Friday, December 31, 2010

Pakistan and the IMF

Guardian: Pakistan Takes $5bn IMF Bail-Out After Allies Refuse Funds
WSJ: IMF Chides Pakistan on Budget Gap
Daily News & Analysis: IMF Warns About Pakistan's Deteriorating Economy
The Telegraph: Pakistan Wins Reprieve from Financial Crisis

In an official letter to the President of Pakistan, Asif Ali Zardari, the IMF warned that Pakistan’s economy is in danger of crisis and urged immediate fiscal tightening. Implementing IMF reforms will be difficult as the government is unstable after ministers from Zardare’s coalition partners left this week. Also, many politicians are resisting austerity measures while Pakistan is still suffering from the devastating flood that occurred earlier this year.

The IMF, and the World Bank, in conjunction with influential members – the U.S., Japan, and European countries− worry that Pakistan’s economy will unravel through escalating inflation caused by poor tax revenue. Pakistan is financing the budget deficit by borrowing from the central bank, so Pakistan is printing money. If done on a large scale and continuously, borrowing from the central bank will lead to inflation as the money supply disproportionately expands.

The IMF became involved in Pakistan in 2008 with a balance of payments crisis. The IMF gave Pakistan $5 billion so it could make payments on foreign debts. Pakistan’s foreign exchange reserves were nearly depleted, making Pakistan unable to repay debts and functionally bankrupt. The IMF then gave Pakistan access to £7.5 billion from 2008-9, more than it had ever received since 1947.

In 2010 the IMF withheld $3.5 billion from its total $11.3 billion loan package to Pakistan to induce fiscal responsibility. The IMF has not disbursed any loans to Pakistan since May; the exception was the $450 million in IMF relief aid for the flood. The IMF wants to decrease the budget deficit of 6% of GDP, above the 4% target, as the government failed to decrease expenses and enact a general sales tax , both of which Pakistan promised in exchange from IMF financing.

In addition to budgetary concerns, Pakistan’s external debt is also a growing problem. The external debt is currently £35.5 billion, and will increase to over £47 billion in 2015. This has led the interior minister, Rehman Malick, to ask for Pakistan’s external debt to be written off. Financial analysts, and even some financing ministry officials in Pakistan, greeted his request with derision and warned it would frighten investors and thus slow economic growth.

The IMF projects that Pakistan’s economy will grow by 2.5% in the fiscal year through June 2011, lower than the 9.1% projected for India, and half the growth rate of Bangladesh. The IMF is also concerned the Pakistan’s central bank will be forced to raise interest rates to combat inflation at the same time the economy is suffering, which would make the economic situation more dire. There are also political implications of slow growth. Pakistan’s economy must grow between 8% and 10% a year to absorb the two million new entrants to the labor force and reduce poverty. However, the many unemployed are recruits for the Taliban, which use Pakistan as a base for the fight in Afghanistan.

1. Pakistan’s military is still producing nuclear weapons at the highest rate in the world. How could that money be appropriated to help the economy?
2. How do concerns about corruption in Pakistan and neighboring nations affect the fight against terror in those nations?
3. Agricultural elites generate a fifth of Pakistan’s GDP and pay less than 1% of taxes. Is there a legitimate economic reason for this, or, if not, how should Pakistan redistribute the tax burden?

Friday, December 24, 2010

Elections and Financial Pressure in Ivory Coast

Bloomberg: West African Bank Gives Vote Winner Ouattara Access to Reserves, AFP Says
Reuters: Dutch Warship Heads to Ivory Coast to Help French
Times Live: West African Bank Freezes Out Gbagbo
WSJ: World Bank Freezes Ivory Coast Financing

The November 28th elections in Ivory Coast sparked a wide array of human rights abuses, the most notable of which is the death of at least 173 people between December 16th and 21st. Former President Laurent Gbagbo lost to Alassane Ouattara and has refused to relinquish power, sparking riots across the country and international condemnation. Gbagbo’s allies in the Constitutional Court destroyed hundreds of thousands of votes for Ouattara, and Gbagbo has control of the military, making it nearly impossible to forcibly depose him absent international help. This election was supposed to unite the country, which is still recovering from the 2002-3 civil war, but has led to disorder.

International financial organizations have taken action to dismantle his finances. The World Bank, the African Development Bank, Economic Community of West African States, and the African Union have all stated Gbagbo needs to step down. The World Bank has frozen $841.9 in financing to Ivory Coast, meaning Gbagbo will struggle to pay his troops and previous debt. The World Bank’s action caused Ivory Coast’s $2.3 billion bond due in 2032 to fall to a record low on Thursday because investors worried Ivory Coast would be unable to meet a $30 million bond payment due Dec. 31.

African financial institutions have also taken action. The Central Bank of West African States recognized Ouattarra as President and gave him control of state reserves. The seven finance ministers of the West African Monetary Union all endorsed Ouattara.

Despite international pressure, financial and moral, Gbagbo has shown no signs of stepping down. The French even asked for, and received, assistance from a Dutch warship, the Amsterdam, to provide logistical support to possibly evacuate European citizens if violence worsens. Gun battles have occurred between government soldiers and those backing Outtarra, and masked gunmen have kidnapped residents of pro-Outtarra neighborhoods from their homes at night. The U.S. State Department was considering strengthening the 10,000 strong U.N. peacekeeping mission in conjunction with France and African states to make Gbagbo’s military options less appealing. However, the French Minister in Charge of Cooperation said the African states must lead any direct effort to oust Gbagbo.

1. Should the World Bank be so involved in Ivory Coast’s domestic politics?
2. If the situation devolves such that military action is necessary, will the African Union be able to depose Gbagbo?
3. What effects does Ivory Coast’s instability have on neighboring countries?

Thursday, December 23, 2010

India and China Agree to $100 Billion Trade Target


India and China have two of the world's fastest growing economies, and have agreed to more than double the trading between the two nations by 2015. Last week, Chinese Premier Wen Jiabao and Indian Prime Minister Manmohan Singh met to discuss the future of trade between India and China and agreed to set a bilateral trade target of $100 billion by 2015. The joint communique aims to expand co-operation in infrastructure, environment, information technology, telecommunications, and investment and finance. The two nations also agreed to organize an India-China Chief Executive Officers Forum that will settle business issues and make recommendations for the trade expansion, and to increase cooperation between the Reserve Bank of India and the China Banking Regulatory Commission to allow each nation to open bank branches in the other country.

During the last fiscal year trade between India and China reached $51 billion. This year that number is expected to reach $60 billion. That is an impressive increase, given that in 2005 trade stood at $15 billion. However, China's economy has been more prosperous over this period than India's, which is currently facing a $19 billion trade deficit. One of the primary goals of this trade agreement is to reduce that deficit and provide India with better market access for its exports to China.

Trade relations between India and China have been rocky over the years as India has imposed strict antidumping duties on Chinese imports. "Dumping" occurs when a country exports a product at a lower price than it would charge in its home market. India's antidumping duties were the highest of any country in the World Trade Organization last year to protect itself from China’s alleged artificially low prices. China has reciprocated by objecting to India's regulation of sourcing power and telecommunications equipment, alleging that they discriminate against Chinese producers.

In spite of an increasingly strong economic relationship, other contentious issues still exist between India and China. Included among these issues are a long-standing border dispute, China's military build-up along the border, and India's support for the Dalai Lama. Prime Minister Singh seems hopeful that this trade partnership may help them resolve some of these issues, stating that the agreement "will contribute to long term peace, stability, prosperity and development in Asia and the world."

Discussion Question: Do you think that a stronger economic partnership between India and China will help the two countries resolve long-standing political issues?

Friday, December 10, 2010

Food Security and Development

The Ghanaian Journal: Ghana-Qatar Talks on Food Security Programme
Bloomberg Businessweek: Ghana, Qatar Plan to Start Joint Agriculture Project Next Year
Trade Arabia: Ghana, Qatar in Food JV Talks

Ghana and Qatar plan to create a joint venture company early next year to produce food for both countries. A pilot project will be created that will cover 50,000 hectares in Ghana. Both parties have agreed to expand the program if the pilot project is successful, which it is projected to be. The type of food that will be grown will be diverse, encompassing fruit, vegetables, cereal and rice.

Qatar is operating a food security program led by the Hassad Food Company to protect it from the same disaster that occurred during the 2008 food price crisis. Although the causes of the food crisis are still not totally clear, it is certain that the crisis was expensive to Qatar. Qatar imports almost all of its food, so Qatar was totally dependent on getting its food from the world market, where prices had greatly increased. Qatar wants to control its own secure source of food.

Ghana is also gaining in this deal. In May, 2010, the Ghana Investment Promotion Centre (GIPC), an agency under the Ghanaian President, said it was seeking investments from Qatar totaling around $700 million to develop the agriculture and natural resources of Ghana. Family farming is the current basis of the Ghanaian farming system, leaving room for modernization under Hassad Food. In addition to providing more demand and developing Ghanaian agriculture, the GIPC is also seeking Qatar’s aid in utilizing Ghana’s oil and metals.

Ghana has rich supplies of oil, gas, and bauxite, a type of aluminum ore. Qatar has expertise in the oil and gas industry and has a strong aluminum industry. Ghana is seen as a country ready to rapidly expand as its natural resources are still underdeveloped. In fact, Ghana seems to be in such a favorable position that the GIPC CEO quipped, “We need to build more five star hotels because we expect a boom.”

Despite the increase in production that will occur because of the project, many local farmers are against Hassad Food’s actions to modernize Ghanaian agriculture. Family farmers will either be co-opted by the incoming food conglomerate or have to face much tougher competition to sell their food on the market as modern, more efficient methods bring lower prices.

1. Ghana is a country rich in natural resources. What is the likelihood Ghana will become less democratic and more elitist (like Middle Eastern nations after discovering abundant natural resources)?
2. Qatar and China are both heavily investing in Africa. Is there a serious prospect of conflict, political or otherwise, between the two nations as a result of their competing interests?
3. Qatar is an Islamic nation. Will Qatar’s greater involvement in Ghana help spread Islam in Ghana and the region?

Wednesday, December 08, 2010

WikiLeaks Founder Says To Expect Major Leak Concerning Big U.S. Bank

Forbes: An Interview with Julian Assuage

CNN: Which Bank is WikiLeaks’ Target?
FDIC’s Bair: ‘Ignore’ WikiLeaks Bank Release
CNN Money: Wacky Wiki Won’t Wreck Bank Stocks

The news the last few weeks has been filled with mentions of WikiLeaks, the website that releases confidential and nonpublic documents. Most of that news has been filled with discussion concerning the website’s recent release of thousands of the United States’ State Department’s diplomatic cables. However, there is also some curiosity over information the website may have that could affect the United State’s private sector.

Julian Assuage, the founder of WikiLeaks, sparked this curiosity in a recent interview with Forbes. While discussing the massive nature of the cables leak, Assuage mentioned that the website had enough information for another major leak, and this one would be the website’s first leak concerning the private sector. Assuage stated that about half of the website’s documents concerned the private sector and hinted that the website’s next major release, scheduled for early next year, would target one of the biggest banks in the United States. Assuage said that the information was of such a nature that it would “take down” the bank.

Although evasive on the actual contents of the documents that the website will release, Assuage mentioned that the leaks would detail the inner workings of the bank and likely spark even more investigation and reform within the financial sector. Assuage likened the bank’s atmosphere to “an ecosystem of corruption.” Assuage alluded that there were definite ethical violations occurring within the bank, as well as possible criminal actions, and he predicted that it will cause a scandal of Enron-like proportions.

Assuage’s comments have ignited wide speculation regarding on which bank the WikiLeaks’ has such condemning information. Most commentators think the likely candidates are Wells Fargo, Wachovia, Citibank, JPMorgan Chase, and Bank of America. However, the media has speculated that one bank in particular is the likely subject of the controversy, because of Assuage’s previous comments. Last year, Assuage mentioned to an interviewer from Computerworld that WikiLeaks had five gigabytes of information from a Bank of America executive’s computer. Bank of America’s stock is already suffering from Assuage’s comments. On Tuesday, shares fell more than 3% and ended pennies above their lowest price of the past year.

The head of the FDIC, Sheila Bair, downplayed Assuage’s comments. She suggested consumers simply ignore his remarks and rumors of an upcoming leak. Bair stated that since the financial crisis the transparency of the banking industry has increased. Bair was also skeptical that Wikileaks could have any major information about the financial sector and banking industry that has not already been previously released. Time will tell what kind of impact these WikiLeaks could have on the private sector. If Assuage is to be believed, there will be at least some impact, and we probably won’t have to wait long.

1. Do you think Assuage has the kind of information that could cause another Enron-like scandal or is Bair’s statement that there isn’t any further and unknown information more accurate?
2. If WikiLeaks does have such information, what kinds of reform would you expect?

Saturday, December 04, 2010

Ecuador Renegotiates Contracts with Foreign Oil Companies

Sources: If it Ain’t Broke… Presidente Correa: Renegociación de contratos petroleros fue todo un éxito Quito Takes Over Petrobras Fields Ecuador in Final Stage of Oil Contract Talks Termina renegociación de contratos petroleros

The government of Ecuador recently finished negotiations with foreign oil producers to help maximize its profits in the country’s most lucrative business. The new contracts completely change the rules of business for the oil sector. Now, instead of being forced to pay over a percentage of their profits to the national government through taxes, foreign oil companies will become service providers—meaning they will be paid a set price for each barrel of oil they extract, with most agreements requiring that the government pay about $35 per barrel. The national government will then keep the profit above that amount, ensuring that the government will profit when oil prices increase. This has lead President Rafael Correa to claim that the negotiations were a resounding success, though it has been hard for the companies to swallow, and has even pushed Brazil’s national oil company Petrobras to end production in Ecuador.

The process of changing the way foreign oil companies do business in Ecuador began earlier in the decade when oil prices first exceeded $70 per barrel. The previous set of oil contracts, signed in the mid-1990’s, gave the government the rights to 17-27% of the first $15-$17 in revenue for each barrel of oil sold; a paltry figure considering today’s oil prices. In 2006, the government added an additional 50% tax on oil company’s profits above the contract cut-offs as oil prices began to soar. In 2008, that tax was increased by the current government to 99% when oil prices reached record levels of nearly $150 per barrel. That year the government also seized the oil fields from the French company Perenco over a tax dispute, further straining relations with foreign oil companies.

Since the first change in 2006 the foreign oil companies have been wary of the government. Some companies threatened international arbitration over the changes, though little more than posturing ever happened. Unfortunately for the government, its actions have all but halted exploration and investment in the national oil sector because companies fear being kicked out of the country like Perenco. The number of barrels of oil produced per day in Ecuador has dropped from 255,000 to 162,000 just since President Correa took power in 2007. That drop has cost the country $2.3 billion per year at current prices.

Ecuador hopes the trend of declining oil production will reverse in light of the new contracts. In theory, the companies will no longer be concerned about losing their investments entirely through expropriation and will therefore expand production and exploration activities. If that is coupled with an increase in global oil prices, a prospect Ecuador is surely banking on, Ecuador’s profits from the new contracts could be enormous. However, when coupled with the country’s 2008 international debt default of $3.2 billion, the new contracts could further drive down foreign investment in a country that is already lagging behind its Latin American peers in that category, which would continue to be a drag on growth.

1) President Correa claimed that the new contracts will ensure that oil profits go to the people that own the oil—the Ecuadorean people. How might foreign investors react to this statement?
2) Though Ecuador’s economy is expected to grow by about 3% this year, ever other country in Latin America (excluding Ecuador’s oil dependent neighbor, Venezuela) is booming with much higher growth rates and levels of foreign investment. Considering that foreign investors were already wary of investing in Ecuador because of the 2008 default, is this the right time for Ecuador to have a major shakeup in its largest industry?

Wednesday, December 01, 2010

Police Take Back Favela in Rio

Sources: Time's Up Bandidos fugiram do Alemão pelo esgoto e com uniformes do PAC, diz delegado Security Forces Win Control of Rio’s Favelas Brazilian Forces Expel Criminal Gangs from Favels; Promise to Stay Brazilian Forces Claim Victory in Gang Haven

After a week-long struggle, Brazilian police and military forces claimed victory in a fierce gun battle in the notorious Alemão favela (shantytown) in Rio de Janeiro (population 100,000). The battle was sparked by an uprising in the neighborhood by drug gangs on November 20. Brazilian officials have labeled the uprising as a response to the government’s “pacification” campaign. The campaign was started in 2008 as a strategy for making Rio’s streets safer before the 2014 World Cup and 2016 Olympics to be held in the city.

Brazil has had a long history of problems with both gangs and the favelas generally. It is estimated that up to one-third of Rio’s population of six million resides in a favela. These favelas usually lack basic services such as running water, electricity, and banking. They have been controlled by powerful drug cartels for decades. Brazilians have long complained of the problem while their politicians have ignored the problems, thanks to hefty bribes paid by the cartels.

Only because of the international concern raised in the wake of the announcements that Brazil would be hosting the World Cup and Olympics has political support swelled to a level sufficient to attack the problem. In 2008 the state and national government announced a new plan to place “police pacification units” (known by the Portuguese acronym UPP) in Rio’s favelas to establish a permanent police presence in those areas. Many were concerned that the program would fail because residents of the favelas have historically trusted the police even less than they trusted the drug lords. Their only contact with police officers was often in situations where police entered a slum to forcefully extract someone—situations that often caused collateral casualties.

The police and military victory on November 28 is proof that the pacification plan is indeed working. The government was able to seize 40 tons of marijuana, 150 kilos of cocaine, 50 assault rifles, 50 stolen motorbikes, and 9 antiaircraft guns while making around 200 arrests. Though there have been around 40 casualties, the reaction from favela residents to the operation has been positive. The overriding fear, however, is that the newfound peace will not last, even though the government promises that the police presence will remain permanently.

Discussion Questions:
1) To the casual observer this police tactic appears to be a top-down approach to solving a problem. How might a bottom-up approach better aid development and sustainable growth in the favelas while at the same time rooting out gangs?

Sunday, November 28, 2010

The Rise of the IMF

Irish Times: Efforts Intensify to Finalise Bailout Package by Tomorrow
New York Times: Debt Crisis Highlights I.M.F.’s Renewed Role
Bloomberg: Serbia Accepts IMF Terms, Paving Way for Loan Tranche

This year alone, the IMF has given loan packages and credit lines to Ireland, Colombia, El Salvador, Greece, Jamaica, Mexico, Poland, and Ukraine. Serbia is expected to join that list soon, and few would be surprised if Portugal and Spain accepted IMF aid in the near future. IMF’s active involvement throughout the world since 2007 has increased its legitimacy and made more countries inclined to accept IMF aid.

Two reasons for the IMF’s greater authority are its changes in policies and structure. The IMF gives out conditional loans. The conditions are various economic reforms recommended by the IMF. The IMF now gives central banks greater freedom to structure aid packages, retracting the old policy that central banks could only target a very low level of inflation. The old policy was an unpopular one because the central bank had to restrict the money supply to achieve low inflation, and restricting a country’s money supply slows its overall economic growth. The IMF also mandated severe budget austerity programs to decrease government borrowing and eliminate the prospect of future inflation. Decreasing borrowing alleviated long term concerns that the government would increase the money supply and then use the less valuable, and thus inflated, currency to repay its debts. Although unpopular, the old policies were effective at fighting inflation. The IMF also allows developing countries to exercise mildly protectionist measures in severe situations to help domestic industry where the IMF was previously against protectionism in any situation.

Structurally, the IMF has reorganized itself by giving more voting authority to Asia at Europe’s expense. The redistribution of power has given the IMF more legitimacy to many in the developing world as many feel the IMF now reflects their interests. Another sign that the IMF is incorporating more of the developing world is that the next Managing Director of the IMF is not expected to be from the developing world. Kenneth S. Rogoff, the former Chief Economist of the IMF, finds it “inconceivable that they’ll have a Western European or North American as the next Managing Director.”

The IMF has also taken on a new role as advisor. The G-20 economic powers gave the IMF the task of correcting the balance-of-payments distortion which is a source of political and economic danger between Asia and America. This is a massive task that lies at the heart of the global economy.

The IMF and EU bailout of Ireland shows the IMF’s traditional role as lender, and its new role as global economic advisor. The total loan of €85 billion comes from a variety of sources, only one of which is the IMF. However, the IMF is in charge of supervising the use of all the funds and advising Ireland’s economy policymakers. The IMF is seen as the best institution to monitor policy reforms and is highly valued in that capacity.

While the IMF has increased its power in recent years, it still issues the same type of conditional loans it always has. Serbia and IMF recently reached an agreement, subject to approval by the IMF Board of Directors, for anther loan tranche from the IMF in exchange for Serbian economic reform. Serbia will reduce its budget deficit from 4.8% to 4.1% of GDP this year, freeze subsidies at 2010 levels, and allow for only modest rises in public wages and pensions. The IMF will also oversee the reform of the pension system.

1. The IMF is the leader in the G-20’s effort to diminish the trade imbalance between Asia and America. Will the IMF be as successful advising China and the United States as it has previously been with smaller nations?
2. Does the fact that the IMF is now directing most of its energies towards European issues please or displease the developing world?
3. Given the increasing economic power of the developing world, how many more changes in the IMF’s structure can be expected in the next twenty years?

Portuguese Economy Struggling


With the slow growth that has plagued the Portuguese economy over the past decade, both Portuguese officials and EU Commission President Jose Manuel Barroso have had to fend off rumors that Portugal is next in line for a financial rescue package from the European Union. The Financial Times Deutschland recently reported that several Euro Zone countries and the European Central Bank were encouraging Portugal to seek financial aid from the EU and the IMF. However, Barroso claimed that that report is "absolutely false," and that a rescue package for Portugal has been neither requested nor suggested by the EU.

Nevertheless, economists still anticipate that Portugal will eventually receive EU bailout funds. One economist stated that the market is already assuming a bailout for both Portugal and Spain, even though officials from both countries have vehemently denied this possibility. Portuguese Prime Minister Jose Socrates emphasized the 2011 budget that the Portuguese parliament recently passed, which aims to cut the deficit from 7.3% of GDP to 4.6% in 2011 by imposing public spending cuts. The budget measure also includes a value-added tax (VAT) increase to a maximum rate of 23%.

Portugal's economic problems are primarily a result of the country's inability to adapt to globalization over the past decade. Portugal has struggled to compete with nations like China, who are able to produce the same goods as Portugal but at a much lower price. At one time, one of Portugal's largest exporters was its shoe-making industry. But since 2001, its shoe production has decreased by 40%.

Some of the stronger economic EU countries may be putting pressure on Portugal to accept aid to help stabilize its economy. The euro has sharply fallen due to fears of instability in several European nations, including Portugal. The euro fell to $1.32 this week, down 3% in this week alone.

Discussion Question: Are EU and Portuguese leaders just trying to instill confidence by denying that Portugal is set to receive EU bailout funds?

Saturday, November 27, 2010

Bemba Trial Marks Crucial Point in International Criminal Court’s History

The Economist: International Justice: In the Dock, but for What?
The Washington Post: Witness at War Crimes Trial Weeps Over Girl’s Rape
The Guardian: Bemba Trial: The International Criminal Court Takes on Gender Crimes

CNN: Militia Leader Accused of Crimes Against Humanity Goes on Trial
International Criminal Court: Situation in the Central African Republic
Wikipedia: International Criminal Court

Last Monday marked the start of the long awaited trial of Jean-Pierre Bemba Gombo in The Hague, Netherlands. Bemba was formerly the vice president of the Democratic Republican of Congo. He is on trial in the International Criminal Court (ICC) for both war crimes and crimes against humanity, including murder, pillaging, and rape. These alleged crimes did not take place in Congo, but in the bordering country of the Central African Republic from October of 2002 to March of 2003.

International human rights groups have accused Bemba, the leader of the political party and militia known as the Movement for the Liberation of Congo (MLC), of using the MLC to kill, rape, and pillage civilians in the Central African Republic in order to assist the Central African Republic’s then president in his fight against rebel forces. Bemba, as the MLC’s commander in chief, is accused of failing to prevent and punish the MLC’s war crimes and atrocities. This is the ICC’s first case trying the commander of a military force for failing to responsibly handle his troops.

Bemba’s trial marks a critical point in the ICC’s history. The Rome Statute of the International Criminal Court treaty established the ICC in July of 2002. There are currently 114 countries that have either signed or ratified the treaty, including the United States. The main purpose of the ICC is to provide an international tribunal that has jurisdiction over four different types of crimes: genocide, war crimes, crimes against humanity, and the crime of aggression. Since its creation in 2002, there have only been a handful of trials in the ICC. Critics of the tribunal condemn its slowness, the expensive natural of its operations, and even its credibility. The Bemba trial is a chance for the ICC to silence some critics by holding a fair and speedy trial in the midst of high publicity.

The Bemba trial also marks a significant point in history, because it is the first trial in which sex crimes are part of the main focus. Bemba’s trial is an opportunity for the ICC to prove it is serious about the prosecution of sex crimes. The tribunal needs to set a firm precedent that sex crimes will not be tolerated in order to discourage their occurrence in the future.

Sex crimes have been historically used to demoralize and terrorize civilians into submission. Sexual violence in conflicts usually results in increased numbers of AIDS, gang rapes, and unwanted pregnancies. Often victims of sex crimes are wrongfully blamed within their cultural groups. If successful, the International Criminal Court’s trial of Bemba should be a step in the right direction for the prosecution, punishment, and declination of sexual violence in times of conflict. Hopefully, it will also bring more peace to the Central African Republic and its survivors, many of whom have been waiting almost a decade for justice.

1. Do you think there should be an international tribunal, like the ICC, to try crimes against humanity, war crimes, genocide, and the crime of aggression? Why or why not?

Wednesday, November 24, 2010

Eastern European Stock Exchanges

The Economist: Bourse Battle
Bloomberg Businessweek: Shares in Warsaw Stock Exchange Rise After IPO

On November 9th, the Warsaw Stock Exchange (WSE) launched its initial public offering (IPO) of shares to great demand. The Polish government is looking to raise 25 billion zlotys ($8.6 billion) to pay for part of its budget deficit in the coming years. The IPO raised 1.2 billion zlotys, which was more than anticipated, and represented 63.5 percent of the exchange’s total stock. The targeted price per share was 36-43 zlotys, but the price for each share by the end of the day was 46 zlotys.

This is a massive privatization effort by the Polish government. Previously, stock in the WSE has been under the aegis of the Polish government. Although this gave the Polish Government great control over the economy, it was an outdates policy resulting from actions taken immediately after Soviet rule. There is evidence that Poland is succeeding in privatizing its stock market. There are now 700 businesses listed on the exchange, and daily trading surpasses $600 million. The November 9th IPO was the 25th IPO this year, which is a strong number of IPOs for the WSE compared to Poland’s neighboring countries.

Poland is not alone in Eastern Europe in trying to create a viable stock market. Vienna is striving to be the regional leader too. The Vienna stock exchange, the CEE Stock Exchange Group (CEESEG), brings together the exchanges from Vienna, Budapest, Prague, and Ljubljana. However, in the CEESEG, there has only been one IPO since 2007. In the Prague exchange alone, there are only 27 companies listed, which is down from over 150 a decade ago.

The development of multiple stock exchanges has led to competition for companies’ IPOs. Many companies in Eastern and Central Europe find that their own nation’s stock exchange is fragmented or unstable. For example, Romania has two competing stock exchanges. This is a problem as smaller stock exchanges have less liquidity than larger ones, decreasing investment. The WSE has been a popular destination, drawing companies from Ukraine, Romania and elsewhere. The CEESEG is targeting companies in the Balkans. Although both are looking for international clients, the two are still mostly composed of domestic companies.

The biggest threat to the WSE or the CEESEG is not from one another, but from the London Stock Exchange (LSE). The LSE has attracted many listings from Russia, Ukraine, and Kazakhstan. Even the chief executive of the WSE admits the WSE is modeled after the LSE. Another threat outside of Eastern Europe is the Istanbul Stock Exchange (ISE). The ISE is has double the market capitalization of the WSE and five times the turnover. The ISE may also act as a more accurate model for the WSE as the ISE is still state-owned, and like the WSE, it has not expanded its sphere of influence much beyond its own borders.

Eastern European companies are now looking for a place to hold an IPO, and investors are eager to invest. The stock exchanges are rising in Eastern Europe to serve that demand. While it would be beneficial to the region if the WSE and CEESEG were successful, as money would stay in the region, it will be a long time before either can rival the Dow Jones or the LSE.

1. Financial markets allow for businesses and governments to conduct commerce around the globe. If the world is so globalized, then why do companies care which stock exchange their stock is listed on?
2. Given that Greece was one of the nations worst hit by the financial crisis, how wise is it for the CEESEG to focus on gaining investment from Balkan nations?

Monday, November 22, 2010

Argentina Ready to Pay Paris Club Debt

Sources: Argentina's Paris Club Debt to be Resolved by Early 2011, Lorenzino Says El Club de París quiere que la Argentina pague en el corto plazo La Argentina y el Club de París El FMI ve como una "cosa buena" el inicio de negociaciones de la Argentina y el Club de París UPDATE: Argentina Rules Out Quick Paris Club Repayment –Minister

Argentine President Christina Fernández de Kirchner announced earlier this week that Argentina would begin negotiations to pay off its debts to the Paris Club, a group of international creditors that includes the U.S., Japan, and Germany. Argentina has been in default with the Paris Club since its economy collapsed in 2001.

The Paris Club debt totals about $7.7 billion. The Argentine Government originally announced plans to pay the debt with foreign currency reserves in late 2008, but when Lehman Brothers failed and the global financial crisis ensued, the Government changed course and decided to hold on to those reserves through the lean times. Now that the country is back on track economically (its economy is projected to grow by around 9% this year), the Government has decided that it is financially capable of making the debt payments.

Normally the Paris Club will only negotiate debt repayment plans with the participation of the International Monetary Fund and its team of auditors. However, most Argentine politicians say the 2001 collapse was a direct result of the changes the International Monetary Fund required Argentina to make to qualify for loans, which has resulted in poor relations between the two over the last decade. This inspired Argentina to successfully insist that any negotiations with the Paris Club not include the IMF. This is a huge political victory for Argentina, where politicians claim victory in this “David versus Goliath” clash. The IMF has even made public statements saying that its exclusion is a “good thing.”

Though the IMF will not participate in the negotiations, the meetings will surely still be contentious. The Paris Club creditors want Argentina to pay the debt off as fast as possible to avoid another change of course by the Argentine Government. This fear has escalated with the recent passing of former President Néstor Kirchner who was widely expected to run for (and easily win) the presidency in 2011; with his death the race is now wide open.

Argentina, on the other hand, disagrees with any proposed payment schedule that might interfere with its growth. The Argentine Government has already made it clear that it will not pay the debt in one lump sum or in less than one year, but it is also anxious to receive the benefits that come with removing the stigma that comes with defaulting on national debt. The Government hopes that paying the debt will increase the amount of foreign capital flowing into the country, which would help build needed infrastructure and fund further economic expansion.

1) Some government critics have suggested that Argentina wants to keep the IMF out of the negotiations process because the Government fears that the IMF auditors will find flaws in the Government’s accounting that will expose an economic situation less favorable than the picture the Government currently projects. This is surely a situation the Paris Club recognizes, and yet it has agreed to negotiations without the IMF. Why?

Thursday, November 18, 2010

India's Microfinance Sector Facing Collapse

WSJ: SKS Chairman Fights Backlash
NYT: India Microcredit Faces Collapse From Defaults
FT: Microfinance: India Considers Rate Cap on Loans to Poor

Microfinance is the practice of extending small loans to individual borrowers who have traditionally lacked access to credit. The goal of this practice is to help the poor start or expand businesses, and it has become a popular antipoverty strategy in the developing world. In India, commercial banks are required to direct a certain percentage of their net credit (40 percent for local banks, and 32 percent for foreign banks) to designated "priority sectors." The Reserve Bank of India designates these sectors, and includes areas such as agriculture, small business, housing, education, and lending to the poor and vulnerable.

In recent years, Indian commercial banks have met this requirement by making loans to microfinance institutions such as SKS Microfinance. Rather than making loans to hard-to-reach borrowers directly, commercial banks turned to these microfinance institutions because it was cheaper and easier for them. Today, Indian banks have $6 billion in outstanding loans to the 44 for-profit Indian microfinance companies. Initially, this relationship was mutually beneficial–– microfinance companies received the liquidity they needed to make the millions of tiny loans to provide poor borrowers with the capital necessary to lift themselves from poverty, and the banks were able to fulfill their required priority lending targets by simply making loans to a couple of large microfinance companies, "rather than trying to establish rural network lending themselves."

Now, it appears that this mutually beneficial relationship is breaking down. Microfinance companies have recently been under scrutiny for their lending tactics, which have been compared to the subprime mortgage crisis in the United States. For example, the microfinance companies borrow from commercial banks at a rate between 11 and 15 percent, and then turn around and lend at a rate of 30 percent. They also have been criticized for their "coercive" debt collection tactics. Further, these microfinance institutions are making huge profits. SKS, India's largest microlender, was valued at $1.5 billion last August. According to India's Minister for Rural Development, "[t]hese institutions are using quite coercive methods to collect . . . . They aren't looking at sustainability or ensuring the money is going to income-generating activities. They are just making money."

All of this came to a head in October, when India's Finance Minister asked India's state-owned banks to stipulate that interest rates be capped at 24 percent in their loan agreements with microfinance institutions, and legislators in Andhra Pradesh passed a strict new law restricting how microfinance companies can lend and collect money. But this new legislation may be too late, as the industry is now facing collapse because it has put the banks' portfolios in serious risk, and many borrowers have no idea how they are going to pay their debts back.

Microfinance systems similar to India's have sprung up in Africa, Latin America, and other parts of Asia. The World Bank has used India as a test for similar social enterprises that make profit will simultaneously filling a social need.

Discussion Question: How should law makers in India, and around the world respond to microfinance companies' tactics?

Wednesday, November 17, 2010

G-20 Summit Concludes without Much Resolution on Important Issues

BBC: G20 to Tackle US-China Currency Concerns

Wikipedia: G20 Major Economies
Republic of Korea G20 Website: What is the G20?
Christian Science Monitor: Curtain Closes on G20 Summit

The Financial Times: G20 Shuns US on Trade and Currencies

The G-20 Summit in Seoul, South Korea came to a close last week. The G-20 group consists of the European Union along with the 19 countries that comprise the world’s leading economies. The countries are usually represented by their finance ministers and governors of central banks, and in more recent times, by the heads of state. Since 2008, the G-20 group has replaced the G-8 as the main global economic forum, mainly in response to the global financial crisis, but also in recognition of the need to include emerging countries in discussions about the global economy. The G-20 group represents two-thirds of the global population, 80% of all global trade, and 85% of the global gross national product. The group’s purpose is to address issues involving global economic stability and growth, as well as global development.

Tensions were high coming into the Summit because of the impending currency war between the United States and China. (See Currency Wars). During the Summit, the G-20 failed to reach any agreement concerning the “currency imbalances.” The G-20 Summit declaration did state that the world should move towards “more market-determined exchange rate systems” in order to enhance “exchange rate flexibility to reflect underlying economic fundamentals” and avoid “competitive devaluation” of global currencies. The declaration, which relied on G-20 existing policies, was well short of what the United States wanted– China to revalue its currency that would limit the United States’ trade deficits.

Because of the vast impact currencies and trade have on the global economy and the tensions going into a summit, it was unlikely China and the United States could reach an agreement; the Summit seemed doomed to fail. Indeed, many critics have categorized the 2010 G-20 Summit in Seoul as a failure. However, despite the G-20 group’s failure to resolve any of the major issues concerning the currency wars and imbalances of global trade, the group made some important progress. G-20 leaders did agree on the procedures that will increase emerging countries’ influence on the International Monetary Fund. Additionally, the G-20 group approved the Basel III standards on bank capital and liquidity. However, this progress may not be enough; many experts fear that without any resolution on the issues of trade and currency imbalances, the conflict between the United States and China will only escalate further and hinder global growth.

1. Was the G-20 Summit doomed to fail?
2. Why would the G-20 Summit rely on previous language and existing policies, rather than try to craft new ones?

Monday, November 15, 2010

A Basket of Gold

Reuters: World Bank Chief Surprises with Gold Standard Idea
The National: Obama Defensive in Face of World Bank
Financial Times: The G20 Must Look Beyond Bretton Woods II
Financial Times: Zoellick Seeks Gold Standard Debate

The President of the World Bank, Robert Zoellick, has called for reform of international exchange rate policy. His most striking comment was the suggestion that the world use gold as a reference point for inflation, deflation, and determining future currency values. Many financiers, and even textbook writers, view gold as “old money” with no place in modern, computer-driven finance. Zoellick’s rationale is that many countries, especially in the West, still hold massive amounts of gold in reserve as secure assets; it should be formally put to use. Gold is viewed as a safe asset, so its value goes up when the economy is in recession, or when people think the economy is slowing. Thus, its use as an indicator is that its value is inversely related to general economic trends.

Although Zoellick’s recommendation that gold regain some of its lost importance was surprising to many, it was part of a more important statement. Zoellick outlined a system bringing together a basket of currencies, plus gold, into a fixed relationship with each other to create greater stability to the global monetary system. The system would not leave currencies totally fixed in value with one another, rather the currencies would be adjusted to allow for changes in economic conditions.

The primary reason for Zoellick’s recommendation is the current instability in currency markets. Although initial signs indicate the United States’ second quantitative easing is having positive effects, many nations have voiced their discontent or condemnation of American monetary policy. The Federal Reserve bought $600 billion in various bonds to increase the money supply in an effort to strengthen the American economy. Buying bonds, and thus increasing their price, causes the interest rate to fall. When the interest rate falls, holding dollars is less profitable, and investors move their money elsewhere. China, Germany, Russia, India, and many emerging nations worry the excess money will gather in their economies where the interest rates are higher, creating fears of inflation and asset price bubbles.

The German Finance Minister also noted that it is inconsistent for the U.S. to criticize China for currency manipulation and then use the Federal Reserve to lower the value of the dollar. The G-20 Summit, occurring November 11th-12th, will focus mostly on currency disputes. Zoellick’s proposal is certain to add to the discussion.

1. Other developed nations have not greeted the recent expansion of the American money supply with the same harshness as the developing world. Why is Germany the exception?
2. How would American interests be damaged by the world shifting away from using the U.S. dollar as the main reserve currency?
3. Given the tension among the G-20 members on various issues regarding the world economy, how will this latest dispute affect the talks?

Friday, November 12, 2010

UK Tuition Hike Spurs Protests

NYT: Protest in London Turns Violent
Financial Times: London Street Protest Turns Violent
WSJ: UK Students Protest Higher Tuition Fees
BBC: Q&A: University Funding

In an effort to curb Government spending and balance the budget, the UK Government has proposed to cut funding for higher education by 40%. These cuts include the elimination of teaching grants in all areas except for science and math. Under the new proposal, a tuition hike that will be implemented in 2012 will cover these costs. The education cuts are part of a larger UK spending plan to cut $130 billion by 2015.

The proposal will allow universities to charge £6,000 to £9,000 ($9,600 to $14,400) in tuition per year. This is a significant increase from the current caps on university tuition, which is £3,290 ($5,264) per year. The hike is even more significant in light of the fact that until the late 1990s, college tuition was free. It wasn't until the Labor Government introduced tuition fees in 1997, requiring all students to pay £1,000 in tuition fees per year of study, that British students had to pay anything at all to attend a university. Under the new plan, the Government will continue to loan students money to cover tuition costs; graduates will have to start paying their loans once they earn £21,000 or more per year, up from £15,000; and graduates will be required to pay up to 9% of their monthly income towards their student loan debts. The interest rate at which the repayments will be made, currently at 1.5%, will be raised according to a progressive tapering system: interest rates will not increase at all for anyone making less than £21,000, but will increase to 3% or more for those making more than £41,000.

The Government has traditionally subsidized higher education in the UK and many students are protesting this transition with great fervor. An estimated 52,000 people came together near Parliament on Wednesday to protest the new education proposals. Fourteen people, including seven police officers, were injured, and thirty-five were arrested. The protests turned violent when the protesters attempted to storm the Milbank Building that houses the Conservative Party. Protesting students set fires, smashed windows, fought police, and eventually made their way to the roof of the Milbank building, from which they threw down water, paper, and even a fire extinguisher, onto crowds of people below.

The protest was organized by the National Union of Students and the University and College Union, the academics' trade union, and was intended to be peaceful. NUS president Aaron Porter claimed that a "small minority" undermined the efforts of the rest of the group that sought to maintain a peaceful protest. Porter and others argued that the violence would undermine their message. One vice-chancellor from a London university making this point stated "[the protest] could not have gone better for the Government. George Osborne [the current Chancellor of the Exchequer] will be delighted."

Discussion questions: Given the state of the economy in the UK, are the protesters overreacting to the Government's decision to increase tuition? What could the UK do to avoid increasing costs for students?

Thursday, November 11, 2010

Tanzania Announces Plans for Large Infrastructure Development

Wikipedia: Eurobonds
Investopedia: Eurobonds
All Africa: Tanzania: Poor Infrastructure Dogs Development
Bloomberg: Tanzania May Sell $500 Million of Eurobonds in 2011 – 2012, Central Bank Says
All Africa: Tanzania: Business Confidence High Despite Impending Polls

Last June, the Finance Minster announced that Tanzania would try to borrow around $1.4 billion from lenders in order to finance massive infrastructure projects, such as building roads, expanding ports, and increasing the nation’s power generation. Eurobonds are one avenue for the country to raise these funds. Last week, the Bank of Tanzania announced this week that it was planning on selling around $500 million of Eurobonds within the next two years.

Eurobonds are bonds for an international market. The issuing country issues the bond in a foreign currency, rather than its own local currency. The bond issuer will pay the bond holder interest on the bond over time. An attractive feature of the Eurobond is that the holder does not have to pay a withholding tax on the interest. Eurobonds also draw investors because of their small par value (face value) and high liquidity (investors can easily buy and resell the bonds without affecting their price).

The bonds will help provide Tanzania with the funds to undertake massive infrastructure-building projects. Constructing roads will be one such infrastructure project. Tanzania’s road system is a network of 85,000 kilometers of roadway, but only around 5,000 kilometers are paved. This new infrastructure is important for Tanzania, because poor infrastructure has caused many problems for the county, such as inhibiting both trade and anti-poverty efforts.

Tanzania is currently one of the least developed countries in the country. The national economy relies heavily on agriculture that is not industrialized. Although there are other sectors, such as tourism, mining, construction, and manufacturing, the agriculture sector employs almost 80% of the country’s workforce. If the nation can develop better infrastructure, it will be an important step for the nation’s development and help ease the Tanzanian economy’s reliance on agriculture.

Discussion Questions:
1. What are some of the advantages and disadvantages Eurobonds have over other revenue-raising tools?
2. In what ways, other than helping trade and anti-poverty efforts, might new infrastructure affect Tanzania?

Sunday, November 07, 2010

China Makes More Investments in Greece

NYT: China, Looking for Investments, Turns to Europe
WSJ: Beijing Offers Support to Greece
China Daily: COSCO Acquires Rights to Athens Port

Since the global financial crisis, China has made huge investments in several European countries. Particularly, it has invested in those that were hit hardest by the financial downturn such as Greece and Spain. These investments are beneficial for both China, which has huge currency reserves, and the countries in which China is investing, which desperately need foreign investments. Haris Pamboukis, the Greek Investment Minister, recently said "the support of our Chinese friends is fortunate for us." But China is fortunate as well, as Greece's desperate need for financial support may benefit China financially and politically.

China has focused its investments in infrastructure; specifically, on ports in Greece and Italy along with highways between Eastern Europe, Germany and Turkey. Last month, Chinese Prime Minister Wen Jiabo visited Athens to discuss Chinese investments in Greece. Wen pledged that China would continue to buy Greek bonds and announced the creation of a $5 billion fund that shipbuilders could use, but only to buy Chinese ships. This summer, China's state-owned shipping giant Cosco acquired the rights to Athens' main port, Piraeus. Cosco signed a 35-year lease and paid $4.2 billion for the rights. Cosco is seeking to transform Piraeus into a much larger port to rival Rotterdam, which is currently the largest European port. It aims to double the traffic at Piraeus to 3.7 million containers by 2015. Cosco has also recently expanded in Italy, to the port of Naples. China has also purchased $625 million in Spanish debt, and other struggling countries such as Ireland and Hungry are hoping to persuade China to make investments there, too.

These investments may make China a more dominant player in Europe. According to one source, China is hoping to build a track record of investments that will eventually encourage Europe to support it in disputes with the World Trade Organization concerning trade and currency. Some analysts say that China is hoping to wield greater influence over the economic policies set in Europe. Investing in Greece could also be quite profitable for China. Haris Pamboukis, Greece's Investment Minister, stated investing in Greece is a good opportunity right now "because it has undervalued assets due to its systematic risk . . . [w]hen there is a crisis and risk, there is a very significant profit margin." China will continue to foster relations with Europe this week, as Hu Jintao, China's President, is scheduled to meet with officials in Portugal and France.

Discussion Questions: Should European countries be more hesitant about allowing China to make such significant investments? What are the possible downsides of these investments?