Japan's easy money / re-flate plan showing positive signs

Cheaper yen means higher sales expectations for Japanese manufactures in general.  In fact, Japanese automakers are especially optimistic because a cheaper yen will reduce the cost of their autos in terms of other currencies and help them to become much more competitive in the global market.

Last December, Japan’s prime minister Shinzo Abe promised to weaken the currency and create more government stimulus in attempt to fight deflation and re-flate Japan’s economy.  The new BOJ leadership, installed by Mr Abe, are following through – announcing plans to double the amount of yen in circulation.  Although, this plan is in the very early stages, given a 20% plunge against the dollar, and rosy forecasts from the Japanese automakers, there are some positive signs already that the plan may be working.  Furthermore, the exchange rate changes will have an even greater impact on Japanese manufactures like Mazda, who make majority of their products in Japan.  Mazda’s shares are up 90% this year!  Is this the new world of cheap money or should we return to fixed exchange rates?

Debating measurement

For a long time, economists have used general principles and assumptions like utility maximization, self-interest, and GDP, among others.  These assumptions and indicators help everyone from investor to politicians make important decisions that affect everyone around the world; but do they really reflect individuals underlying preferences and general economic performance?

Intuitively, we may question some of these measures and their accuracy, and there is emerging evidence that current measures do, in fact, leave out some important factors.  A recent article in the economist discusses several of these issues, including the assumptions of an individual’s fixed preferences, which are taken as a given.  Recent research in the field of cognitive science has shown people hold on to items well past the point at which it “makes sense” to sell.  They have also found people dislike losing something more than they like gaining the same amount; a finding such as this may have implications for future tax policy.

Another article continues the discussion about GDP vs. a county’s wealth and wellbeing.  GDP calculations only measure dollars spent but not what there spent on, i.e. things that either are beneficial or detrimental to growth and prosperity.  Unpaid and open source goods and services are not calculated either; even though improving an open source code will not create a monetary exchange, it does improve the overall utility of those who use the product.

Amartya Sen, a Nobel laureate in economics at Harvard, had this to say about GDP:

“We may be in the early stages in the United States of recognizing that the gross domestic product is very misleading and something must be done to get better measures of well-being.”

While there are problems with our current measures, they do help us make decisions about policy and investment, and they are the best indicators we have.  However, as domestic and international economies become more complex and less traditional, our current measure may become less and less effective, in which case new metrics must be created.

Cash Sent Home by Immigrants Remains Stagnant

heres an interesting article in the WSJ about how cash sent home by immigrants from the United States is much lower than expected

http://online.wsj.com/article/SB10001424127887323798104578451082562984810.html?mod=e2tw

Why so little demand for protectionism?

This is a question that Paul Krugman asks this week, and Tyler Cowen has some thoughts on it. What do you all think?

Blog-worthy topic: factory collapse in Bangladesh

Last week, a textile factory in Dhaka, Bangladesh, collapsed, killing hundreds of workers. A few days later an economics/business blogger at Slate Magazine, Matthew Yglesias, wrote that

Bangladesh may or may not need tougher workplace safety rules, but it's entirely appropriate for Bangladesh to have different—and, indeed, lower—workplace safety standards than the United States.
...
The reason is that while having a safe job is good, money is also good.
...
Safety rules that are appropriate for the United States would be unnecessarily immiserating in much poorer Bangladesh.

Yglesias backtracked some of his comments later, but this poses some interesting questions nevertheless. We addressed some of these issues, for instance regulatory races to the bottom, earlier in class. But there are a number of interesting questions worth asking:

• What can political economy tell us about why this disaster happened?
• What can it tell us about why regulations are the way they are?
• What can it tell us about the gap between laws and regulations on the one side and practice (the condition of the building) on the other?
• What can a political economy approach tell us about how such tragedies might be avoided in the future?

I'm looking forward to hopefully a few posts this week that address these or other questions related to this event.

Austerity vs Growth

Greece’s struggling economy was back in the spotlight this weekend.  According to BBC News, “The Greek parliament has passed a bill which will see 15,000 state employees lose their jobs by the end of next year.”  But that’s not all, by 2015, 150,000 public employees are expected to lose their jobs.  How’s that for austerity?  Not surprisingly, the passage of the law, which will continue to swell Greece’s already high unemployment rate of 27%, was not well received and the people took to the streets in protest. 

Interestingly, also over the weekend, Business Insider published a story outlining how support for austerity in the United States may be diminishing in light of “the very public demolition of a sacred text of the austerity movement, the 2010 paper by a pair of Harvard professors arguing that once debt exceeds 90 percent of a country’s gross domestic product, it crushes economic growth.”  As we discussed in class, the validity of the Reignhart-Rogoff study has been called into question due to a coding error in their spreadsheet that led to some data being omitted.  Their data, according to The Economist, shows a steep decline in growth, from 3% to -0.1%, at 90% GDP.  But a new paper, published by Herndon, Ash and Pollin of the University of Massachusetts, Amherst stated that with the inclusion of the omitted data the decline in growth is in fact 2.2% and not the reported –0.1%.  Business Insider asserts that these findings have brought many in Washington to “The realization that growth is how you close the deficit and that austerity (because it saps growth) is counterproductive.”

In Greece’s case, it doesn’t matter.  The moves toward austerity are not self-imposed.  According to BBC News the recently passed law and other austerity measures are a condition of a structural adjustment loan that is dispersed by IMF in tranches.  If Greece hopes to receive future tranches of the loan, they have no choice but to continue to move toward austerity.  But it still begs the question: Is austerity the right move for Greece? 

Remittances--the "New Foreign Aid?"

Recent data suggests that remittances to Africa have added up to far more than Western donors send in foreign aid.  Not only are Africans sending more money home than Western donors are giving, the money is also thought to be much more effective. 

According to Adams Bodomo, a professor at the University of Hong Kong, the remittances to Africa have been “more efficient and better targeted....it’s more effective because it’s better informed.  An African family member abroad knows what is needed...only a small amount of ‘traditional aid’ ends up with the people who need it.”  

This can be connected with our in-class discussion about one of the major problems with bilateral aid: governments don’t always know what the people need.

Because of the vast influx of remittances from country to country, efforts have been made to facilitate this process.  For example the AIR project (African Institute for Remittances), commits itself to “us[ing] remittances as development tools for poverty reduction.”  In doing this, they have dedicated resources to performing more research on remittance flows and policy change in order to develop ways in which remittances can effectively contribute to development in Africa. 

Others are actually capitalizing on remittance flows.  A company called Xoom has created a convenient service to simplify the wiring of money from one country.  They do this by allowing the customer to use their bank accounts and credit cards instead of hassling with cash.  And all this for a small fee of around $5 per transaction.  Because of the immense number of remittances that are being transferred around the world, the company is sure to make a hefty profit in the billions. 

However, some claim that remittances aren't all they’re cracked up to be.  A study by Chami et al. argues that, contrary to popular belief, remittances are not necessarily correlated with economic growth.  Part of the problem, they say, is the Dutch disease, or the idea that an increase in remittance flow will appreciate the country’s exchange rate, thus distorting the market.  Dutch disease often leads to a decrease in price competitiveness for the remittance-receiving country.    

Though not everyone agrees on the effectiveness of remittances, it will be interesting to read upcoming research on whether or not remittances can become the “new foreign aid,” or, if in the long run, remittances are problematic. 

What policy recommendations could be useful to implement, given the popularity of remittances? 

Muhammad Yunus and Microfinance

I ran across an interesting piece in the NY Times that was a conversation with Muhammad Yunus, who is best known to the world for his pioneering work in microfinance.  He has also advocated the spreading of microfinance.  Microfinance providers currently reach 200 million clients globally.  Yunus, the founder of Grameen Bank which started in Bangladesh, received the Nobel Peace Prize in 2006 along with the Grameen Bank.  Yunus has received numerous awards including most recently the Congressional Gold Medal.  Yunus was also selected in 2008 for the FP Top 100 Global Thinkers list, receiving recognition as the second most important public intellectual alive.   According to the New York Times piece Grameen bank currently has 8.6 million borrowers, 96% of which are women.  The government  of Bangladesh in the last 2 years has been attacking the work of Yunus according to Yunus and the New York Times.  Yunus thinks that the government of Bangladesh is trying to takeover the Grameen Bank.  Here, NY Times, a blog in the New York Times defends the work of Yunus.

One of the themes that we have been discussing in class is the role of central banks in deciding to reduce unemployment or inflation.  When combatting unemployment central banks lower interest rates which gives incentives to people to borrow more money and stimulate the economy.  Microfinance provides financial services, including microcredit, to the world poorest people who wouldn’t otherwise receive such services if left up to normal banking institutions in the hopes that it will lower unemployment, raise the standard of living, and as an added benefit stimulate the economy.  Also instead of governments using welfare and foreign aid to address the issue of poverty, microcredit lets poor individuals have borrowing capabilities from banking institutions.

In the interview Yunus describes what he calls social business, he says “I dismiss personal profit, and focus exclusively on people and planet.”  “That’s what I call social business: a nondividend company dedicated to solving human problems.”  He goes on in the New York Times conversation to say, “I’m not saying to get away from profit-making businesses.” “I’m saying keep these separate, run them in parallel.”  Yunus is an idealist that imagines making the impossible become possible.  Yunus says in the NY Times conversation that in five years he would like to see social business make up at least 1% of the world economy.  

An article in the Economist discusses the current revival of the micro finance industry and the reckless lending to the poor that led to its initial downfall.  Regulators are playing more of a key role. “Microlenders’ annual interest rates are now capped at 10-12 percentage points above their own borrowing costs, leaving most charging 23-27%.” “Some charged 40% during the boom; dodgy local loan-sharks, the only alternative source of credit in many rural areas, have even higher rates.”  Also the article says that microlenders such as the Grameen Brank are beginning to attract capital again.  I think that microfinance is a good idea and I would like to see it continue to grow.  Either way Muhammad Yunus is fascinating person that has a vision for addressing poverty.

Boosting Economy by giving undocumented Immigrants?

I came across a very interesting article how granting a undocumented immigrants a path to a citizenship could help improve the economy.  According to the article, it talks about how as much as 11 million undocumented immigrants are in the United States and if we grant them all US citizenship they would be able to add $1.4 trillion to the country's economic growth and also create more than 200,000 jobs and also boost a tax revenue by more than $180 billion in the next decade.  Sounds like that is what exactly America needs right now during this touch economic crisis doesn't it?  According to this article a study from the Center for American Progress shows that "undocumented immigrants currently pay less in taxes than they would as citizens, so granting them citizenship would bring in additional revenue.  The article suggest that not only would earning more increase the amount of taxes they pay but it would also increase the amount of money the spend which will boost our economy by them spending more on food, clothing, housing, cars, and computers.  That spending in turn will stimulate demand in the economy for more products and services, which creates jobs and expands the economy."Also according to the article the Immigration Reform Act in 1986 which granted legal status to about 2.7 million undocumented immigrants benefited in US home ownership because these illegal immigrants were earning more money.

What I remember from Tuesday's discussion class was regarding why people cross borders?  I am sure most of these illegal immigrants present in this country came here for mostly unskilled labors and some skilled labors as well as family reunions.  Do you really think that by giving these undocumented immigrants a path to citizenship is a best way to go about fixing our economy?

I would say there is absolutely no way we can go about granting undocumented immigrants a path to citizenship because we don't know how many of these are skilled and unskilled workers.  Some of these undocumented immigrants could be students who came to US legally but after completion of their studies decided to stay here but cannot find a job.  While I do agree that immigrants in general whether legal or illegal helps boost tax revenue and help country boost economy I am sure there is gotta be a better way to fix our economy than putting our country under national threat.

http://abcnews.go.com/ABC_Univision/Politics/undocumented-immigrants-citizenship-boost-economy/story?id=18790677#.UXi9bSsjrr0

The Sequester Effecting International Non-profits

Oxfam America's "Change Makers" ads

Since March 1st , congress has started implementing the outlined concessions of the sequester as a result of both parties inability to reduce the United States deficit. With plans to increase certain taxes and cuts to federal spending already evident, domestic non-profits are not the only ones within the third sector worried about how this will effect funding to their programs. Oxfam America, an international non-profit organization which works to alleviate different human rights inequalities around the world , posted an article earlier this month voicing their concerns of how the United States sequester cuts will effect the already less then 1% of U.S. federal budget aid they receive. This 1% of funding is spread over hundreds of non-profit organizations located in numerous countries around the world and is classified as poverty-focused international aid.

At Oxfam America, the staff and many of the people they work with are concerned about those who will be directly effected by cuts to poverty-reducing aid. They wonder what Americans and policymakers imagine when they think of developing countries and their assistance they give to them through foreign aid. Furthermore, the organization posed the overarching question throughout the article , do massive federal budget cuts have human faces associated with them?

Oxfam America wanted to make it very clear to DC policymakers that there were indeed human faces tied to the international aid they give and in January they produced multiple ads containing stories of local "change makers" in developing countries. These change makers are local entrepreneurs who are holding their governments accountable, seeing results from their products, and are using US foreign aid to start and progress thier local enterprises. The ads were originally focused to get the attention of DC policymakers but to many people's surprise, the U.S. general public has picked up on these ads via social media. Their responses to the ads were mixed. Some U.S. citizens thought the ads were forced and inaccurate, thus furthering their desire to have foreign aid be the first item reduced during the sequester cuts. While others were pleasantly surprised to see a non-profit working alongside developing countries to ensure accountability and growth from the aid they obtained.

This article address a lot of the major themes discussed throughout the course relating to foreign aid, specifically within William Easterly's critiques regarding the lack of accountability and feedback given with foreign aid. Seeing a large international non-profit like Oxfam America proactively working to implement regulations on accounting where aid is going while also tracking its effectiveness is encouraging to see but is it enough to change the way Americans and U.S. policymakers view the importance of continuing foreign aid? Either way, it will be interesting to see the exact effects the sequester cuts will have on the 1% of federal budget funds given to poverty-reducing aid within the next couple of years.

Colbert Satirizes Unsupported Evidence that Supports Austerity

In the most recent Colbert Report, there is a funny segment about the central role that the idea of austerity has played in contemporary politics and fiscally conservative economic policy, as we discussed in class. It takes a look at the methodological errors that haunt Reinhart and Rogoff's study, "Growth in a Time of Debt" followed by an interview with Eric Herndon (University of Massachusetts) who unearthed the skewed spreadsheet data that has largely informed our understanding of the relationship between sovereign debt and GDP growth. Watch it!

German Parliament Backs Cyprus Bailout

I know there had been a lot of previous talk on Cyprus earlier this semester and It could be becoming monotonous...but there has been substantial process in the bailout plan and euro giant Germany has stepped up to the plate and overwhelmingly voted in favor to supply one third of the bailout for Cyprus. Earlier this week the German Parliament had a vote on a bill which would give 13 billion dollars or 10 billion euros to the future bailout plan for Cyprus.  This new and revised bailout plan would require 30 billion euros to bailout Cyprus and return them to some form of economic security and safety.  The new rescue plan plans massive reforms on Cyprus's bloated banking sector and over the next two years is expected to drop to 12% or 13%.  This new reformed version of the Cyprus bailout plan as well as Germany's example by stepping up and offering one third of the international assistance could be just what Cyprus needs.  Maybe after this new bailout if it ends up going through will help Cyprus recover from their turmoil and they might be able follow the model of Ireland and Portugal who have made some great recoveries through hard restructuring.

Test your economic literacy

The New York Times' Economix blog posted a nice little quiz that you all should be able to pass with flying colors after having worked through our seminar. Try it!

Is Immigrations the Answer to Aging Populations?

Countries around the world are facing a problem with an aging population and slowing population growth rate. Some of the countries that will be most affected by this on the near future are Japan, Spain, Italy, Germany, France and the UK among many other developed countries.  With these changing demographics governments must find a way to lessen the affect this will have on the economy, at home and abroad.

An aging population is one were a greater percentage of the population is over the age of 65, therefore increasing the dependency ratio and decreasing the number of workers in the labor force. Some of the main problems faced by this situation are, increased government spending on healthcare and pensions with lower tax revenue from fewer workers, requiring higher taxes which can create disincentives to work, a general shortage of workers, and changing sectors in the economy to markets focused on older people.

Given the adverse affects these changes could have on the economy, it is important to address these issues before they continue to grow. One proposed solution to the shrinking work force is immigration. Increasing or promoting immigration in countries affected by this change in demographics can fill the lost work force that the home country cannot replace. This not only mitigates the potential problems faced, but also improves the job possibilities for those in other countries. It is also believed that “if future immigration was at 2001-2002 levels instead of at around 900,000 per year it would reduce the Social Security trust fund’s long-term shortfall by 12%” (Forbes) in the United States. Which would have a huge impact on economy especially when taking into account state debts.

There are obviously other things to look at outside of the economic impact in the short term, such as, long term affects as well as social and political stipulations. However, those issues aside, the current immigration policies and opportunities will not be conductive the type of immigration needed to fill the vacated positions. By changing these policies to help increase both high skilled and low skilled immigration, these countries may not face the foreseen problems.

Should there be a cap on Visas?

This week in class we are looking about why people decide to move across borders and the economic effects of migration therefore I thought it would be interesting to look into immigration. For the first time in five years, America’s immigration service just recently chose to hold a lottery to allocate the visas it makes available to foreigners recruited by private business to work in the country. This is giving the opportunity for more foreigners to come to America and have the opportunity to work. The economy still is not booming here and unemployment is still an issue for many Americans…. So why are they allowing foreigners the opportunity to come work here? Possibly because many Americans are either unskilled or do not want to work in the fast food industry or either low income jobs.

According to a recent economist article, The visa system Not working, “The cap on visas is entirely arbitrary and unnecessary, and almost certainly imposes high economic costs on the country”. Immigrants may be stealing American jobs, but they are more likely than U.S. citizens to “create patentable inventions or start new businesses. As we discussed in class, U.S. citizens are more likely to move to another country because of personal interest or they possibly have family there. For many immigrants moving to the U.S. it is because of the American Dream and want for a better opportunity at life. I think it is fair to allow immigrants to move to the United States whom are wanting to work, become educated, and later be entrepreneurs.

In another article from the economist, Tourist visas: You’re not Welcomed, it is discussed how some countries make visas very hard to obtain. “Only 18% of Chinese visitors to Europe make it to Britain, but two-thirds visit France, a member of the Schengen travel zone where visas are both easier to get and are 40% cheaper.” Why is this the case, when tourists traveling to the United States are big spenders? The poorer countries are the ones charging some of the highest fees simply because they can.

What do you think? Shoulder some borders have less restrictions and be made easier accessible? What should determine whether or not someone is applicable for a visa?

http://www.economist.com/news/united-states/21575782-how-hurt-economy-needlessly-not-working

http://www.economist.com/blogs/gulliver/2013/02/tourist-visas

Credit Rating Agencies: Friend or Foe?

Department of Justice Sues Standard & Poor's

Years after the worst financial crisis since the great depression in 1933, perpetrators and those thought to be held responsible for this catastrophe are still being brought to justice. The U.S Department of Justice along with Senator Carl Levin, who heads the Senate's Permanent Subcommittee on Investigations, maintain that:

"S&P lied about its ratings being free of conflicts of interest because it downplayed or disregarded credit risks to win more business from investment banks and other issuers of the securities that paid the company to provide the ratings and that sought the highest possible ratings."

These allegations  carry large problems for S&P, not only morally, but legally as well.

If these accusations are proven true, they will carry grave penalties for Standard and Poor's. Currently the Justice Department estimates that S&P can face $5 billion or more in civil penalties "based on losses by federally insured financial institutions  that relied on S&P's ratings" (Bloomberg).

So, what really went wrong.. We know that S&P provided false and inflated ratings on structured financial products, but what does that all mean? When it boils down, S&P are being accused of giving such "financial products," like Collateralized Debt Obligations (CDO's) and Residential Mortgage-Backed Securities (RMBS), inflated or a false ratings. S&P's obligation is to rate the CDO's and RMBS's  in an unbiased and objective manner, with no incentive to rate investments other than for their real value. Here lies the moral dilemma. S&P was essentially hired by the investment banks that were selling the CDO's and RMBS's. If Standard and Poor's credit ratings on something that the investment banks are selling (CDO) is high , or AAA for that matter, business is good for everyone. S&P looks good, and the investment banks sell their CDO's, and RMBS's because of S&P's high ratings. Because Standard and Poor's credit ratings are suppose to be objective and truthful, selling these bundles of debts should not carry a ? over them. If the ratings are good, than there is no reason to not want to buy a AAA credit rated investment.

Because S&P issued false credit ratings, CDO's and RMBS's that were sold from investment banks misguided third party buyers to believe the credit ratings were good. Buying these bundles would normally represent a safe investment with a low risk, but not in this case.

From the Glass-Stegall Act of the 30's, to the Dodd-Frank act of 2009, we have seen Congress try to regulate the financial district of Wall Street for the protection of citizens and their investments. Although a central question remains, does regulation of investments and banks actually have an effect on how the industry operates? Or will the lucrative aspect of making a fortune on Wall Street by doing the wrong thing prevail?

Austerity, Cheap Money, and the 90% Threshold

Austerity is the new buzz word; and not just in Europe. Since protests and civil strife have begun to plague the western world people are now beginning to question the importance of minimizing debt. At first,  I thought this issue was relatively logical. The more you save meant that your economy was essentially more stable. Apparently I was wrong. 

As we discussed in class, Austerity policies are designed to tighten fiscal spending in order to reduce the national debt. If you reduce the debt then you don't have to print money to pay it off. In short, Austerity policies are anti- inflationary policies. We also learned that these policies are painful to implement. Countries that are already struggling financially (Greece, Ireland, and Portugal) are having a hard time forcing austerity policies onto an already poor society. They simply cannot afford it. Elsewhere in Europe the complaints are beginning to gain international attention. The link below gives a profile of each european countries' prospective on austerity policies which I found to be enlightening. http://www.guardian.co.uk/business/2012/may/08/austerity-europe-what-does-it-mean. 

"The 90 % Question" was an article that was posted yesterday (4/20) in the Economist regarding the debt to GDP ratio that we recently discussed in class. This article called into question the 90% ratio in which some economists believe is the threshold at which debt becomes bad for the economy. As we saw in class, there are some irregularities with the data used to explain the findings that 90% is the magical number to explaining debt. Rather, this article generally agrees with the fact that debt is not good for growth, but also insisted that there is no right number at which countries experience low growth. They did mention that above a ninety percent debt/GDP ratio perceptions of risk were higher but this does not doom the economy. However, sometimes in economics perceptions can account for a lot. This is a good article that proposes both sides of the Austerity debate. http://www.economist.com/news/finance-and-economics/21576362-seminal-analysis-relationship-between-debt-and-growth-comes-under. 

In the Economist article, "A World of Cheap Money," the authors provide their insight on historically low interest rates in Great Britain, Japan, Switzerland, the U.S., and others in the Euro zone. The low interest rates appeared after the global recession in 2007-2008 and were thought to have disappeared after the economy recovered. Years later, the interest rates have stayed the same and prospects are not looking much better. What does it mean when interest rates are close to 0%? Well, as we all know, low interest rates should be good for entrepreneurs and the capital sector. Low interest rates mean that more loans will be demanded which means that people will be spending money. It also means that people who own real estate will have more money in their pockets which should further stimulate the economy. If this is the case then why is the economy not getting better? Richard Katz (Oriental Economist Newsletter) provided the answer when he said, "Businesses do not invest because the economy is weak; the economy stays weak because businesses do not invest."

http://www.economist.com/news/leaders/21575760-federal-reserve-making-better-job-it-european-central-bank-world-cheap. 

Click on this link above and notice the slogan before the article.

"The Federal Reserve is making a better job of it than the European Central Bank"

Is this a question of austerity again? Everyone seems to strongly believe that austerity is killing the economy by discouraging spending. I tried to take an unbiassed stance on the issue but it seems to be true. I have been so critical of Keynesian economics in the past, but maybe I was wrong to do so. 

Foreign Aid in the Wake of the Arab Spring

It wouldn't take an economist, or even anyone who's studied economics at any level to tell you that right now Egypt is certainly a risky place for investment.  However, that doesn't seem to be stopping the government of Qatar from developing a plan to buy $3 billion dollars in Egyptian bonds (Al-Jazeera).  This deal was announced just over a week ago.  Many people might be wondering what Qatar's endgame in this is, though they claimed that they didn't expect anything in return.  This is in addition to numerous other aid pledges Egypt has received in the last six months.  Notably, the United States has also pledged $450 million in aid to Egypt, hinting at more if the Egyptian government can reach a deal with the IMF for a $4.8 billion loan (BBC News).  What's more, the EU, which promised $6.4 billion last November (BBC News), is threatening to stop aid to Egypt unless Egypt can meet conditions with regard to not only human rights and the rule of law, but also a mention of a "social safety net, [ensuring] macroeconomic stability and [strengthening] public finances, as well as [working] toward a free-trade deal with the EU," (Reuters).

All of this kind of makes a person wonder... why so much aid to Egypt?  Is this purely an issue of Egypt's neediness and the beneficence of more wealthy countries in the wake of Egypt's revolution, or is there a strategic end to this?  What the motivations behind aid are is one of the questions we've discussed in class, and it would seem that one would have to be quite foolish to assume that the aid is simply wealthy countries being friendly.  Given the strategic importance of having Egyptian and Israeli relations toward one another be peaceful, one would think that the US and EU are attempting to secure some sort of favorable situation in the region.  Plus, it seems unlikely that the EU would suggest a free-trade deal unless it had some sort of ulterior motive, or that the US would desire Egypt to reach a deal with the IMF (an institution so famous with regard to structural adjustment) if it didn't have some design on the situation.  So it seems clear that Western governments want something in return, and since that's the case it makes you wonder what Qatar actually wants in return (other than "nothing").

A Tale of Two Cows

... below the jump.

China Beaks In: Free Trade Agreement Between China and Iceland

On April 15, 2013, China signed its first trade agreement with a European country. During a state visit to China by Icelandic Prime Minister Johanna Sigurdardottir, Iceland formed an economic alliance with China when many others would not. The New York Times reported in an April 15, 2013 article that, out of fear of China’s “increasing economic might”, many other countries in the Europe have denied FTA’s with China. The articles notes that in 2011, Iceland’s GDP was $14 billion, compared with China’s $7.3 trillion GDP. Furthermore, these “two hugely mismatched economies…” engage in, what is by world standards, relatively small annual trade. Iceland’s 2012 exports to China were only $61 million and Chinese imports were valued at $341 million.

An article written by the London-based newspaper, The Daily Telegraph, examined China’s hopes for long-term gains from this agreement. “Iceland has unique importance to China as it attempts to gain a foothold in the Arctic, where melting ice is opening passages for shipping and could create a boom in extraction of resources such as gas, oil, diamonds, gold and iron.” China has been rejected by many other European nations as a trading partner, and while it was assured that China “would not gain backdoor access to the European market, Iceland is a member of, and holds influence in the European Free Trade Association and the European Economic Area.

China is also negiotiating deals with Iceland regarding exploration of natural resources. The Wall Street Journal reports that, both Icelandic and Chinese companies are discussing opportunities for exploration of, what is believed to be, vast crude oil reserves.

From the Icelandic perspective, they seek to gain from this FTA through the removal of all tariffs surrounding their number one export – fish. The Wall Street Journal notes that Chinas rising middle

As melting continues to occur in the Arctic, China seeks to gain access to key a trans-polar shipping route that, according to Yang Huigeng, the director of the Polar Research Institute of China, this passage, which could become operational as early as 2020, could reduce shipping times by as much as 40%. China’s relations with Iceland and increased presence in the Arctic will ensure their ability to utilize these routes.

What’s Slowing America Down?

Conventional wisdom regarding recessions says that the severity of a recession determines the intensity of the recovery. Friedman famously illustrated this theory by comparing the economy to an elastic band, the harder you pull back the harder the band is going to snap back. Since the end of the recession in 2009 though, growth has averaged about 2.2% annually. The average has been about 4.2% for the last seven recoveries. So, what is different now? An article from the Economist provides interesting answers to this question.

The first is that there are underlying trends that have to do with recovery and that these trends were slowing before the crisis hit. These trends are supply of workers, capital, and technology. Ultimately this is potential growth. One paper published in 2012 states that 80% of the shortfall in growth can be accounted for by slower potential.

The article provides some explanations for the slowing of America’s potential. One reason is that since the end of 2007 the population who can be in the labor force increased by 11.6 million while the actual amount of people who joined the labor force during this time was 1.6 million. This dragged the rate of people actually in the labor force from 66% to 63.5% (lowest in 30 years). The article also argues that the reason for a decrease in TFP (total-factor productivity) is because the “productivity-enhancing  impact of the internet has begun to wear off.” They don’t have any numbers supporting this claim, but it would be interesting to see more research done on this. 

Controversy over debt and growth

A little while ago, we discussed whether there is a unanimous threshold of the debt-to-GDP ratio that would consistently create problems for economies. (Our preliminary conclusion was that there was no unanimously agreed-upon threshold.)

Two recent studies now follow up on this issue. First, Reinhart and Rogoff suggest in their “main result [...] that [...] median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.”

Second, however, a re-analysis of their data by Herndon, Ash, and Pollin suggests that the above conclusion has some problems and cannot be sustained by the data.

This is an interesting exchange worth following if you are interested in the implications of high debt-to-GDP ratios - a phenomenon that has not been irrelevant in the past few years.

Edit: why is this relevant? Not just for theoretical concerns, but also for the debate about the merit of austerity policies. See two takes here:
1. Is the evidence for austerity based on an Excel spreadsheet error? (Washington Post - Wonkblog)
and 
2. An update on the Reinhart and Rogoff critique and some observations (Tyler Cowen's blog).

Foreign Direct Investment and Corruption in Nigeria

Last week in lecture we discussed who gives aid and for what reasons. With the onset of the Millennium Development Goals, Foreign aid has increased in the global south in an attempt to combat the dire situations in the developing world. We discussed how "good aid" requires transparency of the donor and beneficiary, and an accountable, democratic government in the recipient country. Adversely, we determined that "bad aid" is attributed to corrupt, autocratic regimes where a fragmentation exists in the population.

Nigeria is an intriguing example into the discrepancy between "good aid" and "bad aid." As a nation  rich in natural resources and its significantly large size, Nigeria has attracted foreign direct investment (FDI) from the donor governments of the world. The potential for economic growth and development in Nigeria is promising. Yet, the level of corruption in the oil industry has prohibited the wealth from the sale of this demanded resource to find its way to the poorest of Nigerians. The unequal distribution of wealth and investment has created a significant gap between the rich and poor. In an Economist article, the author references this emerging problem, "Some 60% of Nigerians still live below the poverty line, while a rich elite—“the top million”, as it is sometimes jestingly called—educates its children privately (often abroad), relies on private health care and its own electricity, and is generally immune to the travails of ordinary Nigerian life" (The Economist, April 13 2013).

Along with the unequal distribution of FDI inflows into Nigeria, unemployment has reached 23 percent (The Arab News, March 1 2013). Additionally, political insecurity has lead donor governments to question whether or not to keep aiding Nigeria. In an article in the Arab News, the author describes this paradigm presenting FDI to Nigeria, "Yet investors remain reluctant to put funds into long term job-creating areas like agriculture or manufacturing until President Goodluck Jonathan makes good on promises to reform things like power, roads and the food industry" (The Arab News, March 1 2013). While the illuminating promise of economic growth in Nigeria is focused on its oil sector, clearly further FDI inflows must be distributed to promoting sustainable, practical, and essential needs of the entire population.

These articles conclude varying points. In the economist, the author states that, "But it is hard, in the short run, to see how Nigeria will turn into a prosperous, equitable and decent democracy" (The Economist, April 13 2013). This conclusion relates back to the concept of "good" versus "bad" aid. As a trait of "good aid," democratic regimes are important for ensuring the equal and effective distribution of funds. In the case of Nigeria, until the President and government take steps to combat corruption, they may be faced with a decline in FDI. Perhaps a solution, for the donors giving to Nigeria, would be to specialize their funds into allocating to a specific good or service that would target the poorest of the population. The author of the Arab News article argues, "Either way, until investment gets refocused into areas that create jobs, poverty in Nigeria will remain stubbornly high" (The Arab News, March 1 2013).

LINKS

1. http://www.arabnews.com/economy/imf-expects-nigeria’s-fdi-grow-73-bn-year

2. http://www.economist.com/news/middle-east-and-africa/21576135-africas-giant-waking-up-it-still-looks-unsteady-its-feet-lurching-ahead

3. http://www.ventures-africa.com/2013/03/nigeria-the-sleeping-giant-awakens-for-fdi/

Studying migration patterns via IP use

In advance of our upcoming discussion of migration, this is a potentially interesting and certainly innovative study. The authors use IP addresses for users of Yahoo! services to identify temporary and more permanent migration patterns.

La Strega e der Dummkopf

International relations are often characterized by extreme politeness and strict adherence to social etiquette.  Even competing powers who share little in common, such as China and the United States, find the time for political niceties.  It was therefore even more surprising to read that Italy's then-Prime Minister, Silvio Berlusconi, was caught referring to Angela Merkel, Germany's Prime Minister, as a "culona inchiavabile."  While it is amusing to finally catch a glimpse of the personal thoughts of a head of state, the reactions sparked by Berlusconi's misstep were anything but funny.  Many Italians were outraged at their Prime Minister's remarks, but rallied behind him after Italy was publicly ridiculed by several European Union countries, most notably France and Germany. Apparently, nothing unites a country like being on the receiving end of international ridicule.

The relationship that Italy and Germany share has always been close, but the creation of the European Union has added an additional dynamic.  Northern Italy's strong Germanic influence is noticeable almost everywhere: some northern towns speak a dialect of Italian that borrows heavily from German (and is almost unrecognizable to southern Italians); public transportation management matches German methods, and not the notoriously inefficient South; and economic activity in the region is dominated by the production of machinery and other high-skill goods.  The division between the two countries is first apparent after the creation of the European Union, where both countries lost domestic monetary autonomy.  The loss of domestic monetary autonomy is important because Germany and Italy traditionally, and in recent times, have had almost opposite views on the correct way to manage a national economy.  Generally, Germany has tended towards more conservative policy that focuses on maintaining low levels of inflation while Italy has tended towards more liberal policy that focuses on economic growth even in the face of a growing debt and deficit.

These contrasting opinions on economic management have led to friction between the two countries as the European Union struggles to haul itself out of the global recession.  The European Union's power lies in the ability of its 27 member states to act collectively; however, if any of the members choose to free-ride, the collective action of the group will be less efficient and more prone to failure.  Italy promised the EU to reduce its deficit, in part by crafting two austerity budgets, but at the same time the Italians refused to pass a stimulus package, as the rest of the EU had already done.  Italian's semi-commitment to EU monetary policy, resulting from a combination of foolish politicians and nationalist sentiment, came to a brief end after the election of technocrat Mario Monti.

Monti, an economist by trade, was quick to understand the problem and to identify solutions.  His most effective solution was putting into place emergency austerity measures which raised taxes and cut welfare.  Italians quickly grew to hate the austerity measures and their champion, Mario Monti.  In February of 2013, new elections were held in Italy after Mario Monti announced his forced retirement.  Although there was no clear victor (new elections will soon be held), the 'disgraced' Berlusconi still managed to attract almost one third of the vote, an indication of how unpopular the austerity measures are with Italians.

More stuff on bitcoins from the economist

check it out

Bitcoins, what the heck are these things?

A brief summary - check it out.

All Dried Up

Over 75% of Colorado is currently facing severe or worse drought conditions.  There are similar conditions across many other states.  Farms across the Midwest are going through one of the worst droughts they’ve seen in their lifetime.  Last year, corn production was down 27.5% due to dried up land.  Some say this may have cost the United States 0.5 to 1% in GDP.  This should cause great concern because a recent Forbes article explains that roughly 75% of all the food you see in a grocery store contains corn.  When producers are lacking in production, they are going to charge a higher price because they cannot produce as much.  Any product with drought-effected products in it will have to raise its price.  In the article, the Department of Agriculture estimates that the drought will raise food prices by 3 to 4%.

In a recent Mother Jones article, they note some of the effects the drought is causing the country this early in the year.  According to them, 51.9% of the continental United States is in moderate or worse drought and that it has cost roughly $50 billion.  There are a few ways to fix this problem.  Some are pointing to increased farm assistance in forms of emergency loans or more federally paid farm subsidies.  These will cost taxpayers and the government more money in a time of tight budgets and only make our goods more expensive and uncompetitive in the global marketplace.  There is a way to still use agriculture products without seeing such high increases in price.  The United States has 364 pages of import tariffs.  Getting rid of, or reducing the tariffs for drought-effected goods will allow us to get them elsewhere without increasing government expenditures.

Another possible solution is to re-focus some of the farm subsidy money to foreign aid.  As we discussed in class, some countries set up “aid for trade” deals where they will direct some money to a developing country for aid while also setting up free trade deals with them.  This creates an incentive to give foreign aid to another country.  We give farm subsidies to farms so they can sell their goods at cheaper prices than they normally would without them.  For farms hit by the drought, they will not be able to produce at the quantity they need to for the subsidy to be effective.  Setting up aid for trade deals will allow us to get the goods we need at cost-effective prices.

"We Are Absolutely Not Cyprus"

Concern erupted this week across the Euro Zone over fears that Slovenia would be the next Cyprus in asking for a bailout, allegations which Slovenia's Prime Minister Alenka Bratusek was quick to rebuff. Bratusek, just three weeks into her term as PM is challenged with the task of reforming the stagnating Slovenian economy, which is in its second recession since the global economic crisis.

Speaking in Brussels alongside EU Commission President, José Manuel Barroso, Bratusek denied the need for an EU bailout at the present time, "We don't need help. We just need time." The concern about the Slovenian economy arose earlier this week when Slovenia missed it's debt sale target by €200 million, according to Nerja Cehic of Bloomberg. This was coupled with the fact that bond yields on Slovenian government debt were quickly approaching the levels of Cyprus when it asked for a bailout.

While Bratusek was able to stave off rumors of a bailout for the present time, her statement suggests that Slovenia is not completely ruling it out in the future. According to an article published this week in The Economist, the economic prospects of Slovenia are looking dim as GDP is expected to fall by 2.1% this year and unemployment is expected to rise to 9.7%. In addition to these economic projections, concern centers around Slovenia's banking system, where the majority of the banks are state-owned.

Despite Bratusek's statement, the Slovenian PM has major incentives to reform her nation's banking system. If Slovenia were to ask for a bailout, it would be one of the first countries to become subject to the EU's Macroeconomic Imbalances Procedure. This EU law focuses on early detection of economic imbalances, preventative and corrective action, and strict enforcement. Failure to comply with the MIP can result in a fine equivalent to 0.1% of GDP-- a great burden for debt ridden countries.

 Much of the success of the Slovenian economy depends on the economic strength of its Euro Zone neighbors; exports account for 50% of Slovenia's GDP, according to The Economist. Only time will tell if Slovenia will be able to resolve its economic problems.

Foreign Aid and Corruption

I found our discussion last week on foreign aid and corruption to be a very interesting concept as it sometimes feels very frustrating to think about how the world's richest nations could possibly be completely helpless when it comes to developing a foreign country, specifically with the goal of reducing corruption.  A comparison of the UN's Human Development Index and Transparency International's yearly Corruption Perceptions Index shows a very interesting positive relationship between corruption levels and the UN's comprehensive HDI showing that more corrupt countries generally are worse off.  It is important to remember that correlation does not mean causation, so we are unable to see whether decreased corruption lead to a better HDI or if it was the other way around, but the statistics are important nonetheless.  For instance, Singapore, after gaining independence, embarked on a highly effective, long-term campaign to stamp out corruption and this move, combined with other economically strategic actions, is widely regarded as one of the top reasons for its success as a nation.

When countries, for whatever reason, are unable to reduce their own levels of corruption, it is then important to discuss the options available to the global community.  Foreign aid is often discussed as either a boon or a burden in the fight against corruption in developing countries.  Money can potentially be used to pay officials and domestic security forces more, decreasing the incentive to supplement one's income.  On the other hand, the aid can also be used to strengthen an autocratic government's position and contribute directly to increasing corruption.

According to an article on Breitbart.com an aggregate news site, "[excepting] Israel, eight countries receiving the most US foreign aid are the eight most corrupt countries in the world..." which, if true, is a startling fact about the efficacy of foreign aid.  Another article on policynetwork.net cites a report correlating the rise of foreign aid levels with increasing corruption.  The author, Wolfgang Kasper, states that hope for reducing corruption in some of the most corrupt countries rests with

"[the] young people [who] are now becoming freedom and corruption fighters, who no longer share the fatalism of their fathers in the face of corrupt officials, oppression and poverty.  It is time to listen to Third-World corruption fighters, confine overseas aid to emergencies, such as Asia's tsunami in 2004 and Pakistan's earthquake in 2005, and tie all aid to stringent conditions of corruption control"

 Fortunately, in a contrasting article, the Anti-Corruption Research Network found in an empirical study, that "attention to combating corruption has been rather effective for the multilateral donors. However, this was not found to be the case for bilateral donors."  There have been several papers written about the effectiveness of multilateral policy implementation over bilateral ones in the general sense.  It follows that this would be the case with aid and corruption, possibly giving the world an option in this fight.

In the end, as with all policy, I firmly believe that it comes down the the fact that the best intentions do not ever guarantee positive results.  Policymakers would best serve those in need by examining as much information as possible before sending foreign aid.  In this case, the worst thing that can happen isn't wasting money.  Its impeding or even regressing the development of countries whose people cannot afford for life to get any worse.

Portugal and Its struggles

As we have all seen lately there have been a lot of areas within the EU that have been struggling to repay debts and get their deficits in order with what Germany has deemed the acceptable rate of 3% of total GDP. With this being said, some countries that have been experiencing these crisis have been doing so due to poor judgement and bad practices. According to this article from the Economist this has not been the case with Portugal. Although they are currently reaching 19% unemployment and their debt to GDP ratio is hovering around 120%, this hasn't been caused by reasons similar to those of Greece, Cyprus, or Ireland. The country has simply been under performing.

For the first time in a while the country has a trade surplus and the account balance is improving. The main issue is that it is not enough to right the ship. It is also said that the countries exports are not strong enough should countries like Germany and France "tighten their belts"or fall back into recession.

With these small countries, with comparatively weak exports, that have been struggling to pay back debt and get out of recession thinking about dropping the euro, could this lead to the end of the Euro Monetary Union? It seems that this seemingly rapid expansion of the EU since its inception has possibly been ill timed as it has created so many "piggy backing" countries with little development. For portugal, its exports mainly consist of agriculture, wine, shoes, plastics, chemicals, metals, and some oil; it would seem that these countries lack that niche industry in which they can specialize and develop. If you look at the US there are a lot of states that have their own Niche's, Michigan has auto, California has wine, agriculture, and silicon valley. Colorado is based around Tourism, Military training, agriculture.

So with all of this being said, perhaps the planning of the EU needed to be based around countries establishing their own niche's with in the european community and then getting help from other EU nations to create economies of scale for these industries. Now it could be too late and might lead to a flight away from the Euro by these smaller countries. Would this improve the current condition of the Euro or lead to its total collapse potentially ruining the economies of all countries tied to it?

I guess only time will tell. Would love some other opinions on this as it is really interesting to think about what might happen to the Euro.

Germany, the eurozone scapegoat?

As mentioned in the previous blog post, Greece—Whats the next step?, Greece’s economy has shrunk over 25% in the last 5 years. This blog post laid out a few options for Greece to get back on their feet. The first option was a 2.8 Billion Euro loan and the other option is for Greece to leave the Eurozone completely. In the Economist article, Don’tmake us Fuhrer, Michael Burda states, “the bigget risk for the euro right now is not that Greece leaves, it’s that Germany leaves.”

The article explains how Germany is beginning to feel upset with being deemed the Eruo zone’s scapegoat. This nickname comes about because some believe that Germany had veto power over Greece, Cyprus, Spain and Portugal’s euro zone membership but chose to allow them into the euro zone knowing that they were not qualified to join. Germans feel the have already shown solidarity, they bear much of the risk of the euro bail-outs, they undertook painful reforms decades ago that are now paying off and Germans think that the euro crisis was caused largely from rule-breaking which much not be repeated. The German people fear that the rescue money they are putting fourth could cause these crisis countries to bypass their reforms and not take responsibility for their actions. The question that arises from this article is, can Germany use its power by unapologetically leading?

The blog post, Will Austerity Save the Eurozone?, brought up some interesting predictions about the fate of Germany. Billionaire George Soros predicts that Germany would be in a recession by the end of the year. Soros claims that Germany is pulling the rest of the Eurozone down with its instance on strict monetary policy and austerity. However according to Don’t make us Fuhrer, Poland’s foreign minister, Radek Sikorski, believes the opposite on German rule. “I fear German power less than I am beginning to fear German inactivity.” Unfortunately, only time will tell the fate of the eurozone and all of its members.