The Right to Work in America

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.

U.S. Cities Face Serious Challenges

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.

Monetary Policy Disagreement Plagues the FOMC

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.

Uncertainty in the U.S. Employment Situation Continues

Sources:

NYT: Bank of America Confirms Plans to Eliminate 30,000 Jobs

NYT: Bigger Economic Role For Washington

U.S. Dept. of Labor: Employment Situation Summary

U.S. Postal Service: News Release

WSJ: GOP Balks At Taxes TO Finance Jobs Plan

WSJ: Post Office History For Sale

Since 2007, Congress has passed three stimulus bills aimed at reviving the ailing economy: a $158 billion tax cut package in 2008, a $787 billion stimulus plan in 2009 and a tax cut and unemployment fund extension plan in 2010. While these packages have forestalled major job cuts, none of these measures have been successful in appreciably reducing the unemployment rate, which remains persistently high at 9.1%. In response, President Obama unveiled a $447 billion job creation bill that was quickly met by partisan opposition and more job losses.

Several major U.S. employers recently announced plans to layoff significant numbers of workers. Bank of America announced a plan to cut 30,000 jobs over the next “few years” as part of a $5 billion cost savings initiative. After cutting 30,000 jobs in 2010, the U.S. Postal Service eliminated an additional 7,500 positions last month in an effort to chip away at its $9 billion debt. The book retailer Borders cut 10,700 jobs and pharmaceutical giant Merck eliminated 13,000 positions. Even the U.S. Army has had to cut back—earlier this year it announced plans to eliminate 8,700 positions.

The continuing economic slowdown has forced companies to search for creative ways to save money while trying to preserve as many jobs as possible. For example, the U.S. Postal Service is redefining large aspects of its business model. It is reducing its overhead expenses by selling its real estate in favor of operating out of third-party retail locations like grocery stores and pharmacies. Similarly, Bank of America views its short-term workforce reductions as necessary to ensuring long term-growth and workforce stability.

President Obama’s plan calls for the creation of new jobs and a reordering of fiscal priorities to help get the U.S. economy back on track. During periods of high unemployment the demand for consumer goods and services declines as fewer people have extra money to spend, production slows due to the decreased demand, and businesses ultimately lose money, which forces them to cut jobs to save money and reinforce the negative economic cycle. President Obama believes that the government can break the cycle by spending money to spur consumption and thereby force companies to increase production, which theoretically requires those companies to hire new workers who become new consumers that spend money and establish a positive cycle of growth. Economists estimate that President Obama’s plan could add 100,000 to 150,000 jobs per month over the next year to lower the unemployment rate by a full point. Opposition to Obama’s plan is rooted in the belief that the government has already tried similar stimulus measures with little success. Notwithstanding the partisan political debate over Obama’s Job Act, many economists believe that stimulus packages and further intervention from the Federal Reserve are ultimately necessary to prevent the economy from falling back into a recession.

Possible Conflict May Arise Over Jamaica’s Stand-by Agreement with IMF Over 5% Tax Cut in Fuel

Sources:
Jamaican Gleaner: IMF Open to New Standby Agreement with Jamaica
Business Content Jamaica: Jamaica Shaves 5% Off Controversial Gas Tax
Business Content Jamaica: 1.2% Decline in Jamaica’s Economic Growth

On April 12, 2011, the Jamaican government successfully avoided protest by opposition party, the Peoples National Party (“PNP”). The PNP, had originally scheduled the protest to oppose the Jamaican government’s implementation of a 15% tax increase on fuel. Consumers had already been hit hard by the international increase of fuel prices and the 15% tax increase would have only increased costs for cash-strapped consumers. Currently Jamaican motorist pay more than $4.40 per gallon for gasoline. The 15% tax increase would have sent the price of gasoline to over $5.00 per gallon, something the PNP was unwilling to accept. In response to the possible protest, the Jamaican government agreed to reduce the tax by 5% and successfully quelled the party’s protest.

Although the Jamaican government avoided the immediate fear of political protest, reducing the fuel tax has only created another imminent fear for the Jamaican government. The 15% increase in tax fuel was one of the conditions negotiated in a medium-term economic stand-by agreement with the International Monetary Fund. This agreement between the Jamaican government and the IMF provides the Jamaican government with a 3-year $1.27 billion dollar loan in order to help the government implement new economic reforms and cope with the global downturn. However, the agreement comes with conditions and clearly states that the Jamaican government must meet certain markers and goals for ensuring greater fiscal discipline. One of these markers included increasing cash supply through increased taxation, which the 15% fuel tax increase was supposed to be a part of. The 5% decrease assented to by the Jamaican government, will now force them to explain an unexpected budgetary cost of 3.5 billion Jamaican dollars (roughly $41 million U.S. dollars) to the IMF. It is clear from the terms of the stand-by agreement with the IMF, that Jamaica faces possible legal sanctions for failing to meet these markers. Already identified as a government with a “terminal point problem,” or a problem with failing to meet financial and structural markers, the Jamaican government is unsure if this decrease in tax fuel will have a legal affect for the country. However, in the February review of the agreement, IMF technocrat Trevor Alleyne said the IMF is working with the Jamaican government to ensure that resort to legal sanctions is avoided.

Although some support the stand-by agreement between the IMF and the Jamaican government, critics point to Jamaica’s 1.2% GDP contraction in the 2010 year as an indicator that the reforms imposed by the terms of the agreement are not stimulating growth. Alleyne contends that increasing GDP was never the major goal of issuing the loan, but providing insurance for banks in case of a sharp demand for loans during a debt exchange shock, or fallout, was. Maintaining the economic confidence of companies is crucial toward the growth of the country, Alleyne stated.
However, when a sharp GDP contraction in Jamaica’s September quarter, did not send companies running to the bank for cash bailouts, critics viewed the loan as an attempt to swindle the Jamaican government into paying interest on a overly excessive loan, since $950 million of the $1.27 billion loaned by the IMF had been allocated for such a shock. Alleyne contends that the loan was created to prepare Jamaican banks against the worst possible scenario, not as a reflection of the IMF’s belief that the worst case scenario would actually happen.

Despite criticisms of the loan, the Jamaican government will continue to work with the IMF to make improvements in their fiscal planning. If nothing else the existence of the loan will encourage much needed cheap budgetary support from the World Bank and the Inter-American Development Bank.

Is Basel III “Doomsday” for Banks and Economic Growth?

Sources:
Financial Times: Bankers Warn of Basel III hit to GDP
Financial Times: Bankers’ ‘doomsday scenarios’ under fire
Financial Times: Basel Chief hits back at growth curb claim
Financial Times: Digesting the Basel Reforms
Bloomberg Businessweek: Geithner Meeting Barnier on Basel III Presses Banks
Wall St. J.: G-20 is Nearing Accord on New Capital Rules
Bank for International Settlements: History of the Basel Committee and its Membership

The Basel Committee on Banking Supervision (Basel Committee) sets global banking standards, which national regulators then implement. In 1988, the Basel Committee introduced a measure of capital called the Basel Capital Accord (Basel I) requiring a minimum capital of 8%. In 2004, the Basel Committee issued a revised framework, commonly referred to as Basel II, which refined the standardized rules set forth in the Basel I.
Among other things, Basel II lowered capital requirements and allowed the largest and most sophisticated banks to use internal models to calculate risk of their assets in determining the capital charges against them. Basel II is the minimum standard for international banks and many countries have adopted it in some form.

While Basel II sought to improve on Basel I by aligning regulatory capital requirements more closely to banks’ underlying risk, many have criticized it. In the wake of the global financial crisis, criticism of Basel II has not waned, but has actually increased. In fact, many critics such as Charles Goodhart, a former Bank of England policy maker and professor at the London School of Economics, have gone as far as saying “that Basel II failed.” Therefore, regulators are trying to fix Basel II through a financial reform dubbed “Basel III.”

Basel III will still rely on the banks’ risk models, but will call for tighter control of what goes into the calculations. There will be a narrower definition of what counts as capital and higher capital charges against riskier holdings such as derivatives. Basel III may also impose a cap on the amount of assets a bank can have in relation to its equity. Put simply, Basel III would require banks to keep enough money in reserve to insulate them against future crises. Not surprisingly, these proposed changes have not been without criticism.

As you may surmise, the loudest criticism of Basel III comes from the banking industry. Banks are claiming that the increased capital requirements will significantly reduce their profitability. Moreover, the world’s leading banking industry group has warned that economic growth in the eurozone, the U.S., and Japan will be cut by three percentage points between now and 2015 if the proposed changes come into force. Another group warns that this would lead to 9.7 million fewer jobs in those countries. Thus, according to the banking industry, the combined effects of Basel III will have a disastrous effect on the worldwide economic recovery.

Proponents of Basel III believe that these worries are unwarranted. Banks are assuming the “maximum impact of the maximum change with the minimum behavioral change.” Banks’ business models are not static and can be changed to deal with the new regulations. Furthermore, if Basel III is applied with equal force to all banks, there is no reason why banks could not maintain their profitability by passing the costs of increased capital to their customers without adverse impact on business. However, it is not clear that they would necessarily do so.

Due to the differing views regarding the effects of Basel III, the Basel Committee and the Financial Stability Board have given a mandate to the Bank for International Settlements to assess the economic effects of the Basel III reform. The estimates are still in progress, but the study shows that the costs “aren’t huge” and the “improvements to the resilience of the financial system will not permanently affect growth—except for possibly making it higher.” However, even if the reforms do slow economic growth, many proponents believe that it is a price worth paying for a stable financial system worldwide.

Even though the banking industry contends that the effects of Basel III will be disastrous, it is debatable whether Basel III truly is doomsday for banks and economic growth. Indeed, if there are costs, they may be a small price to pay for global financial stability going forward.

Discussion:
1) If Basel III does reduce banks' profitability, how do you think banks will deal with it (pass it on to customers, find a loophole, more innovation, etc.)?
2) Even if Basel III slows economic growth, do you think it is a price worth paying for a stable financial system?

Has the Recent Sharp Decline in Value in U.S. Financial Markets Indicated the Economy is in the Downside of a Double-dip Recovery?

Sources:
Financial Times: The Double-Dip Threat
Financial Times: S&P Falls Most Since April 2009
Wall St. J.: Data Points: U.S. Markets
Yahoo Finance: U.S. Stocks Drop in First Correction of Bull Run
Bloomberg: Good Orders, Home Sales Probably Climbed: U.S. Economy Preview
Bloomberg: Fed's Dudley Sees Start of 'Significant' Growth in Employment

Currently, there are competing economic activities that point in opposite directions with respect to whether the U.S. economy is recovering. In the past four weeks, the U.S. financial markets have declined significantly. The Dow Industrials, Nasdaq Composite, and S&P 500 were down 4.02%, 5.02%, and 4.23% this past week, respectively. Moreover, over the past four weeks, they were down 9.02%, 11.90%, and 10.65%, respectively. Does this necessarily indicate that the U.S. economy is in a “double-dip” recovery (a double-dip recovery is one where there is a brief intermittent economic recovery and then a quick fall back into recession)? Not necessarily.

Observers have articulated a number of rational theories as to the causes of this decline. Some contend that investors’ risk appetites have decreased because of the events taking place around the world, such as the financial crisis in the Eurozone, the uncertain effect on markets of U.S. financial reform, worries of a slowdown in China, the German short-selling ban, and the geopolitical tensions from Thailand to the Korean Peninsula. Others note that there has been a 14-month stock market rally which, combined with this uncertainty, may have induced investors to sell stock and realize their profits. Still other observers believe that a 10% market correction is typical after a prolonged rally. Therefore, the sharp decline in the markets does not necessarily indicate a double-dip recovery.

U.S. economic data also indicates the U.S. economy is not declining—in fact, it is strengthening. Last week, although the new weekly jobless claims surprisingly increased by 25,000, there was a decrease in the number of the long-term unemployed by 40,000. Additionally, there was an increase in bookings for durable goods, sales of new and existing homes, and construction starts. This indicates consumers are spending more, which tends to indicate a strengthening economy. Further, U.S. exports have been rising.

Thus, even though there has been a significant decline in the financial markets over the past weeks, there are perfectly rational reasons for this decline rather than a declining economy. Indeed, economic data tends to point to an economic recovery.

Discussion:
1) Have the worldwide events, coupled with the 14 month stock market rally, affected your decision to sell your stocks and realize profits?
2) Regardless of the economic data, do you believe that the sharp decline in the financial markets indicates another recession or is this just a market correction?
3) What is the more significant news–the decrease in long-term unemployment or the increase in the weekly jobless claims?

Despite economic unease, Botswana reelects incumbent party

Sources
AllAfrica: Botswana: SADC election observers applaud elections
Financial Times: Botswana set to vote for stability
New York Times: Botswana poll marked by discontent over economy

Last week, Botswana re-elected its ruling Botswana Democratic Party (BDP) to another five year term. The party, led by President Seretse Khama Ian Khama won a total of 45 out of 57 parliamentary seats and 53.26 percent of the popular vote, according to an independent election commission. The BDP has not lost an election since Botswana gained its independence in 1966. The African Union sent a 25-member observation mission to monitor the election, and concluded that Batswana voted in a peaceful and orderly manner. Despite some police presence, there were no firearms present at the polling stations to intimidate voters.

The peaceful elections took place against a gloomy economic backdrop. Botswana, long viewed as one of Southern Africa’s best-run economies, has been hit hard by the recession. The worldwide slowdown has reduced the demand for diamonds, which account for nearly 40 percent of Botswana’s economy. Demand for rough high-value diamonds has fallen by 90 percent, forcing De Beers and Botswana’s government to cut costs dramatically. All four of the country’s diamond mines were closed during the initial months of this year. Gross domestic product is expected to shrink by ten percent this year, and the country borrowed $1.5 billion from the African Development Bank in June to sidestep a massive budget shortfall.

Despite these economic woes, many voters continue in their support of the BDP. Most analysts predicted a comfortable BDP win, largely because of the party’s official efforts to limit the social impact of the recession. Although opposition parties offered criticism, many voters were unwilling to blame the BDP for the economic downturn. The country’s sound fiscal position meant it had considerable reserves to draw on during the first months of the recession. Many voters also credit Mr. Khama’s firm leadership for Botswana’s stability over the years. One 35-year-old voter likened Khama to a “father” in charge of a difficult family, saying “he is fair and honest and he makes sure things get done in the way they are supposed to be done.” Although the diamond market remains depressed, signs of recovery are beginning to appear. De Beers and the government have already reopened three of the country’s diamond mines.

Discussion
1. The effects of the economic downturn in Botswana were greatly exacerbated by the country’s extreme dependence on the diamond market. What can Botswana do to better weather future fluctuation in the diamond market?
2. The BDP has been in power since Botswana gained its independence in 1966. Botswana has also enjoyed more stability than most of its South African neighbors during those years. In the recent election, some voted to extend the long-standing BDP rule while others opposed President Khama’s re-election precisely because he had been in power so long. Which is the better perspective? Is it preferable to maintain the status quo, or to “switch horses in midstream” during an economic crisis?

IMF predicts weak growth in sub-Saharan Africa

Sources
Bloomberg: Sub-Saharan Africa’s Per Capita Income to Fall
IMF: IMF Survey: Prudent Policies Help Sub-Saharan Africa Ride Downturn, Regional Economic Outlook: Sub-Saharan Africa

The International Monetary Fund, in its Regional Economic Outlook, expressed expectations for meager growth in sub-Saharan Africa in 2009. The IMF predicts that sub-Saharan Africa’s economy will expand 1.3 percent this year, down from 5.5 percent in 2009. The estimate is down from the IMF’s July forecast of 1.5 percent. The fund does expect growth to bounce back as the global economy recovers however, rebounding to 4.1 percent in 2010.

Angola’s economy, once marked by explosive growth (20.3 percent in 2007, 13.2 percent in 2008), will be a significant drag on the region. The IMF predicts 0.2 percent expansion in the Angolan economy this year. Nigeria- the most populous nation in the region- will see a decline from 6 percent growth to 2.9 percent this year. The fund also emphasized that its predictions were subject to “significant uncertainty”; improved growth in sub-Saharan Africa will be closely tied to a strong global recovery. As donor countries attempt to set their own advanced economies right, many may scale back their commitments to developing economies. The IMF remains concerned that reduced aid and investment flows into sub-Saharan Africa could jeopardize recovery and exacerbate poverty in the region.

The IMF outlook isn’t wholly bleak however. The report notes that the region is faring better this time around than it has in crises past. Many sub-Saharan countries were better prepared when crisis struck. The region’s current account balance was fairly strong in 2008, and international reserves were relatively high. From this position, most countries were able to survive the sharp declines in foreign exchange inflows caused by the global crisis.

The IMF urges countries in the region to continue pursuing supportive fiscal policies. The report urged sub-Saharan policymakers not to withdraw fiscal stimulus measures too early, to focus on medium term considerations (like growth and debt sustainability), to contain macroeconomic imbalances and to continue monitoring financial sector developments closely. Shrewd policymaking, paired with a steady global recovery, could lead many sub-Saharan countries back to their impressive, pre-crisis growth rates.

Discussion
1. The IMF warns of “significant uncertainty” in their growth forecasts for the sub-Saharan region, emphasizing the linkages between global and regional recovery. What, if anything, can African leaders do to protect their economic recoveries from potentially negative international effects?
2. The IMF and G20 have pledged increased funds to developing and emerging economies in the wake of the crisis. How can these countries best allocate the new funds to meet economic and humanitarian needs?

G20 summit marked by high hopes for international cooperation

Sources
Financial Times: New body takes on economic leadership, Skepticism over G20 pledge of new era, Full G20 communique
New York Times: Leaders of G20 vow to reshape global economy

As the recent G20 summit came to a close in Pittsburgh, many leaders voiced their hopes for a new era of global economic cooperation. U.S. president Barack Obama praised G20 members for real, tangible cooperation, and said that the financial system of the future “will be far different and more secure than the one that failed so dramatically last year.” Members addressed a wide variety of issues at the Pittsburgh summit, including a timetable for regulatory reform, improved guidelines for bankers’ pay and a new global framework for balanced economic growth.

One of the most noteworthy aspects of the summit was a marked shift in many countries’ views toward international oversight. The concept of national sovereignty has often been a stumbling block for international organizations, in economics and in many other contexts. In Pittsburgh, the G20 made plans for a more balanced global economy and established multiple priorities: the United States will need to increase its savings rate and trim its trade deficit while countries like China, Japan and Germany will need to decrease their dependence on exports and promote higher rates of consumer spending and domestic investment. In a remarkable step toward true international cooperation, each country agreed to submit these balancing policies to a “peer review” process, as well as to monitoring by the International Monetary Fund. Many attribute this change of heart to the severity of the recent crisis. The rest of the world was so shocked by the financial crisis, emanating from the United States, that they may be reevaluating what is in their best interest. Allowing international oversight may mean giving up a degree of sovereignty in economic policymaking, but that concession may be well worth the price if it can prevent another severe financial crisis.

Another important shift occurred at the Pittsburgh summit— the leaders formally announced that global economic discussions would shift permanently from the Group of 7 (the United States, Britain, France, Canada, Italy, Germany and Japan) to the Group of 20 (which includes China, India, Brazil, South Korea and South Africa and others). This change, believed by some to be long overdue, reflects the shifting dynamic of the global economy and the increased importance of fast-growing developing nations. The G20 also reemphasized their commitment to give China and other emerging economies a larger share of voting power at the IMF and the World Bank. Some analysts have voiced criticism over the potentially “unwieldy” nature of a 20-member group, while United Nations secretary general Ban Ki-Moon visited Pittsburgh to remind leaders that 85 percent of the world’s countries are not represented by the G20. Although current member nations do account for 85 percent of global income, group membership will remain an important issue as the global economy continues to shift.

The summit’s formal communique articulates clear priorities and cooperative goals. However the agreements endorsed by G20 leaders on Friday were for the most part non-binding pledges. President Obama and other leaders have hailed a new era of cooperation. They must now meet the very real challenge of working together to build a better global financial system.

Discussion
1. The G20 member nations have agreed to require higher levels of capital reserves at banks and other financial institutions. However the communique includes no specific numbers on how high the capital reserves must be. Different countries have diverse approaches to this issue (Japan’s banking system, for example, is traditionally more conservative than those of most European countries). Should the G20 establish a single, one-size-fits-all requirement for capital reserves, or should there be room for variation in the standard?
2. In response to the critique that a 20-member group is too unwieldy to manage global economic discussions, some argue that the real work will be done in sub-committees. What are the potential benefits of allowing sub-committee work within the context of the G20? Are there disadvantages?

Chief IMF economist calls for careful approach to recovery

Sources
Financial Times: IMF warns on ending fiscal stimulus
IMF: Sustaining a global recovery
New York Times: IMF revises up 2010 world GDP forecast

IMF economists are confident that a global recovery has begun. Sustaining that recovery however, will require careful monetary policy and spending choices in countries across the world. In a recent IMF report, chief economist Olivier Blanchard described the unique problems facing economic strategists in the aftermath of severe crisis.

Blanchard argues that just as the United States was the source of the crisis, a healed U.S. economy will be the key to global recovery. He fears that without an increase in external demand to the United States, stimulus measures could carry on for too long and increase the United States’ already significant debt burden. If fiscal deficits are maintained for too long, the stability of the dollar could be called into question, resulting in capital flows out of the U.S. and a potential depreciation of the dollar. Dollar depreciation may not be independently problematic, but if it occurs suddenly, or in a disorderly fashion, it could undermine the recovery by creating uncertainty and market instability. Alternately, Blanchard warns that negative consequences could result from cutting off stimulus funds too soon. The stimulus funds provide the liquidity that makes recovery possible. Allowing the funds to dry up too soon could compromise resurgent growth.

Emerging economies, after feeling the sting of reduced capital flows during the crisis, could be crucial to the U.S. recovery. If private U.S. domestic demand remains weak, the U.S. must hope for an boost in net exports, in order to keep pace with production. Emerging economies that still possess account surpluses, like China, could greatly improve the balance by boosting import demand. Sustained recovery in both developed and emerging economies will also require a rebalancing from public to private spending. Blanchard calls for international cooperation in efforts to sustain the current, “nascent” recovery.

Discussion
1. There are significant downsides to both prolonging stimulus measures too long and to cutting off stimulus funds too early. Is one alternative worse than the other? Should developed economies err on the side of providing too much stimulus funding or too little?
2. Which other emerging economies have weathered the crisis and surfaced with account surpluses? Are they, like China, in position to aid the U.S. recovery through increased import demand?

Reformed IMF lending policies address the needs of low-income countries

Sources
Reuters Africa: IMF to boost funds, revamps lending to poor nations
IMF: The IMF Response to the Global Crisis: Meeting the Needs of Low-Income Countries

For the world’s industrialized economies, the worst of the global financial crisis seems to be over. G8 leaders are contemplating recovery strategies, trying to rein in inflation and hoping to reduce the overall severity of the recession. In low-income countries however, the global economic downturn, along with rising food and fuel prices, threatens to erase years of economic progress.

On July 29, the IMF announced a series of new lending policies to combat the effects of the recession in low-income countries. By adopting the new measures, the Fund has “transformed its relations with low-income countries,” and responded directly to an emerging international consensus on how best to respond to global crisis.

The IMF plans to increase concessional lending to low-income countries to $17 billion by 2014. The increased funding will be accompanied by more generous borrowing limits and by new, flexible concessional financing facilities. For example, the new Standby Credit Facility will address short term needs by allowing countries to tap the IMF specifically when they need funding, rather than in the course of an established IMF program. The Fund also plans to place a strong emphasis on poverty alleviation and growth, implementing programs to protect social and other priority spending. The Fund also plans to freeze interest rate payments on outstanding credit for 60 low-income countries over the next two and a half years, until 2011.

Already, in the first six months of 2009, the IMF has lent or committed about $3 billion, more than in the past three years combined. Their new commitment will increase overall lending to four times historical levels and represents an unprecedented transformation of the IMF’s lending policies.

Discussion
1. The IMF is overhauling its lending policies to meet an immense need. However some of those policies were established as safeguards against problematic lending to already debt-burdened countries. What are the potential costs of these new, flexible lending practices?
2. How can the Fund effectively monitor poverty-alleviation spending? Will other member countries be more willing to subsidize low-cost lending if the IMF is able to scrutinize loan spending?

IMF responds to global crisis with SDR allocation plan

Sources
International Monetary Fund: IMF Executive Board Backs US $250 Billion SDR Allocation to Boost Global Liquidity
Reuters: IMF backs $250 bln plan to bolster members’ reserves
Unlikely SDR allocation will affect inflation
Financial Times: How the Fund can help save the world economy

On August 7, the IMF will vote on a plan to allocate $250 billion worth of special drawing rights (SDR) to bolster reserves in member countries. The allocation would improve liquidity in the IMF’s 186 member countries, and provide $100 billion for emerging economies. In order to pass, the plan requires approval from 85 percent of member countries, which it is widely expected to receive.

World financial leaders have debated such an allocation since the Group of 20 summit in April of this year. A successful allocation of this size could increase confidence in cooperative, international solutions to global recession. IMF Managing Director Dominique Strauss-Kahn hopes the allocation will highlight an expanded role for the IMF as it provides “significant support to its members in these difficult times.”

If the allocation garners the required support on August 7, member countries could receive their allocations, disbursed in proportion to each member’s IMF quota, as early as August 28. Countries are free to lend or exchange their SDRs for hard currency. Many developed countries, which have the largest quotas, are expected to loan or donate their SDRs to their poorer, liquidity-strained neighbors.

Some financial analysts are wary of the proposed allocation, citing concerns about increased inflationary pressure. Isabelle Mateos y Lago, an advisor in the IMF Policy and Review Department believes inflationary problems are unlikely, given the small scale of the allocation relative to the global economy. The proposed $250 billion represents only one-third of a percentage point of global gross domestic product. The IMF has emphasized however, that the allocation should not weaken member countries’ pursuit of prudent macroeconomic policies or postpone necessary policy adjustments.

Discussion
1. The SDRs will provide funds to emerging and poor countries at current, low interest rates. If interest rates should later rise, the possible long-term cost to poor countries would be significant. How should this potential interest liability affect the way developing countries chose to use their SDRs? Should they hold them or spend them?
2. A substantial amount of the allocation will go to developed countries that may not need the additional funds. Are IMF officials right in assuming that countries will donate, trade or loan the SDRs? Should the IMF consider allocating SDRs out of proportion to the IMF quotas?

Nigeria allows foreign bank ownership, aims to acquire more than capital

Sources

Financial Times: Nigeria to lift ban on foreign bank takeovers,
Nigeria’s top banker to boost transparency
Reuters: Nigeria may lift ban on foreign bank ownership

Nigeria, a country of 140 million people, is Africa’s most populous nation and the continent’s second largest economy. There are 24 banks in Nigeria today, operating approximately 23 million accounts. The country’s large population and growing economy make it a massive potential market for retail banking. Large companies also view Nigeria as a desirable, strategically-located base for launching regional operations elsewhere on the continent.

For more than 30 years however, foreign acquisition of more than 5 percent of any Nigerian bank has been subject to approval by the governor of the country’s Central Bank. Foreign banks have also been prohibited from owning more than 10 percent of any Nigerian bank. These limitations date back to the 1970s, a period of strict nationalism under military rule, and have outlived their purpose, according to recently appointed Central Bank Governor Lamido Sanusi.

Recent financial turmoil has caused contraction in foreign credit lines, a stock market collapse and an overall tightening of liquidity in the Nigerian banking system. Sanusi sees increased international participation as an important step toward improving the health of the country’s banks, calling the old rules “unnecessarily restrictive.”

By opening doors to foreign banks, Governor Sanusi hopes to do more than simply shore up Nigeria’s capital base. He aims to improve the banking system’s disclosure requirements and tighten bank supervision, and he’s counting on foreign expertise to advance those goals. In the short to medium-term, Nigerian banks will undoubtedly benefit from capital influx, but exposure to the skills and management strategies of large foreign banks could reap even greater rewards in the future. During this period of recovery and potential growth, Sanusi brings an open perspective to his post as governor of Nigeria’s Central Bank. “What you want to do,” he says, “is open up all the possibilities.”

Discussion:
1. How will continued unrest in Nigeria’s oil delta impact the involvement of foreign banks in Nigeria?
2. Should the Central Bank maintain some lesser degree of control over the bank acquisitions as they occur? Are there risks that offset the sizeable benefits of foreign involvement?

The G8 is Unified on Fragile Recovery, Divided over Policy Details

Sources
Bloomberg: G8 plans to reverse stimulus as rebound signs grow
Reuters: G8 says economies stabilizing, recovery uncertain
Financial Times: Measures to tackle downturn cloud G8 meeting

The Group of Eight (G8), comprised of government leaders from Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States, met in Lecce Italy last weekend to discuss the current economic outlook and monetary policy priorities. The G8 leaders took a united stance on the global economy’s tentative recovery, but remain divided on multiple important issues.

The leaders of G8 member countries disagreed on the timing of economic recovery strategies. U.S. and British leaders argued for a continued emphasis on combating the recession, saying that the recovery is still too fragile for the removal of strong federal support. Canada and Germany meanwhile, insisted that the time is right to begin scaling back mammoth government spending programs, in an effort to avoid inflationary problems. The French economic minister Christine Lagarde hesitated in the middle ground, saying that France should “anticipate” the planning of exit strategies, but that it was too soon to give up the stimulus measures.

G8 leaders also discussed the rift over European stress tests. U.S. and Canadian leaders pressed for increased transparency in European banks. They believe European countries should be doing more to test their banks, and that the results should be made public. European leaders like Germany’s Peer Steinbrück, resist disclosure, citing concern for investor confidence. The vulnerability of the Euro zone’s recovery was highlighted by the release of April’s industrial production numbers. Official figures confirm a staggering 21.6 percent drop from the previous year, the steepest year-on-year decline since Euro zone records began in 1991.

IMF managing director Dominique Strauss-Kahn didn’t sugarcoat his global recovery outlook, calling the current recovery “weak” and insisting that the social effects of the crisis aren’t going to diminish anytime soon. He predicted a recovery in average growth in the beginning of 2010 and estimated the peak in unemployment for more than one year from now, in early 2011. One thing is clear after the international debate of the Italy summit: there is not a lone, correct path out of the mire. Each country will emerge from the crisis in different shape, and at a different pace. The timing and content of recovery plans will vary as widely as the economic landscapes upon which they are based.

Discussion
1. Global financial markets are interconnected. As individual nations attempt to combat the effects of recession at home, does it make sense for leaders to strategize together? What are the benefits and the shortcomings of a global approach to recovery?
2. Who is right in the European stress test debate? Are the European leaders justified in resisting disclosure? What are the potential benefits of the increased transparency?