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.

US Dollar Will No Longer Be A Dominant International Currency By 2025

Sources:
FT: World Bank Sees End to Dollar’s Hegemony;
World Bank: Emerging Market Growth Poles are Redefining Global Economic Structure, Says World Bank Report

According to a recent World Bank report, the US dollar will no longer be a single, dominant international currency by 2025 as the economic power shifts to emerging market economies. Instead, the euro and the renminbi will likely emerge as the international currencies along with the US dollar in a “multi-currency” system. The report, “Global Development Horizons 2011-Multipolarity: The New Global Economy,” expects that by 2025, six emerging market economies (Brazil, China, India, Indonesia, South Korea, and Russia) will account for over half of overall global growth. The report also expects that the average GDP growth rate of emerging market economies will be 4.7 percent between 2011 and 2025 while the average GDP growth rate in advanced countries will be 2.3 percent in the same time frame.

As the power of global growth shifts to the emerging market economies, this will bring several changes. For example, robust economic growth and strong domestic demand in emerging market countries will benefit low income countries through increased foreign investments and trade. There will be much more cross-border merger and acquisition deals and “South-South FDI,” said Mansoor Dailami, lead author of the report and manager of emerging trends at the World Bank. Also, the multipolar world economy will no longer be dominated by “established multinationals,” and emerging market corporations will become more active and influential as well, having better access to global bond and equity markets. Justin Yifu, the World Bank’s chief economist, emphasized that to keep up with these changes, international financial institutions would have to change fast.

The report also pointed out several challenges emerging market economies would face to sustain high growth rate. Emerging market economies need to grow by enhancing productivity and strengthening domestic demand rather than depending on exports and technological transfers. Also, emerging market economies, especially, China, Indonesia, India and Russia, need to reform their domestic institutions while Brazil, India, and Indonesia face challenges of developing human capital and providing quality education.

Lastly, the report emphasizes that multilateral institutions need to provide assistance to developing countries and low income countries as the international monetary system moves to a multi-currency system. Multilateral institutions can provide technological assistance, aid, and policy advice so that those countries can adequately respond to new challenges and opportunities.

New Derivatives Rules Would Hurt Competitiveness of US Banks

Sources:
FT: Derivatives Reform Will Not Prevent Next AIG ; Lawmakers Warning on Derivatives Rules; Banks Anxious Over Fed Regulations

A group of New York lawmakers recently sent a letter to US financial regulators including the Federal Reserve and the Commodity Futures Trading Commission, warning that a newly proposed rule on derivatives under the Dodd-Frank Act would hurt the competitiveness of the US financial institutions. The lawmakers also wrote in a letter that the rule would be “inconsistent with Congressional intent.” It is a margin rule that the lawmakers make an issue of, which applies to US banks as well as their foreign subsidiaries located outside the US. Specifically, the rule requires parties to some derivatives transactions to post cash or securities as collateral or “margin” in order to assure their obligations. Under this rule, foreign subsidiaries also have to collect collateral from their foreign clients.

Unless foreign regulators do not adopt a similar approach, the rule would put foreign subsidiaries of US banks in a disadvantageous position, said the lawmakers. While the lawmakers acknowledged that the new rule would provide important safeguards and make the US financial system more resilient to another financial crisis, they argued that it should not harm the competitiveness of non-US subsidiaries of US banks. Those who oppose express their concerns that under the new rule, more clients will opt to transact with non-US financial institutions in Europe such as Deutsche Bank and Barclays Capital which are not subject to the same rule. Opponents also worry that the rule would tie up capital that could be used for investments and prevent investors from making rational risk management decisions.

On the other hand, those who support the rule emphasize that the margin rule is essential as a measure to prevent future financial crises. Proponents also argue that since exempting foreign subsidiaries of US banks from the margin requirement would put US banks in a disadvantageous position, the same rule should apply both to US banks and their foreign subsidiaries. The US financial regulators defend the extraterritorial application of the rule by saying that it is necessary “because the US parent company’s ownership of the subsidiary is likely to expose the US parent company, as a result of legal, contractual or reputational factors, to the risks of the foreign subsidiary’s derivatives activities”.

Responding to the critics of the rule, US financial regulators have said that the margin rule has not been finalized yet and the problem of regulatory arbitrage could be resolved if regulators in foreign jurisdictions also adopt a similar rule.

Cuba Attempts to Depart From Its Centralized Economy Through Major Economic Changes

Sources:
The Miami Herald: Cuba Publishes List of Proposed Economic Changes
Guardian Media: Raul Castro has Launched a Campaign of Genuine Renewal and Redirection
Guardian Media: Cuba's Theater of the Absurd
BBC: Cuba's Economic Changes

Last week, the Cuban government announced various broad goals in a 313-point economic plan. The plan details Cuba’s effort to revive and shift its economy from a state-controlled Communist system, in which the government controls every aspect of the economy, to a more market-based economy where citizens will be allowed to participate in private enterprise and sell their products and services in the market. The economic plan was unanimously approved at the Communist Party Congress, but remains for the Cuban National Assembly to work out the specifics and translate the guidelines into law. The plan purports to allow Cubans to purchase and sell homes, a practice which currently only takes place in the black market. Today, the only way for Cubans to acquire new property is through an exchange of their homes, in which multiple families must coordinate the transactions and money is often exchanged under the table. However, the details of how the purchase and sale system will work and the restrictions or taxes to be applied have not yet been revealed.

Another important feature of the plan is the establishment of private cooperatives. The new guidelines will allow Cubans to form cooperatives that would function as mid-size companies, capable of hiring private employees. The cooperatives would also be allowed to determine the salary of each worker according to their productivity. Currently, such entities have only been allowed in the agricultural sector. Additionally, for the first time, Cubans will be allowed to hire employees that are not family members.

The guidelines will also permit the sale of cars between citizens. Under current law, Cubans can only obtain cars by purchasing them from the government and with special permission. Cubans often circumvent such restrictions by illegally selling their cars in the black market, while claiming to government authorities that the transaction is simply a lending of the vehicle. Still, the change will be welcomes by Cuban citizens who hope to upgrade their cars to more efficient ones without fear of breaking the law. Other guidelines included in the plan are a reduction of travel restrictions for Cuban residents, an elimination of the dual currency system, the legalization of the sale of construction materials at unsubsidized prices, the promotion of the fishing industry, and the connection of sugar prices paid to Cuban producers to those prices paid on international markets.

Moreover, despite the government’s official announcement, there are various conflicting views about what these purported changes will actually mean to the Cuban people. On the one side, many welcome the changes as a genuine renewal and redirection of the economy. On the other side, some Cubans are wary as to how these changes will actually be implemented and whether they will truly lift the Cuban economy out of its crisis.

SEC's New Rules on Credit Rating Agencies

Sources:
WSJ: SEC Aims to Tighten the Rules on Raters
Bloomberg: SEC Credit-Rating Rules, 401(k) Bill, WTO’s Airbus Aid Ruling: Compliance
SEC: SEC Proposes Rules to Increase Transparency and Improve Integrity of Credit Ratings

On Wednesday, the Securities and Exchange Commission (SEC) proposed more restrictive rules on credit rating agencies (CRAs). CRAs rate the “creditworthiness” of debts as well as financial institutions holding debts. During the financial crisis, CRAs were criticized for contributing to the housing bubble by providing inaccurate and inflated ratings for mortgage-backed securities. Congress, in passing the Dodd-Frank Wall Street Reform and Consumer Protection Act, intended to correct such problems, and the SEC’s new rules would implement relevant provisions of the Act. The SEC’s proposed rules aim to “strengthen the integrity and improve the transparency of credit ratings,” said SEC Chairman Mary L. Schapiro.

Specifically, new rules would require CRAs to disclose more background information explaining their ratings. In the case of ratings on asset-backed securities, CRAs would have to submit any information provided by a third-party firms which conduct a review of the underlying assets. Also, the new rules require CRAs to file an internal control report with the SEC every year. Additionally, the new rules propose measures to prevent conflicts of interest problems. CRAs and issuers of debts have close relationships as most CRAs get fees from issuers and CRAs provide advice for issuers regarding how to receive high ratings. Under the new rules, for example, CRAs are not allowed to issue a rating if their employee who is involved in the sales of a debt also plays a part in assigning a credit rating for the debt. If a CRA violates such rules, the SEC can suspend or revoke the CRA’s registration with the SEC.

Critics say that the new rules still do not require CRAs to provide sufficient information about the ratings. In addition, some point out that the rules would not solve the fundamental problems of an “inherent conflict” that arise from close relationships between CRAs and issuers. As for the internal control report requirement, Kathleen Casey, one of the SEC commissioners, said that small-sized CRAs might find the requirement onerous and the requirement could discourage such CRAs from registering with the SEC, reducing competition.

The new rules will be finalized after the 60-day comment period. Upon a final approval by the SEC commissioners, the rules will apply to the CRAs registered with the SEC. Currently, 10 CRAs including Moody’s Corp. and Standard & Poor’s are registered with the SEC.

IMF Warns Europe’s Sovereign Debt Crisis Could Spread to Other Parts of Europe

Sources:
Guardian: Fix Banks to Avoid Eurozone Meltdown, IMF Warns
IMF: IMF Calls for Strengthened Policy Response, Stronger Financial Integration to Bolster Europe’s Recovery
WSJ: IMF Weighs Extending Greek Repayments

Last week, the International Monetary Fund (IMF) published the latest Regional Economic Outlook for Europe. The IMF expects that economic growth in Europe will not be fast “but still solid and sustainable.” It estimates that economic growth for Europe will be 2.4 percent and 2.6 percent in 2011 and 2012, respectively. In the case of emerging market economies, they are expected to grow at 4.3 percent both in 2011 and 2012. However, the IMF also warns that sovereign debt problems in Greece, Ireland and Portugal could spread to “the core euro area, and then onwards to emerging Europe,” calling for comprehensive and strong policy actions to restore confidence and fix vulnerabilities in the financial sector and accelerate reform efforts.

As banks in other countries in Europe hold substantial amounts of bonds of the governments with sovereign debt problems, “a shock to confidence” could spread to other European countries, said the IMF. According to Morgan Stanley, BNP Paribas in France holding around €5billion of such bonds would be hit the hardest. In order to contain contagion risk, the IMF emphasized a need to strengthen the banking system in Europe and it also said that the 2011 EU-wide bank stress test will be a great opportunity to identify and fix weaknesses in the banking sector. Antonio Borges, Director of the European Department said that while systemic risk in the European banking sector had been reduced, banks in Europe would have to raise additional capital and accelerate their efforts to consolidate. Also, the IMF called for more financial integration, arguing that the incomplete financial integration as well as the lack of effective institutions to handle cross-border problems at the regional level had contributed to the worsening of the financial crisis in Europe.

As for Greece, the IMF showed optimism, saying that there would be no possibility of a default and that any type of debt restructuring would be necessary at this point. Mr. Borges said, he did not think that restructuring would provide a “miraculous” solution. Instead, Mr. Borges pointed out that the Greek government “has an extraordinary portfolio of assets” and it can raise additional cash through privatizing such assets. Currently, the Greek government is in the process of privatizing its assets amounting to €50 billion. Also, the IMF said that Greece will likely meet it deficit target of 6.2 percent of gross domestic product in 2012.

Brazil’s Economic Success leads to Inflation

Sources:
FT: Brazil resolute on rate rises to calm inflation
WSJ: Price of Success in Brazil: $15 Movies
IMF: Watching Out for Overheating in Latin America
CIA: World Fact Book, GDP Real Growth Rate

Over the past few years, Brazil’s Gross Domestic Product (GDP) has steadily increased, going from 3.70% in 2006, to 5.10% in 2008, and reaching 7.50% in 2010, making Brazil’s economy one of the most stable, and the country itself one of the wealthiest in South America and the western hemisphere. However, this success has not come without a price, as Brazil’s cities have become some of the most expensive in the world. The Wall Street Journal reported that Brazilians pay the equivalent of $15 for a movie, which is more than New Yorkers pay. Likewise, the jump in the price of food, transportation, and land has resulted in the inability of millions of poor Brazilians to maintain their standard of living as their income remains unchanged but the price of items continue to rise.

One reason for these rising prices is Brazil’s increasing inflation rate, which currently stands at 6.4%. In a statement issued earlier this month, President of Banco Central de Brazil, Alexandre Tombini, stated that Brazil will continue to increase interest rates for as long as necessary in order to drive inflation down to the target rate of 4.5% by 2012. The government continues to use conventional monetary policy in its effort to reach this goal. Such policy includes increasing taxes on lending and financial transactions in order to dissuade the flow of “hot money,” or speculative investments,into Brazil from abroad. “Hot money” occurs when investors attempt to ensure high short-term interest rates by taking their money from low interest rate yielding countries into higher interest rates countries as a way to obtain higher returns. Also, it can lead to lower savings rates and cause rapid overvaluation of the currency. These type of investments are particularly troublesome because as investors pull their money out of one country, in an attempt to profit off the exchange rate, it can shock the economic system and cause instability in that country. Likewise, speculative investments can lead to bubbles in certain economic markets such as real estate.

Two weeks ago, Brazil’s central bank increased interest rates by twenty-five basis points, to 12%. The increased interest rates will help to reduce the growth of demand in the economy, which in turn will slow growth and reduce inflation. Higher interest rates will reduce consumer spending by increasing the cost of borrowing and making it more attractive for citizens to save money. Although it is expected that such measures will decrease the month-on-month inflation starting as early as this month, the annual inflation rate might still continue to rise in comparison to the lower inflation rate of the corresponding period in the previous year. Nonetheless, for the time being, there is no indication that the Brazilian government will implement harsher capital controls such as the imposition of “quarantine on foreign investment” which, if implemented, would force investors to deposit a portion of their money with the central bank for a period of time.

Brazil is not the only country facing inflation and the risk of an overheating economy. In a report issued earlier this month, the head of the International Monetary Fund’s (IMF) Western Hemisphere Department, Nicolas Eyzaguirre, warned about the overheating risks facing many countries in Latin America.Rapid economic growth leading to an increase in demand and high levels of inflation are the main causes of an overheating economy. The problem is that if these overheating risks are not addressed, they can eventually lead to a recession. There are early signs of overheating problems in Latin American where countries that are facing rapid economic growth coupled with an expanding domestic demand, which has already led to inflation in much of the region. Although many central banks are increasing interest rates in order to deal with this problem, it is likely that more rate increases will be necessary in the future to contain much of the demand pressures.

Many Banks in Europe Face Funding Difficulties

Sources:
Economist: Cutting It Fine
Bloomberg: European Bank Funding Threatened as Basel III Meets Solvency II
FT: Banks Endorse Option of Creditor ‘Bail-in’; Brussels to Target Bondholders on Bail-outs

In many European countries, the maturities of bank debt have shortened dramatically in 2011 compared to 2006, according to data provided by Dealogic. In particular, in countries having sovereign-debt problems such as Greece and Portugal, the maturities of bank debt have fallen more sharply. In other countries such as Spain and Italy, banks also face funding difficulties and have been issuing more short-term bonds or paying higher yields. In the case of Italy, banks pay higher yields on their bonds by 1-1.5 percentage points than banks in France and Germany. Having more short-term funding is worrying because it makes banks vulnerable to a sudden liquidity dry-up in short-term funding markets as it happened during the recent global financial crisis.

On the other hand, banks in some countries including France and Germany have been able to improve their funding situations, issuing more long-term bonds during the same time period. In France, for instance, banks’ weighted-average debt maturity in 2011 increased over eight years from around six years in 2006.

However, most banks in euro-zone countries will likely continue to suffer from funding difficulties in the near future as new regulations pose additional challenges. The new Basel III rules require banks to hold more capital. McKinsey & Co. estimates that banks in euro-zone countries will have to raise additional €2.3 trillion ($3.4 trillion) in long-term funding. However, other two regulations imposed by European regulators may make it even harder for banks to sell long-term bonds. First, under the Solvency II rules, insurance companies are required to hold more capital against corporate bonds when they purchase longer-term bonds. Insurance companies are the biggest purchasers of bank bonds in Europe, holding about 60 percent of banks’ debt. The Solvency II rules may discourage them to hold longer-term bonds. Second, European regulators have proposed a regulation which requires bondholders to share the losses of failing banks. Under the proposed rules, bondholders will be first asked to reduce the value of their bonds before taxpayers bail them out.

Diverging Views on Greek Debts

Sources:
Economist: A Question of Maturity; Latin Lessons
FT: Jump in Greek Yields Spurs Restructure Talk
WSJ: Greek Debt Talks Widen Divisions in the Euro Zone

In May 2005, the euro-zone governments and the International Monetary Fund (IMF) provided a bailout program of €110 billion ($162.9 billion) for Greece, hoping that Greece will be able to reduce its budget deficit and repay its public debts in full. Recently, however, yields on the Greek bonds, which are inversely related to bond prices, sharply rose to over 20 percent, reflecting investors’ fear that restructuring Greek debts is inevitable. Also, Greece’s budget deficit remained still high (10.5 percent) in 2010. While the German government is now open to a restructuring of Greek debts, other European policymakers including the European Commission and France still firmly oppose any type of restructuring, arguing that it will lead to the belief that Ireland and Portugal will follow the same path.

What German officials suggest is a voluntary debt restructuring by extending the maturity dates without a “haircut,” a debt reduction. In that case, Greece will have more time to repay its debts and avoid borrowing more loans from the euro-zone governments and the IMF. However, there is a concern that the extension of the maturity dates alone will not fundamentally solve the Greece’s insolvency problem. The German approach does not aim to restore Greece's solvency, but it is politically motivated to reduce the taxpayers’ burden to provide additional loans to Greece. If no measures of a debt restructuring or a haircut are introduced, taxpayers in euro-zone countries will have to pay about €142 billion by the end of 2013, according to David Mackie, an economist at J.P. Morgan. However, if the maturity dates of Greek bonds that come due in 2012 and 2013 are extended, taxpayers’ burden can be reduced to 77 billion.

Countries in Latin America offer examples of how to solve sovereign debt problems in Greece. In 2003, Uruguay negotiated its debts with its creditors and extended the maturity dates by five years without reducing the size of its debts. Such option was successful in that Uruguay was able to avoid default on its debts and minimize losses on creditors. However, the problem Greece faces is worse. Greece holds debts (145 percent of GDP at the end of 2010) twice the size of the Uruguay’s and its economic growth prospect is not as strong as Uruguay’s. According to the Economist, Greece will ultimately need to reduce its debts as Mexico did during the debt crisis in the 1980s. In the case of Mexico, a debt restructuring was the first measure taken in 1982, which only provided additional time without solving the problem. In 1989, another measure to reduce the size of the debts eventually had to be introduced.

Economists also believe that reducing the size of Greece debts is ultimately inevitable and any further delay will likely contribute to a worsening of the problem. However, whether policymakers in Europe will achieve political consensus remains to be seen.

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.

Haiti's New President Has Vision and Support of People but Lacks Experience

Sources:
NPR: The Root: Haitians Wonder, What Happens Now?
Guardian.co.uk: Haiti Delays Certifying Election Results
FT: Haiti President-Elect Wins Clinton’s Backing
The Seattle Times: Michel Martelly Wins Haiti Election

The election of Michel Martelly as Haiti’s new President spurred celebration and joyous chant from thousands of Haitians nationwide. However, the road toward becoming Haiti’s new President was not an easy one. According to the the first round of run-off elections held in Haiti in November of last year, Martelly was not even one of the finalists. However amidst much voting confusion and allegations of fraud, the results of this initial run-off election were rescinded in Haiti. It had been anticipated that given Martelly’s popularity amongst the urban poor, that he would definitely emerge as a finalist in the first round of run-off elections. When the expectation of Haitian citizens to see Martelly as a finalist, did not come to pass, a nationwide insurgence followed. The level of violence and protest in the streets caused businesses to close as well as the Port-au-Prince airport. The response of Haiti’s electoral council was to cancel the results from the first run-off election, replace then finalist candidate Jude Celestin, with Michel Martelly and to reschedule a subsequent run-off election. The results of the second run off were known on April 4, 2011, with Martelly emerging as the new President of Haiti.

Although Martelly’s opposing candidate, Mirlande Manigat has stated that she will not contest the results of the election, Martelly’s assumption of office may be stalled by the Haitian election council, which has raised concerns about the results of those voted into senate seats. In a statement issued by the election council, they say they have seen no reason for the reversal of 18 legislative races in the election results. “Without a public explanation and review...the legitimacy of seating these candidates is in question.”

Despite the possible stall of formally taking office, Martelly has not allowed this hiccup in the senate election to prevent him from taking proactive measures toward the reconstruction of Haiti, something the country so desperately needs. As of today 750,000 people still remain homeless from the 2010 earthquake and are continuing to live in cholera ridden tent communities. In an effort to eliminate these and other pressing concerns of Haiti’s poor, Martelly has already met with the World Bank, the International Monetary Fund and the American Development Bank in order to revamp efforts toward reconstruction. In doing so he has sought to assure foreign donors that following through on the pledges they made to Haiti in the aftermath of the earthquake, is still needed and will be handled appropriately and effectively. Martelly has also sought to improve Haiti’s investment conditions by increasing security measures and offering tax benefits to outside investors. Additionally Martelly is seeking to increase agricultural production so that Haiti can once again be a self-sustaining state.

Despite his lack of political expertise and questionable ability to push reforms through Congress, Haitians and United States Secretary of State Hilary Clinton have shown overwhelming support for Martelly. Some proponents of Martelly claim that it is exactly his lack of expertise and dealings in corrupt politics that have made him so popular with Haitian citizens. Haitians were tired of maintaining the status quo of presidents who cared more about catering to the demands of the upper class and had no connection to the plight of the poor. It is hoped that despite Martelly’s inexperience, his vision for the reconstruction of Haiti will finally usher in an era of economic and political stability for the country.

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.

In Trinidad Unions for Public Service Employees Strike Over Government Wage Increase

Sources:
GuardianMedia: Need to Stabilize Economy, Encourage Growth
Trinidad Express Newspapers: Dookeran: Wage Bill Will Increase to $8 Billion
Guardian Media: Delays at Port of Point Lisas
Guardian Media: Oil Slips on Japan
Guardian Media: OWTU Members Turn on Labor Minister
CNews: Labor Leaders Debate State of the Unions
Guardian Media: Agriculture Faces Declining Production, high Food Prices

Protests continue in Trinidad as public service employees united with the Public Service Association to reject the 5% wage increase offered by Chief Personnel Officer, Stephanie Lewis. Originally, the Public Service Association (“PSA”) requested a 60% increase, while the Chief Personnel Officer Lewis only offered a 1% increase. The gaping disparity between the two figures can be attributed to three major factors. One is consideration of core inflation over headline inflation by the government, second is the rapidly increasing food prices in Trinidad, and third is a provision in Trinidad’s Industrial Relations Act that only adjusts wages to account for inflation every three years.

Headline inflation measures the rate at which the cost of living rises while core inflation measures total inflation excluding the price of food and energy. It is common for governments, not just Trinidad’s, to use core inflation as a better indicator of domestic inflation, since food and energy prices are highly volatile and subject to rapid decreases or increases due to weather or political crises. Usually in the long run, headline inflation and core inflation average about the same increase rate. However, in the past ten years, headline inflation has increased at a consistently higher rate than core inflation. This disparity is attributed to the rise in cost of oil per barrel from $20 in 2002 to roughly around $100 today. Consequently, this has raised the price of shipping and food imports into Trinidad, which has led to higher food prices in grocery stores.

Currently in Trinidad the headline inflation rate is at 12.5%, mainly spurred by food inflation which was at 29% just this past December. However, core inflation, which excludes food prices and which the government gives higher priority to, only increased by 4.7%. While food prices in Trinidad and Tobago have been consistently rising over the past 5 years, food prices peaked this year due an exceptionally large amount of flooding that lowered domestic agricultural supply and forced greater dependency on expensive food imports. Food prices further increased in the past few months due to the political unrest in major oil producing countries like Libya and Saudi Arabia. Additionally a recent discovery of $33 million worth of marijuana in two shipping containers in Trinidad’s major port, Port of Point Lisas, has led to more thorough checks of incoming containers, causing delays in offloading cargo. The delays lead to higher storage cost of goods at the port and will further raise the price of those goods in grocery stores.

In the face of these dramatic food increases, Chief Personnel Officer Lewis’ offer of a 1% wage increase was viewed by critics as disrespectful and deceitful. In an attempt to find a compromise and end the unrest of public service employees, the CPO made a reoffer to the PSA of a 5% increase. Again, given the extreme and increasing rate of food and goods, critics viewed this meager increase as further disrespect. In response to the CPO’s reoffer, labor unions in the public sector began striking. Finance Minister, Winston Dookeran, has appealed to unions to accept the offer by stating that a 5% increase for all public sector employees will mean that salaries and wages account for 19% percent of the government’s annual budget. Any further increase would hamper growth and create instability for the economy and government. However, labor leaders debate Dookeran’s theory on increasing wages. Senator David Abdullah, also President of the Federation of Independent Trade Unions, states the government should not be afraid to run a deficit to increase wages given the current economic conditions for consumers. He states that though there may be an initial deficit, income will return to the government through increased activity and spending made possible by the wage increase.

In an effort to avoid future disputes between labor unions and government, employment law specialist Lennox Marcelle advocates revision of the wage increase law in the Industrial Relations Act. He says that only reviewing for wage increases every three years inevitably leads the government to consider only current economic frailties, rather than the economic conditions as they existed during the previous three years. He states that review for wage increases should occur annually to ensure that wages are based on the “economic conditions of their respective periods.”

China and Uzbekistan Agree to Trade Deals

FT: China-Uzbekistan: Gas diplomacy
Hu Jintao Holds Talks with Uzbek Counterpart
Bloomberg: China Supports Uzbek Gas Pipe to Boost Central Asia Deliveries
Central Asian Newswire: Uzbekistan, China Agree to $5B in Joint Projects

Uzbekistan President Islam Karimov traveled to China to meet with Chinese President Hu Jintao to discuss a series of business and trade agreements. The two leaders signed on to over 25 separate projects totaling $5 billion of Chinese investment in Uzbekistan. The deal includes $1.5 billion in the form of loans to Uzbek banks in order to finance joint investment projects such as transportation and chemical production projects.

The bilateral cooperative agreements will build on the already growing relationship between China and Central Asia. Beyond financial agreements, the two nations agreed to increase trade in technology, communication and enhance cooperation in social programs focusing on culture, education, sports, tourism and environmental protection. The two countries will also work to improve Uzbekistan’s infrastructure and diversify imports and exports. The deal includes a commitment from Uzbekistan to provide 25 billion cubic meters of natural gas per year to China, which is more than twice what the two nations had previously agreed upon and more than one third of Uzbekistan’s current total gas production. The high promised output may be a challenge for Uzbekistan, but the investment gains should accommodate the increase in output. In return, China’s loan will be partially invested in building a China-Uzbekistan natural gas pipeline alongside existing pipelines running from Turkmenistan to China.

China continues to look for energy providers in the region after rejecting, due to cost, an offer from Russia to provide all of China’s gas needs. China has been developing its energy partnership with Central Asia since 2009. Both parties benefit from reducing Russia’s monopoly in the energy market. With more competition in the gas market, Russia will find it harder to increase its market share in China. Russia will also continue to lose its leverage to charge inflated prices to China or undercut the Central Asian countries when purchasing their energy resources. The result will be more favorable prices for both China and Central Asia. The energy deal was accompanied by several diplomatic agreements. The nations vowed to increase cooperation in regional security, calling on both nations to fight extremism and separatism, as well as organized crime. The breadth of the two countries’ talks signals a developing regional attitude. This attitude may be based on energy policy but extends to a deeper social and financial cooperation that can only increase with China’s rising energy needs and commitment to regional infrastructure projects.

World Bank Chief Warns on High Food Prices

Sources:
Guardian: Food Price Rises Pushing Millions Into Extreme Poverty, World Bank Warns
FT: World Bank Chief Warns on Food Threat
WSJ: World Bank: Rising Food Prices Pose Imminent Threat

Over the past year, the world has seen a rapid increase in food prices. The head of the World Bank, Robert Zoellick, recently warned that if this food inflation continues, it could have tragic consequences for much of the developing world and could lead to the impoverishment of millions of people.

The cost of food, as measured by the World Bank’s global food price index, has increased by 36% over the past year, which is one of the largest year-over-year increases in food costs in recent history. Bad weather has been the primary cause for the price increases, as it has caused supply shortages in staples such as corn, wheat, and soybeans. Exacerbating the increase in food prices has been rising energy costs, especially increasing oil costs, which make it more expensive to transport food products.

The effect of these increased food prices has been harsh, especially for people living in poorer countries, where an increasing portion of their small income must now be used to purchase food, leaving little money to pay for other necessities. According to Zoellick, an estimated 44 million were driven into poverty in the last year because of higher food prices. Zoellick warned that if the food prices continue to increase, it could be disastrous for the world’s poor. According to World Bank estimates, if food prices increase another 30%, 34 million more people will be driven into poverty. Indeed, Zoellick went so far as to cite the hardship caused by food inflation as one of the main reasons for the political unrest in North Africa and the Middle East.

To combat the threat of food inflation, Zoellick is hopeful food-producing nations around the world will take steps to mitigate price increases. Specifically, Zoellick encouraged nations to stop using export controls on agricultural products. Countries, such as Russia and the Ukraine, have recently imposed exports bans on wheat to keep their domestic supplies high, thereby relieving upward pressure on wheat prices. By imposing such bans, however, countries deprive the rest of the world of much needed food supplies, which leads those other countries to confront higher food prices.

World Bank Report Suggests New Approach to Development in Conflict-Torn Nations

Sources:
NYT: How to Rebuild a War-Torn Nation
BBC: Aid Spending Should Target Conflict, World Bank Urges
WSJ: World Bank Shifts Focus to Security in Poor Nations

According to the World Bank’s annual World Development Report, the best way to foster development in conflict-prone nations is to direct aid towards improving security. The report, which the World Bank released last week, represents a significant departure from the World Bank’s traditional approach to development. In the past, the World Bank has shied away from security issues and has focused more on the economic and social aspects of development.

The World Bank is the leading international institution for fostering economic development around the world. However, its efforts to promote development in developing countries have been frustrated by frequent outbreaks of violence. According to the report, 1.5 billion people live in countries affected by repeated outbreaks of violence. The report stated that 90% of recent civil wars have occurred in countries that had already experienced civil wars within the prior 30 years.

The cyclical nature of these outbreaks has made sustainable economic and social development virtually impossible in those countries in which they occur. When violence does erupt in a country, the effects can be even more devastating on development than natural disasters. For example, the report estimated that, in 2005, violence in Guatemala affected economic development in that country twice as much as the effects of Hurricane Stan. In addition, the report indicated that in conflict-torn nations, children are twice as likely to be undernourished, three times less likely to be able to attend school, and twice as likely to die before the age of five.

Recognizing the fact that frequent violence restricts development, the World Bank’s report takes a new approach to development that focuses on security and stability before other developmental reforms. To this end, the report proposes that developmental efforts should be focused on strengthening the institutions that support the rule of law, such as police forces, the justice system, and effective governmental institutions that are free of corruption.

In Making Dam Decision, Laos Balances Hydropower and Flood Control with Environmental Uncertainty and Angry Neighbors

Sources:

Bangkok Post: Tensions rise over Mekong dam

Bangkok Post: Ch Karnchang sees way clear for dam

New Scientist: Mekong dam delay a reprieve for giant fish

VOA: Communities Want More Information on Mekong Dam

AP: Activists fight to stop dam across Mekong

This week Laos deferred a decision to dam portions of the Mekong River to develop hydroelectric power that it can export to generate badly needed foreign exchange. Laos plans to develop 11 dams across the lower Mekong River that travels through Myanmar, Laos, Cambodia and Vietnam. The government planned to begin construction soon on the $3.5 dollar dam soon, but last minute protests by some neighboring countries over environmental concerns led the Lao government to delay the decision.

Laos is a nation of six million people and is one of the world’s poorest countries. Its economy is dependent on agriculture and foreign aid. The Lao government hopes that by exporting power it can develop the income necessary to develop other sectors of its economy, like mining and manufacturing. Laos is a member of the Mekong River Commission, a group of countries that attempts to settle international water disputes related to the Mekong River. The Mekong River Commission has the ability to express concerns and encourage dialogue, but is unable to sanction governments or stop projects on the river.

Most of Laos’s neighbors have expressed concern over the project. Vietnam has called on Laos to defer the hydropower dams for 10 years until neighboring governments or third parties can conduct more environmental assessments. However, Thailand has been a strong supporter of dam project in part because Laos will export 95% of the electricity generated by the dam to Thailand and because a Thai construction firm will design and build the damn.

The World Wildlife Foundation and more than 250 other environmental NGOs have warned that the Mekong Delta’s ecosystem will be significantly altered by the dam. They say that over 60 million people in the region depend on the river for food and their livelihoods. Further, they say the giant catfish could be driven to extinction if Laos builds the hydropower dams.

India Nears Double Digit Growth, but Debate Continues Over Who Benefits

Sources:

FT: India planners step back from double-digit growth

VOA: India to Step up Economic Growth, But Inflation Remains a Concern

Bloomberg: India Aims for Economic Expansion of 9% to 9.5%, Ahluwalia Says

WSJ India Blog: Is India’s Economic Growth Socially Sustainable?

Next month India will release its new five-year social and economic plan. The government seeks a target of 9 to 9.5% GDP growth per year from 2012 to 2017 while continuing to manage inflation that currently stands at 9%. The government’s three key policy targets include attracting more foreign investment, removing barriers to entry in the retail and infrastructure sectors, and building a competitive manufacturing sector.

Private sector economists estimate that India can achieve 10 percent growth per year, but maintaining such a high rate would require tremendous structural reforms that may not be socially sustainable. For example, the Chairman of the Planning Commission has cutting the fiscal deficit as a top priority while others wish the government to improve social programs. Nobel Laureate Amartya Sen is among those who have accused the Indian government of being fixated on GDP numbers while largely ignoring social development issues like female illiteracy and child mortality.

Last year India’s economy grew at 8.6%. So far India’s economy has continued to pick up speed despite rising energy prices and interest rates. India is one of the few large economies that continued its growth during the global financial crisis. Over the past decade India has developed a strong service sector, particularly in IT and consulting, and has major conglomerates like TATA and Mahindra. But despite India’s rapid growth over the past decade, 50% of its population still lives in poverty.

A key concern of Prime Minister Manmohan Singh is that all social classes benefit from India’s increased wealth. Specifically, Singh seeks to improve India’s schools, reduce gender gaps in education and health, and improve data collection to help policy advisors make more timely decisions. Lately, the government has been alarmed by rising food prices, but it has pushed to minimize food price spikes by attempting to dramatically increase agricultural productivity.