Economic Interests

If you owe the bank £100, that's your problem. If you owe the bank £100 million, that's the banks problem.

Archive for the tag “FDI”

Is a Brixit possible?


Britain has always been the odd one out within the EU; declining to adopt the euro, going against general European opinion in “liberating” Iraq and generally having a poor reputation with the rest of Europeans. More recently David Cameron vetoed the European Fiscal Compact last year (tightening fiscal rules for countries in the EU) while Britain’s foreign secretary was excluded from a group of eleven European foreign ministers in trying to come up with a solution for the Euro crisis over the last year. Furthermore, Britain is also very hard to fit into the general pattern that has emerged in Europe, that of prudent northern nations and reckless southern nations. The likes of Germany and Holland lived within their means and are now footing the bill for the likes of Greece and Portugal that are drowning in their own debt and cut off from the international markets.

Britain would be considered one of the Northern nations geographically, but has finances more like those of Spain (another troubled country). For example, a high budget deficit to GDP ratio of 8.3% resembles Spain’s slightly lower ratio of 6.8% rather than Germany, who boast a far lower deficit to GDP ratio of 0.3%. But while Spain are facing talks of a bailout and bond yields near the levels of those that had to be bailed out (5.9% on ten year bonds), Britain are comfortably paying extremely low yields on their 10 year bonds, at 1.86% recently. Some argue this is because Britain holds the confidence of the international markets, as it still holds its AAA credit status, had a budget deficit reduction plan (albeit rather unsuccessful so far) and importantly has its own currency – allowing it to depreciate externally.

A graph showing the difference in the UK and Spain’s 10 year bond yields. 

But just because Britain’s position within the EU is hard to place, it doesn’t mean they should leave, so next we will look at the positives and negatives for staying in the EU. A big positive is that the UK is part of the world’s largest single market, with free trade within the EU boosting the UK’s exports and imports (with protectionism not allowed). For example, 51% of the UK’s exports are to the rest of the EU, accounting for around £200 billion. Another benefit is the free movement of labour within in the EU, which has seen 3.5 million jobs created that are directly or indirectly linked to the EU. This also works the other way as Britons are allowed to move freely to different countries to find work. Both these measures help in cutting the regulation for firms and individuals as well, that for too long strangled the opportunities for business between different countries in Europe. For example the 27 different currencies made trade between multiple countries much more complicated and created instability as currencies could appreciate or depreciate too readily. Lastly investment is a bonus, as the UK is a good entry into the rest of the EU market for foreign firms, with the UK receiving £28 billion in 2009 from FDI. That is not to mention the increased togetherness of Europe now, with war highly unlikely and diplomatic relations at an all time high. But eurosceptic’s will argue differently, pointing to the current-account deficit of £33 billion in the first quarter of this year (a deficit to GDP ratio of 2.1%)) and the ever increasing contributions to the euro budget that outweigh, some think, the benefits that Britain receives.

UK FDI inflows in 2010 near $50 billion. 

I would argue that being part of the EU has benefited Britain over the years, but that the real question is whether they should leave now? Britain is facing the costs of helping to bail out countries that have struggled to depreciate while being part of the euro, a currency that Britain doesn’t actually use. These bailouts have stemmed from a euro crisis, which is having a clear negative effect on Britain’s exports, investments and confidence. A full scale break-up of the EU would have dire consequences on Britain, as the nation’s banks are heavily linked with the rest of Europe and could conceivably collapse as part of a domino effect.

Showing the exposure of UK’s banks to the Eurozone. 

Even considering that the EU doesn’t implode and instead moves towards further integration, is that where Britain wants to head towards? The country is already an outsider for having a separate currency; any further integration would surely lead to the adoption of the euro. It would also mean more loss of sovereign powers, as budgets would be decided in Brussels, debts spread across the whole union and credit transferred across countries to those nations that need it most (as what happens with the USA and its states). A country already angry at the loss of sovereign powers to the European High Court would be very reluctant to transfer even more control to central Europe. Another problem of further integration is that many believe this could only happen by shrinking the union itself. If so, the dropping of some unwanted countries would reduce the markets open to Britain substantially, reducing the benefits (more trade) of the single market and making the idea of staying in the EU more unattractive.

The nation’s future with the EU is clearly in doubt, with both possible outcomes leading to a big change in the relationship the country shares with the rest of Europe. For years it has gained all the benefits of being partly integrated and now it is facing all the problems. A referendum seems unlikely in the near future, as the public’s views is tainted with all the current media storm about the euro crisis, while the government would do better than to revolve the next election on whether the country stays in the EU.

So for now Britain will remain on the sidelines, as Europe moves towards an uncertain future, but sooner or later the nation will have to make a choice.

Winners and Losers in Africa


Map of Africa

The continent of Africa sums up the current imbalances in the world perfectly; a resource rich continent that could rival the USA for potential, but corruption, crime, civil wars and poverty have kept Africa at the bottom of the pile. Readily exploited by the rest of the world and seemingly unable to escape its poor position, it is a sad situation for a continent with such vibrant culture to reside in.

But for some countries within Africa, there is hope as better conditions and economies have seen growth where decline was surely expected. In this article, I will give my opinion on the winners and losers currently in Africa.

Winners

South Africa currently has the biggest economy within Africa, with GDP accounting for 30% of the total GDP for the continent. The World Bank currently rates it as an upper-middle income economy, though there is still disparaging gaps between the rich and poor which leaves around 35% of the population in poverty. But despite this, the country’s economy is in good health, with inflation manageable at around 4.5%, the domestic currency (rand) currently the most active of the emerging economies and also currently benefitting from a rise in the price of commodities (which south Africa is a big exporter of).  A good infrastructure has helped as well (with high tech telecommunications) and South Africa leads the rest of the African Economy.

South Africa’s economy nearly as big as these four combined. 

Botswana is another success story of Africa, again an upper middle income economy that is rich on diamonds. They boast low corruption and don’t face the political instability that threatens their neighbours.  Growth per capita has been the highest in the world (due to a low population) and the country was smart in managing its resources, owning half of the only diamond-mining corporation in the country. Successful plans like this can only happen with strong political and economic institutions, something westerners don’t appreciate enough and the importance of which can only been seen by its absence. The only pitfall in the future of Botswana is their over reliance on the diamond industry, their economy lives and dies by it and so far any economic diversification has been unsuccessful. Still, they remain an example to other countries on the continent on how to run a resource rich country.

The diamond industry that Botswana relies on. 

Mauritius may be small, but its success is big enough to make it into this list. It has had one of the world’s most successful democracies and has successfully diversified its economy after a reliance on sugar exports. This strategy helped it weather the storm of the financial crisis which surely would have seen the country sink if it had remained dictated by the sugar market. A strong government and institutions also mean (like Botswana) they have low levels of corruption and strong trade. Since the 70’s,  real GDP growth has averaged 5% each year and GDP per capita has increased from $500 to almost $6000. In 2009, the World Bank even ranked Mauritius the best country to “do business in” in Africa. Low taxes have made it a haven for businesses and tourists, and were a clever move to bring trade to the small island. So despite its small stature, Mauritius makes into my success stories of Africa.

Showing the economic freedom Mauritius has. 

Rwanda completes my list despite a reputation of Genocide (in 1994, half a million were killed). But in reality they have since been a peaceful country that retains hope of becoming a richer state. They face some challenges, namely some volatile neighbours (Uganda, Congo) which can harm the trade of a country that is landlocked. But the advantage they do have has been a trend throughout this list; strong institutions that keep a strong law and low corruption. Rwanda has gained a reputation for tackling corruption, with many claiming its does a better job than some of its European counterparts (ahem, Italy and Greece), while it is also ranks third in Africa (only behind South Africa and Mauritius) in the World Bank’s index measuring the “ease of doing business”  in a country. This was summed up when Visa selected Rwanda as a test ground for bring electronic payments to emerging economies. The government also did well to handle the problem of a low skilled labour force; recruiting educated westerners and opening its borders to encourage immigration. Still they face some big hurdles; taxes are too harshly reliant on the rich, internal infrastructure is poor and the transport links to the country are too long and ridden with corruption. If Rwanda can find solutions to these problems, they could become central to trading within its region, and makes it onto my Winners list.

The trading route to get to Rwanda, a long and corrupt journey. 

Losers

Ivory Coast were once a model of stability for its West African Neighbours, but internal conflict between the south and north (with the north populated by Muslims) has seen them drop down into the plight that has seized most other African countries.  The government, located in the south, has been accused of discrimination against the northern Muslims, and a bloody civil war broke out in 2002 which officially lasted for 5 years, though much of the fighting had ended by 2004. Peace was on the cards for three years but elections in 2010 brought new violence when the current occupant at the time, Gbagbo, refused to accept his loss and had to be forcibly removed by northern forces. During this recent episode the state ran out of cash, with economic sanctions crippling the economy and other West African states cutting off financial links with the Ivory Coast. Foreign banks shut themselves down inside the country, refusing money to the public or government, while supplies started to run out (including medicine).  In total, the economy shrank by 5.8% in 2011 and around 3,000 people died, so for these reasons, Ivory Coast make it onto my Losers list. But there is hope as a now stable government could proceed over a return to the good economic times of old, and already an 8.5 % rise in growth is being predicted for 2012.

The north and south divide of Ivory Coast. 

Next on my list is Zimbabwe, a country many of you will already know the troubles of. Just in case you didn’t, Zimbabwe is ruled by a dictator who became obsessed with seizing power from the white race in the country and giving the resources to the black population. A grand gesture, but one that sent the economy spiralling into Hyperinflation as production dramatically fell and the agriculture based economy collapsed. In numbers this transforms into food output falling by 45%, manufacturing output falling by around 30% and unemployment rising to around 80%, while inflation peaked at an incredible 231,150,888.87%. Zimbabwe eventually abandoned this currency and as of now, has yet to create a new one, with other nation’s currencies currently being used instead. The country is in turmoil and that is why they make it onto my list and unlike Ivory Coast, there doesn’t seem to be any rainbows in the distance for Zimbabwe.

Amount of Zimbabwe money needed to carry around. 

The Democratic republic of Congo (DR Congo) make onto my list too, with good reason as they remain at the centre of massive conflict within central Africa. A country with vast resources seems to have lost faith in the state ever recovering, with the country hosting a civil war where the government is backed by Angola, Namibia and Zimbabwe and faces rebel forces supported by Uganda and Rwanda. The five year conflict has resulted in an estimated 3 million deaths and an exploitation of the countries natural resources by both sides (in effect fuelling the war). To put into perspective the damage, DR Congo is roughly 2/3’s the size of Western Europe, now imagine Western Europe embroiled in this sort of Civil war, a shocking thought.  The country remain in the worst state of any country in Africa and its economy is a shambles; the average annual income is a lowly $189, just 9% of population have access to electricity and inflation is around 17%. With the economy reliant on aid from the IMF and the country rife with conflict, DR Congo makes it onto my list.

size map

Size of DR Congo compared to Europe. 

Nigeria, despite being Africa’s leading oil exporter, half of its population lives in poverty. The money from oil sales rarely reaches the locals and the economy is too reliant on the oil economy, diversification is needed. Violent protests have been aimed at the oil infrastructure which could damage Nigeria’s biggest economic income. The country is keen to attract foreign direct investment (FDI) but a poor national infrastructure (summed up by regular power cuts) and concerns over internal violence have been big turn-offs for Multinationals. Thousands of people have died over communal rivalries and inter-faith disputes (Islamic law has seen Christians flee the country). Rise in oil prices should see the Nigeria economy experiencing a boom right now, but corruption and poor government policies have restricted growth. But then maybe I am being harsh on Africa’s third largest economy, GDP growth is still around 10% and they are not in as bad a position as their compatriots on this list. But there is a feeling Nigeria could do so much more, a country that had a similar stance to South Africa at the start of Africa’s growth, they haven’t managed their economy well enough and rely far too much on the oil industry. This is why they are the final addition to my list.

Showing reliance of GDP per capita on Oil production.

So this concludes my list of winners and losers of the African continent. I should say Africa as a continent is growing, and faster than any other region in the world. More impressive was the resilience of the growth to the world recession, as growth figures hardly changed. Looking back at past figures, trade has increased with the western world by 200% since the year 2000, while inflation has dropped since the 90’s from 22% to 8%. Commodity prices do have a big impact on these growth figures, but only a third of recent growth has actually been caused by commodity prices, with Eastern Africa (where commodities are much lower) showing the strongest growth on the continent.

What the future holds for Africa is a mystery, there are signs of strong growth, which should see Africa reach parity with the rest of the world. But this has been predicted before and unless Africa can solve its main problem of in-fighting I don’t think they can reach that goal.

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