Emerging and Frontier Markets: Economic and Geopolitical Analysis

[LeveragedBuyout]

With the problems still ongoing in the DRC, this is one hell of a risky proposition for foreigners. However, many of the problems in the region, and in the DRC, are related to a lack of money and opportunities for the people of these regions. Few work opportunities, they turn to crime and war. Corrupt politicians siphoning funds, they turn to crime and war. Inflation and a declining stock of resources, they turn to crime and war. Just like Greece or Spain with their problems and daily protests, sometimes investors need to take a risk to solve long-term problems. Investing in the DRC might make it more stable. I just don't know if I would have "the balls" to do so.

I completely agree--this sounds like a strategy of desperation. The returns for this kind of risk would have to be very high, and I just don't see agriculture fulfilling those requirements.

I have been looking around to see if anyone else has had the following idea before, but no luck. Please let me know what you think.

I have been thinking about a new kind of economic and political structure that could take advantage of the best development models of the West and East. China's special economic zones were incredibly successful in launching China's decades-long growth trend, and the zones allowed the introduction of Western management techniques, Western capital, and experimentation to determine the best model to roll out to the rest of China. However, China had already established a sufficiently strong government such that it could avoid the problems mentioned in the article (e.g. even if a corporation buys the land from the central government, local actors may dispute these rights).

How can failed or failing states try and replicate the special economic zone model? I wonder if it's time to try for a 21st century East India Company. That is to say, the central government will provide a 50 year lease to a corporation to effectively govern a special economic zone, and that corporation will pay a percent of the revenue it generates from economic activity to the central government. Otherwise, the corporation will hire police, install infrastructure, set regulations (let's call it that instead of laws) and run the government apparatus for the zone.

I no longer believe that this is as extreme a measure as it might have once been considered. After all, private security companies already operate all over Africa, and Chinese (and other Asian) companies are already purchasing farmland and building infrastructure. Why not formalize the process? Even in the US, many government operations have been privatized or outsourced to the private sector. With the right safeguards, this might achieve economic success without being regarded as a new kind of colonialism.

Obviously, this would only be tried with the most extreme basket cases, but at this point, what is there to lose? It might even work, jump-start the economy, and improve the lives of the common people.

 

[SvenSvensonov]

I completely agree--this sounds like a strategy of desperation. The returns for this kind of risk would have to be very high, and I just don't see agriculture fulfilling those requirements.

I have been looking around to see if anyone else has had the following idea before, but no luck. Please let me know what you think.

I have been thinking about a new kind of economic and political structure that could take advantage of the best development models of the West and East. China's special economic zones were incredibly successful in launching China's decades-long growth trend, and the zones allowed the introduction of Western management techniques, Western capital, and experimentation to determine the best model to roll out to the rest of China. However, China had already established a sufficiently strong government that it could avoid the problems mentioned in the article (e.g. even if a corporation buys the land from the central government, local actors may dispute these rights).

How can failed or failing states try and replicate the special economic zone model? I wonder if it's time to try for a 21st century East India Company. That is to say, the central government will provide a 50 year lease to a corporation to effectively govern a special economic zone, and that corporation will pay a percent of the revenue it generates from economic activity to the central government. Otherwise, the corporation will hire police, install infrastructure, set regulations (let's call it that instead of laws) and run the government apparatus for the zone.

I no longer believe that this is as extreme a measure as it might have once been considered. After all, private security companies already operate all over Africa, and Chinese (and other Asian) companies are already purchasing farmland and building infrastructure. Why not formalize the process? Even in the US, many government operations have been privatized or outsourced to the private sector. With the right safeguards, this might achieve economic success without being regarded as a new kind of colonialism.

Obviously, this would only be tried with the most extreme basket cases, but at this point, what is there to lose? It might even work, jump-start the economy, and improve the lives of the common people.

I like the idea, but foresee problems with allowing such in developed nations. Giving extra rights corporations is a great way to invite backlash against your political party, even if the implementation is successful. I personally have nothing against the business community, and actually rather like their contributions in terms of social, financial and labor support, but recurring protests are a reminder that not everyone takes too kindly to large businesses in developed nations and especially in democratic nations such plans would see established governments voted out of office.

That said, for nations that are still developing or lack the democratic process, or who's is too weak to make a major impact on the ground, the thought of a return to the East India Company type of business model would be welcomed, and even more so if it can deliver on the promises that FTZs advertise (not always viable though as seen with China's most recent FTZ). Private police are still an issue as well and allowing corporations to hire their own police and emergency services is a concern in most nations.

Nationalization is another concern, but could be a version of this type of plan. For left-leaning nations such as Venezuela who dislike giving large businesses more power, the government could score political point and an economic win.

Overall I like the idea, but it can only be a solution in the most extreme of cases.

 

[LeveragedBuyout]

I like the idea, but foresee problems with allowing such in developed nations. Giving extra rights corporations is a great way to invite backlash against your political party, even if the implementation is successful. I personally have nothing against the business community, and actually rather like their contributions in terms of social, financial and labor support, but recurring protests are a reminder that not everyone takes too kindly to large businesses in developed nations and especially in democratic nations such plans would see established governments voted out of office.

That said, for nations that are still developing or lack the democratic process, or who's is too weak to make a major impact on the ground, the thought of a return to the East India Company type of business model would be welcomed, and even more so if it can deliver on the promises that FTZs advertise (not always viable though as seen with China's most recent FTZ). Private police are still an issue as well and allowing corporations to hire their own police and emergency services is a concern in most nations.

Nationalization is another concern, but could be a version of this type of plan. For left-leaning nations such as Venezuela who dislike giving large businesses more power, the government could score political point and an economic win.

Overall I like the idea, but it can only be a solution in the most extreme of cases.

Omni Consumer Products did an outstanding job in the frontier market known as Detroit, so while there are risks, there is also precedent.

In all seriousness, the risks are real, and moreover, such a plan would require a visionary statesman in charge of the country--the very factor that's missing, and causing such failures to date--or a rather corrupt leader who could be bought off to enable the implementation of such a plan (the more likely scenario). That said, at least this plan doesn't require the elimination of corruption in the central government, which appears to be entirely unrealistic at this point.

Thanks for your feedback, you raised great points.

 

[SvenSvensonov]

Omni Consumer Products did an outstanding job in the frontier market known as Detroit, so while there are risks, there is also precedent.

The precedent for success is there, but unfortunately so too is the precedent for failure and one is not more inclined than the other. As you said the central issue is having someone or a group that can make it happen. To have the vision, make it stick and attract others to the project. That's a problem though as few people think in ways that would be required. The model has been done before, the precedent set, but the outcomes are always varied, even with fringe iterations of this type of concept. The jury is still out on the Shanghai FTZ, but things aren't yet looking bright. Industrial parks, corporate centers, they're variations, sometimes they even have their own police services, but they come and go as quickly as they occur. If a person has the vision and the ability to make these types of zones happen would they rather implement such a plan in a dangerous place such as the DRC or in a stable region such as Japan, the US or China? I know which I would pick and this is another reason we have yet to see such a plan be implemented in a nation such as the DRC. Those with the plan, the brains and the capital just aren't interested in the region when brighter opportunities exist.

 

[LeveragedBuyout]

From the Potomac to the Euphrates » Egypt’s Economy: Bringing The State Back In

Egypt’s Economy: Bringing The State Back In
by Steven A. Cook
October 28, 2014

Egypt's President Abdel Fattah al-Sisi (R) meets with U.S. Treasury Secretary Jack Lew at the presidential palace in Cairo (Hassan Ammar/Courtesy Reuters).
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Secretary of the Treasury Jack Lew visited Cairo on Monday and no one seemed to notice or care. That’s probably because of the awful terrorist attack that took the lives of at least 33 Egyptian conscripts in the Sinai Peninsula over the weekend. Lew’s visit was not going to deal with any number of the hot topics on the U.S.-Egypt agenda—human rights, military and economic assistance, press freedoms, and the ongoing fight against extremism, anyway. “Economic statecraft,” it seems, is just not that sexy. Exciting or not, it is important, especially since the Obama administration seems to have come to the conclusion that the United States can be most constructive on Egypt through policies that focus on the economy. There is an assumption among many in the Beltway policy community that at least on economic issues and their solution, the United States and Egypt can agree. Working with other countries to aid their economic development is a good idea, of course, but I wonder whether, like so much of the conversation between Washington and Cairo, American and Egyptian officials have very different ideas about the right approach to Egypt’s economic problems. Don’t be surprised, then, if the economy becomes another point of friction, or if Egyptian decision makers just ignore Washington’s advice.

It should not be a surprise to anyone paying attention that the Egyptians are not in favor of private sector-led inclusive economic growth and the range of neoliberal economic reforms that the United States and the IMF deem necessary to get there. They never really were. Anwar al-Sadat’s Infitah (opening) created a commercial economy without the institutions of a market economy. When he came close to implementing an IMF-recommended subsidy reform on basic foods in 1977, the ensuing demonstrations shook the regime. Hosni Mubarak resisted American economic advice mightily until the early 1990s before relenting and pursuing IMF reforms for about six months before it got too hard politically. It was not until 2003 when Gamal Mubarak (and a number of other advisors) convinced his Dad to kinda, sorta float the exchange rate. The following year, Mubarak appointed the so-called economic “Dream Team” of Ahmed Nazif, Mahmoud Mohieldin, Rashid Mohamed Rashid, and Youssef Boutros-Ghali to guide Egypt’s first-ever serious effort at neoliberal economic reforms. The resulting macroeconomic performance was impressive, but it came at a cost—the impoverishment of many Egyptians. Crony-capitalism and the rise of the puffed-up businessmen-politicos who populated Gamal’s National Democratic Party Policies Secretariat characterized that brief era. For President Abdel Fattah al-Sisi and his mostly military advisors, the late Mubarak period was a distortion of a political and economic order that had worked (i.e., it had maintained stability) for the previous five decades. Now they are returning to it. It is true that Sisi embarked on subsidy reform, especially in the energy sector, there have been price hikes on certain goods, and the bourse is suddenly buoyant with investor confidence, but the overall picture suggests a move back toward a more state-oriented economic approach. Here is why:

• As I have written in the past, undertaking IMF reforms is harder politically for Egypt’s leaders than it is economically. It seems that to many Egyptians the Fund is an affront to their nationalist sensibilities and reminiscent of the nineteenth century British and French Debt Commission that drew European powers further into Egyptian affairs. Consequently, do not expect the Egyptians to sign up for an IMF standby agreement soon, unless of course the economy craters.
• Subsidies exist not only as part of a (badly frayed) social safety net, but also as a means of political control. As a result, under current political circumstances, subsidy reform can only go so far.
• The $20 billion in various forms of assistance that Cairo has received since July 2013 from the Gulfies has refloated the Egyptian economy, instilling a semblance of economic stability. It is true that the Emiratis and Saudis have talked a good game about the need for Egyptian reform and there are limits to how much aid they are willing to provide. It is also true that there are questions about the Gulf states’ capacity to deliver the amounts of assistance the Egyptians need over a long period of time. Even so, expect the aid to continue uninterrupted. The Emiratis and Saudis want Egypt to have a functioning economy to instill the regime with legitimacy, thereby diminishing the risk of another uprising and the potential return of the Muslim Brotherhood. That’s why the Gulf states are not likely to reduce or turn off the flow of aid. Think of it this way: The relationship between the UAE, Saudi Arabia, Kuwait and Egypt is similar to that of New York banks that invested heavily in Latin America in the 1970s. When the economies there crashed, the bankers had no choice but to extend more credit to them, otherwise they risked going belly-up themselves. The geo-political interests that have dictated the Gulf states’ huge investment in the post-July coup d’état political system are not going away, and now that the Emiratis, Saudis, and Kuwaitis have put so much money into Egypt, it is going to be extraordinarily difficult for them to get out. The Egyptians know this.
• Supporters of President Sisi hailed the announcement this past summer of a series of “mega-projects,” including the widening of the Suez Canal and the revival of something called the New Nile Valley Project (also known as Toshka), which failed in the early 2000s. The cheerleaders for this stuff need to take Economics 450 “Public Investment Decision-Making” all over again. There is no reason to believe that widening the Canal will produce double the traffic and double the revenue that Cairo is predicting. There is also no reason to believe that Toshka will be a success this time around. This likely does not matter to Egypt’s leaders, though. These big projects provide people with work even if the return on investment is not great.

Taken together, these factors suggest that the Egyptian leadership continues to put a premium on what they have always believed to be most important: stability. And just as Mubarak learned the lesson of reforms from the 1977 bread riots, Abdel Fattah al-Sisi has learned the lessons of the economic reforms of the latter Mubarak period and has decided to move Egypt back to a place where economic rationale was secondary to the political and social goals of the state. One could argue the merits of this approach, but it reveals how far apart Washington and Cairo are on the seemingly non-controversial, though highly consequential, issue of Egypt’s economic development. I have no idea about the quality of Secretary Lew’s conversations with Egyptian officials, and I do not know if he has ever had the pleasure of visiting Cairo before, but I hope he and his staff had the chance to visit some of Egypt’s first mega-projects—the Pyramids.

 

[LeveragedBuyout]

Asia Unbound » Bangladesh: Capitalist Haven

Bangladesh: Capitalist Haven
by Alyssa Ayres
October 28, 2014

Dhaka, April 2014. Photo by Sharada Prasad CS licensed under CC BY 2.0 / Cropped from original.
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Earlier this month, the Pew Research Center released the second of two major reports detailing findings from a global public opinion survey on economic issues conducted last spring in forty-four countries. Read together, the two reports reveal something you might not have guessed: Bangladesh is among the countries most supportive of the free market, and certainly the most free-market, trade-oriented country surveyed in South Asia. At least as far as public opinion is concerned, the People’s Republic of Bangladesh is a capitalist haven.

First, the data. The spring 2014 survey asked a variety of questions about the benefits or losses from trade, beliefs about inequality, optimism or pessimism about the future, and support for a free market. A report released last month focused on beliefs about trade, and this month’s looked at inequality as well as beliefs about capitalism and the market.

Across all forty-four countries surveyed, Bangladesh emerged as the world’s second most supportive of a free market economy. Eighty percent of those surveyed expressed support. Vietnam was the only country with higher levels of support, with 95 percent of respondents supportive. The next three countries most supportive of the free market were South Korea, China, and Ghana.


Source: Pew Research Center, October 2014, “Emerging and Developing Economies Much More Optimistic than Rich Countries about the Future.”

In addition, in comparison to the two other South Asian countries included in the survey—India and Pakistan—Bangladesh once again exhibited higher levels of approval for trade and foreign investment. Public opinion in Bangladesh greatly favors open trade, believes trade creates jobs and leads to better wages, and sees foreign investment as a net positive. We hear much more about India’s post-reforms tiger economy, but Bangladeshis are eight percentage points more supportive of the free market than India (72 percent) and eighteen percentage points more supportive than Pakistan (62 percent). When asked for views on growing trade, 91 percent of Bangladeshis surveyed responded that it was either “very good” or “somewhat good,” compared to 76 percent of Indians answering in the same way.

Bangladeshi public opinion also much more broadly believes trade creates jobs and leads to higher wages in comparison with public opinion in India and Pakistan. The question on which Indian responses exceeded Bangladeshi responses focused on optimism for a better life at home, with 78 percent of Indians surveyed stating that they would recommend staying in India (instead of going abroad for work) for a better life, and 71 percent of Bangladeshis surveyed recommending the same.


Source: Pew Research Center, September 2014, “Faith and Skepticism about Trade, Foreign Investment” and Pew Research Center, October 2014, “Emerging and Developing Economies Much More Optimistic than Rich Countries about the Future”

For those who follow South Asia these findings make sense. The Bangladeshi economy has benefited greatly over the last two decades from an export-oriented push at the entry level of the manufacturing space—garments. Bangladesh is now the world’s number two garment exporter, just after China. As I have written previously, despite known problems with workplace safety and labor rights in this sector, its more than 5,000 factories employ some four million Bangladeshis, mainly women, and the sector has significantly boosted Bangladesh’s economy. The garment sector is export-oriented, supplying some $20 billion in exports to the world. That Bangladeshis see trade and the free market system in a very positive light, despite the “People’s Republic” of the country’s official name, makes a great deal of sense given the positive impact Bangladesh has seen from trade and the free market. It’s a good news story about globalization that the world often misses.

 

[FairAndUnbiased]

@LeveragedBuyout

I read both reports by Pew, the one about views of the free market and of Global Views of Economic Opportunity and Inequality | Pew Research Center's Global Attitudes Project .

Chinese in general are divided between whether raising taxes to pay for social programs, or lowering taxes to stimulate investment and consumption, are more beneficial to the society as a whole. This seems to me as a huge conflict with the overwhelmingly positive feeling for the role of the free market. This, to me, represents a possible wording/translation problem of the question.

An extremely worrying trend is how only 28% of Chinese see education as important for getting ahead in life, while advanced economies usually have 60%+ belief in this category. Indeed, East Asian countries score *extremely low* on the importance they attach to education - only 30% of South Koreans, 27% of Japanese believe education is important.

I believe that we are doomed to a dark and dismal future if this trend continues - how athletes, movie stars, social media stars, property developers and thugs turned businessmen are respected, while scientists and engineers suffer under the twin yolks of social disrespect and low government funding. I have seen this phenomena myself, where a writer/TV host (Cui Yongyuan) argues with a Ph.D. in biochemistry from Michigan State University (Fang Zhouzi) about the dangers of genetically modified plants - and more people support the TV host. Would this ever happen in the US?

 

[LeveragedBuyout]

http://blogs.ft.com/beyond-brics/2014/10/28/venezuelas-debts-to-china-well-thats-alright-then/

Venezuela’s debts to China – well, that’s alright then
Oct 28, 2014 2:17pm


When oil prices fall, it’s a fair bet that Venezuela’s economy will suffer. After all, that has been the case every time oil prices have fallen in the past. When Venezuela’s official gazette then publishes a legal notice on October 10 saying that its oil-for-loans scheme with China had been tweaked, it is also a fair bet that this would be taken as a sign of Venezuelan economic distress and maybe even a default on loans from its closest ally, China. That is how beyondbrics and many others understood it. How wrong one can be — sort of.

A quick re-cap. Under the amended agreement, Caracas no longer has to send a minimum 330,000 barrels per day of oil to Beijing to service some of the $50bn China has loaned to Venezuela since 2006. Instead, Caracas can decide what the minimum oil shipments will be, subsequently confirmed with Beijing in diplomatic cables. If that appeared to be a de facto debt rescheduling, a press notice posted by China’s Ministry of Commerce on October 16 subsequently seemed to confirm it was the case.

Not so, it subsequently transpired. First, the statement by China’s ministry was not a statement at all. Rather, it was a translation of an article in Venezuela’s El Mundonewspaper posted by MOFCOM on its own website. Talk about a comedy of errors.MOFCOM has since taken down its “press notice.”

Second, the change in the repayment terms apparently reflects the fact that China’s original loans-for-oil agreement was signed when oil prices were far lower. As a result, Caracas had been overpaying China by sending more oil than it needed to, and then claiming a rebate. Indeed, last year’s rebate was a chunky $9.3bn, according to the estimable Venezuela-watcher Francisco Rodriguez, of Bank of America Merrill Lynch. “The new structure allows PdVSA to directly receive these revenues rather than have to wait,” Rodriguez wrote in a research report late last week titled “Lost in Translation”.

However, even if that clears up some of the situation – apparently there has been no Venezuela/China debt rescheduling after all — it still leaves two important questions hanging in the air.

First, the accord governing this debt repayment scheme was first signed in 2008. Back then, Venezuela’s oil basket traded at an average $88 per barrel (the average price over the life of the agreement is, so far, much the same.) However, Venezuela’s oil basket is now trading below that price, at $76 per barrel.

On the face of it, this means that Venezuela might have to ship more barrels than it once had to. Looked at another way, the $9.3bn rebate that Caracas received last year followed a year of peak oil prices in 2012, when Venezuela’s oil basket averaged $103. But those price conditions no longer pertain. Indeed, they could get worse. For what it’s worth, Goldman Sachs forecasts that US oil prices will drop by 10 per cent next year from current levels.

Second, and more importantly, the last time oil prices really collapsed was in 2009, following the global financial crisis. Back then, Venezuela’s oil basket dropped to around $56 a barrel and Caracas funded itself by raising debt from Wall Street and Beijing. Both were happy to lend. Today, by contrast,Venezuela’s economy is in recession, oil output is languishing, foreign reserves are low and the country is suffering from an import crunch.

There is no indication whatsoever that Caracas has any intention of defaulting on its international bonds. Yet Venezuela’s evident economic problems raise a crucial question. Caracas is already struggling to roll over it current debt. So, will Wall Street or Beijing be willing providers of additional, fresh finance today?

 

[LeveragedBuyout]

@LeveragedBuyout

I read both reports by Pew, the one about views of the free market and of Global Views of Economic Opportunity and Inequality | Pew Research Center's Global Attitudes Project .

Chinese in general are divided between whether raising taxes to pay for social programs, or lowering taxes to stimulate investment and consumption, are more beneficial to the society as a whole. This seems to me as a huge conflict with the overwhelmingly positive feeling for the role of the free market. This, to me, represents a possible wording/translation problem of the question.

An extremely worrying trend is how only 28% of Chinese see education as important for getting ahead in life, while advanced economies usually have 60%+ belief in this category. Indeed, East Asian countries score *extremely low* on the importance they attach to education - only 30% of South Koreans, 27% of Japanese believe education is important.

I believe that we are doomed to a dark and dismal future if this trend continues - how athletes, movie stars, social media stars, property developers and thugs turned businessmen are respected, while scientists and engineers suffer under the twin yolks of social disrespect and low government funding. I have seen this phenomena myself, where a writer/TV host (Cui Yongyuan) argues with a Ph.D. in biochemistry from Michigan State University (Fang Zhouzi) about the dangers of genetically modified plants - and more people support the TV host. Would this ever happen in the US?

Thank you for the analysis--certainly some surprising numbers, there.

I share your concern over this issue, and sadly, it has long been thus in the US. One of the aspects of the United States that has frustrated me for decades is the celebration of sport. When I was younger, I used to dismiss professional sports as an outlet for those with physical talents, but few mental ones--so no great loss to the overall economy. However, I have met so many highly intelligent athletes since then that I truly believe that the emphasis on sports is diverting critical human capital away from our STEM fields and entrepreneurial activity.

I come from the northeast of the US (New England), so perhaps I have certain cultural and intellectual biases in this regard, but I also view Silicon Valley as a culprit. The idea that one should aim to revolutionize the world (and if possible, monetize one's idea through advertising revenue), combined with parallels in other fields (i.e. earn millions of dollars by becoming a professional athlete) has distracted from the real way wealth is built--through hard work, and steady, incremental improvements in productivity that change the industry over time, not overnight. Too many Americans are impatient for change, but unwilling to put in the hard work that change requires, and look for a shortcut.

As far as entertainment vs. science, the United States has, since its founding, had an anti-intellectual undercurrent for several complex reasons. It's easy to trust a charismatic TV personality, and outsource one's critical thinking to such a public figure; one assumes the TV personality has studied the issue and prepared well, backed by a professional team at the TV studio. But that's almost never the case, and again, people want the quick answers rather than research it for themselves. I don't solely blame entertainment for this condition, but it certainly doesn't help.

Finally, I can't speak for Asia, but in the US, there is an increasing disconnect between higher education and earnings. This is partly because students are allowed to study fields that have no hope of economic utility (women's studies, African studies, etc.). The other reason is the outrageous cost inflation of higher education, which deprives society of a large pool of otherwise capable citizens. The root cause of this is credentialism, which I suspect also afflicts Asia. Companies will no longer even consider individuals who didn't attend the right school or bear the right degree or certifications, even if the work could be capably done by such non-credentialed individuals. I don't think it's a coincidence that the US experienced such tremendous growth in the 1990s, when such credentialism had not yet been put in place. I remember my bank was hiring philosophy majors, literature majors, and others who would never be considered today, but some of them turned out to be superstars.

In any case, it's a serious problem, and one to which I can't think of a societal solution. Only individuals will be able to weigh the merits of education vs. entertainment, since society on the whole has already decided in favor the latter.

 

[madooxno9]

@LeveragedBuyout

Hi there, great posts . Are you a working in finance sector or a prof.? I will have to come back again to read all these interesting article . Will post some good stuff tomorrow.

 

[LeveragedBuyout]

@LeveragedBuyout

Hi there, great posts . Are you a working in finance sector or a prof.? I will have to come back again to read all these interesting article . Will post some good stuff tomorrow.

Finance, but I'm not an economist, just someone with an avid interest in these areas.

You are most welcome to contribute articles, and I am sure all of the readers of this thread would appreciate it. Thank you.

 

[LeveragedBuyout]

http://blogs.ft.com/beyond-brics/2014/10/28/will-tunisias-polls-free-the-mediterranean-tiger/

Will Tunisia’s polls free the Mediterranean tiger?
Oct 28, 2014 10:12amby Mian Ridge

Hopes are high for Tunisia’s economy after Nida Tunis, the country’s main secular party,won power in the second free election since an uprising that cast out autocrat Zein al-Abidine Ben Ali in 2011.

That was the Arab spring’s first revolution and since then Tunisia has fared better than its neighbours. It has avoided the turmoil of Egypt, the chaos of post-Qaddafi Libya and the civil war of Syria.

But while it has sidestepped the violence that hit other countries, it has not had an easy time. A three-party government led by the Nahda party, which had been accused of mismanaging the economy and failing to curtail a small but dangerous Jihadist movement, was forced to stand down last year.

Tunisia then approved a new constitution, which has been praised for enshrining principles of neutrality and transparency into law, and put in place a caretaker government of technocrats who set about preparing for fresh elections.

Polls have indicated that the economy is Tunisians’ highest priority. A recent World Bank report describes how rigid red tape and misconceived policies – introduced by the ousted president but still in place – have stultified the economy, preventing investment and job creation. That report says that:

Tunisia presents an economic paradox. It has everything it needs to become a “Tiger of the Mediterranean”, yet this economic potential never seems to materialize.​

Since Tunisia obtained a two-year, $1.78bn loan from the IMF on the understanding that it would pursue economic reforms last year, the country has cut fuel subsidies and more recently has imposed new taxes. It has also been allowing the dinar to depreciate in order to rebuild foreign reserves from low levels.

Capital Economics said in a note that the election was “another important step in Tunisia’s long and bumpy road to democracy” and that there were two obvious outcomes to Tunis’s win.

The peaceful nature of the elections suggested that political stability was returning to the country which:

may prompt firms to resume investment projects as well as attract foreign investment. Moreover, an easing of security concerns would help to lift the tourism sector out of its recent slump.

This should lay the foundations for a gradual acceleration in growth over the coming years – GDP growth has languished around 2.5% since 2011 (See Chart 2.) Note that a return to political stability in Egypt has helped to support a sharp pick-up in growth there.​

Capital Economics



Secondly and perhaps most crucially:

The election result bodes well for the election agenda . Nidaa Tounes has outlined plans to push ahead with deeper subsidy cuts, promote foreign investment and continue the country’s cooperation with the IMF. This should help ease feats over Tunisia’s large twin current and budget deficits.
​

Capital did raise one concern. Tunis may have to form a coalition of some sort and:

there is a risk that the party could splinter given that it includes a broad spectrum of political figures. This has raised some concerns that the problems of coalition politics could make it more difficult to push through hard-hitting economic policies.

​

Tunisians, it said, will now be watching as Tunis forms a new government before presidential elections take place in just under a month’s time.

 

[LeveragedBuyout]

Mexico’s Powerful Energy Reforms by Martin Feldstein - Project Syndicate


ECONOMICS

MARTIN FELDSTEIN
Martin Feldstein, Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. In 2006, he was appointed to President Bush's Foreign Intelligence Advisory Board, and, in 2009, was appointed to President Obama's Economic Recovery Advisory Board. Currently, he is on the board of directors of the Council on Foreign Relations, the Trilateral Commission, and the Group of 30, a non-profit, international body that seeks greater understanding of global economic issues.

OCT 28, 2014
Mexico’s Powerful Energy Reforms
MEXICO CITY – Mexico is poised to become Latin America’s economic star in the coming decade. The government’s recent reform of the energy sector will contribute directly to economic performance by reducing the cost of manufacturing. In the context of the North American Free Trade Agreement (NAFTA), the resulting increase in manufacturing competitiveness promises to boost Mexico’s growth substantially.

Until the government adopted the necessary constitutional amendment and enacted the associated enabling legislation, Mexico’s energy sector was entirely state-owned. The sector’s most important component, Pemex, owned all of Mexico’s oil and gas reserves, and was exclusively responsible for exploration, production, and retail distribution. Electricity production and distribution, too, was entirely in the hands of the government.

Pemex’s limited technical know-how meant that it could not fully develop and exploit Mexico’s vast oil and gas resources. There are substantial oil reserves that require deep-water drilling technology that the company lacks. There are also old wells that have stopped producing but that could be made productive again with modern technologies. And there are potential gas and oil fields that can be tapped only with the new technologies of fracking and horizontal drilling.

Until the reform, energy reserves had long been regarded as a national patrimony that could be developed only by Pemex. Because the constitution prohibited any direct or indirect foreign ownership, there was no way to provide incentives for foreign firms to share their technology. But that foreign technology offered such important potential gains that President Enrique Peña Nieto was able to marshal a majority in the Mexican congress to amend the constitution and pass legislation that will bring foreign energy firms to the country.

Opening the energy sector completes the agenda of economic integration that began when NAFTA was approved in 1994. That agreement transformed Mexico from a very closed economy with few manufacturing exports into an economy that is now closely linked with the United States. The expansion of Mexican oil and gas production will consolidate those links and contribute to North American energy independence.

Mexico’s manufactured exports have increased tenfold since NAFTA began, with roughly 80% now going to the US. Many multinational US companies have located plants in Mexico as part of their overall production process, which is closely tied to inputs sourced domestically. Indeed, manufacturing relations between the US and Mexico are such that some 40% of the value added in Mexican exports to the US is actually of US origin.

The new energy reforms will also allow Mexico to benefit from lower-cost gas from Canada. The price of gas in the US and Canada is only about half the current price in Mexico (and less than half the price in Europe and Asia). Mexican access to cheaper gas will boost Mexican petrochemical industries and lower energy costs for manufacturing. Experts estimate that the cost of electricity to Mexican manufacturers could fall by as much as 20%.

Privatizing Pemex and the national electric company will also allow trained, professional managers to replace state bureaucrats and bring an end to trade unions’ current major role in the management process. Furthermore, privatization will remove the constraints on investment that the government budget has imposed on Pemex and the electric company.

Even before the energy-sector reforms, Mexico had been pursuing sound macroeconomic policies for a considerable period of time. As a result, the country has benefited from low inflation, small fiscal deficits, and manageable current-account deficits. And, though Mexico operates a free-floating exchange-rate regime, the peso’s value against the dollar has been stable.

None of this is to deny that Mexico still must confront other significant problems. For example, primary and secondary education needs improvements that the teachers’ unions are blocking, and criminal activity, much of it drug-related, makes personal security a serious concern throughout the country.

But, despite such problems, the energy and electricity reforms, and the deeper links with the US and Canada that they imply, promises to accelerate Mexico’s growth rate, boost employment and income, and thus raise Mexicans’ standard of living.

Mexico’s Powerful Energy Reforms by Martin Feldstein - Project Syndicate

 

[FairAndUnbiased]

Thank you for the analysis--certainly some surprising numbers, there.

I share your concern over this issue, and sadly, it has long been thus in the US. One of the aspects of the United States that has frustrated me for decades is the celebration of sport. When I was younger, I used to dismiss professional sports as an outlet for those with physical talents, but few mental ones--so no great loss to the overall economy. However, I have met so many highly intelligent athletes since then that I truly believe that the emphasis on sports is diverting critical human capital away from our STEM fields and entrepreneurial activity.

I come from the northeast of the US (New England), so perhaps I have certain cultural and intellectual biases in this regard, but I also view Silicon Valley as a culprit. The idea that one should aim to revolutionize the world (and if possible, monetize one's idea through advertising revenue), combined with parallels in other fields (i.e. earn millions of dollars by becoming a professional athlete) has distracted from the real way wealth is built--through hard work, and steady, incremental improvements in productivity that change the industry over time, not overnight. Too many Americans are impatient for change, but unwilling to put in the hard work that change requires, and look for a shortcut.

As far as entertainment vs. science, the United States has, since its founding, had an anti-intellectual undercurrent for several complex reasons. It's easy to trust a charismatic TV personality, and outsource one's critical thinking to such a public figure; one assumes the TV personality has studied the issue and prepared well, backed by a professional team at the TV studio. But that's almost never the case, and again, people want the quick answers rather than research it for themselves. I don't solely blame entertainment for this condition, but it certainly doesn't help.

Finally, I can't speak for Asia, but in the US, there is an increasing disconnect between higher education and earnings. This is partly because students are allowed to study fields that have no hope of economic utility (women's studies, African studies, etc.). The other reason is the outrageous cost inflation of higher education, which deprives society of a large pool of otherwise capable citizens. The root cause of this is credentialism, which I suspect also afflicts Asia. Companies will no longer even consider individuals who didn't attend the right school or bear the right degree or certifications, even if the work could be capably done by such non-credentialed individuals. I don't think it's a coincidence that the US experienced such tremendous growth in the 1990s, when such credentialism had not yet been put in place. I remember my bank was hiring philosophy majors, literature majors, and others who would never be considered today, but some of them turned out to be superstars.

In any case, it's a serious problem, and one to which I can't think of a societal solution. Only individuals will be able to weigh the merits of education vs. entertainment, since society on the whole has already decided in favor the latter.

I am an teaching assistant at a big state university with a reputation in athletics. Some students just don't care about school, and I'm even surprised they're in this class. However, they will never show me disrespect or say things like physics is useless. They recognize that school is important - whether they are good at it or not is a different story. That is why popular science is so, popular, in the US.

I'm just surprised about the attitude towards education displayed in the survey. Even in my generation (I'm mid 20's) kids usually showed respect to their teachers and when I was in high school/college, we genuinely wanted to learn. This can no longer be taken for granted.

However, what is somewhat good news is, education is still rated as the highest relative importance among Chinese.

 

[LeveragedBuyout]

My commentary: The issue of transparency is less interesting than the fact that sovereign wealth funds are now influential enough that there is a fear they will be used as political weapons.

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Gulf SWFs Still Lag on Transparency, Report Says - Middle East Real Time - WSJ

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• October 29, 2014, 8:03 AM ET

Gulf SWFs Still Lag on Transparency, Report Says
ByAsa Fitch

Global SWFs: Assets under Management (USD billion), 2014
GeoEconomica
The sovereign wealth funds of the energy-rich Arab Gulf are some of the world’s largest pools of capital, collectively holding more than $1 trillion of assets. But their strategies, returns and approaches to risk aren’t often disclosed, something political risk consultancy GeoEconomica singles them out for in a new report.

Gulf funds lag global peers in compliance with the so-called Santiago Principles, a voluntary set of guidelines funds agreed upon in 2008, the report says.

At that time, worry was growing that these huge funds might use their financial muscle to accomplish political objectives in foreign countries. The funds wanted to convince the international community that they were only seeking financial gain by more clearly spelling out their investment policies, financial information and governance structures.

Among the report’s findings:

The Santiago Compliance Index 2014
GeoEconomica
• Globally, compliance with the Santiago Principles is still “uneven” some six years after they were announced. While many funds have improved financial and governance disclosure, “numerous funds, most notably from the Gulf region, still need to substantially advance their financial disclosure policies and become more transparent about governance arrangements. Their enhanced commitment to the Principles, in the form of more proactive disclosure policies, is essential to maintaining the legitimacy of the Principles themselves.”

• Nine sovereign funds globally were deemed fully compliant with the principles, including Norway’s Government Pension Fund, the world’s largest sovereign wealth fund.

• A further nine funds were “broadly compliant,” meaning they had only minor shortcomings vis-a-vis the principles. These included Singapore’s Temasek Holdings and Russian reserve funds.

• Eight funds were only partially compliant, including two of the three Gulf funds. The Abu Dhabi Investment Authority got a “C+” grade, while the Kuwait Investment Authority got a “C.” Another Arab fund, the Libya Investment Authority, fell in this category.

• One fund – the Qatar Investment Authority – was given a “non-compliant” rating.

• Arab sovereign funds may have good governance arrangements and sound investment policies, but Geoeconomica said it often couldn’t ascertain their financial approaches and governance. For the time being, it said, “Arab SWFs have demonstrated neither their managements’ operational independence nor their economic and financial orientation, and therefore have not contributed to building confidence in the SWF industry in line with the Principles’ aspirations.”