are redefining the image of Flint where the vacant properties once were. Flint’s Land Bank is now used as a model for other cities and states facing similar circumstances. Although Flint is no longer an industrial stronghold, it has evolved into a smaller, more sustainable urban model.

Other cities that have turned the corner toward redevelopment by transitioning from manufacturing and industrial hubs to service-based economies include Detroit, Baltimore, Philadelphia, and Rochester. Detroit has utilized its massive infrastructure and office space to create “Techtown;” luring young, forward thinking technological enterprises to the city through highly competitive pricing, tax abatements, and creating attractive urban lifestyle environments. Similarly, Philadelphia and Baltimore have used their existing educational and medical institutions as an anchor for promoting business development and creating attractive urban environments. Johns Hopkins Health Care System partnered with city officials and developers to revive East Baltimore by deeding hundreds of hospital owned properties to town developers and providing financial support for the resulting projects. Similarly, Philadelphia used the resources of its colleges, universities, and hospitals to revitalize and rebuild. The University of Pennsylvania, its associated medical center, and other academic institutions purchased surrounding properties, rehabilitated them, and leased or sold them to residents, businesses, students, faculty, and staff with cost incentives such as below-market mortgage financing and favorable lease terms. The common theme among these success stories appears to be a willingness to shed outdated ideas of economic opportunities in favor of innovative community partnerships able to recognize and revitalize existing urban assets.

Minimum Wage and Labor Costs Rise in China

2011-10-28T08:32:00.003-05:00

Sources:
BBC: China Minimum Wage Up by 21.7% Despite Economic Cooling
Bloomberg Businessweek: China Had Best Third-Quarter Urban Job Creation in Years
FT: China Labour Costs Soar as Wages Rise 22%
People’s Daily: 21 Regions Across In China Raise Minimum Wage

The minimum wage in twenty-one of China’s thirty-one provinces has increased by an average of 22% in 2011, according to a recent government report. This increase comes on the heels of similar minimum wage increases over the past two years.

The rising minimum wage has been primarily driven by government policy. At the provincial level, twenty-five of China’s thirty-one provinces aim to increase the minimum wage by 14% annually. Nationally, the government’s Five-Year Plan (2011-2015) targets a minimum wage increase of 13% annually. Both policies aim to decrease inequality while increasing domestic demand for Chinese goods.

China’s economic growth over the past three decades has been heavily dependent on exporting manufactured goods to Western countries. The global recession, however, has decreased demand for China’s exports and has slowed China’s overall economic growth rate. Although the Chinese economy grew by 9.1% during the third quarter of 2011, this was the lowest growth rate in over two years. Chinese officials hope that an increased minimum wage will boost domestic spending which will help to offset lower exports across the globe by expanding the market for those products at home.

Another objective of China’s minimum wage policy is to push manufacturers toward producing higher-end goods (e.g., cars and computers), which will enable China to better compete with global economic leaders. The theory is that manufacturers will not be able to earn enough money selling lower-end items (e.g., clothes and toys) to cover the increased wages, which will encourage them to produce higher-end (and higher profit) products to cover the additional costs. With a larger profit margin, the manufacturers could pay higher wages while still retaining a profit similar to that which they made while manufacturing low-end goods and paying lower wages.

Market forces have also played a role in increasing China’s wages. An increasing number of China’s young adults are college graduates and are either reluctant or unwilling to work in the country’s manufacturing industry. This has led to a labor shortage that forces manufacturers to offer higher wages to attract workers because of supply and demand principles. Still, increased wages in the manufacturing industry have not attracted the 6 million annual university graduates, who are struggling to find skill-appropriate jobs.

Although many Chinese workers have benefited from higher wages, some Chinese are skeptical of the country’s policies. Already, many smaller companies have felt the pressures of increasing labor costs and have sought financial support from banks and government to avoid bankruptcy. Furthermore, the higher cost of labor has contributed to the decline of China’s export industries while other countries with lower minimum wages—in particular Bangladesh, Vietnam, and Indonesia—have cut into China’s market share. Some experts also worry that rising minimum wages have contributed to a three-year high inflation rate. Higher wages can cause inflation if manufacturers pass their increased production cost (in this case, higher labor costs) onto consumers in the form of higher prices. Likewise, increased wages create more consumers to buy the same amount of goods, which pushes prices up—again due to supply and demand principles.

The wisdom of China’s decision to rapidly increase its minimum wage is debatable, but with minimum wage increases of at least 13% planned for the next 4 years, the Chinese people will soon be able to evaluate the results.

The World Bank Increases Short and Long-Term Aid to the Horn of Africa to Fight Drought and Famine

2011-10-24T20:50:00.002-05:00

Sources:
Reuters: UPDATE 2-World Bank Boosts Horn of Africa Aid to $1.88bln
WSJ: World Bank Boosts Aid to Horn of Africa
All Africa: UN Increases Funding for Drought-Hit Africa
Al-Jazeera: Africa's Drought: Is Weather or War to Blame?

The World Bank is increasing funding from $500 million to $1.88 billion to help the more than thirteen million people suffering from the worst drought to hit the Horn of Africa in fifty years. United Nations (UN) officials have called the situation the worst current humanitarian crisis in the world. Most of the aid will go to individuals in Somalia, Kenya, Ethiopia, Eritrea, Djibouti, and Uganda. The stated goal of the aid is to alleviate current pain while putting the region on a path towards sustainable living.

The main reasons for the severe famine are twofold: weather and war. Regarding weather, the region has had two consecutive growing seasons without any rain, which has lead to a devastating decrease in crop production and the death of livestock. In addition to the severe weather, the region is subject to violent militant groups that often destroy crops or do not allow international food aid into the parts of some countries, exasperating the problem.

The World Bank will begin distributing the $1.88 billion by handing out $288 million in 2012 and $384 million in 2013-14 based on needs assessments completed by World Bank experts. The remaining $1.2 billion will be distributed after 2014 to bolster the region’s future drought resistance. The long-term aid will be used to create a system to communicate the early warning signs of future droughts to those who may be affected. The aid will also provide additional support to local farmers with the aim of increasing the geographic diversity of crops and education about new farming techniques that are more resistant to drought. The long-term aid will also help countries increase their emergency food reserves.

While the World Bank’s aid will help, the UN has stated that the countries need an additional $700 million for the last three months of the current year alone. The UN estimates that the countries will need $2.4 billion to meet the needs of the 13 million people the drought is affecting. International donations have totaled $1.4 billion, which leaves a $1 billion remaining funding gap.

Pakistan and India Plan to Increase Trade

2011-10-23T08:58:00.004-05:00

Sources:
The Diplomat: Most Favoured India?
FT: Islamabad Looks to India to Aid Economy
FT: Pakistan and India in Historic Trade Push
FT: Pakistan Takes Giant Step with Trade Move
Livemint: PM-Level Talks between India, Pakistan Likely in November
Reuters India: India-Pakistan Trade Deal is but a First Step
WTO: Principles of the Trading System

Representatives from India and Pakistan met earlier this month and agreed in principle to the most extensive measures to promote trade between the countries since they were granted their independence from Britain in 1947. The countries aim to increase their bilateral trade to $6 billion annually within three years from the current $2.7 billion annually. The countries’ commerce secretaries plan to meet in India in November to finalize the trade agreement.

Pakistani political and military officials have previously insisted that trade agreements be conditioned on the resolution of a territorial dispute over Kashmir (a Muslim-majority region divided among India, Pakistan, and China), but they have backed away from this stance. The countries discussed a trade agreement in November 2008, but India halted negotiations after a Pakistan-based terrorist group killed 166 people in Mumbai. The two countries’ prime ministers did not meet again until March 2011, when Indian Prime Minister Manmohan Singh engaged Pakistani Prime Minister Yousuf Raza Gilani in “extremely positive and encouraging” talks while the latter was in India to watch the India-Pakistan semi-final match of the cricket World Cup.

The proposed trade deal includes an agreement by Pakistan to ease visa restrictions for business leaders in India and Pakistan and to allow goods and services to travel more freely between the two countries. Pakistan’s decision to consider easing trade restrictions with India was spurred primarily by the relatively poor performance of its economy. Pakistan’s 3% growth rate lags behind China’s and India’s 8% growth rates, and increased budget deficits and debt threaten Pakistan’s long-term economic viability. Pakistan anticipates that increased trade with India will promote its export industries, which is an effective way to generate jobs and boost the local economy. A better economic outlook may slow the “brain drain” (a phenomenon in which the best and brightest citizens seek work abroad) and convince its citizens to remain in Pakistan and contribute to its economic development. Another reason for Pakistan’s policy shift is due to improved relations with India following India’s acquiescence in allowing Pakistan to have preferential European Union (EU) market access following last year’s floods in Pakistan. Furthermore, Pakistan may fear being left behind, both politically and economically, after India signed a similar free trade agreement with Afghanistan last week.

Business leaders in Pakistan anticipate that the easing of restrictions will benefit the Pakistani cement, textiles, agriculture, and engineering industries (industries that produce products India desires, and Pakistanis cannot wholly afford), but others fear that opening up Pakistan to India’s generic drug industry and Bollywood (India’s entertainment industry)will destroy Pakistan’s pharmaceutical and entertainment industries. Nevertheless, officials in both countries believe the deal will benefit both economies.

Although Pakistani and Indian officials are optimistic that they will reach a deal, a degree of doubt is warranted. Pakistani-based militant attacks often accompany diplomacy between the two countries, and a Kashmiri group, the United Jihad Council, has threatened “grave consequences” if Pakistan cooperates with India. If an attack resembling the Mumbai attack of November 2008 or a violent uprising in Kashmir occurs, trade negotiations may fall apart and the prospect of economic development could be put on hold. Regardless, the renewed effort to set aside political differences is encouraging.

Can Contraception Increase the Spread of HIV in Africa?

2011-10-17T10:37:00.003-05:00

Sources:
AllAfrica: Dual Protection Will Reduce Risk of HIV Infections
NPR: Popular Contraceptive in Africa Increases HIV Risk
Seattle News: Depo Dangers
Voice of America: Does a Birth Control Method Raise HIV Risk?

The University of Washington recently conducted a study in Botswana, Kenya, Rwanda, South Africa, Tanzania, Uganda, and Zimbabwe of 3,800 heterosexual couples that had one HIV infected partner. The study revealed that the popular contraceptive shot, Depo Provera, doubles the chance of contracting HIV or passing the virus to the uninfected partner.

The study comprised of measuring the concentration of HIV in genital fluid samples. The study showed that women who had been taking the injection saw the level of HIV concentration in their genital fluid double. The scientists concluded that the likelihood of passing the disease on to the partner increased along with the concentration of the virus. There is still no clear explanation as to why the contraception increases the virus’ concentration.

The World Health Organization, (WHO), stated that it planned to start analyzing the study’s findings, as well as other related, external evidence to figure out whether it would continue to recommend the contraceptive shot. The WHO fears that having to change its stance on the popular contraceptive would reverse some of the progress it has made in convincing African women to use birth control as a means of family planning. The injection is an easy way for African women to prevent unwanted pregnancies, which generally add a financial burden that poor women cannot handle. The reduction of unwanted pregnancies also lowers the number of babies born HIV-positive and in need of costly medical treatment that often is not available. Finally, a lower pregnancy rate saves women’s lives, since poor access to medical services has resulted in high mortality rates for women during childbirth.

Unfortunately, the only way the WHO can verify the study’s findings is to conduct similar tests over longer periods of time. The WHO estimates that the tests would take five years to complete and require about $30 million in funding. The tests would also require women to persuade their male partners to consistently use condoms to limit the rate of infection during the tests—an idea to which African men are sometimes hostile. Despite having limited funds, the WHO is not willing to make such a dramatic shift in its advice to African women without being completely certain that the contraceptive injection truly is dangerous, even if that means spending millions of dollars and five years to prove or disprove the recent test results.

Brazilian University Makes the Grade

2011-10-17T09:51:00.001-05:00

Sources:
The Economist: The Struggle to Make the Grade
Times Higher Education: The Goals will Come
University World News: Latin America: Higher Education Integration for Bloc
Valor: Duas universidades brasileiras entre as 300 melhores do mundo

As a result of continued economic growth in Latin America, the demand for higher education in the region has also grown. Latin American students need the skills and quality of education that will allow them to compete professionally in the global economy. However, experts have noted that Latin American universities are currently ill-equipped to provide their students with such a high-quality education. The curriculum, for example, is generally old-fashioned and does not properly address the demands of globalization. Many faculty members lack Ph.D.s in their fields and are employed only part-time, which means that they do little if any research. As a result, they cannot provide students with the cutting-edge knowledge that leading researchers have. Furthermore, universities are generally ranked according to the quality of research they produce, and higher rankings lead to better quality students attending a university. Few institutions provide incentives to promote good teaching and research, like extra funding or promotions, and public universities do not lose funding if large numbers of students drop out, as is the case in many other countries. Many institutions also enroll too many students, which lowers the quality of education each individual student receives. Both of these issues are the result of insufficient funding. Latin American institutions also do not encourage students to study abroad nor do they recruit foreign students and scholars, so as a result, Latin American higher education fails to provide students with the international experience experts agree they need to succeed in the global economy.

However, the University of São Paulo (USP) recently gained global recognition for being among the world’s best universities. According to Times Higher Education, a weekly British publication, USP ranks among the world’s 200 best universities. USP’s success comes, in part, from breaking out of the Latin American mold. The university receives adequate funding from the government and tuition and fees assessments to employ full-time faculty with Ph.D.s that have helped make USP an international leader in scientific research. USP has also developed a high number of top-rated graduate programs and produces more Ph.D. graduates yearly than any U.S. university. The success is not limited to USP—recent research suggests that Brazilian university graduates have seen the benefits of improving higher education in the form of salaries up to 263% higher than secondary school graduates.

Critics, however, have pointed to the problems that still exist in Brazilian higher education. Although a large number of graduates hold Ph.D.s, Brazil lacks specialized professionals, which is particularly noticeable during times of economic growth when there is great need for specialized skills. For instance, Brazil lacks engineers, so it has had to recruit and pay foreign engineers to help complete the substantial infrastructure projects the country has undertaken in advance of the 2014 World Cup and 2016 Olympic Games. Furthermore, Brazilian higher education, like the rest of Latin America’s, does not have a strong relationship with the international research community, and few graduate students are from outside Brazil. Therefore, Brazil fails to benefit from the knowledge and research of foreign scholars. Brazilian universities also suffer from over-enrollment of students; therefore, classrooms are overcrowded, which makes it difficult for professors to effectively teach students.

Experts suggest that Latin American universities should have greater flexibility in hiring, promotion, and pay that would lead to better quality teaching than the current method of hiring less qualified, part-time faculty. With a larger budget, universities could attract better teachers with the prospect of having more resources to do research. Experts also recommend that Latin American universities have a more global mindset and “internationalize” their curriculum and policies to appeal to foreign students and scholars, like by offering courses taught in languages other than Portuguese and relaxing visa requirements for foreign students and educators. In this way, experts believe Latin American students and scholars would benefit from the global perspective they need to succeed in a global economy, and Latin America would benefit from the research conducted by talented students and faculty from other countries.

European Union Focuses on Banks Rescue Plan

2011-10-17T09:27:00.003-05:00

Sources:
FT: EU Banks Could Shrink to Hit Capital Rules
FT: EU Examines Bank Rescue Plan
Spiegel: Europe Begins Working on Plan B for the Euro
USA Today: EU Plans to Force Banks to Raise Capital Soon
WSJ: EU Pushes Bank Plan

Last Wednesday, European Commission President Jose Manuel Barrosso laid out a general overview of the Commission’s recent proposal to force the biggest banks in the European Union (EU) to raise billions of euros to better withstand the region’s escalating sovereign debt crisis. The extra capital will help banks cover any losses they may incur as a result of the crisis and should help reduce investors’ uncertainty about the region’s stability. The plan is the latest effort to restore confidence in the Eurozone and overcome the crisis.

Under the new proposals, there will be stricter review of the banks’ capital ratio (the amount of capital the bank holds in cash compared to its total assets, which include outstanding loans the bank has made), which determines the banks’ ability to absorb losses. The European Banking Authority is likely to set a higher capital threshold—around 9% (that is, if a bank has $100 of total assets, it must keep $9 in cash on hand at all times)—although this number could change as the details of the plan are worked out. Current rules only require the banks to maintain capital of 5%-6% of total assets. The banks will have six to nine months to raise the additional capital needed to maintain the 9% ratio.

The European Commission recommends that banks in need of additional capital should first seek it from private sources. Doing so may require banks to convert some of their outstanding debt to equity—a process in which the bank’s creditors agree to cancel some or all of the debt the bank owes in exchange for ownership of a portion of the bank. If this effort proves unsuccessful, national governments should then be ready to provide the necessary capital. The European Financial Stability Facility (EFSF) will be available to lend money to the governments for them to use to recapitalize their banks but only as a measure of last resort. Lastly, the Commission stated that banks should be prevented from paying bonuses to employees and dividends to investors before their capital levels meet the new standards. The Commission is still working out the final details of the plan and will not likely reach a final decision until the EU finance ministers meet at the end of the month for the European leaders’ summit.

Banks must recapitalize to be strong enough to absorb losses on Greek government bonds and other sovereign debt they hold to avoid having to be “bailed-out” by their national governments. Banks estimate that they could face a 60-80% loss on Greek bonds if Greece defaults. This means that banks would have to use their capital reserves to cover reserves to cover these losses. If banks are not adequately capitalized to handle such losses, they may become insolvent—they would not be able to pay their expenses and thus would “fail.” Bank failure is a major concern, because banks are deeply interconnected across national borders. If major banks begin to fail in one country, it would risk dragging down other banks across the Eurozone, putting additional strain on the already weak region.

Monetary Policy Disagreement Plagues the FOMC

2011-10-14T17:50:00.002-05:00

Sources:

Federal Reserve: Minutes of the Federal Open Market Committee on September 20, 21, 2011

Forbes: Split in Bernanke’s Fed Widens, QE3 on Deck, FOMC Minutes Reveal

LA Times: Federal Reserve Minutes Show 2 Policymakers Wanted Bolder Steps

WSJ: Fed’s Pianalto-Monetary Policy Alone Cannot Solve All Ills

WSJ: Inside The Fed Fight Over Bond Buys

The Federal Reserve (Fed) is in the spotlight yet again. Just weeks after announcing Operation Twist, the Fed’s most recent attempt to lower long-term interest rates by selling short-term government debt and purchasing $400 billion in long-term Treasury securities, the decision has come under intense scrutiny. While economists continue to debate the effectiveness of Operation Twist, it appears that the members of the Federal Reserve Open Market Committee (FOMC) intensely debated the issue among themselves during their September 20 and 21, 2011 meeting. The minutes of the meeting indicate much disagreement among FOMC officials over what action, if any, the Fed should take to boost the economy. The dissention among FOMC members underscores the difficulties in implementing monetary policy measures in the current economy and the lack of consensus on how to address the U.S. economy’s problems.

The FOMC is the monetary policy arm of the Fed. All seven members of the Federal Reserve Board of Governors serve on the FOMC and five of the twelve Federal Reserve Bank presidents serve on a rotating basis, with the exception of the President of the Federal Reserve Bank of New York who is a permanent member of the committee. Though the FOMC only has twelve voting members, all Federal Reserve Bank presidents attend FOMC meetings and participate in discussions. Immediately after each meeting the Committee issues a single policy statement summarizing its outlook and policy decisions; however, the minutes of FOMC meetings are not published until three weeks after the conclusion of the meetings.

The minutes from the September 20-21 meeting are receiving so much attention because the FOMC is close to exhausting its available economic tools after repeatedly intervening unsuccessfully in the economy. Although differences of opinion are not uncommon within the FOMC, the minutes show the highest level of dissent among committee members in past twenty years, and reflect the conundrum in which the U.S. economy remains. The minutes reveal that three committee members dissented because they felt the Fed has done all it can and further intervention will hinder recovery. At the other end of the spectrum, two committee members felt the Fed should do more than just implement Operation Twist.

While the U.S. economy faces challenges not seen since the Great Depression, the stalwarts of U.S. economic decision making seem to be suffering from an identity crisis. The lack of consensus within the FOMC as to its proper role may undermine consumer confidence and fuel further recessionary fears. However, the diverse opinions of the divided committee may result in more creative solutions and better decision-making.

Should Greece Abandon the Euro?

2011-10-14T11:10:00.004-05:00

Sources:
CNN:Is Greece Going to Default and Leave the Euro?
Economist: When Will the Greeks be Made to Suffer?
FT: Greece Should Default and Abandon the Euro

Despite the vast amount of bailout funds it has received and the extensive austerity measures the country has adopted, there is no end in sight for Greece’s economic crisis. As of October 2011, Greece has received €110 billion in bailout loans from the International Monetary Fund (IMF) and the European Union (EU) to help it get through the crisis and prevent any negative effects from spreading to other European countries. On October 2, 2011, the Greek government announced that its 2011 budget deficit is expected to be 8.5% of gross domestic product (GDP), which is significantly larger than the target of 7.6% the EU and IMF set as a condition for receiving bailout funds. Likewise, IMF estimates show that the Greek economy will contract by 2.5% of GDP in 2012, instead of the hoped for growth of 0.6%.

According to world-renowned economist Nouriel Roubini, Greece has three options. The first option is for the euro to significantly weaken against the dollar. A weaker euro would make Greek goods cheaper, which should increase the demand for Greek goods from countries outside the Eurozone, and thereby increase export revenues that Greece could use to pay its debts. This is not a viable option since for the euro to depreciate there must be, among other things, a sharp appreciation of the dollar, which is unlikely as long as the U.S. economy remains weak.

The second option is for Greece to go through a process of “internal devaluation” to lower prices and wages. During an “internal devaluation” the government would increase the value-added tax (VAT, a European form of sales tax) and reduce public sector wages to put downward pressure on other wages and inflation. A VAT increase will significantly lower demand for goods by raising prices. Lower demand often leads to lower wages as employers cannot afford to keep paying employees the same wages with falling profits. Lower labor costs will effectively make Greece’s products more competitive in the world market.

Greece would need to do an “internal devaluation” because, as a member of the European Monetary Union, Greece does not have the power to use normal monetary policy tools (i.e., it cannot buy and sell its currency on the market or change interest rates to adjust its value through supply and demand principles) to lower the value of its currency. However, lowering the cost of goods by lowering internal demand would have the same effect—i.e., it would increase exports by making it cheaper for foreigners to buy the now cheaper domestic goods. Greece would then use the increased export revenue to pay its debts. However, the “internal devaluation” process is not Greece’s best option as it would likely push Greece into a deep recession with very high unemployment and lower wages.

Greece’s fastest and least painful option, according to Roubini, is to pull out of the Eurozone, return to a national currency, and devalue it. This process would allow Greece to have power over its monetary policy once again, which it could use to keep its currency cheap to become a more competitive exporter without the drastic consequences on employment levels. Greece would also need to restructure its debt, which would require significant write-downs (creditors agreeing to accept less than the full balance due on a debt) on Greek bonds.

Greece would face significant risks if it were to abandon the euro. For instance, Greece would go through a period of limited access to financial markets as creditors will be reluctant to lend Greece for fear of a second Greek default. The country also would not be able to count on loans from the EU and its banking system would no longer have access to the European Central Bank’s liquidity (cash), both of which have been vital to keeping Greek afloat so far. Lastly, the Greek government would have to implement controls on the transfer of capital as individuals and firms would otherwise take their deposits (cash) out of the country to avoid the effects of the devaluation of the domestic currency. If Greek banks were to fail because of this so-called “capital flight,” credit would not be available and the economy would grind to a halt.

The effects of Greece leaving the Eurozone would extend beyond Greece’s borders. Banks in the EU would have to take losses arising from the devaluation of the Greek currency and debt restructuring. If Greece leaves the euro, the debts it owes to banks would have to be re-denominated into its domestic currency. If after this process the country significantly devalues the new currency (which is extremely likely), then the debts owed to the banks (already denominated in the domestic currency) would be worth less—a loss the banks would have to bare. Roubini believes this cost would be manageable if the exit is properly planned and the banks have enough capital to cover any losses.

Considering the potential costs and benefits of leaving the Eurozone, should Greece abandon the euro and return to a national currency?

Cyprus Could be the Next Casualty of the European Sovereign Debt Crisis

2011-10-14T10:15:00.003-05:00

Sources:
AP: IMF: Cyprus Growth Flat in 2011, to Shrink in 2012
Financial Mirror: IMF Sees Negative Growth for Cyprus; "Time is Up for Fiscal Measures"
FT: Cyprus Governor Warns of Emergency After Blast
FT: Mediterranean Gas Reserves Tension Flares
Fumagusta Gazette: Fule Stresses Cyprus' Right for Drilling
Reuters: IMF Says Cyprus Must Act Fast to Avoid Crisis

The International Monetary Fund (IMF) recently urged that Cyprus move forward with austerity measures if it hopes to avoid a debt crisis—and accompanying bailout—similar to the ones that have engulfed Greece, Ireland, and Portugal in recent years.

After spending eleven days studying the Cypriot economy, the IMF projected that Cyprus’s economy will not grow for the remainder of 2011 and will shrink slightly in 2012. The IMF also predicted that Cyprus’s fiscal deficit will swell to 7% in 2011, although it should decrease to 4% in 2012. These projections are less optimistic than those of the Cypriot government, which projected 1.5% growth and a 2.3% deficit in 2012.

Cyprus is an island nation in the Mediterranean Sea with a population of one million people and a €17 billion ($23 billion) economy. Aside from its ongoing fiscal deficit, Cyprus has encountered two additional financial difficulties this year. On July 11, a power station explosion caused an estimated €2 billion ($2.7 billion) in damages. Later that month, credit agencies downgraded the country’s bond rating due to Cyprus’s banks’ heavy exposure to Greek debt—a country going through its own debt crisis. The downgrade pushed interest rates on Cypriot bonds up as investors demand a higher yield (interest rate) to compensate them for the higher risk they are taking in purchasing Cypriot bonds. The IMF also recommends Cyprus conduct “stress tests” on its banks to determine whether they have sufficient capital (cash) on hand to cover any losses that would result from various adverse economic scenarios. These tests would give Cyprus a better understanding of the future financial difficulties it may face and would enable the country to prepare accordingly.

Despite Cyprus’s gloomy outlook, there are some positive signs. Cyprus is in the process of finalizing a €2.5 billion ($3.4 billion) loan from Russia at an interest rate of 4.5%, which is much lower than the current rate Cyprus can borrow at on the international bond markets. The loan will allow Cyprus to pay down some of its existing—and higher interest—debt. Furthermore, the discovery of large natural gas deposits in the Mediterranean provides hope for a boost in Cyprus’s economy. However, ongoing disputes with Turkey about Cyprus’s rights to the natural gas threaten to put a halt to drilling efforts.

The IMF cautions that these positive developments should not weaken the government’s resolve to push through austerity measures. Among the IMF’s recommendations for spending cuts are to mandate public sector employees to contribute to their pensions, freezing public sector wages and the cost of living allowance on public pensions, and raising the value-added tax. In line with the IMF’s recommendations, the finance minister’s 2012 draft budget includes a 1,100 person reduction in public sector employment, a €220 million ($299 million) reduction in social spending, and an increase in the value-added tax from 15% to 17%. The finance minister will present this budget to the parliament in mid-October, but given opposing political parties’ opposition, it is unclear whether the budget will pass.

Cyprus may not be the largest or most important economy in the European Union, but unless it takes steps to reduce its growing debt, it may be the next country in need of a bailout.

The International Monetary Fund Reduces the Economic Forecast for Europe and the United States

2011-10-11T20:17:00.002-05:00

Sources:

Detroit Free Press: IMF Sharply Downgrades Outlook for U.S., Europe
Guardian: IMF wants Europe to get its Finger out and US Politicians Should Behave like Adults
The Jerusalem Post: IMF to Europe: Get Your Act Together

The International Monetary Fund (IMF) recently warned that the world economy has entered a dangerous phase and that national governments need to take strong actions to improve the world economic outlook. The IMF has significantly downgraded the financial outlook for both the United States and Europe through 2012. The IMF forecasts that the U.S. economy will grow by 1.5% in 2011 and 1.8% in 2012, as compared to its prior projections of 2.5% and 2.7% respectively. For the seventeen countries that use the Euro as their currency (the Eurozone), the IMF has forecasted economic growth of 1.6% in 2011 and 1.1% in 2012, which are reductions from prior forecasts of 2% and 1.7% respectively.

Within the United States, the IMF believes a sharp drop in the stock market and political indecision surrounding the government’s deficit reduction plan has created uncertainty. This uncertainty has caused consumers and corporations to save their money instead of spending or reinvesting, which slows economic growth. These and other factors have contributed to an annualized growth rate of .7% in the first half of 2011, which is well below even the revised IMF forecast.

The pessimistic forecast for the Eurozone centers on the sovereign debt crisis. The IMF is concerned that some Eurozone countries will not sufficiently control their debt, which may lead to destabilization within the region. When banks, consumers, and companies are unsure about their economic future, they are less likely to lend money, make long-term investments, or make discretionary purchases, and will instead save excess cash. Reduced lending, investment, and spending leads to lower economic growth, and, therefore, lower revenues for governments to use in paying their debts. The IMF has criticized European leadership for not moving quickly enough to remedy the uncertainty surrounding the debt crisis.

To combat slowing economic growth, the IMF suggests that European central banks and the United States Federal Reserve Bank continue searching for ways to lower borrowing costs, which would hopefully spur increased spending and investment. The IMF also suggests that the United States and European governments spend money to stimulate economic activity instead of reducing spending to lower budget deficits.

Wall Street Protests Part of Global Trend

2011-10-10T20:43:00.005-05:00

Sources:

Economist: The Revolution Will Not Be Liberalized

Forbes: Occupying Wall Street from Liberty

NPR: Occupy Wall Street Gets Union Backing-Approval Rating Tops Congress

NYT: As Scorn for Vote Grows, Protests Surge Around Globe

Reuters: More Than 700 Arrested in Wall Street Protests

WSJ: Hundreds Arrested on Brooklyn Bridge

Across the globe citizens are taking to the streets in mass demonstrations with a wide spectrum of themes: from political and social repression, human rights, corruption, high unemployment, and discriminatory economic systems. The trend has resulted in significant governmental and political reform in Arab and African nations and now U.S. protesters have taken aim at the world of high finance—Wall Street. The Wall Street protests, organized by a group called “Occupy Wall Street,” point to the Tahrir Square protests in Egypt that recently toppled a decades-long dictatorship as their inspiration.

Members of Occupy Wall Street cite a host of gathering calls including income inequality, high unemployment, corporate greed, and suppression of the democratic process. On Wall Street in New York City, home to some of the world’s largest investment banks and financial firms, protestors are entering their third week of rallies, sleep-ins, and marches against the perceived corruption of Wall Street firms, corporate influence over the political system, and other social injustices. Despite the lack of a single cohesive message, the Occupy Wall Street movement has been spreading across the country to places like Boston, Seattle, Ohio, California, and Pennsylvania with rumors of more protests in other cities in the works.

Some observers are calling Occupy Wall Street a ‘national movement’ similar to those that have occurred in other parts of the world like Libya, India, Israel, Spain, and Greece. Libyan citizen movements resulted in the overthrow of an entire decades-old regime, Indian activists are exposing government corruption, and Israeli demonstrators continue to protest political and income disparities. In Spain, where the unemployment rate of 21% is the highest in the developed world, demonstrators are challenging the government to do more to ease economic suffering. In Greece, the harsh spending cuts the government has implemented to continue receiving bailout founds from the International Monetary Fund and European Union have resulted in violent riots, social unrest, and even an increase in suicides. The common theme among all these groups is a collective lack of confidence in their governments. Although the U.S protests may appear less cohesive—and some critics claim less compelling—than these global protests, they represent a resurgence of activism not seen in the U.S. since the Vietnam War.

The low costs of social networking sites, access to governmental information mapping applications, and web-based organizational tools that make mass communication fast and efficient have helped make the massive protests around the globe possible. People around the world can now hear rally cries from protestors in any country instantaneously. Although the causes for these grass-roots efforts vary widely, a common theme is apparent. Citizens feel their governments are ignoring their concerns, so they are taking to the streets in a desperate attempt to revive the democratic process. To date, the impact of global protests has been profound, but it remains to be seen if Occupy Wall Street will result in any substantive reform.

The Growth of Foreign Start-Ups in Chile

2011-10-09T16:55:00.001-05:00

Sources:
Copper Investing News: Copper Mining in Chile: Part I
FT: UK Start-ups Head for Chile
Huffington Post: Chile Edging Up to America as Startup Heaven
Nacional.cl: El aterrizaje de los silicon boys
Nearshore Americas: Country Profile: The Secret Behind Chile’s Thriving Outsourcing Industry
Washington Post: People, Not Industry, Power Innovation in Chile
Prior to 2010, Chile had established itself as an outsourcing hub for information technology (IT) because of its IT-friendly business environment, including a well-developed telecommunications infrastructure and the second-highest rate of research and development investment in Latin America. Chile developed its IT outsourcing industry to break free from its economic dependence on mining. Chile has the world’s largest copper reserves, which have allowed it to become the largest producer and exporter of copper. Historically, Chile’s economy has depended largely on its copper exports, which has meant that Chile’s economy has suffered when copper prices have dropped. Although in 2008 Chile’s IT outsourcing industry generated $800 million and employed 20,000 people, Chile’s goal is to make outsourcing a $5 billion industry by 2015. Experts, however, fear that over-development of the outsourcing industry could result in a large number of Chilean professionals abandoning their positions in other important technical fields, such as mining, for higher-paying IT jobs.

Experts have, therefore, suggested that instead of concentrating on outsourcing to generate revenue, Chile should “import” entrepreneurs to help grow its industrial sector and, thereby, its economy. Thus, in March of 2010, Chile launched a program called Start-Up Chile designed to “import” 1,000 entrepreneurs over the course of three years. The government hopes that the entrepreneurs will bring new ideas to improve technology, increase innovation, and boost wealth. Furthermore, Start-Up Chile encourages foreigners to hire locals, teach Chileans what they know about business, and help build Chile’s international reputation as a center for technology development.

However, the people that came up with the idea for Start-Up Chile realized that Chile, as a relative newcomer to the technology industry, would have to compete with major technology centers like Silicon Valley for entrepreneurs. Therefore, the government agreed to grant entrepreneurs $40,000 in start-up capital, free office space in a modern facility shared with other start-ups, and assistance moving among other benefits. The entrepreneurs only have to promise to stay in Chile for at least six months. Additionally, unlike in other countries that offer similar start-up incentives, Start-Up Chile does not require entrepreneurs to have funding in addition to the $40,000 the government provides to participate in the program.

Although the entrepreneurs are under no obligation to stay in Chile after the initial six month-period, government officials hope that other incentives, such as a low cost of living, will encourage them to stay. About forty percent of the companies that first took part in Start-Up Chile have stayed thus far. Entrepreneurs have been attracted by the ability to use the cash grants for any expenditure, the collaborative working environment they share with the other start-ups, and the credibility they gain globally by being chosen as one of the few start-ups to receive grants from Start-Up Chile. As the global financial crisis continues, Chile’s stable economy also presents an attractive alternative to starting businesses in the United States or Europe, which are teetering on the brink of a second recession.

Start-Up Chile has already proven to be mutually beneficial for Chileans and foreigners alike. American, Canadian, and British entrepreneurs have especially benefitted as the largest groups of foreigners to have received grant money. Chileans living abroad are the third-largest recipients of Start-Up Chile funding. While efforts by other governments to support innovation have failed, experts believe that Start-Up Chile will succeed because it invests in people who already have knowledge and capabilities in their fields and can share them with Chileans to help develop Chile’s economy.

Saudi Women’s New Right to Vote May Be Sign of Better Representation to Come

2011-10-08T11:12:00.002-05:00

Sources:

The Daily Beast: Arab Spring Benefits Women

Deccan Harald: Saudi Women Get Right to Vote, but…

NYT: Saudi Arabia and its Women

Time: Saudi Women Get the Vote, but Real Power is Elusive

King Abdullah of Saudi Arabia announced on September 25 that women will be eligible to vote and hold office in municipal elections starting in 2015. King Abdullah also announced that women will be appointed to the Majlis Al-Shura, an advisory council for the monarchy. This decree is the first major development for women’s rights in Saudi Arabia, an ultra-conservative country, in almost a decade.

Though allowing women to sit on the advisory council and in municipal governments seems to be a significant development in Saudi Arabian culture, the change will largely be symbolic. Saudi Arabia is an absolute monarchy, meaning that the municipal board’s and advisory council’s power is limited to their ability to persuade the monarchy to act in a certain manner. Even if newly-elected women push for reform, King Abdullah can ignore them if he chooses, which severely limits the women’s power to push for more reform.

Even if women do not attain any real political power, the declaration may still be a catalyst for more social change. Saudi women currently have few rights, and the difference between the rights of Saudi men and women is one of the largest in the world. Saudi women’s rights activists have been pushing for equality and are optimistic that this declaration will open the door for reform of more important social issues. Some observers believe the king’s declaration is insubstantial and meant only to silence civil unrest, but others believe it shows he is willing to listen to the needs and wants of Saudis.

If the right to vote is just the first of many expanded rights for women, it could lead to a dramatic change in economic output. Women currently occupy only a small minority of the workforce in Saudi Arabia. If the king were to change other laws to make it easier for women to work, women would be able to contribute to Saudi Arabia’s economy both by increasing productivity and as new consumers. Allowing women in the workplace should also increase competition for jobs, which would theoretically increase workplace productivity by making it more likely that employers will find better workers in the larger applicant pool. In sum, expanding women’s rights is good not only for creating a more equal society but for also improving the entire country’s economy, which is good for all Saudis.

Building South Asia’s Infrastructure

2011-10-05T19:38:00.004-05:00

Sources:
ADB: Innovative Fund to Pave Way for Infrastructure Boom
Asia One: ASEAN Launches $650m Fund to Build Infrastructure
Bernama: ASEAN Infrastructure Fund Set to Pave Way for Infrastructure Boom
Brunei Times: US$500m Infrastructure Fund for ASEAN Launched
Business World: ASEAN Infrastructure Fund Seen Fueling Regional Boom

The Association of Southeast Asian Nations (ASEAN), made up of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, launched a $500 million fund on September 24, 2011 to finance infrastructure projects that will better interconnect the region and improve access between the region and surrounding countries with larger economies. The Asian Development Bank (ADB), the Manila-based regional financial institution, will oversee the fund.

The ASEAN countries created the fund after observing that China, a country with which they have tenuous political relations, has been looking to exert more influence over them by increasing its investment in the region. As a result, the ASEAN countries have agreed that they need to invest more within the region to avoid becoming overly reliant on China’s money. They also believe that the region’s lack of highways, railroads, and an efficient electric grid is inhibiting economic growth by increasing production costs.

The ADB will administer the fund and be responsible for choosing and overseeing all of the projects that receive money from the fund. The ADB will select projects based on evaluations of their potential economic and social impact. Initially, member country contributions will make up 70% of the funds, and the ADB will contribute the remaining 30%. The fund will lend about $4 billion total through 2020, but the ADB projects that the countries will need a combined $60 billion for infrastructure projects over the next decade. The fund will serve as way for the ASEAN countries to effectively use the region’s $700 billion in foreign currency reserves. The countries also hope the fund will entice much-needed private investors who have been reluctant to invest in infrastructure projects in these countries because of the perceived high risk of long-term infrastructure transactions.

If successful, this co-venture between ASEAN and the ADB will encourage major economic development in the Southeast Asia. Improving infrastructure will reduce production and transportation costs, which should lead to increased trade and revenue. In addition, the infrastructure will improve the lives of millions of people in the region by increasing access to water and electricity.

Fed Official Calls for Stricter Regulation of Short-Term Credit Markets

2011-10-02T17:05:00.003-05:00

Sources:

Bloomberg: Fed’s Rosengren Backs More Rules for Banks Based Outside U.S.

Dow Jones Global Finance: Fed’s Rosengren-Money Market Funds Still Pose Threat to Financial System

Federal Reserve Bank of Boston: Housing and Economic Recovery

Market Watch: Fed’s Rosengren Urges Scrutiny of Bank Dividends

SEC: SEC Approves Money Market Fund Reforms to Better Protect Investors

WSJ: Call by Feds for Money-Fund Curbs

On Thursday, September 28, 2011, Federal Reserve Bank of Boston President Eric Rosengren addressed the need for stricter oversight of money market mutual funds at a conference held by the Global Interdependence Center in Stockholm, Sweden. U.S. money market funds are a $2.5 trillion industry that consists of cash and “cash equivalents,” or high-quality, short-term debt securities. Laws require money market funds to be low risk and very liquid, meaning that investors should be able to sell them for cash quickly without losing money because of transaction costs or decreases in market value. According to Rosengren, increased foreign bank reliance on money market funding has left the short-term credit markets particularly vulnerable to the European debt crisis. Banks, including foreign banks, issue short-term bonds to raise cash, money market funds buy the bonds for their portfolios, and investors subsequently buy the money market funds. Thus, money market funds (and their investors) are holding increasing amounts of European bank debt, which are quickly becoming riskier investments.

The short-term credit markets are of particular concern because banks rely heavily on short-term funding to raise cash. However, investors are increasingly reluctant to buy bonds from European banks that hold large amounts of Greek debt for fear that the banks would fail if Greece defaults, and, thus, investors would lose their money. As the European debt crisis escalates, money market funds that own bank debt are more susceptible to losses due to credit downgrades that reduce the value of the banks’ outstanding bonds. It also makes it more expensive for the banks to access funding because the interest rate they must pay on loans increases. This creates the potential for large numbers of investors to sell their shares of money market funds at once as they try to avoid losses on their investment, a phenomenon called a “bank run.” A bank run creates massive cash shortages for banks and, according to Rosengren, regulators are not doing enough to protect banks. Cash shortages are problematic because banks need cash for daily operations and fulfillment of capital adequacy requirements.

Rosengren’s comments are noteworthy as the Federal Reserve Bank of Boston led the money market fund rescue programs used in the U.S. during the 2008 economic crisis, and his experience may provide some insight into the current European crisis. As a result of the 2008 U.S. economic crisis, the Boston Federal Reserve Bank successfully urged the Securities and Exchange Commission (SEC) to significantly reform money market fund regulations. Under the revised regulations, adopted in January of 2010, the SEC changed fund reporting periods from semi-annually to monthly, increased liquidity requirements, improved credit quality, and implemented capital and risk assessment protocols. Although the reforms improved transparency and reduced risk, they have proven inadequate in identifying actual risk in the face of the increasingly volatile European markets. Rosengren points out that some money market funds simply clean up or “window dress” their portfolio holdings in time for monthly reports, and thus avoid providing an accurate picture of the actual risk profile or fund value on a day-to-day basis. Such actions mislead investors and can understate the overall risk of the money market funds.

Rosengren believes that regulators can prevent bank runs by increasing the transparency of money market funds to allow investors to better gauge the risk of their investments. To avert such a crisis, Rosengren proposes greater transparency of risk profiles, more stringent value reporting mechanisms, and increased capital requirements, all of which would protect investors. However, such reforms might also make it more costly for banks to raise funds, which could worsen the European crisis.

Social Unrest in Colombia May Affect Investment in Colombian Oil Industry

2011-10-02T16:13:00.001-05:00

Sources:
Columbia Reports: Violence Escalates in Columbia Oil Worker Protests
MercoPress: Columbia the Rising Star of the Oil Industry in South America
Time: Violent Protests Threaten Columbia’s Oil Boom
WSJ: Columbia Protests Halt Oil Output at Big Fields
WSJ: Oil Firm to Restart Columbia Output
WSJ: Pacific Rubiales Moves to Restart Output at Columbia Oil Field

Eight years ago, Colombia’s oil fields were unsafe to operate. Insurgents from the Revolutionary Armed Forces of Colombia (FARC), Latin America’s largest and oldest guerilla group, frequently blew up pipelines and kidnapped oil workers. Since that time, the government has successfully increased its efforts to drive the FARC out of the oil-producing eastern part of the country. As a result of improved security, investment in Colombia’s oil industry has increased. Colombia’s relatively low tax and royalty rates have also encouraged foreign drilling.

The oil companies and the Colombian government have benefitted financially from the oil boom that began four years ago. Oil companies have boosted production by investing in new technology. Last month, Colombia produced an average of 953,000 barrels of oil per day—double the amount it produced four years ago. The oil industry aims to reach one million barrels of crude per day by the end of 2011. However, social unrest in Colombia has threatened the ability of oil companies to reach this goal.

Although the oil boom has helped the Colombian economy overall, oil workers and locals from the towns and villages surrounding the oil fields feel that the oil industry has not benefitted them equally. For example, 44% of people in Puerto Gaitán, an oil boomtown, live in poverty and have access to running water for only a few hours per day. Last week, production was halted at two of Pacific Rubiales Energy Corporation’s oil fields—which represent nearly a quarter of Colombia’s oil production (nearly 225,000 barrels a day)—due to protests by workers and locals. The protests have also hurt Ecopetrol S.A., a state-run oil company that is the fourth-largest oil company in Latin America, as Ecopetrol receives a large share of the oil pumped from Pacific Rubiales. On September 22, Pacific Rubiales resumed production after reaching a temporary agreement to meet with workers to discuss their concerns. The leader of the Colombian Oil Workers’ Union, however, warned that labor strife will be constant unless companies begin responding to local demands. If they cannot come to an agreement, protests in the region may continue.

Experts believe that oil workers and members of the local community may have legitimate reasons for demanding that oil companies provide better living and working conditions for workers, hire local people, and buy local products. However, they largely blame the government’s mismanagement of petrodollars (U.S. dollars countries earn through the sale of oil) for these conditions. For example, instead of investing in social welfare projects, the government spent millions on a cycling arena and a waterpark.

Analysts are concerned that if the government cannot adequately protect the oil companies from continued social unrest, foreign investment in the region will decrease. Following the protests, the price of Pacific Rubiales’ and Ecopetrol S.A.’s stock dropped. Prospective investors may hesitate to invest in the oil industry if social unrest would limit areas available for drilling, as was the case eight years ago. Social unrest could also lower production—and profits—as was the case this past week, which would also scare investors away.

IMF Calls for Stronger Economic Policies in Russia

2011-10-02T15:04:00.003-05:00

Sources:
Bloomberg: Putin Faces “Unpopular” Decisions to Overhaul Russia’s Oil-Reliant Economy
China Radio Int’l: IMF Lowers Russian Growth Forecast on Global Headwinds
IMF: Russia Should Leverage Commodity Boom to Boost Growth
WB: Growing Risks: Russian Economic Report #26

Last week, the International Monetary Fund (IMF) lowered its prediction for Russia’s annual economic growth by half a percent, to 4.3% for 2011, and by .4%, to 4.1% for 2012. The IMF justified the downward revision based on two primary factors: (1) the recent slowdown in Russia’s economy caused by lower oil prices, and (2) a general slowdown of global growth. Before the global financial crisis, the Russian economy was growing by more than 7% per year. However, during the global crisis, Russia’s economic growth slowed dramatically and has not fully recovered since. Following the crisis, the country started exporting oil from its Oil Reserve Fund (oil the country stores for emergencies) as a way to increase oil revenue; however, the fund has almost been exhausted. This excessive reliance on oil revenue is dangerous as it makes the economy particularly vulnerable to sudden drops in oil prices. If the price of oil were to fall to the same level seen during the financial crisis ($40 per barrel), Russia would have a deficit of 8% of GDP.

According to the IMF report, there are four main policy areas that the Russian government should focus on to put the country’s economic growth back on track: monetary policy, fiscal policy, structural reforms to improve the investment climate, and banking sector supervision. In terms of monetary policy, the IMF suggests the Russian Central Bank concentrate on lowering inflation. Russia currently has an inflation rate of about 8%, which is down from 11.7% in 2009, but still remains very high compared to other emerging market and developed countries. The Central Bank can increase interest rates to increase the cost of borrowing, while at the same time making it more attractive for consumers to save money. Lower borrowing and higher saving will reduce the amount of money people will spend—in other words, demand will fall. At the same time, production of goods (supply) should remain constant, which allows prices to fall based on basic supply and demand principles.

The IMF recommends that Russia strengthen its fiscal policy by aiming for a “non-oil” fiscal balance (where spending equals total revenue minus oil revenue) instead of an “overall” balance (where total spending equals total revenue). Oil revenue is inconsistent as it rises and falls with the market price of oil. When the oil price is high, Russia has plenty of extra money to spend, however, that money can disappear overnight if the price of oil falls. Since Russia currently plans for high oil revenue in its budget, it would have to borrow money to meet its budgetary needs if the price of oil were to fall. By focusing on the “non-oil” fiscal balance, the Russian government will be able to keep its budget stable (the rest of the country’s revenue is less dependent on market forces) and avoid needless borrowing.

The third area in need of policy focus is Russia’s poor investment climate. In a recent survey of the BRICs (Brazil, Russia, India, and China, four major emerging market countries) and other emerging European countries, Russia ranked last in terms of government effectiveness, regulatory quality, rule of law, and control of corruption—all of which make doing business in Russia more expensive. Investors are reluctant to devote substantial amounts of capital to countries that have these added, unnecessary costs. In response, the government has announced a plan to tackle corruption, reduce state interference in the economy, and improve services for businesses to help attract investors.

Finally, Russia needs to strengthen its banking system to help protect it from economic shocks. The IMF’s assessment of Russia’s financial sector found that the quality of bank loans may be overestimated and that banks’ capital (cash) reserves are lower than they should be. Bad loans and low capital reserves are problems because if a high number of borrowers begin to default on their loans, the banks will lose a substantial amount of their income (interest and principal paid on the loans). The banks would then have to reduce their capital by the amount of their losses. If banks with low capital reserves experience large-scale defaults, they might become insolvent—they would “fail.”

The IMF recommended that the Central Bank increase its supervisory authority and the government adopt legislation aimed at consolidating supervision over the country’s banking system. In some regulatory systems, different regulators are responsible for overseeing different parts of banks. Since a parent bank is often responsible for covering the losses of its individual parts, large losses at one branch or subsidiary bank could threaten the entire banking company if the parent bank does not have the money to cover those losses. Consolidated supervision allows for one regulator to oversee all of a bank’s activities, which gives the regulators a better picture of how the bank’s business is doing as a whole. It also forces the parent bank to monitor the risk exposure and capital adequacy of its entire operation, which theoretically makes the entire bank more stable. Russia should be able to improve economic growth and stability if it can successfully address the IMF’s concerns, but making so many changes so quickly will not be easy.

Europe's Embargo on Syrian Oil

2011-10-01T14:29:00.005-05:00

Sources:
FT: Syria to Look East for Oil Markets
NYT: Europe’s Oil Embargo Leaves Syria Urgently Seeking New Customers
Washington Post: Syria Seeks Cutback in Oil Production Because of E.U. Embargo

Syria, a country whose economy is largely based on the production and sale of oil, is now facing a European embargo on its oil exports in response to political turmoil within the country. European leaders began the embargo as Syrian President Bashar Al-Assad continues to violently repress pro-democracy demonstrations. The European reaction is only part of widespread international outrage as thousands of Syrians have died as a result of the government’s actions.

So far, only the United States and Europe have passed embargos on Syrian oil. While the United States embargo is mostly symbolic (it does not import much oil from Syria in the first place), the European embargo has hit the Syrian economy hard. Because Syria sends 90% of its oil exports to Europe, the country’s revenue has decreased by 25% since the embargo has been in effect. The United Nations Security Council is currently trying to levy sanctions against Syria to increase international pressure on the Syrian government. However, Russia has thus far used its veto power to prevent the Security Council from taking action because it is unhappy with how NATO used previous Security Council sanctions to justify its bombing campaign against Libya. Nevertheless, other Security Council members continue trying to sway the Russian vote in the hopes of enlarging the scope of the embargo.

The embargo and subsequent declines in exports have forced many foreign companies to shut down their Syrian operations, which will likely compound the embargo’s effect. However, experts believe Syria will eventually find buyers for its oil, either by finding non-European countries that need oil or companies willing to help Syria avoid the embargo by shipping to Europe via some third country from which Europe allows oil imports. The Syrian diplomat to the UN stated that buyers from the Eastern Bloc had already approached Syria about the possibility of buying its oil, but did not name any countries specifically. Experts also believe that more buyers will emerge in attempts to purchase Syrian oil at a discounted rate.

While the European and U.S. governments are using this embargo to encourage political change in Syria, it is possible they are doing the country more harm than good. Aside from its substantial loss in revenue, the country is now facing a major hindrance in its future economic development. If the political situation does not improve, foreign investors may hesitate to invest in Syria if they fear the government’s actions will spur more international sanctions, and, therefore, more losses for businesses. Even if the political instability is resolved soon, foreign investors may still be reluctant to invest in Syria for a long period of time after seeing how much money oil companies are currently losing. Without resolving the foreign investor problems arising, Syria's economic and political development will not be able to continue.

Can Liberia Stand on its Own?

2011-09-27T21:10:00.000-05:00

Sources:
Economist: Liberia’s Election: Hold Your Breath
UN: Upcoming Elections in Liberia Must be Peaceful, Free and Fair

Liberia, a country that was torn by civil war less than a decade ago, is anticipating holding only the second presidential election since the fighting ended. After years of dealing with riots, marauding gangs, and violence, Liberia now appears to be on a more stable path towards development. In recent years, violence has calmed and economic growth has taken hold. The IMF recently predicted Liberia’s economy would grow by 5.9% this year thanks, in part, to improving relations with foreign governments, who have forgiven $6 billion of Liberia’s debt and have aided Liberia’s reconstruction efforts. 

Liberia has not solved all its problems, however. A recent ranking by Transparency International deemed Liberia the most corrupt country in the world. Rampant nepotism in government hiring and a corrupt police force are two prominent issues. The ranking came as a major blow to current president Ellen Johnson Sirleaf, Africa’s first female head of state, whose “zero tolerance” policy on corruption obviously has not been successful.  

The upcoming October elections are also gaining international importance. The United Nations (UN) currently has about eight thousand peacekeepers in Liberia through its Mission in Liberia (UNMIL). If the election proves to the international community that Liberia is more politically stable, the UN will withdraw its peacekeepers. UNMIL is set to end by the end of the year either way, which may leave the newly elected Liberian government responsible for maintaining a fragile peace. The country’s dependence on foreign aid and UN policing has led some observers to question whether Liberia will be able to stand on its own if and when the peacekeepers leave. 

Finally, the election could have drastic consequences for the Liberian economy. If the election proves to foreign investors that the country is politically stable, foreign investment will likely begin flowing to the country. The withdrawal of the peacekeeping force may multiply any new investor confidence as well, unless investors believe the peacekeeping force is the only thing preventing Liberia from falling into another civil war. New foreign investment would spur economic growth and allow the country to become less dependent on foreign aid. Any economic growth should actually benefit Liberian citizens—not just the government—as new investment would create jobs in a country where 83% of adults are unemployed. In short, this seemingly commonplace election could be the first step toward major changes in Liberia.

Middle Eastern Governments Plan to Spend Huge Oil Profits on the Poor

2011-09-27T12:51:00.002-05:00

Sources:

The Daily Beast: High Oil Prices to Benefit Poor

FT: Sovereign Wealth: Spending Stays Close to Home

San Francisco Chronicle: OPEC’s $1 Trillion Cash Quiets Poor on Longest Ever $100 Oil

The University of Pennsylvania Wharton School: To Stave off Arab Spring Revolts, Saudi Arabia and Fellow Gulf Countries Spend $150 Billion

Many oil-rich countries in the Middle East will see unprecedented profits thanks to high oil prices and have pledged to invest much of these profits in programs designed to alleviate poverty. Countries like Saudi Arabia, United Arab Emirates, Kuwait, and Qatar plan to spend billions on food aid, increasing civil servant salaries, and, to a lesser extent, on infrastructure improvements.

Substantial domestic investment is a new trend in the region, likely spurred by uprisings. In the past, many middle-eastern countries preferred to invest oil profits overseas. The recent political unrest throughout the region, however, has forced governments to pay more attention to the basic needs of their population. Citizens in Libya, Egypt, Tunisia, Bahrain, Syria, and Yemen have started protests and even civil wars against their current governments in the past several months. Many of these incidents resulted from citizens who feel their governments are oppressing them and neglecting their basic needs. In some countries, the uprisings have ousted long-standing leaders– a result none of the region’s leaders want to see in their own country.

Some experts feel the governments’ new investments are not the solution to these region’s problems. Much of the relief, such as food and cash handouts, will only have a short term effect. The governments are spending very little on projects that will support economic development in the long-term. Therefore, when the relief is gone, the poor will be in the same position they were before the handouts. Despite observers’ opinions that the countries should spend money on long-term investments that will support economic activity for years to come, citizens seem satisfied.

Regardless of the motivation for- or longevity of- the relief, increased domestic investment is a positive step for the Middle East. Oil wealth has been the source of some of the most dramatic inequality in the world as dictators and oil barons have kept oil profits for themselves for decades. The vast majority of the population lives in poverty. Unfortunately, many feel the financial disparity between the rich and the poor of these countries is just one characteristic of an oppressive culture in which citizens have little say in their government. The governments’ new domestic spending is the first sign of hope for the poor in these countries and may lead to increased political voice for the underrepresented group.

Italy Struggles to Calm Creditors’ Fears After Debt Downgrade

2011-09-26T16:35:00.002-05:00

Sources:
Guardian: Italy Downgrade Adds to Eurozone Contagion Fears
Spiegel: Belligerent Berlusconi Toys with Europe
Spiegel: Debt Downgrade
Telegraph: S&P Downgrades Italy: the full text
WSJ: Italy’s Frattini Sees Next Austerity Package Soon
WSJ: Italy Approves EUR54 Billion Austerity Plan

On Monday afternoon, credit ratings agency Standard & Poor’s (S&P) downgraded Italy’s credit one notch to A/A-1. The announcement came after S&P lowered its annual growth forecast for Italy to just 0.7% annually between 2011 and 2014, down from its earlier 1.3% prediction. The main reasons for the downgrade, according to S&P, is the political uncertainty regarding the country’s ability to deal with its economic challenges, especially finding a way to reduce its enormous public debt—currently at 120% of gross domestic product (GDP). S&P questions whether Italy’s plans to cut government spending and reach other fiscal targets will be as effective as the Italian government believes. S&P did not raise any concerns about Italy’s economic structure, external liquidity and investments, or the country’s monetary flexibility.

Italy is currently facing a fiscal deficit of 4% of GDP, an increase from just 1.5% in 2007. Although the government has attempted to limit spending, Italy’s exceedingly high public debt still accounts for 23% of all sovereign debt in the Eurozone. This immense debt burden has forced the Italian government to raise an equally large amount of capital by selling bonds (debt) on a regular basis to pay for its already-existing debts.

In an effort to tackle its increasing financial difficulties, the Italian government approved a €54 billion austerity package last week that increases taxes and cuts spending for the next three years. The package includes a 1% increase in the value-added tax (a European form of sales tax) which is expected to bring in €4.2 billion in new revenue per year. Additionally, observers expect the government to introduce a third round of austerity measures to Parliament within the next few weeks. The new legislation will likely aim to decrease the government’s medium-term debt by selling public property and privatizing some public services, although important businesses, such as oil and energy production and high-tech operations, are likely to remain under government control. The new measures are also aimed at promoting economic growth by attracting new foreign investments.

Many critics believe that Italy’s austerity plans will push the country into a recession by the end of the year as tax increases will reduce a major source of economic growth—domestic consumption—by taking money out of consumers’ hands. Thus, the country’s debt-to-GDP ratio will not decrease if a decrease in GDP accompanies any debt reduction the measures achieve. The only certain thing is that the Italian government has a difficult road ahead.

Mexico Decides to Stay the Financial Course

2011-09-26T10:06:00.003-05:00

Sources:
Bloomberg: Mexico Needs No Stimulus to Withstand U.S. Slowdown, Finance Minister Says
Bloomberg: Pemex Scrapping Peso Bond Sale Signals Deepening Slowdown: Mexico Credit
FT: Mexico Presents ‘Prudent’ Budget
Market News International: Repeat: Mexico: 2012 Budget Plan Cuts Deficit to 0.2%/GDP

Mexico’s proposed 2012 budget calls for fiscal policies designed to stimulate economic growth while reducing the country’s budget deficit. The Mexican government hopes the budget will attract foreign investors by showing economic stability at a time of global economic uncertainty. Former Finance Minister Ernesto Cordero, who stepped down to campaign for the presidency, explained that the budget adjusts for the global economic slowdown by increasing public spending “without putting fiscal sustainability at risk.”

Mexico’s economy bounced back in 2010 after experiencing a deep recession the previous year. After recovering economically, Mexico wants to avoid resorting to excessive stimulus that increased debt in a number of other countries during the global financial crisis. Instead of increased borrowing, Mexico’s fiscal policy will concentrate on spending restraint in anticipation of a further economic slowdown to reduce the deficit to 0.2% of gross domestic product (GDP). The Mexican government, however, believes that the budget will stimulate growth despite any economic slowdown by increasing investment in Mexican industry and encouraging higher export volumes and consumption of Mexican goods.

Although Mexico is Latin America’s second-largest economy with growth that currently outpaces U.S. economic growth, it still lags behind other emerging markets. The Mexican government estimates that Mexico’s economy will grow by 4% this year, which is the second-lowest growth rate among Latin America’s major economies, ahead of only Venezuela. In 2012, the Mexican government expects Mexico’s growth rate to decrease by 0.5%. The United States’ economic crisis has affected Mexico’s growth dramatically as 80% of Mexican exports go to the U.S, and U.S. consumers are buying fewer Mexican goods. Critics fear that if the United States slips into a second recession, Mexico could see a drastic reduction in trade, tourism, and remittances, which would be disastrous for the country’s economy.

The Mexican Congress has until November 15 to approve the budget, which calls for 3.62 trillion pesos ($259 billion) in total spending—a 2.5% increase from 2011. The budget includes new investment in Pemex, the state-owned petroleum company that is also the second-largest non-publically listed company in the world. The budget also estimates 3.2 trillion pesos ($229 billion) in total revenue—a 3.8% increase from 2011. The government is counting on Pemex reversing its six-year decline in oil output to generate a 1.15 trillion pesos profit ($82 billion). The budget calculates revenue based on an average oil price of $84.90 per barrel in 2012, a 10.3% increase compared to 2011 when the price has averaged $65.40 per barrel.

The budget also includes a 3.3% increase on economic development spending and a 6.7% increase on social development spending over the 2011 budget, which includes 400 million pesos ($29 million) dedicated to health care, 56.5 billion pesos ($4 billion) for science and technology research and development, and 38 billion pesos ($2.7 billion) for roads and highways. By spending in these sectors, including its lucrative oil industry, the government hopes to boost growth for years to come without resorting to borrowing money that could increase the national deficit.

Portugal Expected To Receive €3.98 Billion Disbursement from IMF

2011-09-26T09:59:00.002-05:00

Sources:
BBC: Portugal Bail-out
CBS Money Watch: Portugal to get More Bail Out Funds
ECB: Statement by the European Commission, ECB and IMF on the first review mission to Portugal
IMF: IMF Completes First Review Under an EFF with Portugal
IMF: Executive Board Approves an €26 Billion Extended Arrangement for Portugal

On September 12, the Executive Board of the International Monetary Fund (IMF) completed the first review of Portugal’s performance under a three year, €78 billion, bailout agreement reached earlier this year. The successful completion of the review allows Portugal to immediately receive a €3.98 billion disbursement from the bailout fund, bringing total disbursements under the agreement to €10.43 billion.

One of the main reasons for Portugal’s financial trouble is that the country’s economy has not grown fast-enough to keep up with the government’s spending. As a result, the government has had to take on a great deal of debt to continue providing the services its citizens have come to expect. As the financial crisis worsened, interest rates on Portuguese bonds increased due to investors’ fears that Portugal was taking on too much debt, which made it more expensive for Portugal to continue borrowing money. Eventually, interest rates increased so much that Portugal needed external financial support to pay its debts—a bailout.

Under the bailout agreement, approved on May 20, 2011, the IMF and other European countries agreed to lend Portugal €78 billion on the condition that it make specific dramatic economic reforms within the next year and a half to address the country’s debt. The reforms, which include forcing banks to increase cash reserves and reducing government payroll costs, are meant to improve competitiveness and put Portugal’s economy on a path toward sustainable growth. In its first review of the country’s austerity program, the IMF stated that the country is on track to meet its fiscal target of reducing the budget deficit to 3% of gross domestic product (GDP) by 2013. The IMF also expects economic growth and inflation to remain in line with its conditions.

The review committee noted that Portuguese banks have been successful in increasing their capital (cash) reserves to meet the new capital adequacy requirements, and that the Portuguese government has made progress in strengthening its supervisory and regulatory framework over the financial sector. Nevertheless, the success of the IMF program is greatly dependent on the government’s ability to address another one of Portugal’s main problems—lack of competitiveness—by opening the economy to competition. To do so, the government has so far eliminated the special rights (shares) it holds in private companies to reduce government involvement in the private sector, which helps level the economic playing field. While the reforms appear promising so far, Portugal still faces more difficulties. The review committee made it clear that Portugal has not yet done enough to ensure the future stability of its debt.

Historic U.N. Meeting Addresses the Global Impact of Non-Communicable Diseases

2011-09-25T15:14:00.006-05:00

Sources:
CNN: U.N. Adopts Political Declaration on Non-Communicable Diseases
Council on Foreign Relations: Global Action on Non-Communicable Disease
Reuters: UN Assembly Backs Steps to Fight Chronic Disease
UN: High-Level Meeting on Non-communicable Diseases

In a landmark United Nations (U.N.) summit, world leaders converged for the first ever high-level meeting to address non-communicable diseases (NCDs)—the leading cause of death across the globe. Non-communicable diseases, such as cancer or heart disease, are diseases that do not pass from one person to another. The General Assembly (GA) addressed prevention and control of four groups of NCDs: cancer, cardiovascular disease, chronic respiratory diseases and diabetes. This week’s session represents only the second time in U.N. history that a global health issue commanded the attention of the GA, after it addressed the global AIDS epidemic nearly ten years ago.

In addition to lost lives, the economic costs of NCDs add to their total impact. NCD’s kill more than 36 million people each year and the World Economic Forum estimates that NCDs will cost the global economy $47 trillion over the next 20 years. Though NCDs are increasing dramatically world-wide, most developing nations are ill-equipped to effectively deal with major health problems due to a lack of equipment, well-trained doctors, and medicines. This reality is especially problematic considering more than 80% of NCD deaths occur in low- and moderate-income nations. With the exception of Africa, NCDs cause more deaths and illness world-wide than communicable diseases like HIV and malaria that generally receive more attention from the international community. Even in developed nations, NCDs create a substantial drag on the economy and highlight the issue of unequal access to medical care.

To combat NCDs, member nations unanimously adopted a “political declaration” calling for implementation of collaborative efforts between governments and the private sector to reduce risk factors, such as obesity and tobacco and alcohol use. The declaration highlights the need for comprehensive health care, calls for assistance to developing countries, and mandates the coordination of local, national, and international efforts to promote healthier lifestyle choices. The broad language of the declaration also touches on key health issues such as breast feeding, cancer screenings, and medical research. The declaration calls on the World Health Organization to prepare global target goals and an international monitoring framework by the end of 2012.

The practical effect of a U.N. political declaration elevates NCD’s on the global health agenda and provides the basis for governmental action at national and global levels. Private and public funding for such initiatives will likely increase as collective awareness rises. The declaration will be part of the U.N.’s permanent record delineating global development priorities and will provide a foundation for further collaborative efforts among member nations. By recognizing the impact of NCDs and addressing root causes, the measures proposed by the U.N. seek to limit the negative effect of NCDs on social and economic development worldwide.

China’s New Marriage Law Interpretation: One Step Forward or Two Steps Back?

2011-09-18T17:52:00.002-05:00

Sources:

Asian Correspondent: New Marriage Law Sparks Debate in China

China Digital Times: China’s New Marriage Law May Exacerbate Gender Wealth Gap

Finance Asia: China’s New Marriage Law Set to Stoke Home Sales

NYT: Chinese Law Could Make Divorced Women Hopeless

Sydney Morning Herald: China Hits Hip Pocket in a Blitz on Divorce

Times of India: In China, Wife Loses Right to Property After Divorce

On August 13, China’s Supreme People’s Court changed its interpretation of China’s marriage law and shattered China’s traditional notion of marriage. Before the ruling, divorced couples split their property evenly, unless either had committed bigamy, domestic violence, abandoned the family, or lived with a lover for more than three months. Under the new interpretation, the person whose name is on the deed will receive the property. The ruling has the potential to have an enormous effect on gender-based wealth-distribution in the country, as Chinese tradition dictates that the groom-to-be should provide housing for the couple. Because the man has to bring property to the marriage, his name is already on the deed. Unless he agrees to add his new wife’s name to the deed, he will now receive the property if they divorce.

The Supreme People’s Court’s ruling came in response to Chinese women’s growing emphasis on material wealth in choosing a husband. Real estate prices have risen 500% since 2000 in some parts of China, which has made it more difficult for young men to afford housing and become truly eligible bachelors. Many observers speculate that the increased importance of finances in courtships led to a recent dramatic increase in divorces, as women have been more willing to marry the few men that actually own property regardless of whether those men will make good husbands. The new interpretation is supposed to encourage women to seek husbands based on love, not money, and thus preserve what the Court sees as an important cultural value.

Not surprisingly, the reaction to the Court’s ruling has been mixed. After the ruling, many couples have taken measures to add the woman’s name to property titles. Some observers say that the move is proof that the ruling encourages marital equality while also encouraging women’s financial independence. Many women’s rights groups, however, say that the ruling is a huge hit to gender equality. Marriage experts believe that the ruling will do little to change the tradition of keeping deeds in the man’s name, meaning the investment the wife makes in the marital home – whether monetary or otherwise – will be valueless if the couple divorces. Some critics have even gone so far as to suggest that the ruling strips women of their right to divorce their husbands, as they would risk losing everything. At the same time, the threat of the wife being left penniless after a divorce may be unsettling enough to cause marital problems even among otherwise happily married couples.

Only time will tell what effect the Supreme People’s Court’s ruling will have on gender equality in China. Real estate experts in the country have noted an increase in the number of women buying homes, a trend that suggests the ruling has increased women’s desire to be financially independent. Because women will often receive no assets after a divorce, the ruling may encourage more women to enter the workforce as a way of ensuring their own financial stability. If that were the case, these newly employed women could become a new class of consumers that could help China grow economically by increasing domestic consumption and demand for goods – a change the government thinks is necessary to help China move away from its dependence on exports. Needless to say, the ruling’s effects could go far beyond the divorce rate.