U.S. Economic Growth Slows Down

Sources:
FT: U.S. Consumers Cautious on Spending
FT: U.S. Factory Orders Increase in May
FT: U.S. Factory Output at Three-Year Low
FT: U.S. Manufacturing Activity Drops Sharply
NPR: “This Is Not Good”: Factories Show Signs Of Slowing
WSJ: Factory Slump Reaches U.S.

In the beginning of July, the U.S. government released reports showing signs of economic growth slowing down in the country. First, U.S. manufacturing shrank in June for the first time in three years. The Institute for Supply Managements (ISM) said that its index of manufacturing activity fell from 53.5 in May to 49.7 in June. A reading below 50 is an indication of contraction—a decline—in the economy. Anything above 50 signifies an expansion of the economy, or an increase in the level of economic activity and of goods available in the marketplace. This is the lowest reading on the index since July 2009, a month after the recession officially ended. Manufacturing accounts for 12% of the U.S. economy and has been at the forefront of the country’s recovery.

There are many reasons for the contraction in U.S. manufacturing. Americans have cut back on spending which has led to lower demand of manufactured goods. In addition, Europe’s economy is in a recession, which has hurt U.S. exports, because Europeans are buying less goods in general and thus less American-made goods. A recession is a general slowdown in economic activity occurring when the country’s gross domestic product (GDP) declines for two or more consecutive quarters.. It also appears that U.S. manufacturing is likely to stay weak for the next few months as the ISM’s new order index plunged from 60.1 to 47.8. The new order index reflects the levels of new orders of goods and products from customers of manufactured goods. Although this measure is traditionally volatile, such a sharp decline could signal a downturn in the demand for U.S. products overseas. It is the first time this index number has fallen below 50 since April 2009, when the economy was in a recession.

The fewer amount of new orders in manufacturing has left many businesses concerned that U.S GDP growth will further decline. This fear stems from the recent decline to a 1.5% GDP growth rate in the April-June quarter from a 1.9% rate found back in the January-March quarter. U.S. businesses are also concerned about Europe’s financial crisis and the possibility that U.S. lawmakers will not extend a package of tax cuts at the end of the year. Thus, U.S. companies are cutting back on manufacturing and purchasing as well as not increasing their hiring to prepare for a downturn of orders from Europe and higher taxes. Another concern of U.S. businesses is that European manufacturing has remained at its weakest level in three years and continued to decline in the month of June. Meanwhile in other parts of the world, a recent survey shows that China’s industrial sector expanded at its slowest pace in seven months.

U.S. consumer confidence decreased to its lowest level of the year at 73.2% in June, which was another reason for the slowing in manufacturing. Consumer confidence is an economic indicator, which measures the degree of optimism that consumer’s feel about the overall state of the economy and their personal financial situation. In a recent survey given to 5,000 U.S. households, it showed that consumers are concerned about slowing job growth and increasing unemployment. The unemployment rate in June was at 8.2% up from 8.1% in April, with the U.S. economy adding only 69,000 jobs in the month of May and only 80,000 in June. The sharp drop in the ISM index will not help the situation, as it will trigger speculation that the U.S. economy may fall into recession.

In an effort to kick-start the economy, the Federal Reserve extended “Operation Twist,” in which the government sells short-term bonds while buying long-term bonds. The aim of the program is to lower long-term interest rates. By selling shorter-time bonds and using the money from the sale to purchase long-term bonds, the government will increase demand for the longer-term bonds, which in turn will drive up the price of those bonds, and lower the rate of return (yield) of such bonds. The relationship between bond price and yield is inverse, thus as bond prices increase, yield decreases.

Additional signs that America’s economy is feeling the impact of slower growth in China and continued unrest in Europe could cause the U.S. central bank to take more aggressive action , including purchasing financial assets (such as bonds and stocks) as a way to inject more money into the economy. Injecting more money into the economy means that banks will have more cash to lend to each other, to companies, and to any consumer making a large purchase like a car or house. The fall in manufacturing will be of concern to Barack Obama’s re-election campaign as well as his rival Mitt Romney.

South African Dlamini-Zuma Chosen to Lead African Commission

Sources:

Bloomberg: South African Wins Top African Union Post in Divisive Vote

Mail & Guardian: Dlamini-Zuma Elected To Head AU Commission

Mail & Guardian: The Dummies’ Guide to the African Union

NPR: Pan-African Group Elects First Female Leader

WSJ: African Union Elects New Leader

On July 15, 2012, the African Union’s (AU) 51 voting member-states chose Nkosazana Dlamini-Zuma, Home Affairs Minister of South Africa, to lead the African Commission for the next four years. The AU countries initially voted in January, but neither Dlamini-Zuma nor incumbent Jean Ping of Gabon were able to garner the 60% of the votes necessary to chair the Commission.

Member-states of the Southern African Development Community (SADC), including Botswana, Zimbabwe, and Tanzania, supported Dlamini-Zuma, while member states of the Economic Community of West African States (ECOWAS), including Ghana, Cote D’Ivoire, and Nigeria, supported Ping.

Dlamini-Zuma is the first woman elected to lead the AU Commission—a position exercising power over the executive and administrative branch of the AU. The Women’s League of African hailed Dlamini-Zuma’s election a victory for women across Africa, who have historically been victims of prejudice and oppression in many parts of Africa.

The election of South African Dlamini-Zuma is also noteworthy because such a position is typically held by a representative from a smaller African government. The reason that representatives from smaller governments have typically held the position is to ensure that African powerhouses—Egypt, South Africa, Nigeria, Libya, and Algeria—do not have too much influence over African politics. However, many leaders in Africa thought a change was necessary to give the AU more global influence; analysts and some Western diplomats have criticized the AU for allowing Western countries to take the lead in recent conflicts in Africa.

South African leaders, including President Jacob Zuma, Dlamini-Zuma’s former husband, have been lobbying for Dlamini-Zuma to chair the Commission for months. They believed that leadership of the AU would cement its status as an emerging global power. Last year, South Africa increased its global status by beginning a two-year term on the United Nations Security Council. A temporary seat on the Security Council gave South Africa authority to vote on Security Council resolutions. South Africa is now seeking to gain permanent-member status, which would give it veto power over Security Council resolutions. South Africa has also been active with Brazil, Russia, India, and China—together, the BRICS—to increase the influence of emerging economies. They have acted together in deciding whether to bailout Europe, and they have plans to set up a development bank for emerging countries, similar to the International Monetary Fund.

There are many ongoing conflicts in Africa: South Sudan’s dispute over oil rights, military coups in Mali and Guinea-Bissau, and a dispute between Rwanda and the Democratic Republic of the Congo. If Dlamini-Zuma wants to increase the AU’s and South Africa’s economic and political power, she must gain the support of the nations that supported Jean Ping and begin to solve these problems. For example, ECOWAS member-states, who predominantly supported Ping, are seeking Security Council support for a military intervention to unite a divided Mali, an intervention that SADC member-states, who supported Dlamini-Zuma, have shown scant support. If Dlamini-Zuma can use her influence to garner Security Council and SADC support for this intervention, countries that were opposed to her candidacy may view her more favorably, which will further increase the AU’s power.

A united Africa could show Western nations that the African Union is a serious player in global politics. For a continent in conflict and mired in indecision for the last six months, this would certainly be a welcome development.

China to Test Freer Yuan in Financial Zone

BI: China is Experimenting with a Truly International Currency
China Offshore: Central Bank Allows Chinese Businesses to Settle Trade Using the Rmb
FT: China to Create Special Currency Test Zone
Reuters: China to Experiment with Freer Yuan

On June 28, 2012, China announced plans to create a special financial test zone. The financial test zone is to be located in the city of Shenzhen on mainland China and will allow China to determine how easily Chinese currency can convert into gold and other foreign currencies. This new measure will allow Hong Kong banks to lend renminbi, the official currency of China, directly to companies on mainland China, particularly in the new economic zone of Shenzhen.

The currency experiment aims to increase the flow of the Yuan (the primary unit of the renminbi), between Hong Kong and mainland China. Prior to the announcement, Hong Kong banks could only lend to Chinese clients in Hong Kong, and if the Chinese clients wanted to bring that money into China, they needed approval from the foreign exchange regulator. The Chinese foreign exchange regulator limits the amount of renminbi that can leave and enter mainland China. The Chinese government also has regulations in place to ensure the renminbi cannot travel without restriction across the border for pure financial transactions, like loans. The currency experiment in Shenzhen allows renminbi held by bank lenders overseas to flow back to China because banks in Hong Kong can lend to Chinese clients in Hong Kong, but with the currency experiment, they can also lend to those on mainland China.

China’s currency experiment could prove important to the eventual undoing of capital controls in the country as well as increase the Yuan’s presence overseas. Capital controls are mechanisms the Chinese government uses to regulate the flow of Yuan in and out of the country. For instance, the Chinese government limits the amount of Yuan companies can take out of mainland China for trading and lending as well as the amount they can bring back in. The experiment follows a series of other steps taken by the Chinese government to make the renminbi a more globalized currency that could eventually compete with the U.S. dollar in global markets. A global currency refers to a currency in which the vast majority of international transactions like sales and trades take place, (e.g., the U.S. dollar and the Euro). China’s drive for financial reform includes the goal of making the Yuan convertible to foreign currencies as early as 2015.

Over the past two years, large amounts of Chinese currency have moved abroad for the first time because Chinese companies could settle their international trade in renminbi, rather than first exchanging renminbi to dollars prior to doing business with foreign companies. The allowance of settling international trade in renminbi meant the Chinese Central Bank allowed all businesses that trade with China to use the renminbi in their trade exchanges and in business transactions, such as sales, with each other. Thus, a Chinese company can now pay a European company in renminbi, allowing the outflow of Chinese currency to foreign hands. The Chinese government has also allowed foreign investing institutions a limited but growing selection of investment options for their renminbi holdings, which includes Hong Kong’s dim sum bond market. Hong Kong’s dim sum bond market is a market that sells bonds denominated, or valued, in Chinese Yuan.

Shenzhen, designated as the country’s first special economic zone in 1980, helped to bring foreign investment and free trade to China. This economic zone was the first city that experimented with China’s broader economic reforms that were later rolled out across the country and helped China on its way to becoming the world’s second-largest economy. If the Chinese government follows through with its announced plans in globalizing the Yuan, Chinese currency could be more easily convertible to foreign currencies very soon.

The Canadian Territory Nunavut Approves Uranium Mining for the First Time

Sources:

Alaska Dispatch: Canadian Federal Territory Supports Uranium Mining

CBC: Nunavut Government Announces Uranium Mining Policy

CBC: Nunavut Group Says Uranium Policy Process Biased

Nunatsiaq News: Areva Touts Proposed Kiggavik Uranium Mine on Eve of Nunavut Mining Symposium

Nunatsiaq News: Impact of Proposed Nunavut Uranium Mine Worries Baker Lake MLA, HTO

Nunatsiaq News: Nunavut Government Says Yes to Uranium Mining

Nunavut Government: Government of Nunavut Uranium Policy Statement

Nunavut Government: Nunavut Facts

Winnipeg Free Press: Ottawa, Nunavut Discuss Province-like Powers Over Natural Resources

On June 6, the government of the Nunavut Territory, Canada approved the creation of the first uranium mine within the territory. The Nunavut Government sees the mine as an opportunity for job and economic growth through the construction and operation of the mine and the taxes it would produce for the government. In giving its approval, the Nunavut government provided specific guiding principles that must govern any uranium mining, as explained below. While community groups express concern about the formulation of the policy and the environmental impact, local leaders continue to be open minded about the mine’s potential economic benefits.

Nunavut is a federal territory in northeastern Canada created in 1999. Its land covers 20% of Canada, and has a population of 33,330 as of 2011. While it currently does not have control over its natural resources, Nunavut is in negotiations with the Canadian federal government to obtain this control and to ensure any mining of natural resources would directly benefit Nunavut. In fact, the Nunavut government stated that its approval of uranium mining is specifically contingent on ensuring that Nunavut is the main beneficiary of government revenue from mining activities within the territory.

 

The Nunavut government created its uranium mining policy after a mining company named Areva Resources Canada expressed interest in creating a uranium mine within the territory. In its policy, the Nunavut government approves uranium mining, provided the five stated guiding principles are met. The five guiding principles came from consultations the Nunavut government held with local communities, particularly those close to the proposed mine. The guiding principles articulated by the Nunavut government include: 1) that the mined uranium only be used for peaceful purposes, such as producing energy, and not for nuclear weapons; 2) residents of Nunavut must be the primary beneficiaries of the mining revenue; 3) uranium mining must meet national health and safety standards of the Canadian Nuclear Safety Commission (CNSC); 4) high environmental standards must be met, as approved by the Nunavut Impact Review Board (NIRB); and 5) Nunavut residents must approve the uranium mining. These principles are simply the first basic articulation of the Nunavut government policies, and any uranium mining operations require further approval from the NIRB and the CNSC.

 

The Nunavut government’s approval of uranium mining has been met by opposition and concerns from local community groups. An environmentalist group called Nunavummiut Makitagunarningit claims that the process for creating the territorial government’s policy was biased because the government hired a consultation company whose primary clients are in the mining industry and stand to directly benefit from governmental approval. Meanwhile, a local community group of hunters and trappers expressed concern about the uranium mine’s potential negative impact on the migration patterns of local caribou populations, a major source of food and income for communities around the proposed mine. The community worries that if the mine is built, the caribou would change their migration pattern to avoid the mine, and thus no longer come near the village.

 

In spite of these concerns, however, local leaders have expressed support for the mine as a source for increased employment and economic development. The Areva mine would provide 700 jobs during its construction and 600 jobs during its projected 14-year operation. In addition, the mine would bring an increase in infrastructure necessary for the mine—such as roads and telecommunications—which would also benefit local communities by providing greater access to economic activities.

 

Seeking to broaden opportunities for economic growth, the Nunavut government approved uranium mining within the territory. In doing so, it provided specific guiding principles for any uranium mining. Although local communities have environmental concerns, many residents of Nunavut are interested in the economic development a uranium mine could provide for the territory.

Paraguay’s Suspension Clears Way to Mercosur for Venezuela

Sources:

Reuters: Mercosur Welcomes Venezuela, Suspends Paraguay

Rio Times: Mercosur Members Suspend Paraguay

WSJ: Venezuela To Join Mercosur Trade Bloc

Washington Post: Paraguay Suspended from Mercosur for Lugo's Impeachment, but Will not Face Economic Sanctions

On June 29, Argentina, Brazil, and Uruguay suspended Paraguay from Mercosur, a trading bloc that consisted of those four countries as voting members. Shortly after, Argentina, Brazil, and Uruguay also voted to make Venezuela a full member of the trading group.

The shakeup of Mercosur followed the Paraguayan Senate’s decision to remove leftist President Fernando Lugo. The Senate, which Paraguay’s right-wing opposition party controls, believed President Lugo did not appropriately handle a forced land eviction that killed nine farmers and seven police officers on June 15 of this year. Leaders of countries throughout South America condemned this impeachment. Argentina, Brazil, and Uruguay withdrew their ambassadors and claimed the impeachment violated due process (the legal procedures required to make a decision valid) because the Senate provided President Lugo less than 24 hours to present his defense at trial.

The decision by Argentina, Brazil, and Uruguay to suspend Paraguay from Mercosur opened the door for Venezuela, whose full-member status in Mercosur had been blocked for six years by the Paraguayan legislature (but favored by former President Lugo), to join Mercosur. Paraguay’s right-wing legislature had questioned whether Venezuela’s President Hugo Chávez was operating a democratic regime. However, with Paraguay no longer eligible to vote in Mercosur meetings due to the suspension, the three remaining countries quickly agreed to grant Venezuela its long-awaited full-member status.

Venezuela will officially become a voting member of Mercosur on July 31, and its addition will increase the trading bloc’s global influence. Although Mercosur is already a major global grain provider, Venezuela will bring in the world’s biggest crude oil reserves into the trading bloc. Potentially, the addition of Venezuela’s crude oil could give Mercosur leverage in long-discussed free-trade negotiations with China as it will now have energy supplies on its side of the bargain.

Although Argentina, Brazil, and Uruguay decided to suspend Paraguay until it votes for a democratically elected president in April 2013 (the interim President, Federico Franco, had served as Lugo’s vice president and had been critical of former President Lugo), the countries did not decide to impose economic sanctions on Paraguay. The land-locked country of 6 million is already one of the poorest in South America, and economic sanction by Mercosur, such as imposing tariffs (a type of tax) on Paraguayan goods, could have devastating effects because half of its trade is with other Mercosur countries. Moreover, the country has already suffered economically this year because a drought destroyed its soy exports and farmers have slaughtered hundreds of cattle due to the outbreak of foot-and-mouth disease. According to Argentina President Christina Fernandez, who has called the removal of President Lugo a “coup,” economic sanctions would not be productive because “they never hurt governments. They always hurt the people.”

The right-wing members of Paraguay’s Senate did not expect a suspension from Mercosur after impeaching and removing President Lugo. Despite their expectations, Paraguay’s suspension is Venezuela’s gain, and the legislators’ six-year efforts to prevent Venezuela from gaining full-member status have finally been thwarted. However, it is too soon to determine what these developments mean for South America’s economic and political landscape.

More Energy Sources Coming to Africa

Sources:
CNBC: Solar Power Rises in the Mideast, North Africa
OPIC: OPIC Board Approves $175 Million for Two Renewable Energy Investment Funds
WSJ: Power to More People


For the 600 million Africans living without access to electricity, help may be on the way. Governments, nonprofits, and businesses across the globe are increasingly looking for ways to provide electricity access throughout Africa.


On June 19, the U.S. Government’s development finance institution, Overseas Private Investment Corporation (OPIC), approved a $50 million investment for GEF Africa Growth Fund. The African Growth Fund aims to build and improve energy infrastructure across Sub-Saharan Africa, which will makes energy and agribusiness production more efficient. Specifically, the fund targets clean energy production and distribution, as well as  focusing on energy efficient technologies.

Private companies are also getting involved in increasing Africans’ access to electricity. These companies, such as Phillips Electronics, Dupont, and Siemens, are experimenting with pilot projects that provide solar-based electricity to small villages throughout Africa. Most of these projects provide electricity free of charge to African villages. For example, in Lomshyo, South Africa, residents can recharge batteries for their LED ceiling lamps by using rooftop solar panels—free of charge—rather  than buying kerosene for lamps when their energy source runs out. This enables them to use the money they once spent on kerosene to purchase other basic necessities, such as food, shelter, and clothing.

The ultimate goal of these companies is to sell solar energy infrastructure to national governments and nonprofits in Africa, who would then provide power to villages at a minimal price. Solar-based systems are appealing to governments and nonprofits because they increase access to energy at a lower cost rather than expanding traditional power grids.  In that sense, access to energy, which increases living standards, can be done more efficiently with solar-based electricity systems.

The longevity of these pilot programs is uncertain. However, the participation thus far by nonprofits and governments is encouraging companies to engage in these type of programs. South Africa, for example, supports solar companies by  guaranteeing to buy their output at a favorable price.

In terms of the number of people with access to electricity, Africa (42%) still lags far behind developing Asia (81%), Latin America (93%), and the average for developing countries world-wide (75%), but recent investment by governments, companies, and nonprofits is encouraging. If efforts continue, many more Africans may soon have access to electricity.

Australia Closes Its Online Development Information Sharing Website

Sources:

AusAID: About AusAID

AusAID: Australian Development Gateway to close

AusAID Engage Blog: Decommissioning the Australian Development Gateway website

Australian Development Gateway: About the Gateway

Development Gateway: About Us

Development Gateway: Country Gateways

On June 19, 2012, Australia’s Agency for International Development (AusAID) announced its decision to close the Australian Development Gateway (ADG), a website for sharing development information and research. The AusAID created the website in 2004 under a World Bank initiative; however, the website’s usefulness has diminished in recent year due to the increased popularity of other social networking and knowledge sharing websites—such as Facebook and Wikipedia.

The World Bank created the Development Gateway in 2000 as a way of using information technology to increase the effectiveness of aid and development efforts. Information technology has the power to increase aid and development effectiveness through faster and more efficient communication and knowledge sharing. In effect, the Development Gateway created a platform for sharing ideas and research in aid and development.

Under the Development Gateway, individual countries could create their own “Development Gateway” that catered to the needs of each country. AusAid created the ADG in 2004 to support its mission of helping people overcome poverty. The ADG created an online meeting place for people and ideas within the Pacific development community. Individuals and organizations could use the ADG to share research, job postings, events, and aid and development opportunities. In the end, the ADG was essentially a social networking website for the Pacific development community used by about 160,000 people.

With the rise in popularity of social networking and knowledge sharing websites, AusAID no longer feels the need for ADG. Because of this reduced need, AusAID decided to close the ADG at the end of June, 2012. Instead, AusAID will use its own website to publish development research, and use existing social and professional network websites to help people in the development community connect with each other. AusAID has already taken steps to shift its online focus from using the ADG to using other websites to fulfill the functions of the ADG. For example, it created a blog in November 2011 to help people connect with AusAID. In addition, AusAID launched its redesigned website in May 2012 to facilitate publishing new research.

Australia sought to take advantage of a valuable resource for increasing development opportunities by creating the ADG under the Development Gateway framework. While the website has been successful, AusAID has decided to close the ADG because its functions can be accomplished by using the AusAID website and other social and professional networking platforms.

Caribbean Development Bank Receives Credit Rating Downgrade

Sources:  

Antigua Observer: Caribbean Development Bank loses top-rated ‘AAA’ status – S&P

Caribarena Antigua: CDB Downgrade Effects Unlikely

CBS News: S&P affirms reduced U.S. credit rating

Reuters: Banks need work implementing risk management

Reuters: S&P cuts Caribbean Development Bank to 'AA+'

Reuters: S&P report says Caribbean debt is on the rise

Stabroek News: Caribbean struggling with debt

In the wake of the recent global financial crisis, many countries and banks are seeing a decline in their credit rating.  The Caribbean Development Bank (CDB) is no exception. Both American credit rating agencies, Moody’s and Standard & Poor’s (S&P),  recently downgraded the CDB from the top rating (AAA) to the second best rating (AA1 for Moody’s, AA+ for S&P). Both credit rating agencies attribute the decline in ratings due to the weakness in CDB’s risk management as well as rising national debt among the Caribbean nations, who are all CDB’s customers. Despite the decline in credit rating, S&P is optimistic that CDB can recover its credit rating. S&P contributes its optimism to the strong relationship CDB has with its Caribbean customers and its strong capitalization—the sum of a bank’s invested cash.

Risk management includes supervising, regulating, and avoiding investment risks. For a bank, risk management is often associated with avoiding bad debt, but also includes ensuring general financial stability. Much of the financial crisis of 2008 and 2009 is credited to poor risk management by financial institutions.

Both Moody’s and S&P justify the downgrade of the CDB due to weaknesses in the Bank’s risk management that led to  reduced liquidity—a bank’s cash on hand—and a low number of borrowers. To avoid financial risk, a bank will have a high level of liquidity and a wide range of borrowers. A bank must maintain sufficient liquidity to pay its obligations when they come due, and thus lower liquidity increases risk of not having enough cash to meet the bank’s obligations. Also, a wide range of borrowers is beneficial because it reduces the impact of a single borrower’s default as revenue continues to come in from the many other borrowers. Last year, the CDB saw its liquidity significantly reduced; in the past, the CDB has held enough liquidity to pay 200% of its debt coming due in 1 year or less, but last year it only have enough liquidity to pay for 143%. In addition, five countries account for 63% of the CDB’s loans. Because many of these Caribbean countries have been facing rising credit vulnerabilities, the CDB’s concentration of borrowers has increased its exposure to financial risk.

Another reason for the CDB’s credit downgrade is the rising credit vulnerability in the region, which is a result of high levels of public debt among Caribbean countries and slow regional economic growth. Among Caribbean countries, net public-sector debt—the amount of government debt minus its cash on hand—increased to 57% of regional gross domestic product (GDP) in 2011, up from 37% in just 2008. On an individual basis, some Caribbean countries have debt burdens of 100% of their GDP or more—a high debt burden is often associated with reduced economic growth.

Despite the poor regional economic outlook and downgrade of the CDB, S&P provided the CDB with a positive and stable short-term year outlook. This outlook is based on its strong relationship with the member countries who borrow from the CDP, as well as its strong capitalization. In addition, the CDB is responding to the downgrades by evaluating and implementing improvements in its risk management, which S&P specifically said would help improve the CDB’s rating in the future. However, the CDB has not stated the specific improvements it will make to its risk management.

While the CDB’s downgrade is a difficult setback, it is largely a reflection of the current financial difficulties worldwide. For example, S&P recently affirmed downgrading the United States’ credit rating, which is equal to the downgrade it gave the CDB. However, the outlook for the CDB is stable and positive, and it hopes to reaffirm that positive outlook by fixing its current weakness in risk management.

Greeks Vote for Pro-Bailout Parties in Election

Sources:
FT: New Democracy Ekes Out Win in Greece
NYT: Supporters of Bailout Claim Victory in Greek Election
WSJ: Greeks Back European Bailout

On June 17, 30% of Greek voters turned out to vote for the New Democracy Party, a conservative party which supports unity with Europe and bailout plans for the Greek economy. The New Democracy Party is set to govern in coalition with Pasok, a socialist party, and the Democratic Left Party. Together, the parties hold 179 of the 300 seats in the Greek parliament.

The election comes after five consecutive years of recession, mass unemployment (currently at 21.9%), and severe cuts in wages and pensions. The struggling economy has been exacerbated by austerity measures mandated by European leaders in previous European-led bailouts of the Greek economy. The election follows an earlier election held May 6 in which the New Democracy Party won, but it was unable to garner enough support to reach the needed majority of seats required to govern.

Voters saw the election as a choice between the New Democracy Party, which supports a European-led bailout, and Syriza, a radical left-wing party which opposes the bailout. Although the New Democracy victory will likely delay, at least for now, any exit from the Eurozone (the countries utilizing the Euro as their currency), analysts are skeptical of whether the new coalition will be able to halt Greece’s economic decline.

First, European leaders distrust the likely new Prime Minister, New Democracy’s Antonis Samaras. Over the last two years, Samaras has been reluctant to support previous bailouts, and many European leaders blame him for Greece’s economic mismanagement which brought on the current sovereign debt crisis.

Second, analysts are not confident the new coalition will be able to govern effectively. The three parties that make up the coalition have never governed together before, and analysts fear the new coalition will not be strong enough to effect meaningful fiscal changes. Moreover, the government lacks broad popular support, which will make substantial fiscal reform difficult.

Still, the financial markets initially reacted positively to the news of the Greek election. Asian stocks, U.S. stock futures, and the Euro rose in value when the results began to indicate a New Democracy victory. However, this optimism was short-lived. U.S. stocks were stagnant on Monday, and investors did not show much confidence in the Eurozone. Investors’ lack of confidence in the Euro was evidenced by investors selling off Spanish and Italian bonds, sending those countries’ borrowing costs even higher.

The next step for the New Democracy coalition government is to fulfill its pledge to restructure the €174 billion bailout deal it agreed to in March. European leaders have insisted that Greece make an additional €11.5 billion in budget cuts before it will extend its loans under the bailout deal, but likely Prime Minister Samaras has insisted on bailout concessions, including debt restructuring, throughout his campaign.

For Greeks, the election may bring about much-needed stability and leadership to the country. However, any hopes that the election will quickly solve the country’s enduring economic problems are misguided.

HSBC Announces $100 Million Global Water Development Project

Sources:
Devex: HSBC to Invest in Developing World’s Water Sector
Devex: Water: The Means to End Poverty
Environmental Finance: HSBC Makes $100m Water, Sanitation Donation
HSBC: HSBC Invests $100m in Water Projects to Improve Lives and Boost Economic Development
Market Watch: Importance of River Basins in Driving Global Growth to Rocket: Top Ten Basins' GDP Set to Exceed That of USA, Japan and Germany Combined by 2050
Reuters: River Basins Critical for Emerging Markets: Report
WHO: Generating Economic Benefits with Improving Water Resources Management and Services

Based on a recent study by Frontier Economics, which demonstrates the economic importance of river basins, HSBC (Hong Kong and Shanghai Banking Corporation), a U.K.-based multinational financing and banking services firm, announced a $100 million project to improve water access and protect water sources in developing countries throughout the world. To accomplish its plan, HSBC is partnering with the World Wildlife Fund (WWF), WaterAid, and Earthwatch. The program will provide economic as well as social and environmental benefits for the countries involved, which span across Asia, Africa, and South America.

HSBC based its plan on a study it had commissioned on water resources in developing countries. The study demonstrated the importance of ten of the world’s most populous river basins, stating that, by 2050, economic development in these ten river basins is expected to produce a quarter of the global gross domestic product (GDP). The increase in GDP comes from an increase in water infrastructure, an increase in health among a nation’s workforce, and an increase in irrigable and traversable water (water that can be used for irrigation and for transportation)—all of which increase a nation’s productivity. The ten rivers in the study are the Ganges (India and Bangladesh), the Yangtze (China), the Indus (Pakistan), the Nile (Sudan, South Sudan, and Egypt), the Huang He (China), the Huai He (China), the Niger (Western Africa), the Hai (China), the Krishna (India) and the Danube (Southeastern Europe). Without significant investment in improving water management, the study found that most of these river basins will be facing water scarcity, thus undercutting their productivity. Reduced productivity would in turn hurt the growth of the developing countries these river basins support.

To prevent future water scarcity in these at-risk river basins, HSBC is implementing its $100 million water development program. Each one of its partners in the project will perform a specific task. WWF will help farmers and fishers implement more efficient water-use practices in Asia, East Africa, and South America. WaterAid will aid in improve sanitation and hygiene in Bangladesh, India, Nepal, Pakistan, Nigeria and Ghana by improving access to safe water. Finally, Earthwatch will address and monitor urban water management issues in twenty cities worldwide by setting up research projects with local conservation groups.

The projects will contribute to economic development in the target countries as studies have shown a direct correlation between increased access to safe water and sanitation and economic growth. By providing universal access to safe water and sanitation, a country can increase its GDP by 15%. The increase in GDP arises from the positive effects that safe water and sanitation have on the health of the country’s workforce and the amount of irrigable and traversable water— all of which, as mentioned above, helps increase a country’s productivity. In fact, the Frontier Economics river study demonstrated that besides improving health and the environment, on average each $1 spent on improving water infrastructure could provide a $5 economic return on the investment or more. Because of this, Frontier Economics believes that loans offered to some African countries to provide universal access to safe water could be paid back in as quickly as three years.

With its $100 million water improvement project, HSBC seeks to take action on opportunities for economic growth in the some of the world’s most populous river basins. Not only will the project increase economic development in the targeted countries, but it will also improve understanding for better practices among similar development projects as HSBC plans to share the findings with the international development community.

Laos Declares Intention to Graduate from List of Least Developed Countries

Sources:

ADB: Confronting Rising Inequality in Asia

IRIN News: Laos: Aiming to Leave Least Developed Country List

Reuters: Laos Clears WTO Entry Hurdle, Yemen Still Trying

UN CDP: Strengthening Smooth Transition From the Least Developed Country category

UN ECOSOC Committee for Development Policy: Report on the Fourteenth Session

(12-16 March 2012)

UN OHRLLS: Criteria for Identification and Graduation of LDCs

 

After obtaining support from all the member countries of the World Trade Organization (WTO), Laos has finally received WTO membership. The next ambition for this country is to graduate from the United Nations’ (UN) list of least developed countries (LDCs). The United Nations first created the list of LDCs in 1971, and the countries on the list represent the poorest and the weakest countries in the world. While graduation from the list symbolizes increased economic stability and international respect, membership on the LDC list allows countries to qualify for greater amounts of foreign aid. In addition, members of the LDC list who are also members of the WTO qualify for lower membership requirements, including lower standards for reducing trade barriers—laws that discourage imports.

 

To be on the LDC list, a country must fit a specific standard. The standard requires countries to have: 1) a low per capita income, which is the total annual income of a country’s entire population divided by the number of people in the country; 2) a low human asset index (HAI) score, which is a numerical scale the UNs uses to measure the quality of a country’s health and education systems; and 3) a high economic vulnerability index (EVI) score, which is a numerical scale the United Nations creates to measure a country’s ability to cope with economic shocks such as natural disasters. The threshold numbers to be included on the list are a per capita income of $992 or less, an HAI of 60 or less, and an EVI of 36 or more. However, the thresholds for graduating from the list are different, requiring a per capita income of $1,190 or more, an HAI of 66 or more, and an EVI of 32 or less. To graduate from the list, a country must meet two of the three thresholds in two consecutive reviews by the U.N. Committee for Development Policy (CDP), which occur every three years. After a country qualifies for graduation, the U.N. General Assembly must pass a resolution to remove it from the LDC list.

While graduation from the LDC list demonstrates economic growth and stability, it also brings challenges for countries. The biggest challenge is that by graduating from the LDC list, a country no longer qualifies for higher levels of foreign aid and lower WTO requirements. Only three countries have graduated from the list since the United Nations created it in 1971, largely due to fears of losing these privileges. Although the United Nations has developed a plan to ease the transition for countries that graduate, losing these privileges remains a major concern.

Laos has set the goal to be off the LDC list by the year 2020. This is an ambitious goal since the recent CDP review in early 2012 showed that Laos failed to meet any of the three threshold requirements for graduation. The country had a per capita income of $913, an HAI score of 61.4, and an EVI score of 37.1. However, these indicators are within reasonable range of the graduation thresholds; the U.N. Conference on Trade and Development (UNCTAD) estimates that Laos will meet the qualifications by the next CDP review in 2015. In order to put its ambitions into action, Laos held a meeting between government officials and experts in May 2012 to formulate a concrete strategy for achieving its goal of graduation by 2020, though the strategy remain unpublished. In addition, Minh Pham, UN Resident Coordinator and Resident Representative of the U.N. Development Program (UNDP) in Laos, believes that Laos is not as vulnerable to the concern of losing LDC privileges because of large increases in foreign direct investment in Laos, particularly with hydroelectric energy. Foreign direct investment involves financial investment in physical assets of a foreign country, such as a manufacturing plant or a financial management company, through either purchasing an existing company or starting a new one.

Laos’ goal to graduate from the LDC list by 2020, along with clearing the way to full membership in the WTO, demonstrates Laos’ determination to be a full participant in the global economy. Although it still has progress to make to graduate from the list of LDCs, Laos has the confidence and support of both the UNCTAD and the UNDP.

 

Samoa Celebrates 50 Years of Independence and Development

Sources:
ADB: Samoa, Building a More Resilient Economy
IMF: Enhancing Resilience to Shocks and Fostering Inclusive Growth in the Pacific Islands
New Zealand Herald: Samoa's Statesman
Radio Australia: China a Better Pacific Friend than US: Samoan PM
The University of Waikato: Samoa and New Zealand’s Special Relationship: More than a Neighbour?
U.S. State Dept.: Samoa Independence Day

On June 1, 2012, Samoa celebrated 50 years of independence from New Zealand. A group of islands halfway between New Zealand and Hawaii in the South Pacific, Samoa was the first modern Pacific country to receive independence. The first half-century of Samoan independence is a prime example of the challenges faced by island nations in the Pacific region and has been marked by improved economic growth and increased stabilization.

As Samoa transitioned to independence during the 1960s and 1970s, it focused on establishing a stable government and economy. To assist in Samoa’s transition to independence, New Zealand maintained control over Samoa’s foreign affairs under the Samoa-New Zealand Treaty of Friendship until Samoa determined it was ready to handle its own foreign affairs. At first, the Samoan government struggled with internal unity among its own officials, but this changed with the introduction of political parties, which encouraged government officials to focus on the unified goals of the party rather than their own individual interests. Samoa also expanded its connections with the global community very early on in its independence by joining the Asian Development Bank, the International Monetary Fund, the World Bank, the Lome Convention (an international trade and aid agreement between the European Community and African, Caribbean, and Pacific countries), and the United Nations. Becoming a member of these organizations allowed Samoan to receive development aid, enabling the country to utilize such funds in critical areas such as infrastructure and education.

Currently, Samoa’s economy centers largely on tourism, remittances—sums of money sent to Samoa by the country’s nationals who are living and working abroad— and an increased amount of aid from China. Tourism and remittances together make up roughly half of Samoa’s annual gross domestic product (GDP). In addition, Samoa has recently seen an increase in aid from China. The government of Samoa has sought out aid from China because the Chinese have proven to be more flexible regarding project plans and more forgiving regarding loan repayment than other sources of aid, including Australia, New Zealand, and the United States.

While Samoa has achieved a level of stability, the recent global financial crisis demonstrates that the country needs to develop further. The financial crisis negatively affected all three of Samoa’s main sources of income (tourism, remittances, and aid) because foreigners, Samoans working abroad, and foreign governments all saw their discretionary income—income remaining after necessary expenses are paid—reduced. To reduce the negative effects of the financial crisis, the IMF has suggested that Samoa and other Pacific countries increase diversification of domestic industries and increase investment in education. Regarding diversification, the IMF suggests creating a set of laws and regulations that make domestic industries more conducive to foreign investment. In addition, the IMF suggests improving access to credit for the domestic private sector to encourage local business development. Concerning education, Samoa has already placed a high priority on educational achievement. For instance, the government spends roughly a third of its budget on education. As a result, Samoa has seen signs of success in a near 99% literacy rate and gender parity in primary education. However, secondary education still needs improvement as there is a 40% drop-out rate during the last two years of high school.

With 50 years of independence, Samoa has much to celebrate and many opportunities to ensure a bright future of continued economic growth.

 

Maine East-West Highway Idea Revived as Potential Impetus for Economic Development

Sources:
Bangor Daily News: East-west highway critics mislead, bully, Cianbro chief Peter Vigue says
Down East Magazine: The East-West Highway: Gateway to opportunity or toll on the environment?
Kennebec Journal: Vigue turns ambition to an East-West Highway
Maine Dept. of Transportation: 1999 East-West Highway Study
The Philippines Dept. of Foreign Affairs: The Philippines Eyes Economic Collaboration in the Canadian Maritimes
The Portland Press Herald: East-West Highway: Savior or Albatross?
Seacoast Online News: A Maine east-west highway is an intriguing proposal

As Maine looks for opportunities for economic growth, a prominent construction company owner has revived the idea for an East-West Highway through the middle of Maine. In 1999, the state government seriously considered the idea, which has been around for at least 30 years, but rejected it because of a lack of public funds. Now, construction company owner Peter Vigue proposes a private East-West highway with tolls to help recover the cost of construction and maintenance. Vigue’s proposal is being met with concerns from environmental groups and some members of the general public, yet it may have potential for increased economic development for Maine.
          
The proposed East-West Highway crosscuts the middle of Maine, removing the need for automobile transportation in Canada to edge around Maine’s northern border. Maine is surrounded on three sides by Canada, and current automobile transportation from Canada’s eastern Maritime Provinces to Montreal and Toronto must go around the north of Maine. The proposed East-West Highway would have the potential to reduce such travel by more than an hour (from about eleven hours to under ten). In addition, the proposed highway would make Eastport, Maine, one of the deepest ports in eastern United States, within a day’s travel of Montreal, Toronto, New York, Detroit, and even Chicago.

Concerns about the East-West Highway center on the environment and the potential failure to bring in financial benefits to Maine. Environmental concerns focus on the conservation of Maine’s extensive forests; because the highway would cut through portions of Maine’s forests, it risks disrupting natural migration patterns for animals that travel through the area. Economically, many citizens view the proposed highway as a gamble that may not pay off. The state government performed the last major studies on the economic feasibility of such a highway in 1999 which concluded that the benefits of the proposed highway were not sufficient to justify the costs of construction and maintenance.

Even with these concerns, however, the proposed highway has the potential to provide for greater economic development in a state that has had very little recent growth. By creating an easier connection between eastern and central Canada, Maine would be connecting with the current increased economic growth of the Canadian Maritime Provinces coming from recent oil and natural gas developments. In addition, the proposed highway would enable Maine’s seaports to increase their economic competitiveness by allowing Maine to attract more freight shipping. The highway would also increase access to tourism in central and coastal Maine.

With a new economic and feasibility study due in January 2013, the proponents of the proposed East-West Highway hope to demonstrate that the benefits to the economic growth for Maine outweigh the costs of associated with building the highway.

The Potential Benefits and Costs of the New Colombia-U.S. Free Trade Agreement

BBC:  Colombia-US free trade agreement comes into force

Brookings:  Celebrating Colombia’s Free Trade Agreement

Colombia Reports:  Colombia celebrates coming into force of FTA with US

WSJ:  Free-Trade Deal Begins Between Colombia, U.S.

On May 15, 2012, Colombia and the United States (U.S.) launched a free trade agreement (FTA)—an agreement that eliminates tariffs (taxes on imports or exports) and quotas (limits on quantities imported) on goods and services traded between member countries. The FTA immediately eliminated a majority of tariffs and quotas between the two countries. However, Colombia and the U.S. will phase out the remaining tariffs and quotas over the next ten to nineteen years. The remaining tariffs and quotas are for protected industries—for instance, a country will protect its young domestic industry by imposing tariffs on imports from foreign countries with mature and efficient industries to give the young domestic industry a chance to compete. An example of a protected industry in the U.S. is agricultural products. The concern for protecting domestic industries like agriculture explains why the two governments will phase out the remaining tariffs rather than eliminating them at once.

The Colombia-U.S. FTA provides benefits for both nations. First, the U.S. International Trade Commission expects the FTA to increase Colombia’s exports to the U.S. by $487 million as well as the U.S.’s exports to Colombia by $1.1 billion. Second, U.S. investors will be more willing to invest in Colombian infrastructure as the passing of the FTA increases investor confidence. The FTA improves certainty for investors by making Colombia-U.S. interactions more predictable through the assurance of a long-term relationship between the two nations. The interactions between these two countries are also more predictable greatly due to the establishment of formal dispute resolution procedures by the FTA. These formal procedures enhance investor confidence as they enable the U.S. and Colombia to efficiently solve the investors’ issues through established well-known procedures, rather than through the current slow informal channels found in Colombia. Third, the Colombian population has better access to education and health care services, which is especially important because the growing Colombian middle class will demand more of these services in the near future.

The Colombia-U.S. FTA also has potential costs. Opponents of the FTA argue that Colombia is not yet developed enough to compete with the United States. For example, Oxfam International—a charity organization who strives to eliminate poverty and injustice—stated that the FTA would put small Colombian farmers out of business and increase poverty in Colombia’s rural regions. Oxfam argued that Colombian farmers will struggle to compete with U.S. farmers because the U.S. government heavily subsidizes U.S. farmers—an agriculture subsidy is a type of government assistance used to compensate farmers in exchange for a reduction in prices of certain goods or services. Colombia does not subsidize its farmers like the U.S. Therefore, Colombian farmers will struggle to compete with U.S. farmers because U.S. subsidies give U.S. goods lower prices than Colombian goods, which makes U.S. goods more competitive than Colombian goods.

Other costs include job losses in the U.S. and violence against union leaders in Colombia. U.S. unions worry that the FTA will encourage domestic companies to outsource—sending jobs to foreign countries to decrease costs through cheaper foreign labor. Also, both Colombian and U.S. unions worry that the FTA will increase violence against union leaders in Colombia. Currently, some U.S. companies that outsource to Colombia have ties to Colombian paramilitary forces (unofficial state military forces), which intimidate union leaders through violence and other tactics. These U.S. companies encourage violence against Colombian union leaders to maintain low worker wages and weak worker rights. Since the FTA encourages U.S. companies to outsource more labor, U.S. companies will invest more in Colombian labor in the future. Thus, U.S. companies will likely encourage even more violence against Colombian union leaders to preserve low wages and weak worker rights for their growing outsourced labor force.

Both the U.S. and Colombia stand to gain from the FTA. However, the FTA also comes with potential costs for Colombian development and worker rights. Both the U.S. and Colombian governments must address these costs to ensure a thriving long-term relationship under the FTA.

Oil-Importing Countries in the Middle East and North Africa Face Continued Financial Challenges

Sources:
Arab News: IMF's economic outlook for MENAP shows growth despite historic transitions
The Daily Star (Lebanon): Experts call for joint action to assist Arab states in need
IMF: Arab Oil Importers Under Strain
IMF: Anchoring Stability to Sustain Higher and Better Growth
IMF: Middle East and North Africa: Historic Transitions under Strain
The Nation (Pakistan): IMF expects high oil prices in 2012

In the Middle East and North Africa (MENA), countries which import oil faced reduced growth last year and projected financial challenges in the future. According to the International Monetary Fund (IMF), growth in the oil-importing MENA countries fell from 4.3% of gross domestic product (GDP) in 2010 to 2.2% in 2011. GDP is the total value of goods and services produced in a country during a year.

The slowed growth came in the form of a reduction in tourism and private investment in local businesses, both of which are sources of employment and revenue. The main cause of reduced tourism was the political unrest in the region as many nations faced either regime changes or significant political changes. Political unrest creates safety concerns, which in turn reduces tourism. It also reduces private foreign investment because the political instability creates a situation in which it is uncertain whether investors will see a return, or profit, from their investment.

Another cause of the reduction of tourism and private investment is the European financial crisis. Europe is a major source of tourism and investment for many MENA countries because of its close proximity to the region. However, Europeans have less money to spend elsewhere on tourism and investments because of domestic financial problems resulting from the European sovereign debt crisis.

While many MENA countries are seeing a return to political stability, the IMF points to continued challenges to economic growth for these oil-importing countries. First, the IMF expects oil prices to continue to rise in 2012, which would increase the amount of money flowing out of the country, making it more expensive to cover the costs of continued oil consumption. Second, Syria is still facing significant political turmoil, affecting the regional economy through continued decreased in tourism and private investment mentioned previously.

To aid in recovery, the IMF asserts that ensuring adequate financing is key. The IMF estimates that oil-importing MENA countries will need $50 billion in 2012 to keep their economies functional during times of political unrest. While the IMF is providing some assistance, the IMF and other experts call for international and regional donors to participate as well. The IMF says that infusions of investment funds will aid in meeting short-term needs and establishing greater long-term stability in the form of job growth and modernizing infrastructure.

Thus, though oil-importing MENA countries are currently facing financial challenges resulting from political unrest in the region and financial instability in Europe, the IMF expects that increased investment assistance will encourage future economic growth.