CNN: Finally, Europe has a Deal
FT: EU Reaches Deal on Greek Bonds
Spiegel: Euro Zone Frees Greece of Half of its Debt
In the early hours of Thursday morning, Eurozone leaders reached an agreement on the next step in dealing with the Eurozone’s debt crisis. The primary goal of the Eurozone Summit, which began October 23, 2011, was to convince private creditors holding Greek debt to accept a voluntary “haircut.” The agreement aims to resolve the Eurozone’s three main problems: Greece’s debt crisis, the instability of the banking sector, and a weak bailout fund.
Under the new plan, creditors holding Greek bonds “voluntarily” agreed to a 50% write-down (“haircut”) on the value of Greek bonds, meaning that roughly €100 billion that Greece currently owes to these bondholders will be eliminated. This measure is intended to reduce the country’s debt to 120% of gross domestic product (GDP) (from 150% currently) by the year 2020. Private investors only agreed to the new plan after Eurozone leaders offered a €30 billion guarantee on the private investors’ remaining debt owned by investors. However, many analysts believe that the 50% haircut may not be enough to lower Greece’s debt to a sustainable level.
The second issue that the plan aims to resolve is the instability of the banking sector. To do so, European banks will be required to increase their capital ratios (the amount of cash the banks hold compared to their total assets, which include outstanding loans the banks have made), from 4% to 9%. The goal of the increase is to boost confidence in the European banks’ ability to absorb losses. It is expected that after the 50% write down of Greek debts, Greek banks will need to raise an additional €30 billion to meet the new capital requirements, Spanish banks €26 billion, Italian banks €15 billion, French banks €9 billion, and German banks €5 billion.
The third aspect of the agreement deals with increasing the power of the EU bailout fund known as the European Financial Stability Facility (EFSF). Under the terms of the deal, the EFSF’s lending capacity will increase from €440 billion to over € 1 trillion through the use of “leverage”. In other words, although the actual amount of the fund will not increase, it will effectively be able to lend more to countries in crisis. For example, under one proposal the ESFS would create a financial entity that would be funded by various sources, such as hedge funds, pension funds, and government investment funds (e.g., the state-owned Chinese Investment Fund). European leaders are considering other leveraging strategies and it may take some time before they reach agreement on the details.
Monday, October 31, 2011
Sunday, October 30, 2011
Three Multilateral Financial Institutions Will Collaborate to Loan Money to Help Fund the First Private Wind Farm in Pakistan
Sources:
Associated Press of Pakistan: IFC Supports Landmark Wind Power Project in Pakistan
Bloomerg: Zorul Gets $111 Million Loan for Pakistan Wind-Power Project
Business Recorder: ADB Boosts Pakistan's Wind Power Capacity
The International Finance Corp (IFC), the Asian Development Bank (ADB), and the ECO Trade and Development Bank (ECO) are providing loans of $38.1 million, $36.8 million, and $20 million, respectively, to a company named Zorlu Enerji Electrik Uretim (Zorlu) to expand its wind power generation plant in the Sindh province of Pakistan, near the border with India. Zorlu will use the funding to install additional wind turbines and increase the facility’s electricity capacity from 6 megawatts (MW) to 56.4 MW. The Zorlu project will be the first internationally financed wind power facility in Pakistan and one of the first two wind power projects to operate commercially in Pakistan.
Zorlu’s total cost for the wind expansion project is $147 million. In addition to the amounts supplies by the ADB, ITC, and ECO, Zorlu will supply $35.9 million and Pakistani bank Habib will loan the remaining $16.2 million.
Increased wind power generation is important in Pakistan because the country’s demand for electricity has increased by 40% over the last five years while production has been unable to keep up. Pakistan’s lack of electricity has resulted in brownouts (the partial loss of electricity) in all major urban centers, electricity rationing, and early closing times for businesses, all of which undermine the country’s economy. To combat these problems, the Pakistani government is pushing to expand its energy resources, which includes increasing wind power generation.
The wind project will also help reduce Pakistan’s reliance on imported fossil fuel for the majority of its energy needs, which is very costly and leaves the country vulnerable to changes in global price. The ADB believes that Zorlu’s additional wind output will provide Pakistan with much needed electricity while also increasing the country’s energy security and lowering its reliance on fossil fuels. The IFC hopes that its investment in the Zorlu project will stimulate other international investors to invest in wind power within Pakistan which will stimulate and strengthen the Pakistani economy.
Associated Press of Pakistan: IFC Supports Landmark Wind Power Project in Pakistan
Bloomerg: Zorul Gets $111 Million Loan for Pakistan Wind-Power Project
Business Recorder: ADB Boosts Pakistan's Wind Power Capacity
The International Finance Corp (IFC), the Asian Development Bank (ADB), and the ECO Trade and Development Bank (ECO) are providing loans of $38.1 million, $36.8 million, and $20 million, respectively, to a company named Zorlu Enerji Electrik Uretim (Zorlu) to expand its wind power generation plant in the Sindh province of Pakistan, near the border with India. Zorlu will use the funding to install additional wind turbines and increase the facility’s electricity capacity from 6 megawatts (MW) to 56.4 MW. The Zorlu project will be the first internationally financed wind power facility in Pakistan and one of the first two wind power projects to operate commercially in Pakistan.
Zorlu’s total cost for the wind expansion project is $147 million. In addition to the amounts supplies by the ADB, ITC, and ECO, Zorlu will supply $35.9 million and Pakistani bank Habib will loan the remaining $16.2 million.
Increased wind power generation is important in Pakistan because the country’s demand for electricity has increased by 40% over the last five years while production has been unable to keep up. Pakistan’s lack of electricity has resulted in brownouts (the partial loss of electricity) in all major urban centers, electricity rationing, and early closing times for businesses, all of which undermine the country’s economy. To combat these problems, the Pakistani government is pushing to expand its energy resources, which includes increasing wind power generation.
The wind project will also help reduce Pakistan’s reliance on imported fossil fuel for the majority of its energy needs, which is very costly and leaves the country vulnerable to changes in global price. The ADB believes that Zorlu’s additional wind output will provide Pakistan with much needed electricity while also increasing the country’s energy security and lowering its reliance on fossil fuels. The IFC hopes that its investment in the Zorlu project will stimulate other international investors to invest in wind power within Pakistan which will stimulate and strengthen the Pakistani economy.
Saturday, October 29, 2011
Re-election of Argentine President Raises Concerns about Argentina’s Financial Future
Sources:
FT: Argentina: A High-Risk Recovery
FT: Argentina Restricts Foreign Trade
FT: Argentina’s Economic Recovery
FT: Fernández Wins Re-election in Argentina
La Nación: Los votos no liberan de las leyes económicas
NY Times: Argentina Nationalizes $30 Billion in Private Pensions
WSJ: Economists Quake as Argentina Votes
Cristina Fernández was re-elected as president of Argentina by the widest margin in four decades. Critics suggest that this landslide victory resulted from the general sense of financial well-being many Argentines enjoy. Despite slow growth in the U.S. and Europe, Argentina’s economy is predicted to grow about eight percent this year. Since 2007, when President Fernández was first elected to office, the economy has grown an average of 5.6 percent per year. Although the country was in an economic disaster from 2001-2002 after defaulting on nearly $100 billion in sovereign debt, Ms. Fernández and her late husband, Néstor Kirchner, increased jobs, wages, pensions, and other benefits for the Argentine people during their consecutive presidencies that have helped restore Argentina to booming economic growth.
However, experts do not believe that the financial policies President Fernández has employed to develop Argentina’s economy can sustain economic growth in the long run. For instance, the government will not have enough money to continue spending on ever-increasing subsidies for energy and transport development. Following the 2001 default, Argentina could not borrow from the international financial markets to finance economic expansion because international lenders were unwilling to lend the country out of fear that it would default a second time; therefore, to generate revenue, President Fernández championed policies that led to a trade surplus through increasing exports and limiting foreign imports. As a result, Argentina became a major global exporter of food commodities, especially soy and soy oil, which led to a trade surplus of $11.6 billion in 2010. However, this number may decrease to $8 billion this year because of continued slow global economic growth. Critics also note that China’s unending appetite for raw materials—including Argentina’s commodities—is as much to thank for the current boom as is any government policy.
Skeptics also claim that the surplus has been funded in part by governmental use of pension funds and central bank reserves to present the illusion of economic health. The government nationalized private pension funds in 2008, claiming that it was trying to protect workers’ and retirees’ pensions from the effects of the global financial crisis as stock and bond prices fell. Critics believe, however, that the government made this move to gain access to funds that would give it “breathing room” as government revenue decreased due to falling commodity prices and tax revenue from agriculture. Critics’ final worry is that although Argentina is a leading producer of food commodities, its lack of productivity in many other areas, such as the development of its large oil and natural gas reserves, may keep it from growing economically, especially if global demand for Argentine commodities or commodity prices decrease.
There are still more issues that may hurt Argentina’s economy. A number of economists report that Argentina’s inflation rate is currently over twenty percent. The government, however, says inflation is only at nine percent and refutes accusations that it is misrepresenting the inflation rate. High inflation is problematic because it reduces exports (because inflation makes Argentine goods relatively more expensive). Additionally, although it restructured its debt, Argentina still owes about $9 billion to foreign creditors, and the international finance markets may remain closed to Argentina until that debt is paid. Argentina has also lost revenue as fewer foreigners have been willing to open businesses in the country in the past four years because of heavy government regulation that makes doing business in the country more expensive. Although experts agree that Argentina does not face a risk of default, they caution that Argentina compromises its continued economic growth by not controlling its debt and inflation rate.
FT: Argentina: A High-Risk Recovery
FT: Argentina Restricts Foreign Trade
FT: Argentina’s Economic Recovery
FT: Fernández Wins Re-election in Argentina
La Nación: Los votos no liberan de las leyes económicas
NY Times: Argentina Nationalizes $30 Billion in Private Pensions
WSJ: Economists Quake as Argentina Votes
Cristina Fernández was re-elected as president of Argentina by the widest margin in four decades. Critics suggest that this landslide victory resulted from the general sense of financial well-being many Argentines enjoy. Despite slow growth in the U.S. and Europe, Argentina’s economy is predicted to grow about eight percent this year. Since 2007, when President Fernández was first elected to office, the economy has grown an average of 5.6 percent per year. Although the country was in an economic disaster from 2001-2002 after defaulting on nearly $100 billion in sovereign debt, Ms. Fernández and her late husband, Néstor Kirchner, increased jobs, wages, pensions, and other benefits for the Argentine people during their consecutive presidencies that have helped restore Argentina to booming economic growth.
However, experts do not believe that the financial policies President Fernández has employed to develop Argentina’s economy can sustain economic growth in the long run. For instance, the government will not have enough money to continue spending on ever-increasing subsidies for energy and transport development. Following the 2001 default, Argentina could not borrow from the international financial markets to finance economic expansion because international lenders were unwilling to lend the country out of fear that it would default a second time; therefore, to generate revenue, President Fernández championed policies that led to a trade surplus through increasing exports and limiting foreign imports. As a result, Argentina became a major global exporter of food commodities, especially soy and soy oil, which led to a trade surplus of $11.6 billion in 2010. However, this number may decrease to $8 billion this year because of continued slow global economic growth. Critics also note that China’s unending appetite for raw materials—including Argentina’s commodities—is as much to thank for the current boom as is any government policy.
Skeptics also claim that the surplus has been funded in part by governmental use of pension funds and central bank reserves to present the illusion of economic health. The government nationalized private pension funds in 2008, claiming that it was trying to protect workers’ and retirees’ pensions from the effects of the global financial crisis as stock and bond prices fell. Critics believe, however, that the government made this move to gain access to funds that would give it “breathing room” as government revenue decreased due to falling commodity prices and tax revenue from agriculture. Critics’ final worry is that although Argentina is a leading producer of food commodities, its lack of productivity in many other areas, such as the development of its large oil and natural gas reserves, may keep it from growing economically, especially if global demand for Argentine commodities or commodity prices decrease.
There are still more issues that may hurt Argentina’s economy. A number of economists report that Argentina’s inflation rate is currently over twenty percent. The government, however, says inflation is only at nine percent and refutes accusations that it is misrepresenting the inflation rate. High inflation is problematic because it reduces exports (because inflation makes Argentine goods relatively more expensive). Additionally, although it restructured its debt, Argentina still owes about $9 billion to foreign creditors, and the international finance markets may remain closed to Argentina until that debt is paid. Argentina has also lost revenue as fewer foreigners have been willing to open businesses in the country in the past four years because of heavy government regulation that makes doing business in the country more expensive. Although experts agree that Argentina does not face a risk of default, they caution that Argentina compromises its continued economic growth by not controlling its debt and inflation rate.
Friday, October 28, 2011
U.S. Cities Face Serious Challenges
Sources:
ABC News: 3 Most Desperate Cities
Brookings: What America’s Cities Need
Brookings: Tracking Economic Recession and Recovery in America’s 100 Largest Metropolitan Areas
Columbia University, The American Assembly: Rebuilding America’s Legacy Cities-New Directions for the Industrial Heartland
The Economist: Smaller is More Beautiful
The Economist: The Parable of Detroit, So Cheap, There’s Hope
Across the United States, cities large and small are confronting unprecedented social and economic challenges. Although the problems many cities face are similar, including loss of industry and population to rapidly increasing crime and unemployment rates, the approaches cities have taken to address these problems and the resulting outcomes have been varied.
In America’s rustbelt, cities like Detroit, Flint, Rochester, Cleveland, Pittsburg, Harrisburg, and Buffalo watched as companies such as Kodak and General Motors slashed jobs, closed facilities, and exited the urban centers often formed around their very existence. The result is that cities across the country such as Vellejo, California, Boise County, Idaho, Jefferson, Alabama, and Harrisburg, Pennsylvania are on the verge of, or have filed for, bankruptcy protection. The causes of the economic woes are different for each city, but abandoned properties, lack of municipal services, increased drug and crime rates, high unemployment and social unrest seem to be universal outcomes. Despite the daunting obstacles, some cities have weathered the storm and found ways to reinvent themselves.
General Motors was founded in Flint, Michigan and was home to 80,000 employees in 1968. It now has 6,000 employees in Flint and, as a result, the population of Flint has fallen by nearly 50% since 1960. Abandoned properties littered with trash dotted every area of town and redevelopment appeared impossible until 2002 when Flint created a “Land Bank” with the purpose of taking control of and redeveloping vacant, abandoned, or tax-delinquent properties. Rather than selling abandoned or foreclosed property at auction to the highest bidder who may have no interest in redevelopment, the Land Bank purchases such properties. Some buildings are renovated and then sold while the worst are demolished and the land sold to nearby homeowners or developers. Lured by exceedingly cheap prices, entrepreneurs, small business owners, and local residents have purchased property from the Land Bank. Shops, bars, restaurants, farmers markets, and gardens are redefining the image of Flint where the vacant properties once were. Flint’s Land Bank is now used as a model for other cities and states facing similar circumstances. Although Flint is no longer an industrial stronghold, it has evolved into a smaller, more sustainable urban model.
Other cities that have turned the corner toward redevelopment by transitioning from manufacturing and industrial hubs to service-based economies include Detroit, Baltimore, Philadelphia, and Rochester. Detroit has utilized its massive infrastructure and office space to create “Techtown;” luring young, forward thinking technological enterprises to the city through highly competitive pricing, tax abatements, and creating attractive urban lifestyle environments. Similarly, Philadelphia and Baltimore have used their existing educational and medical institutions as an anchor for promoting business development and creating attractive urban environments. Johns Hopkins Health Care System partnered with city officials and developers to revive East Baltimore by deeding hundreds of hospital owned properties to town developers and providing financial support for the resulting projects. Similarly, Philadelphia used the resources of its colleges, universities, and hospitals to revitalize and rebuild. The University of Pennsylvania, its associated medical center, and other academic institutions purchased surrounding properties, rehabilitated them, and leased or sold them to residents, businesses, students, faculty, and staff with cost incentives such as below-market mortgage financing and favorable lease terms. The common theme among these success stories appears to be a willingness to shed outdated ideas of economic opportunities in favor of innovative community partnerships able to recognize and revitalize existing urban assets.
Minimum Wage and Labor Costs Rise in China
Sources:
BBC: China Minimum Wage Up by 21.7% Despite Economic Cooling
Bloomberg Businessweek: China Had Best Third-Quarter Urban Job Creation in Years
FT: China Labour Costs Soar as Wages Rise 22%
People’s Daily: 21 Regions Across In China Raise Minimum Wage
The minimum wage in twenty-one of China’s thirty-one provinces has increased by an average of 22% in 2011, according to a recent government report. This increase comes on the heels of similar minimum wage increases over the past two years.
The rising minimum wage has been primarily driven by government policy. At the provincial level, twenty-five of China’s thirty-one provinces aim to increase the minimum wage by 14% annually. Nationally, the government’s Five-Year Plan (2011-2015) targets a minimum wage increase of 13% annually. Both policies aim to decrease inequality while increasing domestic demand for Chinese goods.
China’s economic growth over the past three decades has been heavily dependent on exporting manufactured goods to Western countries. The global recession, however, has decreased demand for China’s exports and has slowed China’s overall economic growth rate. Although the Chinese economy grew by 9.1% during the third quarter of 2011, this was the lowest growth rate in over two years. Chinese officials hope that an increased minimum wage will boost domestic spending which will help to offset lower exports across the globe by expanding the market for those products at home.
Another objective of China’s minimum wage policy is to push manufacturers toward producing higher-end goods (e.g., cars and computers), which will enable China to better compete with global economic leaders. The theory is that manufacturers will not be able to earn enough money selling lower-end items (e.g., clothes and toys) to cover the increased wages, which will encourage them to produce higher-end (and higher profit) products to cover the additional costs. With a larger profit margin, the manufacturers could pay higher wages while still retaining a profit similar to that which they made while manufacturing low-end goods and paying lower wages.
Market forces have also played a role in increasing China’s wages. An increasing number of China’s young adults are college graduates and are either reluctant or unwilling to work in the country’s manufacturing industry. This has led to a labor shortage that forces manufacturers to offer higher wages to attract workers because of supply and demand principles. Still, increased wages in the manufacturing industry have not attracted the 6 million annual university graduates, who are struggling to find skill-appropriate jobs.
Although many Chinese workers have benefited from higher wages, some Chinese are skeptical of the country’s policies. Already, many smaller companies have felt the pressures of increasing labor costs and have sought financial support from banks and government to avoid bankruptcy. Furthermore, the higher cost of labor has contributed to the decline of China’s export industries while other countries with lower minimum wages—in particular Bangladesh, Vietnam, and Indonesia—have cut into China’s market share. Some experts also worry that rising minimum wages have contributed to a three-year high inflation rate. Higher wages can cause inflation if manufacturers pass their increased production cost (in this case, higher labor costs) onto consumers in the form of higher prices. Likewise, increased wages create more consumers to buy the same amount of goods, which pushes prices up—again due to supply and demand principles.
The wisdom of China’s decision to rapidly increase its minimum wage is debatable, but with minimum wage increases of at least 13% planned for the next 4 years, the Chinese people will soon be able to evaluate the results.
BBC: China Minimum Wage Up by 21.7% Despite Economic Cooling
Bloomberg Businessweek: China Had Best Third-Quarter Urban Job Creation in Years
FT: China Labour Costs Soar as Wages Rise 22%
People’s Daily: 21 Regions Across In China Raise Minimum Wage
The minimum wage in twenty-one of China’s thirty-one provinces has increased by an average of 22% in 2011, according to a recent government report. This increase comes on the heels of similar minimum wage increases over the past two years.
The rising minimum wage has been primarily driven by government policy. At the provincial level, twenty-five of China’s thirty-one provinces aim to increase the minimum wage by 14% annually. Nationally, the government’s Five-Year Plan (2011-2015) targets a minimum wage increase of 13% annually. Both policies aim to decrease inequality while increasing domestic demand for Chinese goods.
China’s economic growth over the past three decades has been heavily dependent on exporting manufactured goods to Western countries. The global recession, however, has decreased demand for China’s exports and has slowed China’s overall economic growth rate. Although the Chinese economy grew by 9.1% during the third quarter of 2011, this was the lowest growth rate in over two years. Chinese officials hope that an increased minimum wage will boost domestic spending which will help to offset lower exports across the globe by expanding the market for those products at home.
Another objective of China’s minimum wage policy is to push manufacturers toward producing higher-end goods (e.g., cars and computers), which will enable China to better compete with global economic leaders. The theory is that manufacturers will not be able to earn enough money selling lower-end items (e.g., clothes and toys) to cover the increased wages, which will encourage them to produce higher-end (and higher profit) products to cover the additional costs. With a larger profit margin, the manufacturers could pay higher wages while still retaining a profit similar to that which they made while manufacturing low-end goods and paying lower wages.
Market forces have also played a role in increasing China’s wages. An increasing number of China’s young adults are college graduates and are either reluctant or unwilling to work in the country’s manufacturing industry. This has led to a labor shortage that forces manufacturers to offer higher wages to attract workers because of supply and demand principles. Still, increased wages in the manufacturing industry have not attracted the 6 million annual university graduates, who are struggling to find skill-appropriate jobs.
Although many Chinese workers have benefited from higher wages, some Chinese are skeptical of the country’s policies. Already, many smaller companies have felt the pressures of increasing labor costs and have sought financial support from banks and government to avoid bankruptcy. Furthermore, the higher cost of labor has contributed to the decline of China’s export industries while other countries with lower minimum wages—in particular Bangladesh, Vietnam, and Indonesia—have cut into China’s market share. Some experts also worry that rising minimum wages have contributed to a three-year high inflation rate. Higher wages can cause inflation if manufacturers pass their increased production cost (in this case, higher labor costs) onto consumers in the form of higher prices. Likewise, increased wages create more consumers to buy the same amount of goods, which pushes prices up—again due to supply and demand principles.
The wisdom of China’s decision to rapidly increase its minimum wage is debatable, but with minimum wage increases of at least 13% planned for the next 4 years, the Chinese people will soon be able to evaluate the results.
Monday, October 24, 2011
The World Bank Increases Short and Long-Term Aid to the Horn of Africa to Fight Drought and Famine
Sources:
Reuters: UPDATE 2-World Bank Boosts Horn of Africa Aid to $1.88bln
WSJ: World Bank Boosts Aid to Horn of Africa
All Africa: UN Increases Funding for Drought-Hit Africa
Al-Jazeera: Africa's Drought: Is Weather or War to Blame?
The World Bank is increasing funding from $500 million to $1.88 billion to help the more than thirteen million people suffering from the worst drought to hit the Horn of Africa in fifty years. United Nations (UN) officials have called the situation the worst current humanitarian crisis in the world. Most of the aid will go to individuals in Somalia, Kenya, Ethiopia, Eritrea, Djibouti, and Uganda. The stated goal of the aid is to alleviate current pain while putting the region on a path towards sustainable living.
The main reasons for the severe famine are twofold: weather and war. Regarding weather, the region has had two consecutive growing seasons without any rain, which has lead to a devastating decrease in crop production and the death of livestock. In addition to the severe weather, the region is subject to violent militant groups that often destroy crops or do not allow international food aid into the parts of some countries, exasperating the problem.
The World Bank will begin distributing the $1.88 billion by handing out $288 million in 2012 and $384 million in 2013-14 based on needs assessments completed by World Bank experts. The remaining $1.2 billion will be distributed after 2014 to bolster the region’s future drought resistance. The long-term aid will be used to create a system to communicate the early warning signs of future droughts to those who may be affected. The aid will also provide additional support to local farmers with the aim of increasing the geographic diversity of crops and education about new farming techniques that are more resistant to drought. The long-term aid will also help countries increase their emergency food reserves.
While the World Bank’s aid will help, the UN has stated that the countries need an additional $700 million for the last three months of the current year alone. The UN estimates that the countries will need $2.4 billion to meet the needs of the 13 million people the drought is affecting. International donations have totaled $1.4 billion, which leaves a $1 billion remaining funding gap.
Reuters: UPDATE 2-World Bank Boosts Horn of Africa Aid to $1.88bln
WSJ: World Bank Boosts Aid to Horn of Africa
All Africa: UN Increases Funding for Drought-Hit Africa
Al-Jazeera: Africa's Drought: Is Weather or War to Blame?
The World Bank is increasing funding from $500 million to $1.88 billion to help the more than thirteen million people suffering from the worst drought to hit the Horn of Africa in fifty years. United Nations (UN) officials have called the situation the worst current humanitarian crisis in the world. Most of the aid will go to individuals in Somalia, Kenya, Ethiopia, Eritrea, Djibouti, and Uganda. The stated goal of the aid is to alleviate current pain while putting the region on a path towards sustainable living.
The main reasons for the severe famine are twofold: weather and war. Regarding weather, the region has had two consecutive growing seasons without any rain, which has lead to a devastating decrease in crop production and the death of livestock. In addition to the severe weather, the region is subject to violent militant groups that often destroy crops or do not allow international food aid into the parts of some countries, exasperating the problem.
The World Bank will begin distributing the $1.88 billion by handing out $288 million in 2012 and $384 million in 2013-14 based on needs assessments completed by World Bank experts. The remaining $1.2 billion will be distributed after 2014 to bolster the region’s future drought resistance. The long-term aid will be used to create a system to communicate the early warning signs of future droughts to those who may be affected. The aid will also provide additional support to local farmers with the aim of increasing the geographic diversity of crops and education about new farming techniques that are more resistant to drought. The long-term aid will also help countries increase their emergency food reserves.
While the World Bank’s aid will help, the UN has stated that the countries need an additional $700 million for the last three months of the current year alone. The UN estimates that the countries will need $2.4 billion to meet the needs of the 13 million people the drought is affecting. International donations have totaled $1.4 billion, which leaves a $1 billion remaining funding gap.
Sunday, October 23, 2011
Pakistan and India Plan to Increase Trade
Sources:
The Diplomat: Most Favoured India?
FT: Islamabad Looks to India to Aid Economy
FT: Pakistan and India in Historic Trade Push
FT: Pakistan Takes Giant Step with Trade Move
Livemint: PM-Level Talks between India, Pakistan Likely in November
Reuters India: India-Pakistan Trade Deal is but a First Step
WTO: Principles of the Trading System
Representatives from India and Pakistan met earlier this month and agreed in principle to the most extensive measures to promote trade between the countries since they were granted their independence from Britain in 1947. The countries aim to increase their bilateral trade to $6 billion annually within three years from the current $2.7 billion annually. The countries’ commerce secretaries plan to meet in India in November to finalize the trade agreement.
Pakistani political and military officials have previously insisted that trade agreements be conditioned on the resolution of a territorial dispute over Kashmir (a Muslim-majority region divided among India, Pakistan, and China), but they have backed away from this stance. The countries discussed a trade agreement in November 2008, but India halted negotiations after a Pakistan-based terrorist group killed 166 people in Mumbai. The two countries’ prime ministers did not meet again until March 2011, when Indian Prime Minister Manmohan Singh engaged Pakistani Prime Minister Yousuf Raza Gilani in “extremely positive and encouraging” talks while the latter was in India to watch the India-Pakistan semi-final match of the cricket World Cup.
The proposed trade deal includes an agreement by Pakistan to ease visa restrictions for business leaders in India and Pakistan and to allow goods and services to travel more freely between the two countries. Pakistan’s decision to consider easing trade restrictions with India was spurred primarily by the relatively poor performance of its economy. Pakistan’s 3% growth rate lags behind China’s and India’s 8% growth rates, and increased budget deficits and debt threaten Pakistan’s long-term economic viability. Pakistan anticipates that increased trade with India will promote its export industries, which is an effective way to generate jobs and boost the local economy. A better economic outlook may slow the “brain drain” (a phenomenon in which the best and brightest citizens seek work abroad) and convince its citizens to remain in Pakistan and contribute to its economic development. Another reason for Pakistan’s policy shift is due to improved relations with India following India’s acquiescence in allowing Pakistan to have preferential European Union (EU) market access following last year’s floods in Pakistan. Furthermore, Pakistan may fear being left behind, both politically and economically, after India signed a similar free trade agreement with Afghanistan last week.
Business leaders in Pakistan anticipate that the easing of restrictions will benefit the Pakistani cement, textiles, agriculture, and engineering industries (industries that produce products India desires, and Pakistanis cannot wholly afford), but others fear that opening up Pakistan to India’s generic drug industry and Bollywood (India’s entertainment industry)will destroy Pakistan’s pharmaceutical and entertainment industries. Nevertheless, officials in both countries believe the deal will benefit both economies.
Although Pakistani and Indian officials are optimistic that they will reach a deal, a degree of doubt is warranted. Pakistani-based militant attacks often accompany diplomacy between the two countries, and a Kashmiri group, the United Jihad Council, has threatened “grave consequences” if Pakistan cooperates with India. If an attack resembling the Mumbai attack of November 2008 or a violent uprising in Kashmir occurs, trade negotiations may fall apart and the prospect of economic development could be put on hold. Regardless, the renewed effort to set aside political differences is encouraging.
The Diplomat: Most Favoured India?
FT: Islamabad Looks to India to Aid Economy
FT: Pakistan and India in Historic Trade Push
FT: Pakistan Takes Giant Step with Trade Move
Livemint: PM-Level Talks between India, Pakistan Likely in November
Reuters India: India-Pakistan Trade Deal is but a First Step
WTO: Principles of the Trading System
Representatives from India and Pakistan met earlier this month and agreed in principle to the most extensive measures to promote trade between the countries since they were granted their independence from Britain in 1947. The countries aim to increase their bilateral trade to $6 billion annually within three years from the current $2.7 billion annually. The countries’ commerce secretaries plan to meet in India in November to finalize the trade agreement.
Pakistani political and military officials have previously insisted that trade agreements be conditioned on the resolution of a territorial dispute over Kashmir (a Muslim-majority region divided among India, Pakistan, and China), but they have backed away from this stance. The countries discussed a trade agreement in November 2008, but India halted negotiations after a Pakistan-based terrorist group killed 166 people in Mumbai. The two countries’ prime ministers did not meet again until March 2011, when Indian Prime Minister Manmohan Singh engaged Pakistani Prime Minister Yousuf Raza Gilani in “extremely positive and encouraging” talks while the latter was in India to watch the India-Pakistan semi-final match of the cricket World Cup.
The proposed trade deal includes an agreement by Pakistan to ease visa restrictions for business leaders in India and Pakistan and to allow goods and services to travel more freely between the two countries. Pakistan’s decision to consider easing trade restrictions with India was spurred primarily by the relatively poor performance of its economy. Pakistan’s 3% growth rate lags behind China’s and India’s 8% growth rates, and increased budget deficits and debt threaten Pakistan’s long-term economic viability. Pakistan anticipates that increased trade with India will promote its export industries, which is an effective way to generate jobs and boost the local economy. A better economic outlook may slow the “brain drain” (a phenomenon in which the best and brightest citizens seek work abroad) and convince its citizens to remain in Pakistan and contribute to its economic development. Another reason for Pakistan’s policy shift is due to improved relations with India following India’s acquiescence in allowing Pakistan to have preferential European Union (EU) market access following last year’s floods in Pakistan. Furthermore, Pakistan may fear being left behind, both politically and economically, after India signed a similar free trade agreement with Afghanistan last week.
Business leaders in Pakistan anticipate that the easing of restrictions will benefit the Pakistani cement, textiles, agriculture, and engineering industries (industries that produce products India desires, and Pakistanis cannot wholly afford), but others fear that opening up Pakistan to India’s generic drug industry and Bollywood (India’s entertainment industry)will destroy Pakistan’s pharmaceutical and entertainment industries. Nevertheless, officials in both countries believe the deal will benefit both economies.
Although Pakistani and Indian officials are optimistic that they will reach a deal, a degree of doubt is warranted. Pakistani-based militant attacks often accompany diplomacy between the two countries, and a Kashmiri group, the United Jihad Council, has threatened “grave consequences” if Pakistan cooperates with India. If an attack resembling the Mumbai attack of November 2008 or a violent uprising in Kashmir occurs, trade negotiations may fall apart and the prospect of economic development could be put on hold. Regardless, the renewed effort to set aside political differences is encouraging.
Monday, October 17, 2011
Can Contraception Increase the Spread of HIV in Africa?
Sources:
AllAfrica: Dual Protection Will Reduce Risk of HIV Infections
NPR: Popular Contraceptive in Africa Increases HIV Risk
Seattle News: Depo Dangers
Voice of America: Does a Birth Control Method Raise HIV Risk?
The University of Washington recently conducted a study in Botswana, Kenya, Rwanda, South Africa, Tanzania, Uganda, and Zimbabwe of 3,800 heterosexual couples that had one HIV infected partner. The study revealed that the popular contraceptive shot, Depo Provera, doubles the chance of contracting HIV or passing the virus to the uninfected partner.
The study comprised of measuring the concentration of HIV in genital fluid samples. The study showed that women who had been taking the injection saw the level of HIV concentration in their genital fluid double. The scientists concluded that the likelihood of passing the disease on to the partner increased along with the concentration of the virus. There is still no clear explanation as to why the contraception increases the virus’ concentration.
The World Health Organization, (WHO), stated that it planned to start analyzing the study’s findings, as well as other related, external evidence to figure out whether it would continue to recommend the contraceptive shot. The WHO fears that having to change its stance on the popular contraceptive would reverse some of the progress it has made in convincing African women to use birth control as a means of family planning. The injection is an easy way for African women to prevent unwanted pregnancies, which generally add a financial burden that poor women cannot handle. The reduction of unwanted pregnancies also lowers the number of babies born HIV-positive and in need of costly medical treatment that often is not available. Finally, a lower pregnancy rate saves women’s lives, since poor access to medical services has resulted in high mortality rates for women during childbirth.
Unfortunately, the only way the WHO can verify the study’s findings is to conduct similar tests over longer periods of time. The WHO estimates that the tests would take five years to complete and require about $30 million in funding. The tests would also require women to persuade their male partners to consistently use condoms to limit the rate of infection during the tests—an idea to which African men are sometimes hostile. Despite having limited funds, the WHO is not willing to make such a dramatic shift in its advice to African women without being completely certain that the contraceptive injection truly is dangerous, even if that means spending millions of dollars and five years to prove or disprove the recent test results.
AllAfrica: Dual Protection Will Reduce Risk of HIV Infections
NPR: Popular Contraceptive in Africa Increases HIV Risk
Seattle News: Depo Dangers
Voice of America: Does a Birth Control Method Raise HIV Risk?
The University of Washington recently conducted a study in Botswana, Kenya, Rwanda, South Africa, Tanzania, Uganda, and Zimbabwe of 3,800 heterosexual couples that had one HIV infected partner. The study revealed that the popular contraceptive shot, Depo Provera, doubles the chance of contracting HIV or passing the virus to the uninfected partner.
The study comprised of measuring the concentration of HIV in genital fluid samples. The study showed that women who had been taking the injection saw the level of HIV concentration in their genital fluid double. The scientists concluded that the likelihood of passing the disease on to the partner increased along with the concentration of the virus. There is still no clear explanation as to why the contraception increases the virus’ concentration.
The World Health Organization, (WHO), stated that it planned to start analyzing the study’s findings, as well as other related, external evidence to figure out whether it would continue to recommend the contraceptive shot. The WHO fears that having to change its stance on the popular contraceptive would reverse some of the progress it has made in convincing African women to use birth control as a means of family planning. The injection is an easy way for African women to prevent unwanted pregnancies, which generally add a financial burden that poor women cannot handle. The reduction of unwanted pregnancies also lowers the number of babies born HIV-positive and in need of costly medical treatment that often is not available. Finally, a lower pregnancy rate saves women’s lives, since poor access to medical services has resulted in high mortality rates for women during childbirth.
Unfortunately, the only way the WHO can verify the study’s findings is to conduct similar tests over longer periods of time. The WHO estimates that the tests would take five years to complete and require about $30 million in funding. The tests would also require women to persuade their male partners to consistently use condoms to limit the rate of infection during the tests—an idea to which African men are sometimes hostile. Despite having limited funds, the WHO is not willing to make such a dramatic shift in its advice to African women without being completely certain that the contraceptive injection truly is dangerous, even if that means spending millions of dollars and five years to prove or disprove the recent test results.
Brazilian University Makes the Grade
Sources:
The Economist: The Struggle to Make the Grade
Times Higher Education: The Goals will Come
University World News: Latin America: Higher Education Integration for Bloc
Valor: Duas universidades brasileiras entre as 300 melhores do mundo
As a result of continued economic growth in Latin America, the demand for higher education in the region has also grown. Latin American students need the skills and quality of education that will allow them to compete professionally in the global economy. However, experts have noted that Latin American universities are currently ill-equipped to provide their students with such a high-quality education. The curriculum, for example, is generally old-fashioned and does not properly address the demands of globalization. Many faculty members lack Ph.D.s in their fields and are employed only part-time, which means that they do little if any research. As a result, they cannot provide students with the cutting-edge knowledge that leading researchers have. Furthermore, universities are generally ranked according to the quality of research they produce, and higher rankings lead to better quality students attending a university. Few institutions provide incentives to promote good teaching and research, like extra funding or promotions, and public universities do not lose funding if large numbers of students drop out, as is the case in many other countries. Many institutions also enroll too many students, which lowers the quality of education each individual student receives. Both of these issues are the result of insufficient funding. Latin American institutions also do not encourage students to study abroad nor do they recruit foreign students and scholars, so as a result, Latin American higher education fails to provide students with the international experience experts agree they need to succeed in the global economy.
However, the University of São Paulo (USP) recently gained global recognition for being among the world’s best universities. According to Times Higher Education, a weekly British publication, USP ranks among the world’s 200 best universities. USP’s success comes, in part, from breaking out of the Latin American mold. The university receives adequate funding from the government and tuition and fees assessments to employ full-time faculty with Ph.D.s that have helped make USP an international leader in scientific research. USP has also developed a high number of top-rated graduate programs and produces more Ph.D. graduates yearly than any U.S. university. The success is not limited to USP—recent research suggests that Brazilian university graduates have seen the benefits of improving higher education in the form of salaries up to 263% higher than secondary school graduates.
Critics, however, have pointed to the problems that still exist in Brazilian higher education. Although a large number of graduates hold Ph.D.s, Brazil lacks specialized professionals, which is particularly noticeable during times of economic growth when there is great need for specialized skills. For instance, Brazil lacks engineers, so it has had to recruit and pay foreign engineers to help complete the substantial infrastructure projects the country has undertaken in advance of the 2014 World Cup and 2016 Olympic Games. Furthermore, Brazilian higher education, like the rest of Latin America’s, does not have a strong relationship with the international research community, and few graduate students are from outside Brazil. Therefore, Brazil fails to benefit from the knowledge and research of foreign scholars. Brazilian universities also suffer from over-enrollment of students; therefore, classrooms are overcrowded, which makes it difficult for professors to effectively teach students.
Experts suggest that Latin American universities should have greater flexibility in hiring, promotion, and pay that would lead to better quality teaching than the current method of hiring less qualified, part-time faculty. With a larger budget, universities could attract better teachers with the prospect of having more resources to do research. Experts also recommend that Latin American universities have a more global mindset and “internationalize” their curriculum and policies to appeal to foreign students and scholars, like by offering courses taught in languages other than Portuguese and relaxing visa requirements for foreign students and educators. In this way, experts believe Latin American students and scholars would benefit from the global perspective they need to succeed in a global economy, and Latin America would benefit from the research conducted by talented students and faculty from other countries.
The Economist: The Struggle to Make the Grade
Times Higher Education: The Goals will Come
University World News: Latin America: Higher Education Integration for Bloc
Valor: Duas universidades brasileiras entre as 300 melhores do mundo
As a result of continued economic growth in Latin America, the demand for higher education in the region has also grown. Latin American students need the skills and quality of education that will allow them to compete professionally in the global economy. However, experts have noted that Latin American universities are currently ill-equipped to provide their students with such a high-quality education. The curriculum, for example, is generally old-fashioned and does not properly address the demands of globalization. Many faculty members lack Ph.D.s in their fields and are employed only part-time, which means that they do little if any research. As a result, they cannot provide students with the cutting-edge knowledge that leading researchers have. Furthermore, universities are generally ranked according to the quality of research they produce, and higher rankings lead to better quality students attending a university. Few institutions provide incentives to promote good teaching and research, like extra funding or promotions, and public universities do not lose funding if large numbers of students drop out, as is the case in many other countries. Many institutions also enroll too many students, which lowers the quality of education each individual student receives. Both of these issues are the result of insufficient funding. Latin American institutions also do not encourage students to study abroad nor do they recruit foreign students and scholars, so as a result, Latin American higher education fails to provide students with the international experience experts agree they need to succeed in the global economy.
However, the University of São Paulo (USP) recently gained global recognition for being among the world’s best universities. According to Times Higher Education, a weekly British publication, USP ranks among the world’s 200 best universities. USP’s success comes, in part, from breaking out of the Latin American mold. The university receives adequate funding from the government and tuition and fees assessments to employ full-time faculty with Ph.D.s that have helped make USP an international leader in scientific research. USP has also developed a high number of top-rated graduate programs and produces more Ph.D. graduates yearly than any U.S. university. The success is not limited to USP—recent research suggests that Brazilian university graduates have seen the benefits of improving higher education in the form of salaries up to 263% higher than secondary school graduates.
Critics, however, have pointed to the problems that still exist in Brazilian higher education. Although a large number of graduates hold Ph.D.s, Brazil lacks specialized professionals, which is particularly noticeable during times of economic growth when there is great need for specialized skills. For instance, Brazil lacks engineers, so it has had to recruit and pay foreign engineers to help complete the substantial infrastructure projects the country has undertaken in advance of the 2014 World Cup and 2016 Olympic Games. Furthermore, Brazilian higher education, like the rest of Latin America’s, does not have a strong relationship with the international research community, and few graduate students are from outside Brazil. Therefore, Brazil fails to benefit from the knowledge and research of foreign scholars. Brazilian universities also suffer from over-enrollment of students; therefore, classrooms are overcrowded, which makes it difficult for professors to effectively teach students.
Experts suggest that Latin American universities should have greater flexibility in hiring, promotion, and pay that would lead to better quality teaching than the current method of hiring less qualified, part-time faculty. With a larger budget, universities could attract better teachers with the prospect of having more resources to do research. Experts also recommend that Latin American universities have a more global mindset and “internationalize” their curriculum and policies to appeal to foreign students and scholars, like by offering courses taught in languages other than Portuguese and relaxing visa requirements for foreign students and educators. In this way, experts believe Latin American students and scholars would benefit from the global perspective they need to succeed in a global economy, and Latin America would benefit from the research conducted by talented students and faculty from other countries.
European Union Focuses on Banks Rescue Plan
Sources:
FT: EU Banks Could Shrink to Hit Capital Rules
FT: EU Examines Bank Rescue Plan
Spiegel: Europe Begins Working on Plan B for the Euro
USA Today: EU Plans to Force Banks to Raise Capital Soon
WSJ: EU Pushes Bank Plan
Last Wednesday, European Commission President Jose Manuel Barrosso laid out a general overview of the Commission’s recent proposal to force the biggest banks in the European Union (EU) to raise billions of euros to better withstand the region’s escalating sovereign debt crisis. The extra capital will help banks cover any losses they may incur as a result of the crisis and should help reduce investors’ uncertainty about the region’s stability. The plan is the latest effort to restore confidence in the Eurozone and overcome the crisis.
Under the new proposals, there will be stricter review of the banks’ capital ratio (the amount of capital the bank holds in cash compared to its total assets, which include outstanding loans the bank has made), which determines the banks’ ability to absorb losses. The European Banking Authority is likely to set a higher capital threshold—around 9% (that is, if a bank has $100 of total assets, it must keep $9 in cash on hand at all times)—although this number could change as the details of the plan are worked out. Current rules only require the banks to maintain capital of 5%-6% of total assets. The banks will have six to nine months to raise the additional capital needed to maintain the 9% ratio.
The European Commission recommends that banks in need of additional capital should first seek it from private sources. Doing so may require banks to convert some of their outstanding debt to equity—a process in which the bank’s creditors agree to cancel some or all of the debt the bank owes in exchange for ownership of a portion of the bank. If this effort proves unsuccessful, national governments should then be ready to provide the necessary capital. The European Financial Stability Facility (EFSF) will be available to lend money to the governments for them to use to recapitalize their banks but only as a measure of last resort. Lastly, the Commission stated that banks should be prevented from paying bonuses to employees and dividends to investors before their capital levels meet the new standards. The Commission is still working out the final details of the plan and will not likely reach a final decision until the EU finance ministers meet at the end of the month for the European leaders’ summit.
Banks must recapitalize to be strong enough to absorb losses on Greek government bonds and other sovereign debt they hold to avoid having to be “bailed-out” by their national governments. Banks estimate that they could face a 60-80% loss on Greek bonds if Greece defaults. This means that banks would have to use their capital reserves to cover reserves to cover these losses. If banks are not adequately capitalized to handle such losses, they may become insolvent—they would not be able to pay their expenses and thus would “fail.” Bank failure is a major concern, because banks are deeply interconnected across national borders. If major banks begin to fail in one country, it would risk dragging down other banks across the Eurozone, putting additional strain on the already weak region.
FT: EU Banks Could Shrink to Hit Capital Rules
FT: EU Examines Bank Rescue Plan
Spiegel: Europe Begins Working on Plan B for the Euro
USA Today: EU Plans to Force Banks to Raise Capital Soon
WSJ: EU Pushes Bank Plan
Last Wednesday, European Commission President Jose Manuel Barrosso laid out a general overview of the Commission’s recent proposal to force the biggest banks in the European Union (EU) to raise billions of euros to better withstand the region’s escalating sovereign debt crisis. The extra capital will help banks cover any losses they may incur as a result of the crisis and should help reduce investors’ uncertainty about the region’s stability. The plan is the latest effort to restore confidence in the Eurozone and overcome the crisis.
Under the new proposals, there will be stricter review of the banks’ capital ratio (the amount of capital the bank holds in cash compared to its total assets, which include outstanding loans the bank has made), which determines the banks’ ability to absorb losses. The European Banking Authority is likely to set a higher capital threshold—around 9% (that is, if a bank has $100 of total assets, it must keep $9 in cash on hand at all times)—although this number could change as the details of the plan are worked out. Current rules only require the banks to maintain capital of 5%-6% of total assets. The banks will have six to nine months to raise the additional capital needed to maintain the 9% ratio.
The European Commission recommends that banks in need of additional capital should first seek it from private sources. Doing so may require banks to convert some of their outstanding debt to equity—a process in which the bank’s creditors agree to cancel some or all of the debt the bank owes in exchange for ownership of a portion of the bank. If this effort proves unsuccessful, national governments should then be ready to provide the necessary capital. The European Financial Stability Facility (EFSF) will be available to lend money to the governments for them to use to recapitalize their banks but only as a measure of last resort. Lastly, the Commission stated that banks should be prevented from paying bonuses to employees and dividends to investors before their capital levels meet the new standards. The Commission is still working out the final details of the plan and will not likely reach a final decision until the EU finance ministers meet at the end of the month for the European leaders’ summit.
Banks must recapitalize to be strong enough to absorb losses on Greek government bonds and other sovereign debt they hold to avoid having to be “bailed-out” by their national governments. Banks estimate that they could face a 60-80% loss on Greek bonds if Greece defaults. This means that banks would have to use their capital reserves to cover reserves to cover these losses. If banks are not adequately capitalized to handle such losses, they may become insolvent—they would not be able to pay their expenses and thus would “fail.” Bank failure is a major concern, because banks are deeply interconnected across national borders. If major banks begin to fail in one country, it would risk dragging down other banks across the Eurozone, putting additional strain on the already weak region.
Friday, October 14, 2011
Monetary Policy Disagreement Plagues the FOMC
Sources:
Federal Reserve: Minutes of the Federal Open Market Committee on September 20, 21, 2011
Forbes: Split in Bernanke’s Fed Widens, QE3 on Deck, FOMC Minutes Reveal
LA Times: Federal Reserve Minutes Show 2 Policymakers Wanted Bolder Steps
WSJ: Fed’s Pianalto-Monetary Policy Alone Cannot Solve All Ills
WSJ: Inside The Fed Fight Over Bond Buys
The Federal Reserve (Fed) is in the spotlight yet again. Just weeks after announcing Operation Twist, the Fed’s most recent attempt to lower long-term interest rates by selling short-term government debt and purchasing $400 billion in long-term Treasury securities, the decision has come under intense scrutiny. While economists continue to debate the effectiveness of Operation Twist, it appears that the members of the Federal Reserve Open Market Committee (FOMC) intensely debated the issue among themselves during their September 20 and 21, 2011 meeting. The minutes of the meeting indicate much disagreement among FOMC officials over what action, if any, the Fed should take to boost the economy. The dissention among FOMC members underscores the difficulties in implementing monetary policy measures in the current economy and the lack of consensus on how to address the U.S. economy’s problems.
The FOMC is the monetary policy arm of the Fed. All seven members of the Federal Reserve Board of Governors serve on the FOMC and five of the twelve Federal Reserve Bank presidents serve on a rotating basis, with the exception of the President of the Federal Reserve Bank of New York who is a permanent member of the committee. Though the FOMC only has twelve voting members, all Federal Reserve Bank presidents attend FOMC meetings and participate in discussions. Immediately after each meeting the Committee issues a single policy statement summarizing its outlook and policy decisions; however, the minutes of FOMC meetings are not published until three weeks after the conclusion of the meetings.
The minutes from the September 20-21 meeting are receiving so much attention because the FOMC is close to exhausting its available economic tools after repeatedly intervening unsuccessfully in the economy. Although differences of opinion are not uncommon within the FOMC, the minutes show the highest level of dissent among committee members in past twenty years, and reflect the conundrum in which the U.S. economy remains. The minutes reveal that three committee members dissented because they felt the Fed has done all it can and further intervention will hinder recovery. At the other end of the spectrum, two committee members felt the Fed should do more than just implement Operation Twist.
While the U.S. economy faces challenges not seen since the Great Depression, the stalwarts of U.S. economic decision making seem to be suffering from an identity crisis. The lack of consensus within the FOMC as to its proper role may undermine consumer confidence and fuel further recessionary fears. However, the diverse opinions of the divided committee may result in more creative solutions and better decision-making.
Should Greece Abandon the Euro?
Sources:
CNN:Is Greece Going to Default and Leave the Euro?
Economist: When Will the Greeks be Made to Suffer?
FT: Greece Should Default and Abandon the Euro
Despite the vast amount of bailout funds it has received and the extensive austerity measures the country has adopted, there is no end in sight for Greece’s economic crisis. As of October 2011, Greece has received €110 billion in bailout loans from the International Monetary Fund (IMF) and the European Union (EU) to help it get through the crisis and prevent any negative effects from spreading to other European countries. On October 2, 2011, the Greek government announced that its 2011 budget deficit is expected to be 8.5% of gross domestic product (GDP), which is significantly larger than the target of 7.6% the EU and IMF set as a condition for receiving bailout funds. Likewise, IMF estimates show that the Greek economy will contract by 2.5% of GDP in 2012, instead of the hoped for growth of 0.6%.
According to world-renowned economist Nouriel Roubini, Greece has three options. The first option is for the euro to significantly weaken against the dollar. A weaker euro would make Greek goods cheaper, which should increase the demand for Greek goods from countries outside the Eurozone, and thereby increase export revenues that Greece could use to pay its debts. This is not a viable option since for the euro to depreciate there must be, among other things, a sharp appreciation of the dollar, which is unlikely as long as the U.S. economy remains weak.
The second option is for Greece to go through a process of “internal devaluation” to lower prices and wages. During an “internal devaluation” the government would increase the value-added tax (VAT, a European form of sales tax) and reduce public sector wages to put downward pressure on other wages and inflation. A VAT increase will significantly lower demand for goods by raising prices. Lower demand often leads to lower wages as employers cannot afford to keep paying employees the same wages with falling profits. Lower labor costs will effectively make Greece’s products more competitive in the world market.
Greece would need to do an “internal devaluation” because, as a member of the European Monetary Union, Greece does not have the power to use normal monetary policy tools (i.e., it cannot buy and sell its currency on the market or change interest rates to adjust its value through supply and demand principles) to lower the value of its currency. However, lowering the cost of goods by lowering internal demand would have the same effect—i.e., it would increase exports by making it cheaper for foreigners to buy the now cheaper domestic goods. Greece would then use the increased export revenue to pay its debts. However, the “internal devaluation” process is not Greece’s best option as it would likely push Greece into a deep recession with very high unemployment and lower wages.
Greece’s fastest and least painful option, according to Roubini, is to pull out of the Eurozone, return to a national currency, and devalue it. This process would allow Greece to have power over its monetary policy once again, which it could use to keep its currency cheap to become a more competitive exporter without the drastic consequences on employment levels. Greece would also need to restructure its debt, which would require significant write-downs (creditors agreeing to accept less than the full balance due on a debt) on Greek bonds.
Greece would face significant risks if it were to abandon the euro. For instance, Greece would go through a period of limited access to financial markets as creditors will be reluctant to lend Greece for fear of a second Greek default. The country also would not be able to count on loans from the EU and its banking system would no longer have access to the European Central Bank’s liquidity (cash), both of which have been vital to keeping Greek afloat so far. Lastly, the Greek government would have to implement controls on the transfer of capital as individuals and firms would otherwise take their deposits (cash) out of the country to avoid the effects of the devaluation of the domestic currency. If Greek banks were to fail because of this so-called “capital flight,” credit would not be available and the economy would grind to a halt.
The effects of Greece leaving the Eurozone would extend beyond Greece’s borders. Banks in the EU would have to take losses arising from the devaluation of the Greek currency and debt restructuring. If Greece leaves the euro, the debts it owes to banks would have to be re-denominated into its domestic currency. If after this process the country significantly devalues the new currency (which is extremely likely), then the debts owed to the banks (already denominated in the domestic currency) would be worth less—a loss the banks would have to bare. Roubini believes this cost would be manageable if the exit is properly planned and the banks have enough capital to cover any losses.
Considering the potential costs and benefits of leaving the Eurozone, should Greece abandon the euro and return to a national currency?
CNN:Is Greece Going to Default and Leave the Euro?
Economist: When Will the Greeks be Made to Suffer?
FT: Greece Should Default and Abandon the Euro
Despite the vast amount of bailout funds it has received and the extensive austerity measures the country has adopted, there is no end in sight for Greece’s economic crisis. As of October 2011, Greece has received €110 billion in bailout loans from the International Monetary Fund (IMF) and the European Union (EU) to help it get through the crisis and prevent any negative effects from spreading to other European countries. On October 2, 2011, the Greek government announced that its 2011 budget deficit is expected to be 8.5% of gross domestic product (GDP), which is significantly larger than the target of 7.6% the EU and IMF set as a condition for receiving bailout funds. Likewise, IMF estimates show that the Greek economy will contract by 2.5% of GDP in 2012, instead of the hoped for growth of 0.6%.
According to world-renowned economist Nouriel Roubini, Greece has three options. The first option is for the euro to significantly weaken against the dollar. A weaker euro would make Greek goods cheaper, which should increase the demand for Greek goods from countries outside the Eurozone, and thereby increase export revenues that Greece could use to pay its debts. This is not a viable option since for the euro to depreciate there must be, among other things, a sharp appreciation of the dollar, which is unlikely as long as the U.S. economy remains weak.
The second option is for Greece to go through a process of “internal devaluation” to lower prices and wages. During an “internal devaluation” the government would increase the value-added tax (VAT, a European form of sales tax) and reduce public sector wages to put downward pressure on other wages and inflation. A VAT increase will significantly lower demand for goods by raising prices. Lower demand often leads to lower wages as employers cannot afford to keep paying employees the same wages with falling profits. Lower labor costs will effectively make Greece’s products more competitive in the world market.
Greece would need to do an “internal devaluation” because, as a member of the European Monetary Union, Greece does not have the power to use normal monetary policy tools (i.e., it cannot buy and sell its currency on the market or change interest rates to adjust its value through supply and demand principles) to lower the value of its currency. However, lowering the cost of goods by lowering internal demand would have the same effect—i.e., it would increase exports by making it cheaper for foreigners to buy the now cheaper domestic goods. Greece would then use the increased export revenue to pay its debts. However, the “internal devaluation” process is not Greece’s best option as it would likely push Greece into a deep recession with very high unemployment and lower wages.
Greece’s fastest and least painful option, according to Roubini, is to pull out of the Eurozone, return to a national currency, and devalue it. This process would allow Greece to have power over its monetary policy once again, which it could use to keep its currency cheap to become a more competitive exporter without the drastic consequences on employment levels. Greece would also need to restructure its debt, which would require significant write-downs (creditors agreeing to accept less than the full balance due on a debt) on Greek bonds.
Greece would face significant risks if it were to abandon the euro. For instance, Greece would go through a period of limited access to financial markets as creditors will be reluctant to lend Greece for fear of a second Greek default. The country also would not be able to count on loans from the EU and its banking system would no longer have access to the European Central Bank’s liquidity (cash), both of which have been vital to keeping Greek afloat so far. Lastly, the Greek government would have to implement controls on the transfer of capital as individuals and firms would otherwise take their deposits (cash) out of the country to avoid the effects of the devaluation of the domestic currency. If Greek banks were to fail because of this so-called “capital flight,” credit would not be available and the economy would grind to a halt.
The effects of Greece leaving the Eurozone would extend beyond Greece’s borders. Banks in the EU would have to take losses arising from the devaluation of the Greek currency and debt restructuring. If Greece leaves the euro, the debts it owes to banks would have to be re-denominated into its domestic currency. If after this process the country significantly devalues the new currency (which is extremely likely), then the debts owed to the banks (already denominated in the domestic currency) would be worth less—a loss the banks would have to bare. Roubini believes this cost would be manageable if the exit is properly planned and the banks have enough capital to cover any losses.
Considering the potential costs and benefits of leaving the Eurozone, should Greece abandon the euro and return to a national currency?
Cyprus Could be the Next Casualty of the European Sovereign Debt Crisis
Sources:
AP: IMF: Cyprus Growth Flat in 2011, to Shrink in 2012
Financial Mirror: IMF Sees Negative Growth for Cyprus; "Time is Up for Fiscal Measures"
FT: Cyprus Governor Warns of Emergency After Blast
FT: Mediterranean Gas Reserves Tension Flares
Fumagusta Gazette: Fule Stresses Cyprus' Right for Drilling
Reuters: IMF Says Cyprus Must Act Fast to Avoid Crisis
The International Monetary Fund (IMF) recently urged that Cyprus move forward with austerity measures if it hopes to avoid a debt crisis—and accompanying bailout—similar to the ones that have engulfed Greece, Ireland, and Portugal in recent years.
After spending eleven days studying the Cypriot economy, the IMF projected that Cyprus’s economy will not grow for the remainder of 2011 and will shrink slightly in 2012. The IMF also predicted that Cyprus’s fiscal deficit will swell to 7% in 2011, although it should decrease to 4% in 2012. These projections are less optimistic than those of the Cypriot government, which projected 1.5% growth and a 2.3% deficit in 2012.
Cyprus is an island nation in the Mediterranean Sea with a population of one million people and a €17 billion ($23 billion) economy. Aside from its ongoing fiscal deficit, Cyprus has encountered two additional financial difficulties this year. On July 11, a power station explosion caused an estimated €2 billion ($2.7 billion) in damages. Later that month, credit agencies downgraded the country’s bond rating due to Cyprus’s banks’ heavy exposure to Greek debt—a country going through its own debt crisis. The downgrade pushed interest rates on Cypriot bonds up as investors demand a higher yield (interest rate) to compensate them for the higher risk they are taking in purchasing Cypriot bonds. The IMF also recommends Cyprus conduct “stress tests” on its banks to determine whether they have sufficient capital (cash) on hand to cover any losses that would result from various adverse economic scenarios. These tests would give Cyprus a better understanding of the future financial difficulties it may face and would enable the country to prepare accordingly.
Despite Cyprus’s gloomy outlook, there are some positive signs. Cyprus is in the process of finalizing a €2.5 billion ($3.4 billion) loan from Russia at an interest rate of 4.5%, which is much lower than the current rate Cyprus can borrow at on the international bond markets. The loan will allow Cyprus to pay down some of its existing—and higher interest—debt. Furthermore, the discovery of large natural gas deposits in the Mediterranean provides hope for a boost in Cyprus’s economy. However, ongoing disputes with Turkey about Cyprus’s rights to the natural gas threaten to put a halt to drilling efforts.
The IMF cautions that these positive developments should not weaken the government’s resolve to push through austerity measures. Among the IMF’s recommendations for spending cuts are to mandate public sector employees to contribute to their pensions, freezing public sector wages and the cost of living allowance on public pensions, and raising the value-added tax. In line with the IMF’s recommendations, the finance minister’s 2012 draft budget includes a 1,100 person reduction in public sector employment, a €220 million ($299 million) reduction in social spending, and an increase in the value-added tax from 15% to 17%. The finance minister will present this budget to the parliament in mid-October, but given opposing political parties’ opposition, it is unclear whether the budget will pass.
Cyprus may not be the largest or most important economy in the European Union, but unless it takes steps to reduce its growing debt, it may be the next country in need of a bailout.
AP: IMF: Cyprus Growth Flat in 2011, to Shrink in 2012
Financial Mirror: IMF Sees Negative Growth for Cyprus; "Time is Up for Fiscal Measures"
FT: Cyprus Governor Warns of Emergency After Blast
FT: Mediterranean Gas Reserves Tension Flares
Fumagusta Gazette: Fule Stresses Cyprus' Right for Drilling
Reuters: IMF Says Cyprus Must Act Fast to Avoid Crisis
The International Monetary Fund (IMF) recently urged that Cyprus move forward with austerity measures if it hopes to avoid a debt crisis—and accompanying bailout—similar to the ones that have engulfed Greece, Ireland, and Portugal in recent years.
After spending eleven days studying the Cypriot economy, the IMF projected that Cyprus’s economy will not grow for the remainder of 2011 and will shrink slightly in 2012. The IMF also predicted that Cyprus’s fiscal deficit will swell to 7% in 2011, although it should decrease to 4% in 2012. These projections are less optimistic than those of the Cypriot government, which projected 1.5% growth and a 2.3% deficit in 2012.
Cyprus is an island nation in the Mediterranean Sea with a population of one million people and a €17 billion ($23 billion) economy. Aside from its ongoing fiscal deficit, Cyprus has encountered two additional financial difficulties this year. On July 11, a power station explosion caused an estimated €2 billion ($2.7 billion) in damages. Later that month, credit agencies downgraded the country’s bond rating due to Cyprus’s banks’ heavy exposure to Greek debt—a country going through its own debt crisis. The downgrade pushed interest rates on Cypriot bonds up as investors demand a higher yield (interest rate) to compensate them for the higher risk they are taking in purchasing Cypriot bonds. The IMF also recommends Cyprus conduct “stress tests” on its banks to determine whether they have sufficient capital (cash) on hand to cover any losses that would result from various adverse economic scenarios. These tests would give Cyprus a better understanding of the future financial difficulties it may face and would enable the country to prepare accordingly.
Despite Cyprus’s gloomy outlook, there are some positive signs. Cyprus is in the process of finalizing a €2.5 billion ($3.4 billion) loan from Russia at an interest rate of 4.5%, which is much lower than the current rate Cyprus can borrow at on the international bond markets. The loan will allow Cyprus to pay down some of its existing—and higher interest—debt. Furthermore, the discovery of large natural gas deposits in the Mediterranean provides hope for a boost in Cyprus’s economy. However, ongoing disputes with Turkey about Cyprus’s rights to the natural gas threaten to put a halt to drilling efforts.
The IMF cautions that these positive developments should not weaken the government’s resolve to push through austerity measures. Among the IMF’s recommendations for spending cuts are to mandate public sector employees to contribute to their pensions, freezing public sector wages and the cost of living allowance on public pensions, and raising the value-added tax. In line with the IMF’s recommendations, the finance minister’s 2012 draft budget includes a 1,100 person reduction in public sector employment, a €220 million ($299 million) reduction in social spending, and an increase in the value-added tax from 15% to 17%. The finance minister will present this budget to the parliament in mid-October, but given opposing political parties’ opposition, it is unclear whether the budget will pass.
Cyprus may not be the largest or most important economy in the European Union, but unless it takes steps to reduce its growing debt, it may be the next country in need of a bailout.
Tuesday, October 11, 2011
The International Monetary Fund Reduces the Economic Forecast for Europe and the United States
Sources:
Detroit Free Press: IMF Sharply Downgrades Outlook for U.S., EuropeGuardian: IMF wants Europe to get its Finger out and US Politicians Should Behave like Adults
The Jerusalem Post: IMF to Europe: Get Your Act Together
The International Monetary Fund (IMF) recently warned that the world economy has entered a dangerous phase and that national governments need to take strong actions to improve the world economic outlook. The IMF has significantly downgraded the financial outlook for both the United States and Europe through 2012. The IMF forecasts that the U.S. economy will grow by 1.5% in 2011 and 1.8% in 2012, as compared to its prior projections of 2.5% and 2.7% respectively. For the seventeen countries that use the Euro as their currency (the Eurozone), the IMF has forecasted economic growth of 1.6% in 2011 and 1.1% in 2012, which are reductions from prior forecasts of 2% and 1.7% respectively.
Within the United States, the IMF believes a sharp drop in the stock market and political indecision surrounding the government’s deficit reduction plan has created uncertainty. This uncertainty has caused consumers and corporations to save their money instead of spending or reinvesting, which slows economic growth. These and other factors have contributed to an annualized growth rate of .7% in the first half of 2011, which is well below even the revised IMF forecast.
The pessimistic forecast for the Eurozone centers on the sovereign debt crisis. The IMF is concerned that some Eurozone countries will not sufficiently control their debt, which may lead to destabilization within the region. When banks, consumers, and companies are unsure about their economic future, they are less likely to lend money, make long-term investments, or make discretionary purchases, and will instead save excess cash. Reduced lending, investment, and spending leads to lower economic growth, and, therefore, lower revenues for governments to use in paying their debts. The IMF has criticized European leadership for not moving quickly enough to remedy the uncertainty surrounding the debt crisis.
To combat slowing economic growth, the IMF suggests that European central banks and the United States Federal Reserve Bank continue searching for ways to lower borrowing costs, which would hopefully spur increased spending and investment. The IMF also suggests that the United States and European governments spend money to stimulate economic activity instead of reducing spending to lower budget deficits.
Monday, October 10, 2011
Wall Street Protests Part of Global Trend
Sources:
Economist: The Revolution Will Not Be Liberalized
Forbes: Occupying Wall Street from Liberty
NPR: Occupy Wall Street Gets Union Backing-Approval Rating Tops Congress
NYT: As Scorn for Vote Grows, Protests Surge Around Globe
Reuters: More Than 700 Arrested in Wall Street Protests
WSJ: Hundreds Arrested on Brooklyn Bridge
Across the globe citizens are taking to the streets in mass demonstrations with a wide spectrum of themes: from political and social repression, human rights, corruption, high unemployment, and discriminatory economic systems. The trend has resulted in significant governmental and political reform in Arab and African nations and now U.S. protesters have taken aim at the world of high finance—Wall Street. The Wall Street protests, organized by a group called “Occupy Wall Street,” point to the Tahrir Square protests in Egypt that recently toppled a decades-long dictatorship as their inspiration.
Members of Occupy Wall Street cite a host of gathering calls including income inequality, high unemployment, corporate greed, and suppression of the democratic process. On Wall Street in New York City, home to some of the world’s largest investment banks and financial firms, protestors are entering their third week of rallies, sleep-ins, and marches against the perceived corruption of Wall Street firms, corporate influence over the political system, and other social injustices. Despite the lack of a single cohesive message, the Occupy Wall Street movement has been spreading across the country to places like Boston, Seattle, Ohio, California, and Pennsylvania with rumors of more protests in other cities in the works.
Some observers are calling Occupy Wall Street a ‘national movement’ similar to those that have occurred in other parts of the world like Libya, India, Israel, Spain, and Greece. Libyan citizen movements resulted in the overthrow of an entire decades-old regime, Indian activists are exposing government corruption, and Israeli demonstrators continue to protest political and income disparities. In Spain, where the unemployment rate of 21% is the highest in the developed world, demonstrators are challenging the government to do more to ease economic suffering. In Greece, the harsh spending cuts the government has implemented to continue receiving bailout founds from the International Monetary Fund and European Union have resulted in violent riots, social unrest, and even an increase in suicides. The common theme among all these groups is a collective lack of confidence in their governments. Although the U.S protests may appear less cohesive—and some critics claim less compelling—than these global protests, they represent a resurgence of activism not seen in the U.S. since the Vietnam War.
The low costs of social networking sites, access to governmental information mapping applications, and web-based organizational tools that make mass communication fast and efficient have helped make the massive protests around the globe possible. People around the world can now hear rally cries from protestors in any country instantaneously. Although the causes for these grass-roots efforts vary widely, a common theme is apparent. Citizens feel their governments are ignoring their concerns, so they are taking to the streets in a desperate attempt to revive the democratic process. To date, the impact of global protests has been profound, but it remains to be seen if Occupy Wall Street will result in any substantive reform.
Sunday, October 09, 2011
The Growth of Foreign Start-Ups in Chile
Sources:
Copper Investing News: Copper Mining in Chile: Part I
FT: UK Start-ups Head for Chile
Huffington Post: Chile Edging Up to America as Startup Heaven
Nacional.cl: El aterrizaje de los silicon boys
Nearshore Americas: Country Profile: The Secret Behind Chile’s Thriving Outsourcing Industry
Washington Post: People, Not Industry, Power Innovation in Chile
Prior to 2010, Chile had established itself as an outsourcing hub for information technology (IT) because of its IT-friendly business environment, including a well-developed telecommunications infrastructure and the second-highest rate of research and development investment in Latin America. Chile developed its IT outsourcing industry to break free from its economic dependence on mining. Chile has the world’s largest copper reserves, which have allowed it to become the largest producer and exporter of copper. Historically, Chile’s economy has depended largely on its copper exports, which has meant that Chile’s economy has suffered when copper prices have dropped. Although in 2008 Chile’s IT outsourcing industry generated $800 million and employed 20,000 people, Chile’s goal is to make outsourcing a $5 billion industry by 2015. Experts, however, fear that over-development of the outsourcing industry could result in a large number of Chilean professionals abandoning their positions in other important technical fields, such as mining, for higher-paying IT jobs.
Experts have, therefore, suggested that instead of concentrating on outsourcing to generate revenue, Chile should “import” entrepreneurs to help grow its industrial sector and, thereby, its economy. Thus, in March of 2010, Chile launched a program called Start-Up Chile designed to “import” 1,000 entrepreneurs over the course of three years. The government hopes that the entrepreneurs will bring new ideas to improve technology, increase innovation, and boost wealth. Furthermore, Start-Up Chile encourages foreigners to hire locals, teach Chileans what they know about business, and help build Chile’s international reputation as a center for technology development.
However, the people that came up with the idea for Start-Up Chile realized that Chile, as a relative newcomer to the technology industry, would have to compete with major technology centers like Silicon Valley for entrepreneurs. Therefore, the government agreed to grant entrepreneurs $40,000 in start-up capital, free office space in a modern facility shared with other start-ups, and assistance moving among other benefits. The entrepreneurs only have to promise to stay in Chile for at least six months. Additionally, unlike in other countries that offer similar start-up incentives, Start-Up Chile does not require entrepreneurs to have funding in addition to the $40,000 the government provides to participate in the program.
Although the entrepreneurs are under no obligation to stay in Chile after the initial six month-period, government officials hope that other incentives, such as a low cost of living, will encourage them to stay. About forty percent of the companies that first took part in Start-Up Chile have stayed thus far. Entrepreneurs have been attracted by the ability to use the cash grants for any expenditure, the collaborative working environment they share with the other start-ups, and the credibility they gain globally by being chosen as one of the few start-ups to receive grants from Start-Up Chile. As the global financial crisis continues, Chile’s stable economy also presents an attractive alternative to starting businesses in the United States or Europe, which are teetering on the brink of a second recession.
Start-Up Chile has already proven to be mutually beneficial for Chileans and foreigners alike. American, Canadian, and British entrepreneurs have especially benefitted as the largest groups of foreigners to have received grant money. Chileans living abroad are the third-largest recipients of Start-Up Chile funding. While efforts by other governments to support innovation have failed, experts believe that Start-Up Chile will succeed because it invests in people who already have knowledge and capabilities in their fields and can share them with Chileans to help develop Chile’s economy.
Copper Investing News: Copper Mining in Chile: Part I
FT: UK Start-ups Head for Chile
Huffington Post: Chile Edging Up to America as Startup Heaven
Nacional.cl: El aterrizaje de los silicon boys
Nearshore Americas: Country Profile: The Secret Behind Chile’s Thriving Outsourcing Industry
Washington Post: People, Not Industry, Power Innovation in Chile
Prior to 2010, Chile had established itself as an outsourcing hub for information technology (IT) because of its IT-friendly business environment, including a well-developed telecommunications infrastructure and the second-highest rate of research and development investment in Latin America. Chile developed its IT outsourcing industry to break free from its economic dependence on mining. Chile has the world’s largest copper reserves, which have allowed it to become the largest producer and exporter of copper. Historically, Chile’s economy has depended largely on its copper exports, which has meant that Chile’s economy has suffered when copper prices have dropped. Although in 2008 Chile’s IT outsourcing industry generated $800 million and employed 20,000 people, Chile’s goal is to make outsourcing a $5 billion industry by 2015. Experts, however, fear that over-development of the outsourcing industry could result in a large number of Chilean professionals abandoning their positions in other important technical fields, such as mining, for higher-paying IT jobs.
Experts have, therefore, suggested that instead of concentrating on outsourcing to generate revenue, Chile should “import” entrepreneurs to help grow its industrial sector and, thereby, its economy. Thus, in March of 2010, Chile launched a program called Start-Up Chile designed to “import” 1,000 entrepreneurs over the course of three years. The government hopes that the entrepreneurs will bring new ideas to improve technology, increase innovation, and boost wealth. Furthermore, Start-Up Chile encourages foreigners to hire locals, teach Chileans what they know about business, and help build Chile’s international reputation as a center for technology development.
However, the people that came up with the idea for Start-Up Chile realized that Chile, as a relative newcomer to the technology industry, would have to compete with major technology centers like Silicon Valley for entrepreneurs. Therefore, the government agreed to grant entrepreneurs $40,000 in start-up capital, free office space in a modern facility shared with other start-ups, and assistance moving among other benefits. The entrepreneurs only have to promise to stay in Chile for at least six months. Additionally, unlike in other countries that offer similar start-up incentives, Start-Up Chile does not require entrepreneurs to have funding in addition to the $40,000 the government provides to participate in the program.
Although the entrepreneurs are under no obligation to stay in Chile after the initial six month-period, government officials hope that other incentives, such as a low cost of living, will encourage them to stay. About forty percent of the companies that first took part in Start-Up Chile have stayed thus far. Entrepreneurs have been attracted by the ability to use the cash grants for any expenditure, the collaborative working environment they share with the other start-ups, and the credibility they gain globally by being chosen as one of the few start-ups to receive grants from Start-Up Chile. As the global financial crisis continues, Chile’s stable economy also presents an attractive alternative to starting businesses in the United States or Europe, which are teetering on the brink of a second recession.
Start-Up Chile has already proven to be mutually beneficial for Chileans and foreigners alike. American, Canadian, and British entrepreneurs have especially benefitted as the largest groups of foreigners to have received grant money. Chileans living abroad are the third-largest recipients of Start-Up Chile funding. While efforts by other governments to support innovation have failed, experts believe that Start-Up Chile will succeed because it invests in people who already have knowledge and capabilities in their fields and can share them with Chileans to help develop Chile’s economy.
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