Friday, May 30, 2008

Venezuela Strengthens Financial Ties with Middle East

USA Today, WorldNetDaily, The New York Times, World Bank

Ties between Iran and Venezuela, both members of OPEC, strengthened last week as Iranian President, Mahmoud Ahmadinejad and Venezuelan President, Hugo Chavez announced plans to form a joint development bank and investment fund to finance projects in the two countries. According to reports, the purpose of the bank will be to fund programs in the areas of trade, industry, infrastructure, housing, energy, capital market, and technology. Each country will provide an equal proportion of the initial bank funding of $1.2 billion and the investment fund backing of $1 billion.

This financial plan is the culmination of over a year of planning between the two countries to put together a financial plan to fight U.S. imperialism. In January 2007, Chavez and Ahmadinejad pledged to set up a fund of $2 billion to-in Chavez's words-"permit us to underpin investments . . . above all in those countries whose governments are making efforts to liberate themselves from the [U.S.] imperialist yoke." The alliance between Chavez and Ahmadinejad formed through their common disapproval of the U.S. policy and has included many personal visits by the two leaders with Ahmadinejad presenting Chavez with Iran's highest honor for his support during Iran's nuclear standoff with the rest of the world.

This may be the next step in Venezuela and Iran becoming independent from the World Bank and the IMF (International Monetary Fund). In May 2007, Chavez denounced the World Bank and IMF after Venezuela paid off all outstanding loans to the institutions. The World Bank has nine active projects in Iran but, because of pressure by the U.S., the World Bank has suspended $5.4 million in payments. Chavez also led the formation of the Bank of the South which will begin operations this year. The Bank of the South is an attempt to bring Latin America together to reduce dependency on multilateral financial institutions like the World Bank and IMF.

1) Should world leaders be concerned about the alliance between Iran and Venezuela, both of whom have been accused of supporting terrorism? Especially because of the outspoken goal of undermining financial projects made by the West?
2) The World Bank has a stated goal of "reducing global poverty"; if financial alliances such as the ones mentioned above can better achieve this goal . . . should the international community and lending institutions step aside even with the possible negative political consequences?

Wednesday, May 28, 2008

Will the Cyclone Encourage Social Reform in Burma?

Sources: Financial Times, USA Today,

The cyclone that hit Burma on May 3 left an estimated 133,000 dead or missing and wrecked havoc throughout the country. Food, water, shelter, and medical care is badly needed for the 2.5 million cyclone survivors, especially those residing in the impoverished Irrawaddy delta region. Initially, General Than Shwe, the leader of Burma’s leading military junta, balked at allowing international aid workers to enter the country. British and American ships offering food and other supplies arrived soon after the cyclone, but were not allowed to dock in Burma. Since the junta violently put down a pro-democracy uprising in 1988, killing 3,000 people, the junta has been very suspicious of the US and foreigners trying to overthrow their military government.

However, on May 23, in a meeting with UN secretary-general Ban Ki-Moon and representatives from 50 countries, Gen. Than Shwe agreed to allow all foreign aid workers access to the country. The UN has planned a $201m, six-month relief effort for the cyclone survivors’ immediate aid. Western officials view this concession as a potential turning point in Burma’s relations with the rest of the world. Since 1988, international financial institutions, such as the World Bank and the IMF, have denied Burma access to any funds -- citing that major political and human rights reforms are necessary before Burma can gain access to loans.

Access to international financial institutions will become increasingly important for Burma’s future given the estimated $10b in losses the cyclone caused. The World Bank has stated that it will not change its stance on Burma, but that it has offered technical assistance to the country. Whether General Than Shwe and the junta’s recent concessions to international aid organizations will lead to further political and social reforms in Burma remains to be seen. Such reforms will be necessary if Burma wants to have access to desperately needed funds.

Should the World Bank continue to deny Burma funds even during such catastrophic emergencies?

Slowing European Growth: Tipping Point or Downward Spiral?

Eurozone Faces Inflation Risk as Growth Slows
Euro, Franc, Krona to Benefit From Oil, Barclays Says

While Germany masked Europe's service sector's slowdown with a growth spike in the first quarter, it is evident that the European economy is now slowing drastically as output in May proved to be at its slowest rate since July 2003.

A few key indicators clearly illustrate the decline.  Although Germany's growth rate in April was at its highest in seven months, other European countries' slower growth rates remain unchanged, thus implying stagnation.  The first quarter also marked a sixteen-year high inflation rate, a sign that prices will rise and growth will slow further.  Despite the European Central Bank's desire to keep inflation rates just below two percent, some analysts believe April's rate of 3.3 percent may continue to escalate to four percent.  Further, the eurozone purchasing managers' index has fallen to a five-year low of 51.1 points.  This index gauges the expected level of manufacturing activity.  A value above fifty indicates expansion and a value below fifty indicates deterioration.  Since manufacturing represents roughly a quarter of Europe's GDP, the purchasing managers' index is a significant signal in the European economy.  Finally, the International Monetary Fund predicts European growth to slow from 2.6 percent in 2007 to 1.4 percent in 2008.  

Economists disagree whether these market indicators are signs that the U.S. slowdown, tight credit conditions, and high oil prices have hit European markets.  Economists at Goldman Sachs believe that the effects of the record-high euro and the increased purchasing power accompanying it will take time to stimulate growth, thus the European economy will continue to slow.  

However, some economists believe that May's low growth rate is a tipping point.  The strength of the German industries and resilience of emerging Asian and eastern European economies may serve as a protective shield against the effects of the U.S. economic slowdown.  Other economists look to Europe's compact structure and service-oriented market to minimize the effects of rising oil prices, in addition to the strong positive correlation between European currencies and oil prices.  For example, the euro-dollar correlation with oil is .95; as the price of oil increases, the strength of the euro increases as well.  Although a strong euro can result in decreased exports, it means that the value of the currency is increasing; therefore, European purchasing power is increasing. 

Is May's low growth a tipping point indicating growth or an indicator of a severe economic slowdown similar to the U.S.? 

Thursday, May 15, 2008

Brief Hiatus

This blog will be on a hiatus until staff members begin their summer session work in June.