Wednesday, April 27, 2011

Efforts to Increase Tourism in The Bahamas Have Met Some Obstacles

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

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

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

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

Possible Conflict May Arise Over Jamaica’s Stand-by Agreement with IMF Over 5% Tax Cut in Fuel

Jamaican Gleaner: IMF Open to New Standby Agreement with Jamaica
Business Content Jamaica: Jamaica Shaves 5% Off Controversial Gas Tax
Business Content Jamaica: 1.2% Decline in Jamaica’s Economic Growth

On April 12, 2011, the Jamaican government successfully avoided protest by opposition party, the Peoples National Party (“PNP”). The PNP, had originally scheduled the protest to oppose the Jamaican government’s implementation of a 15% tax increase on fuel. Consumers had already been hit hard by the international increase of fuel prices and the 15% tax increase would have only increased costs for cash-strapped consumers. Currently Jamaican motorist pay more than $4.40 per gallon for gasoline. The 15% tax increase would have sent the price of gasoline to over $5.00 per gallon, something the PNP was unwilling to accept. In response to the possible protest, the Jamaican government agreed to reduce the tax by 5% and successfully quelled the party’s protest.

Although the Jamaican government avoided the immediate fear of political protest, reducing the fuel tax has only created another imminent fear for the Jamaican government. The 15% increase in tax fuel was one of the conditions negotiated in a medium-term economic stand-by agreement with the International Monetary Fund. This agreement between the Jamaican government and the IMF provides the Jamaican government with a 3-year $1.27 billion dollar loan in order to help the government implement new economic reforms and cope with the global downturn. However, the agreement comes with conditions and clearly states that the Jamaican government must meet certain markers and goals for ensuring greater fiscal discipline. One of these markers included increasing cash supply through increased taxation, which the 15% fuel tax increase was supposed to be a part of. The 5% decrease assented to by the Jamaican government, will now force them to explain an unexpected budgetary cost of 3.5 billion Jamaican dollars (roughly $41 million U.S. dollars) to the IMF. It is clear from the terms of the stand-by agreement with the IMF, that Jamaica faces possible legal sanctions for failing to meet these markers. Already identified as a government with a “terminal point problem,” or a problem with failing to meet financial and structural markers, the Jamaican government is unsure if this decrease in tax fuel will have a legal affect for the country. However, in the February review of the agreement, IMF technocrat Trevor Alleyne said the IMF is working with the Jamaican government to ensure that resort to legal sanctions is avoided.

Although some support the stand-by agreement between the IMF and the Jamaican government, critics point to Jamaica’s 1.2% GDP contraction in the 2010 year as an indicator that the reforms imposed by the terms of the agreement are not stimulating growth. Alleyne contends that increasing GDP was never the major goal of issuing the loan, but providing insurance for banks in case of a sharp demand for loans during a debt exchange shock, or fallout, was. Maintaining the economic confidence of companies is crucial toward the growth of the country, Alleyne stated.
However, when a sharp GDP contraction in Jamaica’s September quarter, did not send companies running to the bank for cash bailouts, critics viewed the loan as an attempt to swindle the Jamaican government into paying interest on a overly excessive loan, since $950 million of the $1.27 billion loaned by the IMF had been allocated for such a shock. Alleyne contends that the loan was created to prepare Jamaican banks against the worst possible scenario, not as a reflection of the IMF’s belief that the worst case scenario would actually happen.

Despite criticisms of the loan, the Jamaican government will continue to work with the IMF to make improvements in their fiscal planning. If nothing else the existence of the loan will encourage much needed cheap budgetary support from the World Bank and the Inter-American Development Bank.

Tuesday, April 26, 2011

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sunday, April 24, 2011

China and Uzbekistan Agree to Trade Deals

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

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

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

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

World Bank Chief Warns on High Food Prices

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

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

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

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

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

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

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

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

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

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

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

Saturday, April 23, 2011

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


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

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

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

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

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


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

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

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

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

Rising Fuel Prices, Fees Push Shanghai Truck Drivers to Strike

South China Morning Post: Shanghai truckers strike for third day

This week truck drivers at several ports in the Shanghai area went on strike to protest fuel prices and port fees that have cut into their wages. The strikes have so far lasted four days, but all ports continue to operate. The strikes have not yet caused a major roadblock to exports, but area logistics providers have said that container ships are leaving the port without some shipments.

The strikes began on April 20th when truck drivers blocked a dockyard and encouraged other drivers to demonstrate. Several workers smashed windows of trucks that did not stop and join the demonstration. At that point the Shanghai government sent in police to contain the demonstration and arrest those blocking the flow of container shipments. Since then the Shanghai government has been negotiating a settlement with the truck drivers. Xinhua reported that the Shanghai government has cut some fees like warehousing fees that logistics companies have passed on to truck drivers in the form of lower wages.

So far the strikes have not spread beyond ports in the Shanghai area. If the strikes spread to other key ports like Tianjin and Guangzhou, international shipments could be severely delayed and China’s reputation as a hassle-free exporter could be damaged. The Chinese press, even relatively independent financial magazines like Caixin and Caijing, has reported very little on the truck strike except to note that the government is negotiating with the truck drivers.

China’s inflation rates reached a three-year high last month and is one of many Asian countries battling inflation. Fuel price protests have been relatively common in recent weeks in areas as diverse as the Philippines, Kenya, and India. Chinese officials have recently noted that inflation poses some of the greatest risks to social stability.

The IMF Warns Pakistan on Economic Reforms


This week the IMF released a report strongly criticizing Pakistan for backtracking on economic reforms it agreed to as a condition loans. In 2008, the IMF and Pakistan began an $11.3 billion loan program on the condition that the government would increase tax revenue and give its central bank more autonomy to set monetary policy. The IMF says that in the early months of the program, Pakistan followed through on its commitments. However, in May of 2010 the IMF stopped payments to Pakistan after reforms stalled. In December of 2010, the IMF granted Pakistan a nine month extension of the program with the expectation that Pakistan's government would institute a new sales tax program. Pakistan is now attempting to negotiate a second round of loans from the IMF, in part to help pay back loans from the first round.

Pakistan has one of the lowest tax-to-GDP ratios in the world, yet is consistently in danger of defaulting on loans by the IMF and foreign lenders. Pakistan's government has a total public debt of roughly $138 billion and a debt-to-GDP ratio of more than 60%, higher than most quickly developing countries. The IMF has been pushing Pakistan to increase its tax revenues by improving collections, specifically by instituting a sales tax. Pakistan has instituted a sales tax, but some traders have shutdown their businesses in protest over the measures. As a result, the government has been slow to implement the tax. The IMF is pushing for the tax in the hopes that it would allow Pakistan's government to fund more development and poverty reduction projects, especially in areas with poor security conditions.

Beyond tax reform, the IMF plan for Pakistan includes several other measures. The IMF wants Pakistan's government to pay down its debts to boost economic confidence that will lead to higher savings rates and investments. The IMF also believes that Pakistan's monetary policy should be dictated by the central bank and insulated from political pressures. Finally, the IMF is pressuring Pakistan to decrease its subsidies for petroleum, however this is politically unpopular at a time when global fuel prices continue to rise.

Pakistan's GDP is projected to grow at 2.5% this year as it struggles to manage its debt obligations and pay for the cleanup of the 2010 floods that affected more than 20 million people. Pakistan's economy also suffers from internal fighting that frequently lead to displacements of large numbers of people in the areas that provide much of the country's food and mining resources.

Egypt: Finding the Balance Between Fighting Corruption and Retaining Investors

FT: Probes Spread Alarm in Egypt’s Businesses
AP: Egypt Stocks Extend Decline Amid Corruption Probe
The Economist: Staggering in the Right Direction

With the ousting of Hosni Mubarak, Egypt’s long-term autocratic leader in February, the country’s officials have been under pressure to stomp out corruption. In mid-April, Hosni Mubarak and his two sons were detained and charged with amassing illegal wealth as a result of their political positions. Furthermore, senior officials, including the prime minister and some ex-cabinet members were detained and imprisoned on charges of corruption and amassing illegal wealth. Protestors expressly demanded that senior officials be brought to justice, and have praised the efforts of the Egyptian military and civilian leaders in bringing to justice those who have abused and received illegal benefits during Mubarak’s rule.

Corruption probes, however, have not been limited to senior officials but have extended to other businessmen. Moreover, an investigation of a businessman of one company can leave a significant mark on companies not under investigation. For example, Ahmed Ezz of Ezz Steel is currently under investigation for fraud and corruption. The investigation of Ezz Steel has created serious problems for its subcontractor, Bahna Engineering, who has not been paid and cannot make plans for the future. Throughout the country, businessmen are being charged with corruption or are being investigated. This has sent a wave of panic throughout the business community. Additionally, the political authority has imposed restriction to limit capital flight putting further pressures on the Egyptian economy (capital flight occurs when proceeds from domestic businesses are taken out of the country, thereby shrinking the capital available in the country). This week, Egypt’s struggling stock market fell in the first half of the week, in response to news of additional corruption probes.

Insiders have noted that while fighting corruption is essential to putting the country back on the path of democracy, officials must tread a thin line between frightening off investors and fighting corruption. As John Sfakianakis, chief economist with the Riyadh, Saudi Arabia-based Banque Saudi-Fransi suggested, activity in fighting corruption should focus on creating a system of transparency going forward. He noted that going after businessmen in Egypt will only lead to the tightening of capital in the country, when investment and capital is most needed. Indeed, the country’s finance minister has asked the World Bank and the IMF for several billion dollars of loans to provide the economy with more capital. Commentators suggest that holding much of the business community hostage to corruption charges is counter-productive given that the system under Mubarak was corrupt, not the individual businessmen. As the Egyptian government takes on corruption and holds accountable those who have abused the system in previous years, it will have to be cautious not to frighten off investors to the detriment of Egypt’s economic recovery.

Friday, April 22, 2011

MENA Political Watchdogs: Social Media and Al Jazeera

NPR: Clinton Lauds Virtues Of Al Jazeera: 'It's Real News'
NPR: Syrian Activist In Hiding Presses Mission From Abroad
American Journalism Review: The Al Jazeera Effect
Politico: Al Jazeera has fans in Obama W.H

It is undeniable that social networks have been instrumental in fueling the Jasmine Revolution in the Middle East and North Africa (MENA). In fact, the term, “Jasmine Revolution” was coined by a Tunisian political activist and blogger, Zied El Hani in January of this year.

Content on social media outlets galvanized protestors, leading to the toppling of decades-old regimes in the region and spurring others. In doing so, social media content has gained a new prevalence as a source of information for international audiences. Social media appears to be at the frontline of political and social discourse about the Middle East. Many of the blogs, video posts on You Tube, and Facebook pages have not only informed local citizens, but have educated the world of the atrocities committed by autocrats in the region.

On Friday, during what has already been termed as “Bloody Friday” by international medial, Syria’s government initiated a brutal attack on protesters, according to eyewitnesses. Indeed, many of the reports received by news media were received in the form of video recording on cell phones or as links from posts to YouTube. A Syrian political activist, Rami Nakhle, is on the run from Syrian officials in Beirut, Lebanon. He collects much of the eyewitness reports from protestors (which are illegal in Syria) and uploads them on various social media websites, including his own. Some of those images and videos have made it into Al Jazeera’s programming.

In fact, Al Jazeera has received considerable attention and praise for its coverage of the Middle East revolutions. With hundreds of reporters already in place, and, working closely with “cyber activists,” commentators have suggested that Al Jazeera has outperformed more established media channels in its coverage of the Middle East. In a speech on Thursday, Secretary of State Hillary Clinton praised the channel as a leader in “literally changing people's minds and attitude.”

While Al Jazeera has many skeptics, who allege that the channel has an anti-Semitic, anti-American bias, the channel has strongly asserted itself as a leading global news source. The wealth of information communicated by Al Jazeera to its audiences has greatly influenced global sentiments towards events in the Middle East. As social media sources and Al Jazeera gain greater confidence of international viewership, their role in shaping public opinion will continue to gain prevalence, serving as political watchdogs in the region.

Thursday, April 21, 2011

Mexican Violence Has Contradictory Impact on Economy

BBC: The Price of Mexico's 'Drugs War'

In March 2011, Mexico’s Finance Minister, Ernesto Cordero, said that Mexico’s economy was unharmed by the drug and gang violence often reported in the news. He stated that tourism, accounting for an estimated 13.2 percent of Mexico’s GDP, has been unaffected by reports of violence. Cordero also said that the Mexican economy grew 5.5 percent in 2010. Finally, he said there was no reason to think that the violence was deterring investment in the region. However, recent reports tell a different story.

Although Cordero insists that the tourism business has been unharmed, owners of hotels in Acapulco, a major Mexican tourist destination, say their experience is not consistent with Cordero’s report. While tourist destinations previously have been unaffected by Mexico’s heavy drug and gang violence, there have been more reports recently of murders in cities like Acapulco. Violent incidents between the drug cartels and local police are becoming more frequent. Since 2006, there have been about 700 murders in Acapulco.

Although foreigners have not been targeted, and the violence is not concentrated in the hotel district, hoteliers say the city’s reputation has been tarnished by news reports of the violence in the city. One hotel owner says that last year 2,600 students checked-in during the spring break season. This year there have only been 60. Acapulco authorities report that tourism has dropped 93 percent this year. This decrease affects more than just hotels. Bars, restaurants, and shops are all suffering from the lack of customers.

The Mexican government refutes these reports and points out that tourism increased in 2010 by 4.4 percent. However, this increase is most likely due to Mexican tourism suffering a large drop in 2009 when Mexico was the first country to report incidents of swine flu (or H1N1). Nonetheless, the government maintains that the increase in tourism in 2010 is a positive sign of growth for the Mexican economy.

Violence does not only affect how tourists view the country. A recent survey estimates that 67 percent of Mexican business owners feel less safe doing business compared to last year. Another survey estimates that, in the regions most affected by drug violence, 10,000 small businesses shut down in 2010. Many of these businesses experienced extortion and threats from the criminals and gangs who demanded a fee to ensure the business’ security. One shop owner says that she and her husband are required to pay $4,000 each month to a gang. The gang has threatened to kill the couple and their family if they do not pay.

Although the government insists that violence does not affect the Mexican economy, there are clearly conflicting reports from Mexican residents and their businesses. The government should acknowledge these reports and respond to the rising violence before things worsen and there is further damage to the economy.

World Bank Report Warns Central American Violence Harms Economies

World Bank: Central America's Rising Crime and Violence Puts Region's Development at Risk

The World Bank released a report commenting on the damage Central American violence has on the countries’ economies. It estimates that violence costs Central American economies 8 percent of GDP due to law enforcement, citizen security and health care costs alone. This is significant when considering that, in 2010, Central America’s GDP growth rate in was only 2 percent compared to the rest of Latin America’s GDP, which grew about 6 percent.

Crime and violence are commonplace in Central America. The countries of Central America estimated that an average of 40 homicides occur per day. An estimated 71 percent of Central Americans identify crime as the main threat to their wellbeing. Violence rates have been much higher in El Salvador, Guatemala, and Honduras than in the more southern countries of Costa Rica, Nicaragua, and Panama. However, the latter countries have recently experienced an increase in violence.

The report says that Central America’s high rate of crime and violence also hinders economic growth. Business owners in Central American countries, other than Costa Rica, place crime in the top five obstacles to business growth and productivity. This hindrance stems not only from the loss of victims’ wages and labor time, but also from discouraging investment and diverting government resources to law enforcement instead of promoting the economy.

Central American crime and violence stem from easy access to firearms (due to years of civil wars), weak judicial systems, and drug trafficking. Drug trafficking is the main cause of the increase in violence. In fact, 90 percent of drugs bound for the United States flow through Central America. Drug cartels and gangs are a significant cause of the region’s high murder rates. The members of the cartels and gangs are rarely prosecuted, which contributes to the weakness of the judicial system. Because of this, many victims do not report crimes for fear of retribution and also due to a lack of faith in law enforcement and in the judiciary. For example, in 2006 in Honduras, over 63,000 criminal complaints were made, but only 1,015 ended in a conviction.

Although the report suggests that Central American governments have a long way to go to improve their situations, it offers possible steps and goals for the governments to take in the future. It recommends strategies that combine violence prevention with criminal justice reform to fight the increase in crime. It also suggests childhood development programs to steer children away from drug cartel and gang violence. On the bright side, the report estimates that even a 10 percent reduction in murder rates could increase the region’s economic growth by one percent of GDP. Because Central American countries are small and it is easy for individual (and therefore violence) to move among them, these countries must work together to decease crime and violence and their negative effect on their economies.

Wednesday, April 20, 2011

Standard & Poor’s Signals a Possible Downgrade of U.S. Sovereign Debt Ratings

LA Times: Surprise Warning on U.S. Debt Comes as Washington Inches Away from Gridlock
WSJ: U.S. Warned on Debt Load
NYT: Moody’s Says U.S. Debt Could Test Triple-A Rating
CBS: S&P Lowers U.S. Debt Rating to "Negative"

This past Monday, Standard & Poor’s, a leading credit rating firm, changed its long-term outlook regarding U.S. Treasury securities from “stable” to “negative.” The firm revised its outlook after concluding that there was a 33-percent chance that it would have to lower the rating of U.S. government debt in the next two years. While, for the time being, Standard & Poor’s affirmed its AAA rating of U.S. Treasurys, the firm warned that the country’s rising deficit posed a severe threat to U.S. government debt ratings. Standard & Poor’s opined that if the government failed to immediately address its ballooning budget deficit, by 2013 U.S. finances would be “meaningfully weaker” than those of other AAA-rated countries, thus necessitating a credit rating reduction.

A credit rating is an indication of the likelihood that a debtor will pay back a loan. A credit-rating reduction for U.S. Treasurys will impact not only national pride. The government will no longer be able to keep borrowing money on extremely favorable terms because investors will demand higher interest rates due to the Treasurys’ lower credit rating. Higher interest rates will, in turn, increase the government’s overall debt burden, and may lead to higher taxes, spending cuts, or some combination of both. Additionally, such a downgrade will probably drive U.S. interest rates higher, which will negatively affect consumer spending and jeopardize the country’s economic recovery.

Standard & Poor’s started assigning outlooks for government debt in 1989. Since then, five AAA-rated countries have received a negative outlook, and only two of them managed to avoid a subsequent credit rating downgrade. Great Britain provides the most recent example of how to accomplish that. In 2009, the country’s deficit reached 11.2 percent of its gross domestic product (“GDP”), and Standard & Poor’s assigned a negative outlook for British sovereign debt. To reduce its deficit, the British government cut spending and raised revenues. Standard & Poor’s evaluated the government’s austerity measures and concluded that they would reduce the deficit to 3 percent of GDP by 2014. As a result, the firm restored its stable outlook for British government debt.

If the U.S. government is to prevent a credit-rating downgrade, it must simply follow Great Britain’s example. Experts are unanimous that although economic growth may help reduce the growing U.S. deficit, it will not alone be sufficient. Cutting spending and raising taxes is the only proven path to reducing government deficit. Only time will show whether U.S. politicians will muster up the political will to pass such painful and unpopular, but necessary, austerity measures.

IMF Releases World Economic Outlook

FT: IMF Remains Upbeat On Global Economy
WSJ: IMF Says Global Economic Growth to Slow
Forbes: IMF: Turmoil Shouldn't Derail Economic Recovery

The International Monetary Fund (IMF) remains optimistic that the global economic recovery will continue. In its semiannual World Economic Outlook (WEO), which was released last week, the International Monetary Fund (IMF) projected that the combined gross domestic product (GDP) of all countries in the world will grow by 4.4% by the end of 2011. The 4.4% projected growth rate is testament to the resilience of an economic recovery that has been beset with numerous disruptions, ranging from the uprisings in the Middle East to sovereign debt issues in Europe.

However, the recovery is not a perfect one, with uneven growth taking place between the developed countries and the developing countries. Developed nations continue to grow at a slower pace than developing countries. According to the IMF, the GDP of developed economies is expected to grow by only 2.4% in 2011, whereas developing countries are expected to grow by 6.5%. The dichotomy in growth rates raises its own set of concerns. One such concern, and one that has been ongoing for some time, pertains to large capital flows. Because of their higher economic growth rates, developing nations continue to attract excessive amounts of capital, which can pose serious economic risks for those countries. Among other things, large capital inflows can be harmful to a country because they can cause rapid appreciation in the target nation’s currency, which tends to hurt that nation’s exporting industries by making exported goods relatively more expensive for its trading partners to buy. In addition, the investment of large capital inflows in a nation’s economy can accelerate economic growth, which can lead to high rates of inflation.

The IMF’s report also cautioned that, although the chances of a double-dip recession across the world are slim, there are still threats that could derail the economic recovery. In particular, the IMF warned about the problems that could arise if heavily indebted nations did not address their fiscal problems in a timely manner. Nations such as Portugal, Spain, and Greece continue to struggle to control their debt levels, which has dampened economic growth in those countries. The IMF also warned that increasing costs in commodities, especially oil, could likewise threaten the recovery. High oil prices were seen as a contributing factor to the severity of the recent recession, when the price of oil had risen to $150 per barrel.

Monday, April 18, 2011

BP Trying to Resolve Disputes with Partners in Russia

NYT: BP Gets an Extension From Rosneft to Salvage Their Oil Exploration Deal
WSJ: Delicate Endgame at TNK-BP
BP Gives Rosneft a Month to Resolve Legal Wrangle
WSJ: BP 'Never Made a Constructive' Rosneft Proposal

Disputes between BP and its Russian partner Alfa-Acces-Renova (AAR) may jeopardize a $16 billion deal between BP and Rosneft. AAR, a group comprised of four Soviet-born billionaires, currently holds a 50% share of the TNK-BP joint venture (a partnership with BP). BP hopes to save the deal with Rosneft, a state-controlled Russian oil company, for a $16 billion share exchange and Arctic exploration agreement. AAR, however, has been trying to block the deal, claiming that it would violate the TNK-BP shareholder agreement. AAR successfully won an injunction against the deal at the Stockholm Arbitration Tribunal in London, but the parties are planning to return to arbitration to work on a compromise. Meanwhile, BP and Rosneft agreed this week to extend negotiations on their share exchange until May 16th so that BP can attempt to settle its dispute with AAR.

BP is looking for compromise that would allow the Rosneft deal to proceed even if it means buying out AAR’s share of their joint venture. Rosneft is also eager for the deal with BP because it would have difficulty finding another partner willing to include a share swap in an Arctic exploration deal. Together, BP and Rosneft offered to buy out AAR’s half of the partnership for $27 billion. Robert Dudley, BP’s chief executive stated, “We’ve offered participation in the Arctic, we’ve offered cash, we’ve offered participation in international ventures. But we won’t offer a large amount or significant stake in BP because it’s not in the interest of shareholders.” AAR rejected BP’s offer because it claims its share is worth at least $70 billion.

The breakdown in the TNK-BP partnership hurts both AAR and BP. This turmoil caused BP’s shares to fall .9% this week, and the company faces continued protest from shareholders and the public concerning BP’s lack of transparency during the oil spill in the Gulf of Mexico. This is the second bitter breakdown between BP and AAR in the past three years. In 2008 disputes between the two parties resulted in the forced departure from Russia of Robert Dudley, then chief executive of TNK-BP. With the struggling relationship between the parties, AAR should think seriously about selling its shares and walking away from the joint venture. The fact that BP is involved in arbitration over its deal with Rosneft makes it a less desirable partner for investors. AAR may not be able to find a buyer other than BP’s buyout in the future, and by rejecting the offer, AAR remains in the rocky partnership. These disputes appear more serious than the parties’ 2008 troubles and may jeopardize the profitability and reputation of the joint venture moving forward.

The Securities and Exchange Commission Considers Revising Some of the Rules on Private-Company Capital Formation in the United States

AP: SEC Weighs New Rules for Private Companies' Stock
FT: SEC to Examine Private Share Trading Rules
WSJ: U.S. Eyes New Stock Rules
NYT: S.E.C. to Study Easing Rules on Shares of Private Companies

Over the past 10 years, the number of initial public offerings (“IPOs”) in the United States has decreased sharply from an average of 530 per year during the 1990s to an average of 130 per year since 2001. During the same period, however, the value of the transactions involving private-company stock has consistently grown. In 2010 alone, their value was $4.6 billion, which is almost twice as much as the corresponding 2009 figure of $2.4 billion. The proliferation of transactions in private-company shares has caught the attention of the Securities and Exchange Commission (the “SEC”). For example, the agency recently launched investigations to determine if certain private-company insiders have traded their private-company shares on the private market by using information which was not available to outside investors.

In the midst of such developments, the SEC is considering relaxing the rules regarding the ways private companies raise capital. The goal of the likely revisions is to reduce the private companies’ cost of regulatory compliance associated with capital formation without sacrificing investor protection. Such an ambitious objective may prove to be a significant challenge for the SEC in light of its shrinking budget and heavy workload related to the enactment of the Dodd-Frank Act.

Some commentators have opined that the SEC is likely to make two changes to the current regulatory regime. First, the agency would probably increase the number of shareholders a private company can have without being forced to make financial disclosures. Currently, this number is 499. Google, Inc.’s recent history provides an example of how this particular rule affects private companies in the U.S. In 2004, the company decided to go public because it could not raise sufficient capital without exceeding 499 shareholders. Second, the SEC is considering relaxing the strict prohibition against publicizing private-company share issues, known as a “general solicitation ban.” This solicitation ban was designed as a tool for protecting ordinary investors because private companies, unlike public ones, are not required to disclose financial information. If private companies were allowed to contact ordinary investors for the purpose of selling them their stock, those investors could be taken advantage of because they would have little or no information to rely on before making their decision.

Critics of the current version of the rules under scrutiny highlight that these rules discourage private companies from issuing shares, which reduces investment and leads to fewer jobs. Other commentators, however, point out that the SEC’s decision to review the relevant regulations may lead to the cancellation of some pending IPOs. Also, if the SEC amends its regulations to allow private companies greater flexibility in raising capital, it will take away the incentive for private companies to go public. Thus, ordinary investors will in effect be denied access to private-company shares, which are usually reserved for wealthy individuals.

Finland's Election May Put Future EU Bailouts in Question

WSJ: Finnish Voters Cast Shadow on EU Rescue Plans

Finland held a national election on Sunday, and a close, four-way race has emerged. One party in the running is the True Finns Party, led by Timo Soini. The True Finns are in third place with 18.7% of the vote. In the last elections, this party received only a small fraction of the vote. However, they have quadrupled their previous vote totals in this election, which many have suggested represents growing frustrations among many Finns about having to financially support the weaker EU economies such as Greece, Ireland, and Portugal. This is because the True Finns strongly oppose the EU Bailouts. The conservative party (National Coalition Party) is currently in power and is led by current Finance Minister Jyrki Katainen. This party is in the lead with 20.2% of the vote and is expected to remain the largest party in Finland. The Social Democrats are in second place with 19.4% of the vote. This party also opposes further bailouts, but is not as hard-lined as the True Finns. The Social Democrats oppose additional bailouts unless private investors are responsible for financial losses.

The outcome of this election could be important for the Eurozone as it continues to grapple with further bailouts of struggling Europoean nations. Under the current government, Finland has provided aid to Greece and has guaranteed borrowing by the EU's rescue fund that aided Ireland is likely to provide aid to Portugal in the near future. It is not yet clear how much power the True Finns will have. However, it is likely that they will be a part of a coalition government, given the strong showing they have already garnered. This could turn Finland's traditionally pro-EU stance "on its head." Unlike other nations in the Eurozone, Finland's parliament is able to vote on EU requests for bailout funds. This makes it entirely possible that the True Finns will hold up EU plans for future bailouts.

In order for the EU bailout fund to grant new rescue loans, all member nations of the common currency have to agree to the grant unanimously. Therefore, if Finland's government opposes future bailouts, it could have a big impact on the EU. These election results have already had an impact on European markets. In response to the results, the cost of Portuguese debt rose, as did the price of Greek, Irish, and Spanish default swaps.

Vickers’ Reform Plans to Make UK Banks Safe and Competitive

FT: Lloyds Lashes Out at Vickers Report; Ringfenced But Game’s Far From Up; Vickers to Propose More Competition for Banks
Economist: Commission Accomplished
Telegraph: Sir John Vickers Unveils Radical Shake-up of Banking Industry Regulation; The Quiet Revolution for British Banking

Last summer, the UK government established the Independent Commission on Banking (ICB) and asked the ICB to provide banking reform plans to enhance stability of the UK financial system and improve competition. The ICB, chaired by Sir John Vickers, a former chief economist at the Bank of England, published its interim report on April 11th. After the release of the report, bank shares rose since its recommendations were less radical than expected. Notably, the report did not recommend an option of requiring banks to completely separate their retail banking units from investment banking units.

Mainly, the ICB’s report suggests three measures. First, the report recommends that banks’ retail banking units be ring-fenced from other units so that retail units can keep functioning in a financial crisis. Second, as a measure to increase banks’ ability to absorb losses, the report recommends that banks hold a core Tier 1 capital ratio of at least 10 percent, higher than the minimum requirement of 7 percent set by Basel III. Lastly, in order to enhance competition in the retail banking market, the report recommends that Lloyds Banking Group reduce its market share of current accounts by selling more branches. Lloyds’ market share rose up to almost 30 percent after the purchase of HBOS during the financial crisis. As a condition for receiving state aid, Lloyds has already begun selling its 600 branches, but the report did not specify how many additional branches Lloyds would be required to sell.

Critics say that the ICB “bottled it” and its recommendations were timid. They point out that the ICB rejected options of formally separating banks’ retail and investment banking units and unwinding of the merger between Lloyds and HBOS. Also, the ICB did not provide any recommendations regarding caps on bankers’ bonuses. However, Sir Vickers claims that the report’s reform options are “very far-reaching” and would “make a world of difference to UK retail banking.”

The ICB’s final report is due in September. In the meantime, the ICB will receive comments on their recommendations from the public.

Sunday, April 17, 2011

Systemically Important Financial Institutions

FT: Financial Groups Seek to Avoid ‘Important’ List; US Regulators Divided on Systemic Risk List; HSBC Chairman Calls for ‘Systemic’ List of Banks Reuters
Reuters: No Deal Yet on Which Banks Face Extra Cap Rules-FSB; Over 80 Banks Should Be Systemically Important-HSBC

Under the Dodd-Frank Act (DFA), the Financial Stability Oversight Council (FSOC), a group of US financial regulators, has the authority to designate a financial institution as systemically important. If designated, such institutions will be subject to tighter liquidity and capital standards as well as closer supervision pursuant to Title VIII of the DFA so that they would not increase liquidity or credit risks enough to threaten the stability of the entire financial system. Financial institutions have been desperately lobbying to avoid being designated as systemically important since the designation would likely to be a “scarlet letter,” a sign that their profits would be reduced due to higher capital and liquidity requirements.

Currently, there is a split among regulators over which financial institutions should be on the list. The Federal Reserve and the Treasury want to designate only a few (less than 10) as systemically important. Federal Reserve Governor Daniel Tarullo said the “initial list…should not be a lengthy one…in part it’s because some of the obvious pre-crisis candidates – the large freestanding investment banks – have either become bank holding companies, been absorbed by [them], or gone out of existence.” On the other hand, the Federal Deposit Insurance Corporation (FDIC), in charge of winding down systemically important financial institutions, prefers to designate about 30 to 40 financial institutions systemically important including hedge funds and insurance companies.

While the FSOC has yet to finalize the list, every bank holding company with over $50 billion in assets will be automatically included in the list. Those institutions include Bank of America, MetLife, AIG, Prudential, and Hartford Financial Services. Insurance companies argue that they do not deserve to be designated as systemically important since they have stable funding and are not subject to “bank-type runs.” They also argue that their businesses are not dangerously related to other financial institutions. However, Viral Acharya, a professor at New York University, says that insurance companies as big buyers of corporate bonds may be systemically important. If they stop buying corporate bonds during a crisis, it would affect banks’ funds as corporations have to rely on banks.

Globally, the Group of 20 countries (G20) has agreed to require systemically important global financial institutions to hold more capital. The Financial Stability Board has been working on proposals regarding how many financial institutions would be required to hold how much additional capital. The proposals will be available during the G20 summit in November.

IMF Warns United States on its Debt

Bloomberg: U.S. Deficit to Rise to Largest among Major Economies, IMF Says
BBC: US Must Tackle Government Deficit, Says IMF Report
FT: US Lacks Credibility on Debt, Says IMF

As the United States struggles to resolve its financial woes, the International Monetary Fund (IMF) has emerged as yet another critic to chide the country on its precarious financial situation. In the most recent edition of its Fiscal Monitor publication, the IMF warned that the U.S. should address its deficit problem sooner rather than later in order to avoid an insurmountable debt burden.

Addressing the U.S. debt problem has been a contentious topic, with American lawmakers and President Obama unable to come to a consensus on how to reduce the government deficit. Currently, government revenues are able to pay only about 90% of government expenditures, with the remaining 10% being funded through debt. According to the IMF, besides Japan, the U.S. the only advanced economy in the world projected to have increasing debt going into the year 2016.

With the IMF’s warning, the U.S. now joins the ranks of countries such as Greece and Portugal as ones that have been specifically warned about the risks associated with their fiscal position. While it is unlikely that the United States will require a bailout, the country is nevertheless facing a debt burden of historic proportions. According to the IMF, the total amount of accumulated U.S. debt is projected to surpass 100% of the U.S. gross domestic product (GDP) for the first time since the years immediately following World War II. GDP measures the total value of goods and services produced in a country. According to the IMF, the value of the United States GDP in 2010 was approximately $14.6 trillion.

With U.S. debt so high, the IMF is concerned that, if it goes any higher, holders of U.S. debt will lose confidence in the ability of the U.S. to repay its debt obligation. If that occurs, U.S. debt purchasers could demand higher interest rates to compensate for the higher level of perceived risk, which would make it more costly for the U.S. to repay its debt. In a worst-case scenario, these increased costs could cause the U.S. to default on its debt.

Friday, April 15, 2011

Venezuelan Exchange Policy Troublesome for Many

WSJ: In Venezuela, Popular Websites Track Black Market in Currency

Many Venezuelans are unable to exchange Venezuelan bolivars for United States dollars to import necessary American products. In May 2010, in a move to encourage domestic production and consumption, Venezuelan president Hugo Chavez banned private currency trading and required banks to use a state-run exchange market. Since then, individuals have to apply to the government to exchange currency, but most are turned down because Chavez wants Venezuelan money to stay within Venezuelan borders. Trading outside of the government system is illegal. In a country that relies heavily on imports, many Venezuelans are trying to find ways around this strict and troublesome exchange system.

Some Venezuelans travel to neighboring countries, like Colombia, to exchange their money. They often travel hundreds of miles every week to exchange currency and purchase supplies from the United States for their businesses. However, through this system, Venezuelans only get about half the dollars for what the bolivars are supposed to be worth according to the government’s official exchange rate. The Venezuelan government offers 4.3 bolivars per dollar whereas the exchange rate in Colombia is around 8.3 bolivars per dollar. Venezuelans accept the low value in Colombia because the government almost always denies applications for currency exchange. In fact, numerous websites have been designed specifically to track the exchange rate of bolivars in nearby countries. These websites are based in other countries so that Venezuelan governmental control is nearly impossible.

Other Venezuelans participate in a black market exchange of bolivars. In fact, about 11 percent of the country’s imports are purchased on the black market. Exchange of currency used to occur legally through electronic transfer by banks. In this system, Venezuelan importers sent bolivars electronically to traders. The traders then sent the dollars to the American companies to export the products to Venezuela. Chavez banned this trading, but the electronic transfers did not necessarily stop. However, the government is cracking down on the black market. In April 2011, the Venezuelan Attorney General charged 10 brokerage houses with participating in the black market.

While there are methods of getting around the government exchange system, many Venezuelans are finding it too difficult. One Venezuelan who owns a medical clinic and imports equipment from the United States is thinking of selling his clinic and moving out of the country instead of continuing to take trips to Colombia to exchange currency. Although Chavez’s policy attempts to encourage domestic consumption, it appears that it may have the opposite effect and push some to take their business out of Venezuela.

Goldman Sachs Expands in India

WSJ: Goldman Sachs to Bolster India Business
The Hindu Business Line: Goldman Sachs Gets RBI Nod for Primary Dealership
Bloomberg: Goldman Sachs Gets Approval for Indian Primary Dealer Permit
Businessweek: Goldman Sachs Finds It Slow Going in India

Goldman Sachs is bolstering it equity and debt capital market business in India. Anshul Kriskhan, managing direct of Goldman Sachs (India) said, “All the core businesses Goldman Sachs operates around the world are represented on the ground in India.” Mr. Kriskhan also said that Goldman Sachs will further augment is capital markets activity, including debt. The bank operates of out Bangalore and Mumbai, and conducts investment banking, global investment research, and operations and technology practices.

Goldman Sachs has applied for a banking license in India, and it expects to receive the license in the next three to six months. The license allows Goldman Sachs to trade currencies and trade derivates. Goldman Sachs trails its competitors, Morgan Stanley and Citigroup, in getting a license. On Friday, the Reserve Bank of India gave Goldman Sachs approval for a primary dealership that would allow it to underwrite government bonds starting April 18, 2011. Primary dealers are banks, brokers, dealers, or other financial institutions that deal in government securities. The permit for the primary dealership will let Goldman Sachs compete to help the Indian financing ministry raise 4.17 trillion rupees, which is $94 billion.

Indian economic expansion drove mergers and stock offerings to records last year, and India is among the emerging markets that Goldman Sachs is targeting as the firm faces more restrictive rules in the U.S. and Europe on how it can manage and deploy its capital. The bank’s annual revenue in India from all of its businesses is about $100million, which is a 0.25% of the bank’s $39.2 billion in worldwide revenue last year. Indian investment banking fees, although growing, are still a fifth of China’s at $1 billion, and Indian customers are price sensitive compared to other global markets, so Goldman’s expensive, but high quality services, may be a hard sell in India.

Goldman Sachs has invested $2 billion in India, almost all of it since 2005, by buying shares of companies like Benchmark Asset Management Co., which is based in Mumbai. The purchase gave Goldman Sachs access to a market where assets managed by mutual funds tripled to 6.8 trillion rupees over the last five years.

Multilateral Organizations Will Move Forward on a Plan to Assist Economic Development in the Middle East and North Africa (MENA) Region

AFP: Multilateral Banks Join forces to Aid Arab Nations
FT: EBRD Could Start Lending to Egypt
In January 2011, Tunisia’s population overthrew its decades long leader, Ben Ali, because of frustration over economic disparity and political oppression. As the revolutionary wildfire spread to other parts of the North Africa, including Egypt—where demonstrations toppled leader Hosni Mubarak in February 2011—one thing was clear: demonstrators demanded a chance at economic prosperity.
On April 14th, the United States and France announced that a large group of multilateral organizations have pledged assistance to Middle East and Northern African (MENA) countries, in order to foster inclusive economic growth. Multilateral organizations that have pledged support include the World Bank, the African Development Bank and the Islamic Development Bank. The World Bank has already agreed to provide a $500 million dollar loan to Tunisia to support its budgetary obligations. Furthermore, the Untied States has offered to provide generous replenishment to multilaterals, if the banks call for capital increases to facilitate development efforts.
Noteworthy is the prospect that the European Bank for Reconstruction and Development will provide assistance to Egypt, which is a shareholder of the Bank. EBRD was founded 20 years ago to assist Eastern European countries transition from command to market economies and its mandate is limited to those countries. However, with shareholder approval (which is anticipated to go through) EBRD will provide economic assistance to Egypt.
Although the full parameters of the multilateral banks’ assistance package will be announced in May, the plan will likely focus on budgetary assistance to MENA countries and the development of small- and medium-sized enterprises. Commentators warn that economic reforms will be essential in providing stability, as governments will be tempted to “buy peace” by increasing spending for social programs. Some commentators have noted that Washington-based lenders were already working in the region prior to political upheaval this year, and that it will be important to maintain course with respect to reducing those countries’ budgetary deficits, while stimulating the economies. Large budget deficits for countries in the region can create a significant problem by pushing away investors who might fear a government default or devaluation of their investments. Therefore, the multilateral banks’ economic stimulus plan will have to strike the right balance between competing economic and political goals.

Indian Protests China's Yuan

Reuters: Indian CBank Report: Weak Chinese Yuan Disadvantages India
The Economic Times: India Being Hurt by Undervalued Renminbi: RBI
NASDAQ: India-China Trade Deficit Could Reduce on Renminbi Appreciation – RBI Study

India is the newest country to join in the criticism of the value of China’s yuan, China’s currency. Almost all criticism calling for China’s valuation of the yuan has previously come from the United States and Europe, so India’s criticism is an additional pressure on China to properly value its currency. India, the United States, and Europe all have called for China to let the yuan rise in value so their exports are more competitive in the Chinese market, a massive market for exports because China has so many consumers. India’s criticism is likely to be more important than that of the rich nations because China and India are both developing nations, so China cannot claim the developed world is trying to protect its own interests at China’s expense.

In the paper, “The Implications of Renminbi Revaluation on India’s Trade,” S. Arunachalaramanan and Ramesh Golait of the Reserve Bank of India, India’s central bank, have said that an artificially undervalued currency gives China a distinct advantage in the export market. In India, the share of imports from China rose to 10.7% of Indian imports during 2009-10 from 7.3% five years ago. The bulk of imports from China were high value electronic and machinery goods, which form more than 40% of imports. High demand for artificially cheap Chinese goods created an Indian trade deficit with China of $19.2 billion U.S. dollars from 2009-10. The paper estimates that a 1% depreciation of the rupee, India’s currency, against the yuan is likely to reduce India’s imports from China by 0.43 percent.

The Indian rupee has a de facto semi-floating exchange rate with the U.S. dollar. The Indian rupee’s exchange rate is less fluid than that of a pure floating exchange rate, but can still gradually change in value. So when China has a firmly undervalued exchange rate with the U.S. dollar, the exchange regime makes China’s undervalued currency damaging to India too. China has intervened in the foreign exchange markets by buying an average of $1 billion per day for the last five years to keep the American dollar expensive while selling the yuan to maintain its low value. Selling the yuan keeps it devalued because its increases the global supply of the currency. China has now amassed $2.5 trillion in reserves.

Additionally, India’s unit cost of labor has risen, while China’s unit costs have continued to drop, because Indian compensation has outpaced increases in labor productivity. The unit cost of labor is the cost of labor needed to produce one good. These increased labor costs make Indian products more expense to consumers and less attractive to importers, which is another blow to India’s trade competitiveness.