The Role of Foreign Investment in Mongolia’s Mining Industry

Aspire Mining: Update on Mongolia Foreign Investment Law
FT: Chalco—Mongolia’s Angst Attack
FT: Mongolia Open to Talks on Investment Law
MarketWatch: Mongolia Tavan Tolgoi IPO likely in 2013: Banker
NPR: Mineral-Rich Mongolia Rapidly Becoming ‘Mine-golia’
NYT: In Mongolia, a New, Penned-In Wealth
Reuters: Mongolia Passes Watered-Down Foreign Investment Law
WB: Mongolia Quarterly Economic Update – February 2012
WB: Poverty Level Estimated at 29.8 Percent in Mongolia
WSJ: Chalco Bid for SouthGobi in Peril
WSJ: Geography Rules: Why Mongolia’s China Mining Strategy is a Mistake
WSJ: Mongolia Sets Plan to Cap Investments
WSJ: Rio’s Timely Antidote to Poison Pill

Mongolia has a vast amount of underdeveloped natural resources, including coal, copper and gold. Although these resources will likely be the driving force behind Mongolia’s economic growth for the foreseeable future, foreign investment is necessary to take advantage of this natural wealth. Nevertheless, Mongolians worry about the possibility of foreign exploitation, which led the government to pass a new foreign investment law limiting the ownership equity that foreign investors can hold in Mongolian companies within strategic industries. However, investors have become uncertain about the state of Mongolia’s business environment because of the foreign investment law, which is exemplified by the Aluminum Corporation of China’s (Chalco) decision not to proceed with its planned acquisition of SouthGobi resources, a coal mining company based in Mongolia.

Mongolia’s untapped natural resources could make the country’s citizenry economically better off if they were able to share in the profits of the mining industry. Mongolia is home to 10% of the world’s coal reserves, as well as the largest underdeveloped copper mine in the world. Analysts estimate that Mongolia’s resources are worth more than $2.75 trillion, while Mongolia’s population is only about 2.8 million. Moreover, the construction and exports from mining projects thus far have caused Mongolia’s gross domestic product (GDP) to grow 17.3% in 2011, a drastic increase from only 6.4% GDP in 2010.

As of yet, however, the average Mongolian citizen has seen very little benefit from the development of the country’s natural resources. About 29.8% of the population still lives in poverty, and stories abound of mining projects that leave behind ruined pastures or lead farmers to abandon their livestock to work in the mines. Many Mongolians are upset that foreign investors receive the majority of the financial benefits from projects such as Oyu Tolgoi, one of the largest copper and gold deposits in the world. Ivanhoe Mines of Canada owns a 66% stake in Oyu Tolgoi, while the Mongolian government owns the remaining 34%. Thus, Mongolia will receive less than 50% of the profits from mining its own natural resources when the mine is operational next year. On the other hand, Mongolia would likely not have had the $4 billion necessary to invest in the mine because the country’s GDP last year was only $8 billion.

To correct the wealth distribution problem, the Mongolian government has promised to give every Mongolian a share in the multi-billion dollar initial public offering of a state owned enterprise that runs part of the Tavan Tolgoi coal deposit. The government has also passed a law that limits foreign investment in “strategic” industries such as mining, finance, media, and telecommunications. Pursuant to this law, foreign investors must now register with the Foreign Investment Agency of Mongolia (FIA) after they acquire more than 5% of an enterprise that operates in a strategic industry. Foreign investors must also obtain government approval to acquire more than 33% and parliamentary approval for acquiring more than 49% of enterprises in these key sectors. However, foreign investments only trigger the approval process if they are worth at least $75 million or if a foreign state-owned enterprise is involved.

The foreign investment law may have negative consequences for future foreign investment in Mongolia. For example, Chalco announced on September 4, 2012 that it had abandoned its plans to purchase a controlling interest in SouthGobi Resources, an investment that was worth about $920 million. Chalco announced the initial deal in April of this year, just one month before the government passed the foreign investment law. Many analysts believe that the government passed the law because of concerns about further Chinese involvement in Mongolia’s economy. Mongolia is dependent upon China both for export transit and as a market for these exports. China currently purchases 80% of all coal produced by Mongolia for 30% less than global prices. Thus, the investment law and its timing may create an uncertain business environment that discourages foreign investment and hinders Mongolia’s potential economic growth and development. The key for foreign investors going forward is to create ownership structures for projects in strategic sectors that are acceptable to the government.

Bloomberg: BRICs Biggest Currency Depreciation Since 1998 To Worsen
CNNMoney: Will China’s Real Estate Bubble Burst?
FT: China Manufacturers Face Fall in Demand
FT: Chinese Manufacturing Hits Nine-Month Low
FT: China Moves to Lift Property Market
FT: Chinese Property Market Rebounds
FT: Fate of China Property is Global Concern
HSBC: HSBC China Manufacturing PMI
National Bureau of Statistics of China: Sales Prices of Residential Buildings in 70 Medium and Large-sized cities in July
Reuters: China Factor Surveys Signal Economic Growth Easing into Q3
WSJ: Murky Outlook for Dim Sum Market
WSJ: Wage Rises in China May Ease Slowdown
WSJ: Yuan is Luring Bets of a Drop


China’s Economy Shows Signs of Strain

Recent economic indicators show that China’s economic growth was much slower than expected in the first half of this year, and analysts predict that gross domestic product (GDP) growth will slow again next quarter to somewhere below 7.5%—GDP grew 7.6% in the second quarter. Two important issues affecting the Chinese economy are: (1) increased government restrictions in the housing industry, and (2) decreased demand for Chinese products. These relatively poor economic numbers have led the Chinese government to engage in economic stimulus measures such as interest rate cuts and increased spending on investment projects.


Concerns about a housing bubble (rapid increase in housing prices) in China’s developed cities have led the government to clamp down on the housing sector by prohibiting purchases of second homes, toughening mortgage qualifications, imposing residency restrictions, and increasing down payments on property. The housing market in China’s most developed cities, where housing prices are high, accounts for only 25% of the market as a whole. In the rest of the country (the other 75% of the market), however, housing prices are relatively affordable. Yet, government policies designed to correct housing prices in China’s largest cities are discouraging developers from building houses in the rest of the country because the policies lower developers’ profit margins, particularly in rural areas. Moreover, people are discouraged from buying homes due to purchasing restrictions, and many investors do not want to purchase new real estate when property values are on the decline. Decreases in home construction and sales hurt the Chinese economy because property construction accounts for 15% of China’s GDP, and about 10% of economic growth last year is directly attributable to the housing sector. Furthermore, reduction in property construction has a domino effect upon other industries, including steel, heavy machinery manufacturers, and the energy sector.

China’s manufacturing sector already faces tough challenges because demand for Chinese products is decreasing. In the first half of the year, wages for Chinese workers went up 13% from last year, and analysts expect wages to double by 2015 from 2011 levels and triple by 2017. Companies must increase the prices of their products to account for these wage increases. Consequently, many foreign consumers now order these goods from other Asian countries where wages and prices are lower. For example, Euro zone, American and Russian demand for Chinese exports dropped 30% this year. HSBC’s purchasing manager’s index (PMI) (number that is calculated based on purchasing executives’ responses to questionnaires regarding new orders, output, employment, suppliers’ delivery times, and stock of items purchased) for China’s manufacturing sector was posted at 47.6 in August, its lowest level since March 2009, and down from 49.3 in July. Any number below 50 indicates that the manufacturing sector is contracting. HSBC also reported that new orders for goods had declined along with the number of manufacturing jobs. If low demand for Chinese products continues, many more Chinese workers will lose their jobs, which could strain China’s domestic market because these workers will purchase fewer goods.

The Chinese government is introducing various policies to help address the problems in the housing and manufacturing sectors. To help the housing sector, the government has been subsidizing the construction of millions of apartments. However, somewhere between ten and sixty-five million apartments remain empty due to the government’s purchasing restrictions. Chinese Premier Wen Jiabao has also promised to give exporters a tax rebate to help ease the pressure on the manufacturing industry. Furthermore, the government has cut interest rates twice this year, approved numerous investment projects, and lowered the amount of money that Chinese banks must keep on hand. Such measures should encourage lending and development projects. Many analysts also predict that the Chinese government will employ monetary easing policies such as lowering interest rates on loans even further and increasing the money supply. This will make Chinese exports more affordable on the world market because the value of the yuan against foreign currencies will decrease.

New Party in Japan Fights Major Tax Increase

Bloomberg: Ozawa Forms New Japan Opposition Party in Challenge to Noda
FT: Noda Must Pull Off More Than a Tax Rise
FT: Ozawa Breaks with Japan’s Ruling DPJ
Reuters: Japan Eyes Political Shakeup After Ozawa Forms New Party
RTT: Japan's Ozawa Forms New Party Named With DPJ's Campaign Slogan
WSJ: Japan's Ozawa Forms New Party

On July 11, veteran Japanese politician Ichiro Ozawa unveiled Japan’s newest political party, Kokumin no Seikatsu ga Daiichi (“People’s Livelihoods First”).With the new party, Ozawa plans to overturn Prime Minister Yoshihiko Noda’s proposal to double the nation’s consumption tax--a tax on the purchase of goods and services. The new tax hike bill proposed by Prime Minister Noda will increase the current sales tax from 5% to 8% by the year 2014 and to 10% in 2015. Ozawa claims the proposed tax hike goes against the 2009 election promise made by the Prime Minister and his Democratic Party of Japan (DPJ) to not increase the tax for at least four years. Yet, Prime Minister Noda insists that the tax increase is essential to confronting Japan’s high debt, which was 211.7% of gross domestic product (GDP) at the end of 2011, as well as to fund rising social welfare costs of Japan.

Political opponents of the Prime Minister argue that the tax increase will discourage consumption because it will make it more expensive for consumers to purchase goods and services and thus fail to increase government revenue. Critics also point out that Japan has low economic growth and an aging population that is generating soaring social security bills, so an increase in taxes will only slow the expansion of the debt mountain. The aging population means more people are drawing social security and depending on the government for income. Since economic growth is slow, the government is able to take in less money and does not have enough money to cover all of the social security costs and the country must take on more debt to cover such costs. The International Monetary Fund (IMF) stated that Japan needs to raise the consumption tax to at least 15% to begin lowering their debt. Even with Noda’s planned tax increase, Japan’s total outstanding government debt is still set to hit a whopping 292% of gross domestic product (GDP) by April 2016.

Ozawa’s new party has 49 upper-and-lower house members, all who left the ruling Democratic Party of Japan in protest against the tax hike bill. The party also has 37 lower-house members, who voted against the tax bill in rebellion of the Democratic Party of Japan before defecting from the party. Japan is a democratic constitutional monarchy where the power of the Emperor is very limited and mostly symbolic. The power of the executive branch lies with the Prime Minister. The Japanese legislature, called the Kokkai or Diet, consists of an upper house and a lower house, like the United States legislature. The lower house is the Shugi-in or the House of Representatives and it has 480 seats with members serving a four-year term. The upper house is the Sangi-in or House of Councillors and it has 242 seats with members serving a 6-year term. Generally, decisions come from a majority vote in both houses.

The new party aims to seriously threaten the Prime Minister’s power, although public opinion polls show that voters have low expectations for Ozawa’s party. The party will be the third largest in the lower house and it has the potential to remove the Prime Minister if the party joins with other opposition parties. The defection of some members to Ozawa’s party caused the DPJ’s majority to slip to 250 in the 480-member lower house, allowing the party to keep its majority by only 11 seats. This small majority means the DPJ and the Prime Minister could have trouble gaining a majority vote as they try to push their agendas on other divisive issues like the multi-nation Trans Pacific Trade Partnership free trade agreement—a regional trade pact that Japan is awaiting approval to enter into negotiations regarding.

Although the tax hike bill already passed the lower house, Ozawa has promised to block the bill when it comes to a vote in the upper house next month. However, the DPJ and the Liberal Democratic Party have agreed to pass the tax hike bill through the upper chamber, regardless of Ozawa’s opposition. To combat such opposition, Ozawa will likely reach out to other discontented DPJ members to try to delay, if not halt, the passing of the tax hike bill. Conversely, some critics and political opponents of Ozawa say that other parties will be reluctant to cooperate too closely with him given his history of creating and breaking up political alliances. Therefore, even with Ozawa’s new party it still appears as though the DPJ will have enough support and will retain enough power to pass their tax hike in the upcoming upper house vote.
 

China to Test Freer Yuan in Financial Zone

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

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

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

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

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

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

Australia Closes Its Online Development Information Sharing Website

Sources:

AusAID: About AusAID

AusAID: Australian Development Gateway to close

AusAID Engage Blog: Decommissioning the Australian Development Gateway website

Australian Development Gateway: About the Gateway

Development Gateway: About Us

Development Gateway: Country Gateways

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

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

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

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

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

HSBC Announces $100 Million Global Water Development Project

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

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

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

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

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

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

Laos Declares Intention to Graduate from List of Least Developed Countries

Sources:

ADB: Confronting Rising Inequality in Asia

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

Reuters: Laos Clears WTO Entry Hurdle, Yemen Still Trying

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

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

(12-16 March 2012)

UN OHRLLS: Criteria for Identification and Graduation of LDCs

 

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

 

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

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

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

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

 

Samoa Celebrates 50 Years of Independence and Development

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

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

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

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

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

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

 

Potential Effects of New Zealand Limiting Government Subsidies of Post-Secondary Education

Sources:

The Dominion Post: Student Debt Plan Cuts Pay by $30

The Montreal Gazette: From Ontario to New Zealand, student protests are in season

New Zealand Herald: Editorial: Government right to tighten up on student loans

New Zealand Herald: Four-year allowance cap restricts study for many

New Zealand Ministry of Education: Statement of Intent 2012 – 2017

New Zealand Study Link: Budget 2012 - Changes to Student Loans and Allowances

OECD: OECD Thematic Review of Tertiary Education: New Zealand Country Background Report

Otagio Daily Times: Reining in student debt

Radio New Zealand: Student loan changes 'will force graduates overseas'

The New Zealand government is implementing changes in the upcoming year  to the funding of post-secondary education as a way meet the challenges of balancing rising educational costs with managing the government’s finances. In New Zealand, all post-secondary education is called tertiary education, which includes both degree-granting and non-degree-granting education. A degree granting program includes programs that result in degrees such as a bachelor’s, master’s, or a Ph.D., while non-degree-granting programs include adult education or continuing education programs. Because New Zealand places a high value on tertiary education as a means of creating both greater opportunity and greater equality, the government provides a large amount of funding for students.

 

Under the current system, the government provides financial benefits for students who need financial support. Students who demonstrate a financial need, based on the incomes of both students and their parents, are provided a weekly allowance to help cover education costs. Currently, this allowance provides for four years of financial assistance, with the option to extend four additional years for post-graduate education. Besides this allowance, students who need further financial assistance are given the option of government loans that bear no interest. To pay back the loans, borrowers who earn an annual income of more than NZ$19,084 (US$14,395.45) are required to pay 10% of their earnings.

 

Starting next year, the New Zealand government will reduce the amount of government financial aid. It will do this by keeping the four-year allowances for students with financial need, but no longer allow students to apply for the extension of four additional years. In addition, the government has implemented a four-year freeze on the parental-income threshold for allowance qualification, which is currently set at NZ$55,027.96 (US$41,508.70). As for the student loans, borrowers will now be required to repay their loans at 12% of their income if their income is more than NZ$19,084 (US$14,395.45).

 

The changes have raised concerns among student organizations and New Zealand newspapers. Although students have not responded with violent protests seen recently in the United States and Canada, New Zealand students are concerned that they will no longer be able to afford post-graduate education, particularly in the field of medicine. Local New Zealand newspaper editorials also raise concerns of brain-drain. Brain-drain occurs when small or less-developed countries lose their most educated individuals to larger or more developed countries where these individuals will earn a higher income. The largest perceived threat for New Zealand is Australia, where the government only requires students who are paying back education loans to pay 4% of their income if they earn more than Aus$48,000 per year (US$46,861.45).

 

The New Zealand government intends to address these concerns. By reducing the benefits provided to students, the government will save an estimated NZ$70 million per year, which it will reallocate within the tertiary education system to promote math, science, and engineering. In concert with this reallocation, the New Zealand government will also employ collection agencies to seek repayment of student debt for New Zealanders who have left the country to seek employment elsewhere. Both efforts seek to help the tertiary education system remain financially stable and prevent brain-drain.

 

In this way, New Zealand is attempting to balance financial viability in its tertiary education system by reducing student benefits while putting in place measures that will maintain an educated population.

Vietnam Plans Reforms to Aid Slowing Economy

Business Recorder: Vietnam’s Economic Growth Slows to Three-Year Low
Reuters: Vietnam Inflation May Have Peaked; Now the Hard Part
Reuters: Vietnam May Remove Deposit Rate Ceiling by July-Report
WSJ: Vietnam: Reform To Stabilize Economy

In the first quarter of 2012, Vietnam’s economy grew at a three-year low of 4%, down from 6.1% during the last quarter of 2011. In response, Prime Minister Nguyen Tan Dung stated on April 3rd that he plans to reform the communist country’s troubled state-owned companies.

Since his appointment in 2006, PM Dung has urged state-owned companies, which account for 40% of the country’s economic output, to diversify their businesses to promote Vietnam’s economic growth. In many cases, however, this strategy has been unsuccessful. Many state-owned companies took on huge debts because they were losing money in industries in which they lacked expertise. For example, Vinashin, a state-owned ship-building company, defaulted on $4.4 billion in debt to foreign companies in the summer of 2010 after it got involved in the beer brewing and tourism businesses. Following Vinashin’s troubles (eventually nine Vinashin executives went to jail), PM Dung apologized to Vietnam’s parliament and narrowly escaped a vote of “no confidence” in early 2011.

Moreover, this episode shook foreign confidence in Vietnam. Credit rating agencies, more aware of the state of Vietnam’s highly indebted state-owned companies, began to cut Vietnam’s bond ratings (effectively making it more expensive for Vietnam to borrow), and investors pulled money out of Vietnam’s stock market. With less confidence in the economy, investors around the world began to sell off Vietnamese assets valued in Vietnam’s currency, the dong, which contributed to inflation that reached 23% in August 2011. Another cause of high inflation was rising food prices, which was followed by government action to raise minimum wages. Both the selling of Vietnam currency and the higher minimum wage increased the amount of money chasing after the same amount of goods, creating inflation.

Since then, the government has raised interest rates, which promotes saving and reduces spending, to stave off inflation. As a result, inflation subsided to 14% as of March 2012. However, with interest rates over 17%, borrowing is expensive for Vietnamese companies (both public and private) and the more expensive credit has had a deteriorating effect on growth-producing investment.

With investment stalling, PM Dung has targeted reforming state-owned companies to promote economic growth. PM Dung removed the head of the state’s electricity company after it diversified into the mobile phone business instead of building up its energy capacity. He also urged oil and gas firms to pull out of their real-estate ventures. By refocusing on the proper size and scope of Vietnam’s state-owned companies, Mr. Dung hopes to put Vietnam on a path toward higher growth, but whether he will be successful remains to be seen.

Strong Currency Limits Australian Economic Growth

The Australian: Markets See Light at End of Tunnel

FT: Strong ‘Aussie’ Puts Damper on Mining Boom

WSJ: Food Could Be an Aussie Problem Now

On March 21, the Australian dollar (commonly referred to as the “Aussie”) traded at US$1.0537, the highest value with respect to the U.S. dollar in three decades. The Aussie exchange rate has risen over the last three years primarily because Australia has higher interest rates than other advanced economies. A higher interest rate attracts foreign investors who are able to get higher rates of return on their investments than they can elsewhere. The influx of investment to Australia creates a demand for Aussies, which raises the currency’s value relative to other currencies. Another reason why the value of the Aussie has risen is that in the wake of the European sovereign debt crisis, investors have viewed Aussies as a safe investment, which leads investors to buy Aussies, thereby increasing demand and raising the currency’s value. Furthermore, developing countries such as China are looking to diversify their holdings of foreign currency away from the U.S. dollar to minimize their exposure to a potential downturn in the U.S. economy, and the Aussie is viewed as a good alternative given the relatively higher growth rate in the Australian economy compared to the United States.

The higher value of the Aussie has limited the country’s exports (which are a primary driver of economic growth) as Australian products are more expensive for foreigners. Australia’s economy grew by 2.3% in 2011, but only by an annualized growth rate of 0.4% in the fourth quarter—both of these figures are much lower than the average growth rate of 3.25% over the last several years. Furthermore, Australia’s economic growth has been limited because Australian households have increased their savings over the last two years to pay down household debt. With less money being spent in the local economy, businesses are discouraged from expanding their operations which limits economic growth.

Perhaps more concerning to the Australian economy is that demand from China for Australian commodities has decreased and is likely to continue falling. Mining is the main economic sector in Australia and will account for over 40% of total business investment over the next few years. Much of Australia’s mining exports go to China. However, Chinese food and oil prices have been rising over the last several months, which has created inflationary pressure as producers pass on higher costs to consumers in the form of higher prices. With higher inflation, China may tighten its monetary policy by raising its interest rates, thereby encouraging Chinese to save instead of spend, which could decrease demand for Australian goods.

Extreme Poverty Falls, Even Amid Economic Recession

Sources:
Boston Globe: Economic Downturn did not Harm Efforts at Reducing Extreme Poverty in Developing World
Business Standard: Extreme Poverty Drops Worldwide
World Bank: World Bank Sees Progress Against Extreme Poverty, But Flags Vulnerabilities

A new World Bank report finds that the number of people living in extreme poverty—defined as living on less than $1.25 a day—in the developing world has fallen every year between 2005 and 2008, the most recent year where complete data is available. Additionally, according to preliminary data from 2010, the recent global economic recession, which many experts thought would lead to an increase in extreme poverty, instead has only slowed the rate of reduction.

Global attempts at reducing extreme poverty have been notable. In 1981, 1.94 billion people in the developing world lived below $1.25 per day. However, by 2008 that number dropped to 1.29 billion, a reduction of over 600 million people. Poverty reduction has been so rapid that the United Nations Millennium Development Goal of cutting extreme poverty in half from its 1990 level has already been achieved, well before the 2015 deadline.

Progress has been especially dramatic in East Asia. In 1981, the region was the poorest in the world, with approximately 77% of the population living in extreme poverty. By 2008, the percentage had dropped to only 14%. In South Asia, the percentage of people living in extreme poverty dropped from 61% to 36% between 1981 and 2008. In Latin American and the Caribbean, the population living in extreme poverty remained relatively constant at 12% between 1981 and 2002. However, since 2002, extreme poverty has been declining rapidly. In 2005 extreme poverty fell to 9% and by 2008 the number had fallen further to 6%.

Sub-Saharan Africa is the region of the world that has made the least progress since data collection began in 1981. In 1981, 51% of Sub-Saharan Africa lived in extreme poverty, but that percentage rose to 59% in 1993. Some progress has since been made, as the percentage of people in extreme poverty fell from 56% to 52% between 2002 and 2005. In 2008, the population living in extreme poverty was 48%—the first time in the region’s history that less than half of the population was not living in extreme poverty.

Despite the significant reduction in poverty, the World Bank believes additional progress needs to be made. At the current rate of progress, over one billion people will still live in extreme poverty by 2015. Additionally, while many people have escaped extreme poverty, these people remain extremely poor by middle- and high-income country standards. For example, many of those who have escaped extreme poverty now live on less than $2 a day, as evidenced by another recent study showing there has been only a 5% reduction in the number of people living on less than $2 a day between 1981 and 2008 (from 2.59 to 2.47 billion in 1981 and 2008 respectively). This data suggests that while 600 million people have escaped extreme poverty between 1981 and 2008, many of those people remain in dire financial positions. In total, 22% of the developing world still lives in extreme poverty and 43% lives on less than $2 a day. The World Bank hopes that the current trends will continue and world poverty will continue to decline.

India Shows Signs of a Slowing Economy

Bloomberg: Indian Economy Grows the Least Since 2009, Adding to Case for Rate Cuts

FT: Indian Economic Growth Slips to 6.1%

Reuters: Indian Economy Slumps to Weakest Growth in 3 Years

WSJ: Is India’s 6% GDP Growth Rate the New Normal?

India’s economic growth rate slipped to an annualized 6.1% in the fourth quarter of 2011, the lowest growth rate in nearly three years. This growth rate marks the seventh consecutive quarterly slowdown in India and a steep drop from the 6.9% growth rate in the third quarter of 2011. In 2007, India’s economy grew 9.5%, but growth slowed to 8.4% in the last two years and is expected to fall to somewhere between 6.5% and 7% in the fiscal year ending in March.

One reason for the slower economic growth is very high interests rates in India (the official interest rate is at 8.5%), which gives businesses and consumers an incentive to save their money rather than spend it, lowering demand for goods in the economy and limiting economic growth. High interest rates have lowered corporate investment from an average of 18% of GDP in the previous five years to 14% of GDP in 2011. Furthermore, high borrowing costs have stifled the growth of the manufacturing industry, which only grew at an annualized rate of 0.4% in the fourth quarter of 2011—a three-year low.

While other Asian countries have cut their interest rates to promote economic growth in the wake of the global economic slowdown, India has not because it is struggling to rein in inflationary pressure. This inflationary pressure is due, in part, to an increasing government fiscal deficit that has pumped extra cash into the economy. Lower tax revenues due to the slowing economy, along with expensive oil subsidies and a rural worker employment-guarantee program have contributed most to the increased deficit. The money for oil subsidies and the employment-guarantee program increases demand in the economy by ensuring consumers have more money available to spend, but with the supply of goods staying stable, prices rise due to simple supply and demand principles. India’s 2011-2012 fiscal deficit has swelled to an estimated 6% of GDP, which is higher than its 4.6% target, and up from an average of 3% of GDP in the previous four years. Since the inflation rate is so high, the Reserve Bank of India has been unwilling to cut official interest rates. Lower interest rates would encourage businesses and individuals to spend rather than save (borrowing would be cheaper and saving would not provide as high a rate of return), which would further increase demand and push inflation even higher, destabilizing prices and creating a risky atmosphere for foreign investors who worry that prolonged inflation will decrease the value of their assets.

The Reserve Bank meets on March 15th and there are indications that it will cut interest rates to promote economic growth. However, this decision is far from certain. India faces a unique mix of high inflation and slowing growth, and these pressures could increase because of rising oil prices. Higher oil prices cause inflation because producers face higher costs to provide the same amount of goods (e.g., heating, gasoline, and manufacturing products) and pass the cost on to consumers in the form of higher prices.

India is in a difficult position. The Indian government has so far been unwilling to control its spending which has contributed to inflationary pressures, but with high inflation the Reserve Bank has been unwilling to cut interest rates which would increase inflation, but promote economic growth as well. Unless India can manage this problem, it may have to grow accustomed to disappointing economic growth rates in the future.

World Bank May Start Lending to Myanmar

Sources:
AFP: World Bank Encouraged on Myanmar
Reuters: World Bank Says Reengaging with Myanmar After 25 Years
Wall Street Journal: World Bank Supports Reforms in Myanmar
World Bank: Myanmar and the World Bank

The World Bank stopped lending to Myanmar, formerly known as Burma, in 1987 due to the country’s lack of economic and social reform, as well as failing to make payments owed on World Bank loans. The former military government recently handed power to a new civilian government that is reopening communication with the international community. The World Bank, based on Myanmar’s recent openness, has begun discussions with the country about potentially initiating developmental programs in the near future.

Myanmar, once known as the “rice bowl of Asia” due to its strong agricultural sector, had a strong economy before economic mismanagement and civil war transformed the country into one that is now deeply impoverished. For example, the World Health Organization ranks Myanmar’s health system as the worst in the world. The military government gave up power in an attempt to reverse the country’s negative economic and social trends. This new government has initiated dialog with outside countries and organizations, began speaking with the political opposition and ethnic minorities, and released some political prisoners. Additionally, to boost economic development, Myanmar is planning to offer eight-year tax-exempt status to all foreign investors.

The World Bank is satisfied with the country’s recent political and economic decisions, and is now considering new lending programs to Myanmar. However, World Bank regulations do not allow it to provide funding to any country that is behind on debt payments. Therefore, before Myanmar will be able to receive new World Bank loans, the country must first make arrangements to pay its past due debts to the World Bank. While the World Bank has not released exact numbers, financial experts estimate that Myanmar owes $700 million in arrears to the World Bank.

If Myanmar and the World Bank solve the issues surrounding Myanmar’s past debts, new World Bank projects would likely focus on improving public services (such as education and sanitation), upgrading the antiquated banking and finance sectors, and facilitating private sector job creation (for example, by promoting open communications throughout the country). World Bank programs will also support sustained peace, especially in regions where ethnic fighting has torn communities apart since the country gained independence from Britain in 1948, by developing jobs for past combatants. If the World Bank and Myanmar can agree on financial action that will improve the lives of Myanmar’s citizens, it will provide hope to the citizens of other oppressive governments that the international community is willing to help if a peaceful government can be installed.

China’s Future President Xi Jinping Visits the United States

Sources:

NYT: Chinese Vice President Urges U.S. to Respect ‘Core Interests’

USA Today: China’s Xi Jinping, Obama Exchange Polite Warnings

WSJ: Xi Takes Time for a Reunion with Old Friends in Iowa

On February 13th, Chinese Vice President Xi Jinping began a five-day tour of the United States with a visit to Washington D.C. Mr. Xi is expected to succeed Hu Jintao as China’s president this fall, and this visit provided him an opportunity to comment on China’s future diplomatic and economic relationship to the United States—to Americans and Chinese alike. The visit comes just days after tensions arose between the two countries when China (along with Russia) blocked a United Nations Security Council resolution to condemn Syria.

In an address to business leaders, elected officials, and Chinese diplomats on Tuesday, Mr. Xi asserted that the U.S. and China must respect each other’s “core interests,” while working to promote trade with each other and cooperation with regard to how the countries address issues in Iran and North Korea. The phrase “core interests” has become a standard term for Chinese officials in recent months, meaning respect and support for China’s territorial sovereignty. Over the past year, more than two dozen Tibetan clergy have self-immolated and many Tibetans have been killed by the Chinese military in recent months during mass protests demanding independence. Another issue is Taiwan, an island China claims is part of the People’s Republic of China, which controversially purchased arms from the United States in March 2010. Mr. Xi urged the United States not to support either Tibet’s or Taiwan’s efforts to gain independence.

On a lighter note, Mr. Xi did acknowledge the strong economic ties between the U.S. and China, noting that trade between the two countries was expected to grow to $500 billion by the end of this year. He also noted that China is the United States’ fastest growing export market, despite the United States’ trade deficit with China reaching a record $295.5 million in 2011.

Mr. Xi’s speech came one day after Vice President Biden addressed Mr. Xi and business and political leaders in Washington. Mr. Biden told the leaders that China needs to: (1) lower trade barriers, including ending subsidies for its manufacturing industry so that China does not have a competitive advantage in the global marketplace; (2) allow its currency to appreciate so that Chinese exports are priced more competitively with American goods; and (3) enforce intellectual property laws to stop Chinese companies from exploiting the advances of U.S. technology companies.

Although no one knows for certain how Mr. Xi’s presidency will change China–U.S. relations, some are hopeful that his familiarity with the United States will usher in a more cordial relationship between the countries. Mr. Xi spent time in the U.S. early in his political career, his daughter attended Harvard University, and he regularly deals with U.S. officials and business leaders, giving him more interaction with the U.S. than any prior Chinese president.

Tensions Rise Between Hong Kong and Mainland China

Sources:

BBC: Surge in Anti-China Sentiment in Hong Kong

FT: Hong Kong Rages at Wave of Pregnant Chinese

WSJ: Hong Kong-Mainland Tiffs Worry Beijing

Hong Kong residents are growing wary of the increasing numbers of mainland Chinese some of whom are travelling to the island for tourism, and some to take advantage of Hong Kong’s social programs. The number of mainland Chinese travelling to Hong Kong peaked at twenty-eight million in 2011—an amount four times the Hong Kong population of seven million—and anti-Chinese sentiment has culminated in a group of Hong Kong residents raising money to publish a full-page color advertisement in a Hong Kong paper depicting Chinese tourists as a locust overlooking the Hong Kong skyline. Moreover, the number of Hong Kong residents identifying themselves as Chinese fell to 16.6% in 2011—a twelve-year low—down from 38.6% in 2009.

Hong Kong passed from British colonial rule to Chinese control in 1997, and has been operated under a “one country, two systems” policy. Under this policy, Hong Kong is free to determine its own internal affairs, but Beijing controls Hong Kong’s foreign and defense policies. In 1997, Hong Kong residents mostly welcomed the transition as it ended 150 years of British rule and rescued Hong Kong’s struggling economy by opening its borders for increased trade with China. While Hong Kong still generally benefits from trade with China, travel to Hong Kong—primarily from some of mainland China’s wealthiest residents—has increased tension between the mainlanders and Hong Kong residents, as well as the Hong Kong government and Beijing.

Many mainlanders go to Hong Kong to shop for luxury goods because there is no sales tax. In many of Hong Kong’s shopping districts, the mainland Mandarin dialect is heard more often than the local Cantonese dialect, and Hong Kong residents are becoming resentful of seeing the conspicuous consumption of mainlanders who thirty years ago Hong Kong residents viewed as country folk. In January, this resentment came to a head when Hong Kong residents protested and forced a luxury store (Dolce & Gabanna) to close after hearing it permitted mainland tourists to take pictures in front of the store but not local residents.

This relatively minor episode highlights Hong Kong residents’ concerns that mainland Chinese are getting special treatment in Hong Kong in more important ways. Increased wealth, coupled with China’s one-child policy (which is not in effect in Hong Kong), has led a surge in birth tourism (mainland Chinese traveling to Hong Kong to give birth). If a child is born in Hong Kong, the child automatically receives the right to live and work in Hong Kong, carry a Hong Kong passport that eases international travel, access Hong Kong’s health-care system, and twelve years of free education. Over the past ten years, the number of newborns of mainland parents has risen from about 700 in 2000 to over 34,000 in 2011, or 38% of the newborns in the city.

Hong Kong residents complain that mainland Chinese are able to take advantage of the social programs that Hong Kong residents have built through hard work, without contributing to the funding of the social programs themselves. The Hong Kong government worries about access to schools and hospitals, and has already taken action to reduce the quota of hospital beds allocated to non-local mothers to 34,000 annually. In response, Chinese officials in Beijing have assured Hong Kong residents that it will ramp up its efforts to curb mothers travelling to Hong Kong to give birth by imposing heavy fines on those who skirt China’s one-child policy by travelling to Hong Kong.

These ongoing tensions between Hong Kong and Beijing will become more important in the coming years as Hong Kong braces for its first democratic election in 2017. If Hong Kong residents remain resentful of mainland China, it could boost a political party hostile to Beijing’s interests into power and threaten relations between Hong Kong and Beijing.

The World Looks on as Myanmar Prepares for Elections

Sources:

AP: In Divided US Politics, Rare Agreement on Myanmar

Asia Times: Premature Rush for Myanmar Riches

Voice of America: Burmese President Says Nation on Path to Democracy

WSJ: Suu Kyi Stirs Backers in Myanmar

After nearly five decades of military rule, political oppression, and economic mismanagement, Myanmar (also known as Burma) has undergone many reforms since the military gave up control of the government in 2010. To transfer power, Myanmar held elections in November 2010—elections which the U.S. and European countries claimed were unfair—that brought a military-backed civilian government to power, led by former general Thein Sein.

Under President Sein, the government has released political prisoners, called a cease fire with ethnic groups, and eased political censorship, which has encouraged the international community to improve its economic and political relationships with Myanmar. Already, the United States has agreed to exchange ambassadors with Myanmar for the first time in over twenty years, and the European Union (E.U.) agreed on January 23rd to lift travel restrictions on certain Myanmarese leaders. Several individual E.U. countries have responded to political reforms in Myanmar as well, with France agreeing to triple its development aid to Myanmar and Denmark agreeing to double its aid. In January, Australia also announced it would relax its financial and travel sanctions on Myanmar. Despite these positive developments, the U.S. and E.U. still have strict economic sanctions on Myanmar which have limited its economic development.

Despite the political and economic rewards reaped from President Sein’s political reforms, another political leader in Myanmar, Aung San Suu Kyi, is perhaps more important for the country’s future. Suu Kyi is the leader of the opposition party in Myanmar, the National League for Democracy (NLD), and has been under house arrest for fifteen of the last twenty-three years. This year, she is running for parliament in an April 1 election. Suu Kyi has broad support throughout the West, including in both political parties in the United States, and although her party cannot take over Parliament because only 48 of 440 seats are up for grabs in the upcoming election, a fair, democratic election could convince Western countries that the military-backed government is committed to prolonged reform.

A fair election, coupled with the reforms President Sein has already enacted, may convince the West that economic sanctions are no longer necessary. Asian companies are already moving to Myanmar to take advantage of its low labor costs and large supply of natural resources. If the U.S. and E.U. lift their sanctions, Myanmar will see even greater foreign investment, which leads to increased employment and higher wages. The potential of Myanmar is clear—the International Monetary Fund recently said Myanmar has “high growth potential” and is the “next economic frontier in Asia.”

Holding a fair election may seem like an easy choice for the military-backed government. After all, the NLD cannot take over Parliament even with a land-slide victory in April, and ensuring a fair election could end two-decades-old economic sanctions. However, free elections may eventually deteriorate the power of the entrenched military elite, which it may be reluctant to allow.

New Zealand Reserve Bank Holds Interest Rates Steady

Sources:

Bloomberg Businessweek: Bollard Signals Longer N.Z. Rate Pause with Inflation Contained

National Business Review: Bollard Holds OCR at 2.5%, Signals Higher Bank Funding Costs

New Zealand Herald: Bollard’s Arms Stay Folded on OCR

Reserve Bank of New Zealand: What is the Official Cash Rate?

Reserve Bank of New Zealand: Official Cash Rate (OCR) Decisions and Current Rate

On Wednesday, the governor of New Zealand’s Central Bank, Alan Bollard, announced that the Central Bank will hold the Official Cash Rate (New Zealand’s base interest rate) at a record-low of 2.5%, the rate it has been at since March 2011. Mr. Ballard cited weak economic growth due to worsening global economic conditions and lower than expected inflation in the fourth quarter of 2011 as reasons to keep the OCR at 2.5%.

In New Zealand, commercial banks hold accounts at the Central Bank which they use to pay the money they owe to other commercial banks after exchanging assets throughout a business day. The Central Bank pays commercial banks the OCR—currently 2.5% interest—on the amount of money a commercial bank has in its account, and charges the OCR if a commercial bank needs to borrow money to pay other commercial banks it traded with throughout the day. For example, if Bank A sold Bank B $200,000 worth of bonds, Bank B may have to borrow money from the Central Bank to pay back Bank A; the Central Bank would charge the OCR, or 2.5%, on this borrowing.

Although the OCR does not dictate market interest rates in the New Zealand economy, it has a strong influence. As an illustration, commercial banks may find it difficult to lend money at interest rates higher than 2.5% because other banks, which can cheaply borrow money from the Central Bank at a 2.5% interest rate, will quickly undercut an interest rate higher than 2.5%. Alternatively, a commercial bank is not likely to lend money at an interest rate lower than 2.5% because it could receive 2.5% interest by keeping its assets in its account at the Central Bank. Therefore, market rates tend to settle around the OCR.

In December, analysts expected the Central Bank to raise the OCR in early 2012 to encourage commercial banks to hold money in their accounts with the Central Bank, which would slow inflationary pressures by encouraging banks to save money, thereby decreasing demand which would lower prices and decrease inflation. However, a January 19th report revealed that the consumer price index (a measure of how much money it costs to buy certain goods and, therefore, a measure of inflation) rose only 1.8%, below the midpoint of the 1% to 3% inflation rate that the Central Bank has targeted in accordance with a Parliamentary mandate to set an inflation target. Since inflation was lower than expected and the economy is still growing at a slow rate, the Central Bank decided not to raise the OCR. By keeping the OCR low, the Central Bank hopes to encourage banks and consumers to continue to spend, rather than save, thereby increasing economic growth and inflation (higher demand will push prices up) to the target level of 2%.

According to Mr. Ballard, inflation will naturally settle at the target level of 2% and economic growth will increase due to the ongoing reconstruction effort in the region of Canterbury. Canterbury has been struck by a series of earthquakes since September 2010, including a February 2011 earthquake that killed 181 people. A large-scale reconstruction effort is scheduled to begin in early 2012, and the additional demand for commodities will likely increase inflation to the 2% target and increase economic activity.

Indonesia Earns Investment-Grade Bond Rating

Sources:

FT: Indonesia Makes Investment Grade at Moody’s

Jakarta Post: New Rating Upgrade Shows Faith in RI

WSJ: Indonesia Gets Ratings Boost from Moody’s

Moody’s Investor Service—one of the “big three” credit-rating agencies—raised Indonesia’s credit rating to “investment grade” with a stable outlook for the first time since 1997. The decision by Moody’s comes on the heels of a similar decision by Fitch Ratings in December, and analysts expect Standard & Poor’s will also upgrade Indonesia’s bond rating in the coming months.

In 1997, Indonesia’s bonds were downgraded to “junk” status due to the ongoing negative economic effects of the Asian financial crisis, unstable leadership, and a mounting public debt. Since then, the economy and political environment have improved drastically. Under the leadership of President Susilo Bambang, Indonesia’s economy has expanded by at least 5% in seven of the last eight years. Some of this economic growth is due to increased domestic demand from the growing middle class, but much of it is due to Indonesia being the world’s largest exporter of coal and palm oil. The country has also improved its fiscal situation. In 2000, the public debt accounted for 90% of Indonesia’s annual gross domestic product, but now that figure has been trimmed to 25%.

Despite strong economic growth, stable leadership, and less public debt, Indonesia requires infrastructure improvements if its economy is to keep pace with recent growth rates. Companies are increasingly citing congestion on roads, and at ports and airports as burdens to Indonesia’s business climate. In response, Indonesia has stated that it needs more than $400 billion over the next thirteen years to upgrade its infrastructure.

Fortunately, borrowing to fund infrastructure improvements will be less costly if Indonesia can retain its “investment grade” credit rating. Last week, 30-year Indonesian bonds reached a record-low yield of 5.375% due to investors being willing to pay higher prices (yields drop as bond prices rise). Shortly after Moody’s recent announcement, 10-year Indonesian bonds fell to a record-low yield of 5.83%–another encouraging sign. The ability to issue bonds at low yields is important because it has the effect of lowering Indonesia’s borrowing costs: rather than paying 7% annual interest on new 30-year bonds that it issues, as Italy currently does, Indonesia only has to pay 5.375% interest. Put another way, an upgrade in bond rating from credit-rating agencies signals to investors that Indonesian-government bonds are at less risk of default, and could increase much needed investment in the growing economy.

If Indonesia is able to upgrade its infrastructure, it will continue to attract foreign investment, which creates jobs and raises wages for the country’s citizens. Indonesia’s net foreign investment (foreign investment coming into the country less Indonesian investment in foreign countries) has tripled to more than $15 billion in the last three years, and improved infrastructure—funded with lower borrowing costs—will increase foreign investment. Furthermore, both Moody’s and Fitch have stated that if Indonesia is successful in improving its infrastructure, the country may see another credit-rating upgrade, which would lower borrowing costs once again. For a country that “became a poster child for emerging economies run amok” in the 1990s, these trends are encouraging developments.

North Korea Addresses Food Assistance and Nuclear Weapons

Sources:
NYT: North Korea Open to Talks on Nuclear Program
USA Today: North Korea Keeps Door Open for Food-Nuke Deal with U.S.
WSJ: North Korea Accuses U.S. of Politicizing Food Aid

In its first statement addressed to the United States since Kim Jong-il’s death on December 17th, North Korea—now headed by Jong Il’s son, Kim Jong-un—accused the US of “politicizing” the issue of food assistance. The statement condemned the United States’ insistence on North Korea halting its uranium-enrichment program as a condition to food assistance. It did, however, indicate that North Korea may be willing to engage the U.S. in future negotiations.

The U.S. first agreed to deliver food assistance to North Korea in 2008 when it promised to provide 500,000 tons of grain. The U.S. delivered 170,000 tons to North Korea in 2008, but the food-assistance program ended in 2009. Nuclear testing in North Korea was the main reason U.S. ended its aid disbursement, but the U.S. was also concerned that the government was distributing the food to the relatively well-fed military rather than North Korea’s impoverished citizens.

During the last year, North Korea and the United States have held negotiations for an aid-for-nuclear-disarmament agreement. The countries were on the verge of a deal prior to Jong-il’s December death which would have, according the U.S., provided “nutritional assistance” (vitamin supplements, nutrition bars, and snacks) to children in exchange for North Korea’s agreement to suspend its uranium-enrichment program. However, the negotiations stalled in December as North Korea began an official mourning period for Jong-il.

Currently, it is unclear whether any deal is imminent. In its statement, North Korea accused the U.S. of “drastically” changing the type of food assistance from the initially-promised grain to what the U.S. now calls “nutritional assistance.” Oddly, however, the statement also suggested that North Korea has not requested food at all, saying the “hostile forces are spreading unsavory slander” in reporting that North Korea had requested food assistance from the United States. Apparently, the “unsavory slander” is reference to recent reports in South Korean and Japanese newspapers which stated that North Korea had requested aid from the US.

Despite these mixed messages, North Korea has acknowledged that the food crisis is a “burning issue.” The United Nations (UN) World Food Program conducted an extensive survey in 2011 in North Korea that revealed that one-fourth of the country’s twenty-four million people are in need of food assistance. North Korea has gone through decades of economic mismanagement and it has very little arable land to support the nutritional needs of its people.

Given the lack of transparency in North Korea’s government, it is difficult to know what this all means for North Korea’s future. Some analysts speculate that the North Korea’s new leader, Kim Jong-un, has stepped back from his father’s deal for strategic reasons. If there are any threats to his leadership, he must gain the support of North Korea’s powerful military leaders who are resistant to limiting, much less ending, its nuclear program.

It is unclear whether North Korea’s retreat from the proposed December deal signals the continuation of a prolonged relationship of disagreement and distrust with the United States, or rather was a political maneuver meant to ensure Jong-un does not lose the support of North Korea’s military. However, if the move reflects North Korea’s long-term policy toward the United States, it is likely that North Korea will remain underdeveloped and impoverished.