Europe Attempts to Avoid Negative Long-Term Consequences of High Youth Employment Rates

European Commission: Youth Opportunities Initiative 
Euro Observer: Youth Unemployment Risks 'Social Disaster' 
WP: As Youth Unemployment Soars, France Offers to Let Companies Hire Young People on its Dime
WP: Unemployment Rate Remains Above 11 Percent in Euro Zone
WSJ: In Europe, Signs of a Jobless Generation

Out of concern for the long-term negative consequences related to youth unemployment, the European Union (EU), along with member state governments and a consortium of private businesses have adopted plans to put young people to work in Europe. In July 2012, the unemployment rate in the EU reached 11.3%, signifying 18 million Europeans were out of work. This was the highest level of unemployment in the EU since the euro was adopted in 1999. European companies have hesitated to invest and hire new workers due to weak consumer spending, triggered in part by government payrolls cuts, higher taxes, and volatility in the financial markets. European companies have also hesitated to expand their work forces because strict European labor laws make it difficult to lay off workers during tough economic times.

While the overall unemployment rate in the EU is high, its youth unemployment rate is even higher. In July 2012, the unemployment rate for workers under the age of 24 reached 22.5%, up from an already high 21.3% one year earlier. However, this increase was not uniform across the EU. The youth unemployment rate actually decreased in ten EU member states during July and increased greatly in several countries located in Europe’s economic periphery, including Greece and Spain. During July, the youth unemployment rate reached 53.8% in Greece and 52.9% in Spain, the highest levels in the EU.

A prolonged high youth unemployment rate has many long-term negative consequences for workers and businesses. A person’s job skills and work experience begin to fade rapidly after about six months of unemployment. This means that the longer a person is unemployed, the harder it becomes for that person to find a permanent job at a competitive wage. The EU’s challenging labor markets have already forced many out of work youth to accept part-time and temporary jobs for low wages. However, the International Labor Organization (ILO) believes that if a person accepts such work early in his or her career, that person will have a more difficult time finding permanent employment with proper advancement opportunities later on. The negative impact from working in these low-level positions can hamper a person’s career for up to 15 years according to Ekkehard Ernst, Chief of the ILO Employment Trends Unit. Businesses can also be hurt by sustained youth unemployment in the long run. As unemployed youth move abroad in search of better job opportunities, companies in countries with high youth unemployment rates will eventually be unable to find qualified workers to fill vacancies.

To prevent these long-term negative consequences, the EU, a group of private businesses, and several member states have adopted plans to put people to work. The EU already contributed €3 billion to education and apprenticeship programs designed to reduce youth unemployment in Greece, Ireland, Italy, Latvia, Lithuania, Portugal, Slovakia, and Spain. The EU also recently proposed a Youth Guarantee program, which would help young people find employment or training opportunities within a few months of losing their jobs. Private businesses are also trying to reduce youth unemployment. A task force at the Business-20 Summit, a gathering of global business leaders, called for companies to increase their apprenticeships and internships by 20% over the next year in order to put young people to work. Several companies have already responded. For example, Starbucks recently launched a twelve-month apprenticeship program in the U.K. Finally, individual governments are trying to reduce youth unemployment within their borders. For instance, the Italian and Spanish governments have proposed tax breaks for businesses that hire young workers. In addition, the French government recently proposed to pay up to 75% of the salaries for young workers hired by private companies during the first three years of their employment. France hopes the plan will put 150,000 new young people to work over the next two years.

Despite the best efforts of the EU, private businesses, and individual member states, youth unemployment is likely to continue to be a problem in Europe going forward. Due to the continuing problems associated with the European financial crisis, the ILO forecasts that over the next five years the youth unemployment rate in the EU will decrease only slightly to 21.4% from 22.4% today. Such a prolonged period of youth unemployment could produce a “lost generation” of young workers who suffer long-term career setbacks. It could also negatively impact long-term business productivity and competitiveness in the countries experiencing the highest rates of youth unemployment today. 

Despite Past Success, Africa Faces Concerns for the Future

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

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

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

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

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

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

U.S Corporate Tax Reform on the Horizon

Sources:

Chicago Tribune: The Pros and Cons of Obama’s Corporate Tax Rate Cut

Economist: The Devil is in the Details (and the Politics)

Reuters: Obama Urges Corporate Tax Cut, Closing Loopholes

U.S. Treasury: Remarks by Timothy Geithner

For the first time in twenty-five years, it appears the U.S. business tax code will undergo significant change. President Obama proposed dropping the U.S. corporate tax rate from 35% to 28% in an effort to align America’s corporate tax structure with other developed economies and encourage economic growth in the U.S by incentivizing companies already on U.S to soil remain and making America more attractive in the global competition for business investment and development.

President Obama’s proposal seeks to eliminate subsidies and loopholes in the business tax code that give preferential treatment to certain industries and cost the U.S. government billions in lost tax dollars. The plan eliminates unfair and outdated industry-specific tax breaks and deductions for U.S. companies that relocate abroad. As an economic stimulus, the plan calls for permanent incentives in the form of tax deductions and depreciation benefits for U.S. manufacturing companies, tax credits for companies that return off-shore or overseas operations back to the U.S, and a new minimum tax for foreign earnings (currently foreign earnings are not taxed if they are kept abroad). To encourage small business growth, the proposed business tax code would simplify and reduce taxes on investment in and by small companies. Analysts estimate that the President’s current proposal will cost nearly $1 trillion; however, President Obama claims the elimination of tax breaks will pay for the plan without adding to the deficit.

Proponents of the business tax code revision note that the U.S. corporate tax rate is the second-highest in the world behind Japan and that failing to substantially revise and reduce the business tax code will hinder economic growth and competitiveness. Detractors claim that changing the corporate tax rate will dramatically reduce government revenues and increase the national deficit. Critics also claim the revisions fail to account for cheaper labor markets in other countries that play a role in luring businesses abroad.

While there is a general consensus that the business tax code should be reformed, political posturing during an election year makes it unlikely that Congress will approve President Obama’s proposal. Despite nearly a year and half of work on the proposal by the U.S. Treasury Department, critics are already demanding greater detail while also claiming the proposal is too complicated. Some observers negatively compare President Obama’s proposal to presidential candidate Newt Gingrich’s proposal of a flat corporate tax of 15% with no exemptions or deductions. While the national debate over the exact nature of U.S. corporate tax reform appears to have just begun, there is no disagreement that reform is indeed necessary.

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.

Eurozone Crisis Worsens as Unemployment Rises in the Region

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.

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.

U.S. Unemployment Rate Falls Amidst High Food and Energy Prices

Sources:
FT:US Jobless Claims Fall to 409,000; Mixed US Economic Picture as Jobless Claims Fall Back
Economist: America's Labour Market Perking Up
BLS: Commissioner's Statement on the Employment Situation

Earlier this month, the U.S. Bureau of Labor Statistics released its monthly statement explaining the employment situation in the United States. According to the report, the labor market is showing increased recovery and growth. In April, nonfarm payroll employment, which includes the total number of paid U.S. workers of workers of any business excluding government employees, farm employees, and private household employees, increased by 244,000, compared to its average of 104,000 in the previous three months. Likewise, private-sector employment increased by 268,000 jobs, following an average of 250,000 in the previous three months.

The increase in employment was prominent in service-providing industries, manufacturing, and mining. The manufacturing sector has added 141,000 jobs since the beginning of this year alone. Similarly, retail employment grew significantly in April by 57,000, signaling that consumers are not cutting back on their spending despite high oil prices. Such a rise in employment can considerably boost spending, as individuals who were previously unemployed now have a source of income. These individuals will start purchasing more goods and services, thus increasing spending in the economy. The high demand for products will in turn create more jobs as companies will begin employing more workers in order to meet the demand for their products.

Moreover, there are signs that employment will continue to increase in the months to come. For instance, first-time claims for jobless benefits fell by 29,000, to 409,000 in the week ending May 14, compared to 438,000 the week before. Likewise, continuing claims for benefits also decreased by 81,000, to 3.71 million in the week ending May 7. States such as New York, Wisconsin, and Ohio recorded the largest drops in initial claims, while Alabama, California and Puerto Rico had the biggest jumps in claims.

Efforts to Increase Tourism in The Bahamas Have Met Some Obstacles

Sources:
The Bahama Journal: PM: Time For Action
The Tribune: Hotels Suffer 6.1% Percent Revenue Decline
The Tribune: Kerzner Chief: Rising Cost of Travel to Nassau Must Be Addressed

On April 25, 2011 Prime Minister of the Commonwealth of the Bahamas, Hubert Ingraham, addressed the residents of the nation’s capitol, Nassau, on the island of New Providence. Prime Minister Ingraham made this public address in response to the overwhelming residential and business complaints of the capitol’s residents and business owners to the New Providence Road Improvement Project (“NPRIP”). The project which has sought to modernize the 300 year old city of Nassau, includes the installation of new water mains along the city’s main roads in order to provide residents and tourists with improved water quality and water pressure. Additional road work includes improvement in water sewage and electrical upgrades for the residents and tourists of the city. The project also includes the extension of roads to newly created “open green spaces” and the Government High School. Completion of a grand four-lane highway that services major attractions and sectors of the island, such as popular tourist beaches and the airport, is also part of the program. However, the scope and ambitious nature of the project has began to wear on the residents and business owners of the affected areas, making it difficult for them to traverse to and from work and for customers to access businesses. In his address, Prime Minister Ingraham, assured residents and business owners that future construction of the NPRIP project will only occur during the off-peak hours of 7:00 p.m. to 5:00 a.m. However, the Prime Minister also made clear that construction efforts were a ways off from completion and would require the continued patience and support of Nassau residents and business owners. Besides providing the residents of Nassau with basic infrastructural needs, such as water pressure and improved electrical upgrades, Prime Minister Ingraham states that the modernization and aesthetic upgrades of the city, are needed to improve the tourist industry of the island, which accounts for 50% of Bahamian employment.

At the beginning of this year, the Central Bank of the Bahamas said the islands hotel industry saw a 6.1% decline in revenues due to low occupancy rates and low average daily room rates. Early assessment of the decline, accredited much of the revenue decline to bad weather following the Christmas season and the absence of a “Companion Fly Free” program previously offered by the Ministry of Tourism and member hotels during the months of January and February. Hotels quickly coordinated to re-implement the offer to travelers and saw an improvement in the subsequent month of March and April. However, whether or not the totality, or even the majority, of the decline in hotel revenues can be attributed solely to bad weather and the absence of a travel deal, has come into question with a recent discovery on airline service to The Bahamas.

President of the company that owns the Atlantis hotel in Nassau, George Markantonis, has recently spoken out about the dramatic increase of flight cost to The Bahamas from major origin points like Miami and LaGuardia as well as the dramatic decrease in the number of flights servicing The Bahamas. Flight costs in comparison to 2010, have increased by 28% for January, 41% for February and 27% for March. Additionally, the combined number of flights from all airline carriers servicing The Bahamas, has decreased by 16.3%. Kerzner International, the company that owns the Atlantis hotel in Nassau, is now planning to meet with airlines servicing The Bahamas to discuss the issue. Thus far there has been no comment by The Bahamas Ministry of Tourism on the issue, but with tourism generating 50% of Bahamian employment, it can be expected that one will issue soon. Whether the efforts made by Kerzner International to increase flight accessibility to The Bahamas, or the modernization efforts of Prime Minister Ingraham’s NPRIP project, will improve the tourist economy of Nassau is yet to be seen.

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.

Issues Over the Expedition of the Panama Trade Agreement with U.S. Emerge

Agweek: Trade Agreement Moves Forward
U.S. Dept. of the Treasury: U.S., Panama Sign New Tax Information Exchange Agreement
Hispanically Speaking News: U.S. and Panama Finalize Tax Information Exchange Agreement
Iowa Pork Producers Association: Panama Trade Agreement Ready for Congress
Quad-City Times: Trade Agreements Would Boost Iowa

On April 18, 2011, Panama successfully alleviated United States’ concerns about completing a new free trade agreement between the two countries. Primarily, Panama’s full ratification of the Tax Information Exchange Agreement allowed the Office of the United States Trade Representative to generate a trade agreement that can be presented to Capitol Hill for ratification. Panama’s signing of the Tax Information Exchange Agreement basically assured the United States government that there would be transparency in the tax information they exchange and that the United States would be able to enforce their tax laws, especially with respect to bank accounts in Panama. Further Panama has also taken measures to assure the United States of its increased commitment to strengthening its labor laws and enforcement. All of these actions clear the way for Congress to seriously begin drafting and ultimately implementing a new trade agreement with Panama.

However, despite the readiness of both Panama and the United States to enter into a new trade agreement, the U.S. administration is waiting on two other pending agreements with South Korea and Columbia. Ron Kirk, a United States Trade Representative, explained that while the administration wants the agreements approved, it also wants to consider elements of the Panamanian trade agreement in connection with other possible trade agreements. Specifically the administration is concerned about the possible impact of less expensive imports from these countries and the affect it will have on employees of domestic manufacturers and service firms, who have traditionally lost jobs with the influx of cheap imports. The administration considers this a primary concern under the Trade Adjustment Assistance program, which has sought to reemploy workers who have lost their jobs or have suffered decreased wages and hours due to increased imports.

However United States farmers and agricultural and pork producers have pushed for the administration to quickly produce and initiate a trade agreement with Panama and others in order to expand their exporting base. Among the supporters of an expedited trade agreement with Panama are the American Soybean Association, the American Farm Bureau Federation and the National Pork Producers Council. The support of these organizations makes sense considering the United States exported more than $450 million in agricultural products to Panama in 2010, double the amount it exported in 2005. Additionally, according to some economists the Panama trade agreement will add 20 cents to the price of each hog on the market and expects that pork exports to Panama will increase by about $16 million per year. However the number of jobs created in the pork industry by this agreement, is estimated to be only 200.
Whether the increased exporting profits made from the Panama Trade agreement will be able to compensate for possible job losses due to increased cheap imports, is a heavy concern for the administration, and one they have determined requires careful and slow consideration. However, as the U.S. administration halts on implementing a trade agreement with Panama, Panama has already entered into several other trade agreements with Chile, Singapore and Taiwan. The fear among supporters of an expedited trade agreement between the U.S. and Panama is that by the time the U.S. decides to enter into an agreement with Panama, other exporters will have a competitive advantage over U.S. firms.

Are Improved Economic and Political Relations in the Near Future for Cuba and the United States?

FT: Cuba Libre
FT: US-Cuba Ties Grow but Politics Remain Prickly
Washington Post: Maryland Contractor Alan Gross Draws 15-Year Sentence in Cuba

In the aftermath of the global financial crises, Cuba has struggled between its Communist ideology and the need to craft a sustainable economy. Hard hit by the food shortages and increased oil prices and a sobering national debt of $20 billion, President Raul Castro, has made some radical economic and political reforms, all of which point toward a more market based economy and a more democratic government.
Some critics have balked at the depth and scope of the economic reforms implemented by President Castro, wondering whether they will lead to nationwide unrest and protest as citizens make the transition from government funded payrolls to a more market based economy. The reforms include cutting more than 1 million workers from unemployment benefits. The expectation is that those persons cut from unemployment will find jobs as private farmers or in small start-up businesses. Currently the state employs 85 %of the 5 million people in the Cuban workforce.

Additional economic reforms include measures to end state administration of companies in favor of regulation through taxation. The hope is that this will increase foreign investment in “special economic zones.” Additionally, the state has relinquished state land to more than 140,000 small farmers to grow and sell their produce in small roadside kiosks, a practice that would not have been allowed more than a year ago. The government has also issued roughly 200,000 self-employment licenses, resulting in the crop up of small business along Cuban city streets.

Although these seemingly democratic and market based reforms have been made, critics contend that the intent behind them is convoluted. President Castro himself said these reforms were made to ensure the very survival of the “revolution” and a Communist ideology. Whether these reforms will actually allow a Communist ideology to persist, or usher in a new political and economic era for Cuba is yet to be seen. Whatever the result, the outcome will undoubtedly play a role in U.S.-Cuban relations, which have remained strained since the Cold War.

However, independent of this outcome, or perhaps in response to the promise of a less strained relationship between itself and Cuba, President Barack Obama, has made reforms toward making the trade embargo on Cuba more lenient. Last year, the United States exported roughly $366 million in food to Cuba, making Cuba the fourth largest source of United States food exports and comprising a third of Cuba’s annual imports. Additionally 70,000 United States citizens are now allowed to enter Cuba for “educational or charity purposes.” However despite the more relaxed political and economic reforms made by both sides, the formation of a healthy and well-meaning relationship between the two countries is still a ways off.

This is perhaps best demonstrated by the recent arrest and conviction of US aid worker Alan Gross. Gross entered Cuba under the more lenient reforms allowing US citizens to travel to Cuba for “educational and charity purposes.” Barely able to speak Spanish himself Gross went to Cuba on behalf of his employer, Development Alternatives, which had won a $6 million government contract to “promote democracy in Cuba.” Most of his work consisted of distributing computers and satellite equipment to Cuba’s Jewish community. He was found guilty by the Cuban court of working on a subversive United States’ project to undermine the country’s communist system. The result has caused United States’ diplomats to issue a warning to Cuba, stating that bilateral relations will not improve while Gross is detained. Whether the more lenient reforms made by both countries towards each other will actually lead to improved relations, or to more episodes for contention, as demonstrated by the Alan Gross situation, is yet to be seen.

Fuel Prices Set Off a Chain of Protests and Strikes in the Dominican Republic

Sources:
WTO: Trade Policy Review Body - Trade Policy Review - Report by the Secretariat - The Dominican Republic – Revision (IV. Trade Policies by Sector)
EIU: Dominican Republic Regulations: Hydrocarbons Law is Finally Passed
Dominican Today: On Fare Hike Threats, Dominican Republic’s “Owners” Again Get Major Perks
Diario Libre: Gasoline Sales Will Be Suspended Today by Anadegas
Diario Libre: Government and Anadegas Sign Agreement
Dominican Today: Most Fuels Will Cost More
Dominican Today: Unions Propose Talks to Raise Minimum Wage and Beyond
El Nacional: Dicen Arreciarán Protestas el Lunes
El Nacional: Suben Todos Combustibles Menos GLP; alza 0.80 a 3.7

This week, President of the Dominican Republic, Leonel Fernandez, met with transport business and union leaders to address their resolution to increase transportation fares in response to the rising price of fuel. In an effort to dissuade transport union leaders from increasing fare prices, President Fernandez promised a bill amending the Hydrocarbons Law. The bill would identify new sources of funding for transportation workers’ benefits, including a propane gas subsidy for workers that did not already have one. Transportation leaders agreed to keep the current transportation fares if the President kept his side of the agreement.

Whether this agreement will continue to suffice for transportation unions is yet to be seen. Just days after the agreement between President Fernandez and the transportation unions, gasoline retailers (under the union “Anadegas”) began striking to protest the failure of government to raise gasoline prices. Under the Hydrocarbons Law the Minister of Industry and Commerce sets and adjusts the price for hydrocarbon fuels (including gasoline) according to the fluctuating price of oil in the international market. However, gasoline retailers contest that this formula for setting prices fails to account for domestic inflation, which may not correspond with the international price of oil. Gasoline retailers point to the number of gasoline retailers that have gone out of business in the past 10 years as an indicator of how the current prices for gasoline and other fuels are insufficient to cover their operating costs, placing them on the verge of bankruptcy.

The number of gas stations in the Dominican Republic has declined from 768 to 640 over the past 10 years. In contrast, businesses offering Liquid Petroleum Gas (“LPG”), an alternative fuel for vehicles, has grown by 200%, from 320 locations to 925. This increase for LPG providers is attributed to an increase in the number of vehicles that use LPG instead of gasoline. In response to the strike, the Ministry of Industry and Commerce agreed to meet with the gasoline retailers’ union. The following Friday, the Ministry of Industry and Commerce announced that beginning Saturday, February 12, there would be a price increases on every fuel except LPG, including diesel. Although the propane subsidy promised to the transportation unions by President Fernandez will not be affected by the price increase, since propane is an LPG fuel, the diesel subsidy already given to transport workers may be devalued by the price increase on diesel fuel.

Yet, just as President Fernandez and the Ministry of Industry and Commerce avoided a transportation price hike and the continued strike of gasoline retailers, a national strike over the country’s minimum wage seemed to loom ahead. Undoubtedly encouraged by the increase in fuel prices, peasants, bus passengers, and various union organizations say they plan to protest to demand a corresponding increase in the minimum wage.

Just days before the gasoline retailers’ strike, the National Salaries Committee (“CNS”) had refused to set a minimum wage higher than RD$8,465 (roughly US$225), although the Dominican Republic Central Bank stated RD$10,407 was the salary needed to cover the cost of basic staples. Further, labor unions proposed a wage increase larger than the amount stated by the Central Bank, to compensate for an anticipated price increase in fuel and other staples. Before an agreement could be reached, the announcement on increased fuel prices was released. It is yet to be seen whether the demands of labor unions and others for an increase in the minimum wage will be met with as much success as gas retailers achieved this past week.

Discussion:
1) Should the National Salaries Committee raise the minimum wage to the amount stated by the Central Bank? If so, should the increase go beyond the amount stated by the Central Bank to compensate for price increases and inflation?
2) Should the Central Bank be trusted to set the price for minimum wage? Likewise should the Ministry of Industry and Commerce be trusted to set the price for hydrocarbon fuels? Or should the decision for setting both the minimum wage and price require an input from affected unions?

The Countries of the “Northern Triangle” Rise as the New Launch Pad for Drug Distribution in Central America

Sources:
The Economist: Organized Crime in Central America: The Rot Spreads
The Economist: El Salvador’s President: So Far, So Good
Federation of American Scientists: U.S.-Mexican Security Cooperation: the Mérida Initiative and Beyond

The Central American countries of El Salvador, Guatemala and Honduras have in the past two years risen to the forefront of the war on drugs. With harsher crackdowns on the drug cartels in Mexico, the cartels have looked to launch their drug supplies from nearby locations with less police pressure. The major source of cartel pressure in Mexico has come from the Merida Initiative, a “counterdrug and anticrime assistance package” launched in 2007 between the United States and Mexico. The Merida Initiative has provided a total of $1.8 billion in the form of arms and police training for various countries throughout Central America and the Caribbean, and $1.5 billion of this funding has gone directly to counter the drug cartels in Mexico. Ten years ago this would have been a good strategy given that Mexico was the largest “staging post” for drug distribution to the United States. However, with the recent pressures placed on the cartels in Mexico, they have simply moved south into the countries of Honduras, El Salvador and Guatemala. Over the past ten years these three countries have simultaneously grown into the major launch pad for drugs imported from Columbia and Venezuela into the United States and have achieved the highest rates of murder in the world. As such, these countries are now notoriously known as the “Northern Triangle,” a region fraught with poverty and violence.

The “Northern Triangle” has been fertile ground for the Mexican drug cartel— many point to the dire poverty of these countries as the major reason. The average income in these countries is near $2,700 per person, barely a third that of Mexico. Amid the global financial crises, El Salvador’s economy shrank by 3.6%, one of the biggest drops in the region. The country is not expected to reach its pre-recession norm until 2012 because its economic growth is largely dependent on the growth of the United States, which has been slow. Considering the $2.1 billion worth of drugs, arms, and cash seized earlier this year in Guatemala, equal to roughly the same as 5% of the country’s GDP, it is not hard to see why many in financial distress have looked to join with one of the few lucrative ventures in their countries. Mexican mafias, “Zetas” and “Sinaloa,” have found willing and lethal new recruits to ferry drugs, extort, and kidnap, in the countries’ 70,000 street youth gang members known as “Maras.”

Honduras’s Attorney-General Roy David Urtecho, recently stated “Maras” were seeking “to establish themselves as legitimate traffickers instead of street-level thugs.” The 2009 coup in Honduras broke cooperation efforts with foreign states and suspended foreign aid into the country, aid and cooperation necessary to combat organized crime, making Honduras an easy target for increased trafficking. In 2009, 154 drug trafficking flights were logged, up from almost none in 2005. Add to this the assassination of Honduras’s top anti-drugs official in 2009, which seems to have been a Sinaloa hit, and the prospect of these countries freeing themselves from the drug trade appears grim. However the recent adaptation of social, verses militant approaches to countering drug trafficking, may be the solution these countries have been looking for. President Funes of El Salvador initially took a hard-line approach to the drug trade by ordering the army into the streets and banning gang membership, but the effect of this tactic tapered. However, Funes was successful in building other social programs in the country, an approach that could indirectly diminish the strength of the cartel. El Salvador, for example, now has free basic education, and disadvantaged children are given school uniforms and shoes. This year an additional 22,000 children have enrolled in school, which means 22,000 fewer children are likely to become “Maras.”

President Obama appears to believe in the same “social” strategy for curtailing the drug trade. As the term for the initial Merida Initiative draws to an end, President Obama has proposed a new “four-pillar” strategy. Although the first two pillars consist of much of the same tactics as the original initiative, the last two focus on “(3) building a 21st century border between the United States and Mexico, and (4) building strong and resilient communities.” These last two pillars seek to increase the secure flow of people and goods between the United States and Mexico and to improve conditions in cities prone to cartel violence through social programs and alleviating poverty. Although initial implementation of the last two pillars will largely be in Mexico, hopefully the combined efforts of presidents from the United States, the countries of the Northern Triangle and Mexico will give this strategy greater success than initiatives of the past.

Discussion:
1) Given the assassination of drug officials in Honduras in 2009, are efforts to counter drug cartels by ordering armies and police into the streets a good strategic approach to the problem, or does the approach just lend to more violence?
2) Can social programming be justifiably funded by and through the Merida Initiative, an initiative specifically started to counter the “war on drugs?”

South Africa Must Address Gender Inequalities In Private Employment Sector Before It Can Meet Millennium Development Goals

Sources:
The Economist: Women in South Africa Walking Several Paces Behind
Commission for Gender Equality
BBC News: Global Health Declaration – Ten Years On
United Nations Development Programme: South Africa Millennium Development Goal 3

Leaders from across the globe gathered together around a decade ago and to develop the Millennium Development Goals (MDGs). The MDGs are a set of eight goals for the development of social and economic programs across the world. World leaders hoped that countries would be able to satisfy all of the goals by 2015. One of the MDGs http://www.blogger.com/img/blank.gifthat world leaders committed to was the promotion of gender equality and the empowerment of women. Ten years after the MDGs announcement sub-Saharan African nations, even more developed ones such as South Africa, are still struggling to reach the MDGs.

South Africa, in theory, should be leading the African nations when it comes to equalizing the playing field between men and women. South Africa’s Constitution, written in 1996, specifically prohibits sexism and equates it with racism. However, even with such a strong government textual commitment to women’s rights, the country still needs to make significant improvements in order to fulfill the MDGs.

Since the implementation of the MDGs, South Africa has progressed towards the goal of gender equality. When evaluating the number of women in leadership roles in the government, South Africa is impressive. Forty percent of its Parliament members are women, which is the third highest proportion in the world. Women also make up 43% of all Cabinet members and 40% of all local government leaders.

While South Africa exemplifies equality in the government sector, it is struggling to achieve gender equality within its private sector. Despite the Employment Equity Act Parliament passed over a decade ago, white men still dominate South African private companies. The Employment Equity Act mandates that companies with over 50 employees had to hire and promote women, blacks, and the disabled in proportion to their representation in the South African population. The Women’s Business Association reports that only 10% of board members and directors are female. Women represent almost one half of the working population, but most females work in domestic services. In addition, women only get paid about a third of what men receive from employers. Women in South African are also much more likely than men to be unemployed. If South Africa is dedicated to meeting the MDG of establishing gender equality, it is obvious that the country must do something to address the inequalities in its private employment sector. Even if the nation acts, there is a question of whether the five years remaining on the MDG timeline is long enough for South Africa to reform the disparities in its private employment sector.

Discussion:
1.What can South Africa do to fix some of the gender inequalities in the private sector?
2.Why do you think South African women have thrived in the public sector but not the private sector?

Workers’ Strike Causes Problems in South Africa

Sources:
The Wall Street Journal: Strike Hampers South African Growth
The Economist: South Africa's Economy: How It Could Do Even Better
The Economist: South Africa's Strikes: After the Party... Comes an Almighty Hangover
Google Finance Currency Converter

South Africa is currently a country in crisis. A strike of around 1.3 million public-sector employees, which started on August 18, is causing chaos in the country. Services such as hospitals and schools are closed due to the strike. The walkout is costing the South African economy an estimated 1 billion rand ($138,300,000) per day. The public-sector workers are demanding an 8.6% increase in wages, as well as a 1,000 rand ($138) housing allowance. The South African government argues that the wage increase, which is double the inflation rate, is too costly. The government’s “final” offer to the workers was a 7% increase with a 700 rand allowance for housing, which the union refused to accept.

At this time, the biggest threat to the South African economy is the potential actions of the country’s largest union, the Congress of South African Trade Unions (COSATU). In trying to persuade the government to give in to the public-sector workers’ demands, COSATU is threatening to put all of its members, including mining and manufacturing workers, on a sympathy strike. A strike of COSATU’s two million members would exacerbate the existing struggles of the South African economy. Sympathy strikes have already been a problem for the South African government. Despite a court order, on August 24, thousands of municipal garbage collectors held a one-day sympathy strike which led to problems with refuse collections throughout the country’s major cities.

COSATU holds considerable power in the public sector and has consistently arranged raises for public-sector union workers that were well above inflation rates. In fact, public-sector workers’ wages have increased 34% over the last five years. Recently, the government has been trying to draw attention to the problems that consistent wages increases are causing. The country’s Finance Minister, Pravin Gordhan, addressed governmental concerns about the wage increases last February. Gordhan argued that the government could no longer handle the high wage increases, citing the last year’s increase of 13% as being the source of substantial stress on the country’s budget. If the government acquiesces to the wage increase demands this year, the government will be over budget by almost 8 billion rand. Government officials state that more money used to pay public-sector wages will mean less funds will go to essential services, such as road construction, education, and health care.

The strike has already been a significant burden on South Africa’s lower class, many of whom are already unable to pay for private education or health care. If the government agrees to the union demands, a significant portion of the country’s budget will be used towards wage increases for the public sector. This will make it increasingly hard for the government to address the country’s unemployment problems. Only about 40% of the country’s working-age population has a job, which is strikingly low for middle-income emerging markets like South Africa’s (most are around 60-75%). The official unemployment rate is 25%, but experts estimate that it is closer to 36% if those who have given up looking for jobs are counted. Analysts think that the government will give into union demands, but it might not be best option for the South African economy and people, many of whom will not have a job much less a pay increase.

Discussion Questions:

1. Should the South African government agree to the public-sector workers’ increased wage demands?
2. In what other ways might the increased wages hurt the South African economy? Is there any way the payment of increased wages in the public-sector might help the economy?