Economic Interests

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Archive for the tag “politics”

Is the EU being dragged apart?


After a sense of calm had finally emerged in the eurozone since last summer, panic has erupted once again. Cyprus’s long awaited bailout was carried out with little thought of the consequences, both short term and long. The initial decision to place a one off tax on all depositors in Cypriot banks, both over and under €100,000, was always going to lead to public uproar and a bank run. The second bailout decision was slightly better, only affecting those with over €100,000 in their banks accounts and winding down one of Cyprus’s biggest banks, the Laiki bank, while switching accounts to the Bank of Cyprus. But the damage had already been done; the government now has to enforce capital controls to keep money in the country, while the public won’t forget how close it came to them losing chunks of their bank balance. It has almost certainly ruined one of Cyprus’s biggest sources of income as an offshore financial haven, with the conditions of the bailout most likely requiring reforms of the country’s economy. Then there is the tourism sector (another big market) which will be hit, as foreigners won’t want to risk getting caught in the middle of another financial crisis. Worst of all, this will not be the end of it; the economy is set to retract by 5% in the more positive estimates and another bailout will need to be negotiated.

Cyprus’s  Debt-to-GDP ratio could overtake Greece in the future by some estimates. Found at http://trueeconomics.blogspot.co.uk/2013/03/2432013-are-cypriot-debt-dynamics-worse.html

Yet this is not the biggest worry for the European Union. Cyprus accounts for a tiny 0.2% of Eurozone GDP, its bailout at €10 billion is minuscule compared to the €246 billion needed to bailout Greece. If the economy crashed and defaulted on its debt, it would hardly tear the European Union apart. The bigger repercussions of this debacle are that the EU looks as divided as ever. The capital controls being placed on the Cypriot economy are not supposed to be possible in the EU – they are the first case of it since its creation. They are supposed to be short term, but then the same was said about Iceland 4 years ago.

 Cyprus’s Bailout is tiny compared to the other EU Bailouts. Found at http://www.economist.com/blogs/graphicdetail/2013/03/daily-chart-18

Even more worrying is that the much heralded banking union that the EU nations announced last year now seems less likely. The European Central Bank was set to bail out troubled banks directly, thereby cutting off the self-defeating link between weak banks and weak governments. But to some member countries that seemed too much like gifting money without conditions that have so far been ever present within bailouts e.g. reforms to the economy. Cyprus was the big test, to see if the ECB would directly fund the failing banks of the island, but disappointingly this was not to be the case. A banking union would have showed a more unified EU, with member countries prepared to provide assistance to troubled states. It could have possibly paved the way for joint government bonds, stopping the inconsistent borrowing costs that have spread throughout the eurozone. In reality the EU members have been diverging for awhile, amplifying the problems of the union.

Looking across the region, this isn’t the only sign of a gap emerging between EU states. Tensions are rising within the union, with the periphery nations growing resentful over the austerity policies being enforced onto their economies, while the central nations are becoming frustrated at having to rescue the weaker nations from their own mistakes. This is showing in the form of protest votes. Greece had a near miss in their latest election, where a party campaigning on leaving the euro ran the victors close. Italy went a step further, with the 5 Star Movement (a protest party lead by an ex-comedian) caused a political gridlock in the March elections which has yet to be resolved. This was helped by the far right being led by Silvio Berlusconi, a controversial billionaire who campaigned on ending the EU austerity in Italy. In Germany, Angela Merkel will soon face her own elections, where her popularity will be tested by opponents who will campaign against the continued funding of the EU by the German tax payers.

Beppe Grillo has captured votes for his 5 star movement party by campaigning for a referendum on EU membership. 

Then there is France, a country somehow caught in the middle. The nation is central to the EU, its partnership with Germany gives the union its clout and its leadership with Angela Merkel helped lead Europe through the financial crisis in 2008/2009. But Francois Hollande won his presidency by promising policies like the 75% tax on millionaires and the lowering of the retirement age, while he has backed the periphery economies in talks against austerity (to the annoyance of Angela Merkel). The French economy is in desperate need of reform and cuts however. The budget deficit is set to go over the set target of 3% of GDP, public spending is the highest in the EU at 57% of GDP and while Germany’s economy has become more competitive over the last decade, France’s has been left unproductive in the global economy. President Hollande is now set to implement the austerity measures he never mentioned during his campaign and has since seen his popularity plunge to the lowest since the firth republic began.

Showing the high public expenditure of France compared with similar sized countries. 

The contradictory aims of the different members are leaving the big decisions unmade. The lessons of the past bailouts are not being learnt; there is still no definite lender of the last resort, no banking union, no talks of the possibility of sharing out some of the debt across the union to help member states recover. Austerity is needed, but so are some pro-growth policies and just demanding more and more cuts from the bailed out countries is not going to get the right results. The EU budget could be restructured to help improve spending on much needed areas like infrastructure and reduce spending on subsidies like French Farming and the rebates that go to countries like Britain.

Britain is another obstacle awaiting the EU in the future. The government is set to hold a referendum after 2015 (if it wins) on its EU membership and if the union is still facing the problems it is today, it is not inconceivable that the nation could leave the club. The public are already frustrated at the European laws they have to abide by and the levels of immigration that arrive to their shores. Losing Britain would be a deep blow to the union, both as the third largest economy and as a good balance to Germany’s motives. But the growing popularity of the UKIP party, again campaigning on an exit from the EU, shows the split that is appearing between member states.

Together the EU is the biggest economic zone in the world, one which can rival the economies of the USA and China. Divided it is a bunch of quarrelling nations that can’t agree on the best policies to move forward. Right now the latter is a more poignant picture of the EU, with GDP retracting by 0.3% in 2012  and unemployment reaching a new high of 12%. Europe needs to integrate further both politically and economically if it’s reverse this slump. A move towards a banking union would be a good start, while sharing the debt burden of its weakest members would go a long way to restoring stability to an economic zone that has struggled with such a concept.

A divided Europe is a weaker Europe, let’s just hope it doesn’t take its members too long to remember this.

Chaos in North Africa


North Africa is in chaos as internal unrest spreads through the region. Egypt saw the kind of mass protests that started the revolution against Hosni Mubarak, Mali is playing host to a battle between the French and the Jihadists that had taken over north Mali, Libya was recently warned off visiting by the British government while the whole world watched on as an Algerian gas plant was taking hostage by Islamist extremists. Even Tunisia, seen as one of the more stable nations was rocked this week by the assignation of an opposition leader.

But on the whole there are positive signs from all these events. The Egyptian unrest was a predictable reaction to President Morsi’s attempt to fast track an Islamist flavoured constitution without any input from the other factions of Egypt. After being elected democratically, he has stretched the public backing he was given, by granting himself dictator like powers and taking advantage of the main lower house of parliament being dismissed on a technicality. The responsibility of selecting an assembly to write the constitution instead fell to the upper house (the Shura council), which was elected on a tiny turnout (10%), stripped of its non-Islamist members in protest and awarded immunity from the courts by Mr Morsi. The constitution was boycotted by the public when it came to voting, with a turnout of just a third of the population. Mr Morsi is now facing the consequences of his choices and clearly no long has the backing up the public. He has called for dialogue between the government and the protesters and could yet back down on some of the extreme parts of the constitution. The public meanwhile are not hungry for another rebellion; they want a voice and some fair leadership, not more death. If both sides can start negotiations, then this could be a turning point in Egypt.

Mr Morsi is losing the public support that won him the election. 

The same can be said for the rest of North Africa. The French are impressively pushing back the Jihadists that took over North Mali, Algeria moved swiftly to deal with the terrorist occupation of their gas plant, in the process sending out a signal to the rest of the world while Libya is finally embracing democracy after decades of dictatorship (if not rather clumsily).

The main problem that is emerging from this volatility is that the economies of these North African countries are grounding to a halt. This could leave many long term problems for these nations.

Growth has stagnated in the region for the last two years, which for these developing countries is extremely harmful, as growth of near 6% is ideally needed to provide jobs and drag millions out of the poverty that plagues Africa. In Mali, a poor harvest in 2011 was compounded by the coup in March last year (where the military has given back power in nothing but name). This has impacted on Mali’s agriculture where around 70%s of the population works (with the north effectively separated from the southern capital). This is a major reason for the rise in unemployment to 17% as well as the contraction in the service sector of nearly 9%. The fighting has seen many foreigners flee the country, taking their money with them, as FDI has been chased away. Aid has also been impacted, which the country heavily relies on, as Obama and Europe cut off donations to the country after news of the coup in March. This all lead to the economy contracting last year by 1.5% (a devastating blow for a country that already ranks among the poorest in the world). Since the start of 2013, France has entered the country and helped establish the authority of the government once again, while the IMF has announced a loan of $18.4 million to help the economy recover. But the political environment is still heavily unstable, and while the French can help battle off the bad guys, they can’t govern the country for Mali, which has long been a problem. The country needs an election and has to break the power triangle between the president, prime minister and the army that has lead to many squabbles. In December the prime minister was arrested and forced to resign live on TV by the army, which managed to reject the calls of another coup by keeping the president in power. Growth is expected to return this year if Mali can inject some stability into their economy, but no-one would be willing to make that bet. This all prolongs the development of the country to the point where it no longer needs to rely on aid and be able to develop its own private sector. The Jihadists might be leaving, but the destruction and instability they leave behind will set Mali back years.

President Hollande can’t fix Mali’s political problems. 

The Libyan economy is still trying to recover from the fall of the Gaddafi dictatorship in 2011, but has the helping factor of being one of the most oil rich states in Africa. Since the revolution, many large oil companies have been able to return to the country and oil production has impressively returned back to original levels, lifting Libya to third in the oil production league table in Africa. The small population and high oil earnings should help Libya recover much faster that its fellow North African economies. In fact, in 2012 the IMF estimated that Libya grew by 121%, though this was after a contraction of around 60% in 2011. This growth is majorly inflated by the mass oil production, with oil production accounting for 70% of GDP and 90% of exports. A true recovery is still years away and the current government spending on rebuilding infrastructure is too high to be sustained in the long term. More FDI is needed to help lift the service sector and the private sector off its knees, but this is unlikely when the country is still beset by social unrest. The murder of the American ambassador last year and the recent travelling alerts are big warning signs to businesses investing in the country, as internal divisions remain high.  Until this can be resolved, the country will remain reliant on a volatile oil market.

Algeria remains the only country not to experience the same sort of social problems as its neighbours, though this is mainly down to the government raising wages and deferring taxes last year. They could only afford this because of the rebounding oil market, which accounts for 97% of its exports along with gas. The country is just as reliant on oil as Libya and faces the same problems of become dependent on a volatile market without any other diversification in their economy. The increase in wages and food prices also saw inflation rise above 8% last year, weakening the growth of 2.5% for 2012 that was already downgraded from the 4.7% growth forecasted by the government. The hostage situation was dealt with swiftly by the government and perhaps reduced the chance of Islamic extremists moving into Algeria and causing the havoc that has unravelled in Mali. But a less publicised negative impact was that on the countries oil and gas sector, as the terrorists targeted a BP gas plant. If investors and energy companies become anxious that their plants are going to be targeted in the future, they might start pulling out of the country, as they did with Libya when a (albeit more dangerous) civil war broke out. The country is already ranked lower than Mali for business friendliness by the World Bank. This incident has pointed out not only the danger of growing terrorism in the North African region, but also the utter reliance of Algeria on its oil and gas sector.

Tunisia is being hit by angry protests against the Islamist government after the assignation of a secular opposition leader. Tensions have been rising for a while between the two sides, with skirmishes occurring across the country. The unrest reflects their economy that has struggled on since the toppling of its dictator at the start of 2011, registering decline of 1.8% in 2011 and 3.5% growth in 2012 that was overshadowed by increasing unemployment of nearly 20%. The lack of positive change since the revolution has helped increase tensions in the country, with the sacking of the internationally respected Mr Nabli as head of the central bank showing a lack of common sense according to critics of the government. The top aim now is for the country to create real jobs (not just artificial ones) by investing in areas that it could become market leaders in the region. Tunisia’s close integration with Europe has cost the country during the euro crisis, but with the tide perhaps turning in the continent, a chance for economic progression could arise. Tunisia surely needs some signs of economic progress if the governance is to hold off talk of upheaval.

Tunisia fared rather badly in the aftermath of the revolution; declining in GDP and suffering from higher unemployment than its neighbours. 

Finally there is Egypt, the biggest economy in North Africa. Said economy is now collapsing, with the Egyptian pound falling in value, imports at double the rate of exports and public debt equal to over 70% of GDP (too high for a developing economy). Negotiations with the IMF over a vital loan have stalled as well, as the government refuses to cut unhealthy subsidies for gas and food. In a similar situation to Tunisia, the public are impatient over an economic situation that has only gotten worse since the revolution in 2011. High growth in the years before have been replaced by stagnation and decline, unemployment has risen and the private sector is in tatters. Stability more than anything is required to help the economy; after the revolution year of 2011, 2012 was filled with divisions between the supporters of Mr Morsi and those wary of the Muslim Brotherhood working behind the scenes. Because of this, foreign investment has significantly dropped, falling by over three quarters in the last five years. Negotiations is needed between both sides, with neither covering themselves in glory; Mr Morsi remains too radical on the Islamic changes he wishes to implement, while his opponents are too ready to charge to the streets over the smallest issues. If Egypt can achieve some sort of consistency, then an economy full of potential can start to recover, if not then another revolution is never off the cards, worryingly.

This table shows the collapse of Egypt’s currency, as the country spends billions of foreign exchange reserves to try and keep it pegged to the US Dollar. 

North Africa was once one of the leading lights of the African economy, but has since been derailed by the Arab Spring. While the immediate danger of civil wars and revolutions are not as serious as believed, a collective effort must be made to reform the economies and encourage growth. For some there needs to be some diversification in the economy away from oil and gas, while for others some stability and political leadership remain the key principles needed for growth. Otherwise the dreams of the revolutions could become a nightmare.

 

Cameron’s turn to shuffle the cards


The British government had its first re-shuffling since the Coalition took power in 2010 and it could very well be its last before the next election. So it is interesting to see what David Cameron the prime minister feels has gone wrong over the last couple of years and what needed changing. Obviously all is not right within the government, infighting between Liberal Democrats and Conservatives has divided the coalition while hardcore Tories have criticised David Cameron for losing the Parties values. The conservatives also trail the Labour party in the current polls and needed to freshen up the parties’ image.

So what appointments were made and what do they show about the Governments change in direction. First up is the Health Secretary, where Andrew Lansley lost his job after heavy criticism from the public over NHS reforms. In truth he wasn’t moved out for the policies implemented, but rather the handling of the reforms, as messages about what was happening were confusing and vague and his presence in front of the camera was sorely lacking, hurting the public image of the government. In his place comes in the previous culture secretary, Jeremy Hunt. This appointment backs up the previous statement that the government are looking to change the image of the NHS reforms, as Mr Hunt is well versed in both changing people’s minds and remaining very likeable at the same time. This is despite his links with the Murdoch family, an incident he has done well to shake off and move away from.

Jeremy Hunt will be expected to re-package the NHS reforms.

Next up is the removal of Justine Greening as Transport Secretary and her replacement Patrick McLoughlin. This is a clear shift in the policies involving a third runway at Heathrow, with the previous appointment in line with the Tories old stance against expanding Heathrow (more disruption for those living around the airport). In contrast, the new Transport secretary favours a shift in aviation policy as a third runway could possibly boost growth for the country and bring in new investment into London. This change in policy is confusing for the public, as is David Cameron’s continued denial of a u-turn on a third runway whilst clearly manoeuvring out obstacles in his way.

Justine Greening’s objections to a third runway result in her losing her job as Transport Secretary. 

Another key change was the removal of Ken Clarke as Justice Secretary, who was pro-European and leans to the left in nature (showing a move towards the right wing in this reshuffle). Criticised by Tory backbenchers for giving in too easily to the Liberal Democrats wishes, the new Justice Secretary is a clear change in direction. Chris Grayling is less easy to sway on policies and is keen to stand up against European human rights laws that have long conflicted with British law and angered everyday Britons, though it remains to be seen how exactly he will achieve this.

The loss of Ken Clarke shows a move away from the EU and the Liberal Democrats. 

These were the three big moves by the government, but smaller changes also show a new direction by David Cameron. Along with the Transport ministry, pro-growth liberals were moved into the environment and local government ministries to help promote new infrastructure projects that could help get the economy moving. Though one area where this wasn’t achieved was in the movement of Duncan Smith from the work and pensions secretary. He refused an offer to become leader of the Commons and will continue to fight against current Chancellor of the Exchequer George Osborne on cuts to the Benefits system, as Mr Osborne looks to make cuts of £10 billion by 2016.

Duncan smith’s refusal to leave is one obstacle David Cameron couldn’t avoid.

Along with individual changes there were broader changes in the government. The reshuffle showed the ever increasing cracks that are appearing between the Conservatives and the Liberal Democrats. David Cameron has tactically moved out allies of the Lib Dem’s (for example Ken Clarke) and has brought in more right-winged Tories to help boost the parties’ image rather than the coalitions (with two pro-reform Tories moved in alongside Vince Cable to help ensure he keeps on track with Conservative party aims). Nick Clegg disagreed with appointments like Jeremy Hunt to Health Secretary, but gave into a lot of Tory demands so that he could get David Laws into the government, even resulting in the sacking of Nick Harvey from the defence department, who was considered to be doing a good job and came as a complete surprise. The Conservatives also seem to be focusing on growth rather than the environment with plans for new roads and a third runway at Heathrow, which clearly conflicts directly with the Liberal Democrats aims as a green party. Watch this space.

Nick Harvey (above) is sacrificed to help get David Laws into Government. 

Furthermore, the reshuffle also shows a decline in the women and ethnic minorities in the cabinet. David Cameron had promised that at least a third of his cabinet would be female by 2015; now less than 20% of the cabinet is female with the number of women in the cabinet actually declining slightly. Welsh Secretary Cheryl Gillan, Environment Secretary Caroline Spelman and Conservative Chairman Baroness Warsi all left their posts in the reshuffle (with only Baroness Warsi moved to a lesser role and the other two fired completely), while Theresa Villiers promotion to Secretary of State for Northern Island coincides with her move out of the Transport department as she is known to be against a third runway at Heathrow. Men outnumber women in the cabinet 5 to 1, in stark contrast to countries such as Switzerland and France where women are represented far more evenly. Ethnic Minorities are even less represented with Baroness Warsi’s demotion to a minister (who can attend but not vote at the cabinet) a backwards step in the modernisation of the government as she was the only non-white member. It has to be said that at junior level more women and ethnic minorities are being brought into the government, but at the top level there seems a glass ceiling that neither group can break through right now. Other social issues with the reshuffle include the inclusion of Mr Grayling and Mr Paterson into the cabinet (both openly against gay marriage) and the number of southern ministers increased while the number of northern ministers was kept the same (despite the midlands being regarded as northern).

The Cabinet remains on overwhelmingly male and white.  

Overall the reshuffle shows a movement in David Cameron aims regarding the economy (infrastructure growth), the environment (sidelined) and the repackaging of current reforms (NHS). It also enhances the current problems associated with the coalition government, namely that it is too white, too male and too southern.

Will Ethiopia escape Zenawi’s shadow?


You just have to look at the USA and Europe to see what a lack of leadership can lead to; Republicans and Democrats bickering while an impending fiscal cliff approaches and a eurozone on the brink of collapse while national leaders debate the pro’s and con’s of a more unified Europe. In Ethiopia, the country had the complete opposite, a leader with a clear idea of where the nation was heading and more importantly how to do it. But following the death of their Prime Minister, Meles Zenawi (pictured below) the future of the country has suddenly become cloudier, as no likely successor is in sight.

Ethiopia, possessing the second largest population in the continent, has always been a big player in the history of Africa. Famously one of the oldest sites of human existence, Ethiopia was also one of the few countries not to be taken over by Europeans powers (embarrassing Italy in their attempted invasion) and is a founding member of the UN. Despite this they have had a patchy record in politics; after decades of monarchy, a military dictatorship took over in a coup which lasted from 1972-1991, from then the country officially adopted democracy (though many criticised its apparently “equal” elections). Meles Zenawi was elected Prime Minister in 1995 and won three more re-elections in 2000, 2005 and 2010 to the dismay of critics.

Politically, Meles Zenawi has clearly played dirty. In the 2010 elections his ruling party won an absurd 99.6% of the vote, leaving the opposition with only one seat in parliament. That is what’s left of the opposition, as parties were banned and leaders exiled or arrested (in March 2011, 200 opposition members were arrested alone). Then there is the media censorship, where citizens have little choice other than state owned networks and journalists are regularly arrested for being critical of the government (in 2011 several journalists were arrested for such reasons). Mr Zenawi also took upon himself to meddle in other countries problems, with notable incidents involving forced entries into Somalia and Sudan.

Protests against Meles Zenawi in Ethiopia.

But economically, Meles Zenawi has done a better job than many in improving his countries conditions. He has carried out many economic reforms on a country that practically used to have no private sector and youth unemployment as high a 70% (down to a reported 23.7% in 2011). He increased FDI flowing into the country (averaging $240 million from 1995 to 2004) though the global financial crisis hampered this somewhat. Meles Zenawi was primarily able to do this because of global aid, as his country became Africa’s biggest aid recipient. Mr Zenawi contributed to this by working his charms among the biggest nations of the world, with America a reported ally of Mr Zenawi despite his patchy human rights record. To his credit Meles used this money wisely, boosting manufacturing, agriculture and exports (with exports to the US nearly tripling from $270 million in 2009 to $690 million in 2011). In fact over the last 10 years, GDP has increased on average by over 10% a year, around double that of the countries surrounding it and even more impressive when you consider the country doesn’t possess any large scale natural resources to rely on. Recent plans have involved building new Hydroelectric dams that could boost energy output by five times its original amount in 2015. More importantly, Mr Zenawi has managed to lift 15% of the population out of extreme poverty, which for one of the poorest countries in the world is a big achievement. Under his reign, Ethiopia went from a starving country to a food exporter.

Graph showing average GDP growth rate for Ethiopia from 2001-2010. From 2002-2012 this increases to 10.6%. 

 

Like many things in life, Meles Zenawi’s reign is neither black or white, but more a shade of grey. His government has improved the economy and living conditions of its people, but the extreme measures used to stay in power are rightly condemned. The big question now is what will Ethiopia do now he is gone?

For all his good or bad, the running of the country was modelled around him. He left no real institutions in his place for the country to continue growing and leaves a vacuum of power that no-one looks like filling right now. The current successor, Mariam Desalegn (the foreign minister) is just one of the many yes men Mr Zenawi surrounded himself with and does not look up to the job of replacing him. The years of success that Ethiopia has had in reforming its economy and improving the country could now be wiped out if a power struggle tears apart the ruling party.

Mariam Desalegn looks ill suited to the position permanently.

But perhaps it can be lesson for both Ethiopia and for all of Africa. Economic success based on a dictator will always face succession problems, while human rights always lose out. The key to continued success is through democratic elections and the building of institutions. A current example of this is Myanmar, where recent deregulation of the past strict media laws are just one of many economic reforms going through the country in the build up to one of the first truly democratic elections to be held in the country in 2015.

Similar steps must be taken in Ethiopia if it is to grow from out of Zenawi’s shadow.

 

Just another BRIC in the wall?


The term BRIC’s represents four countries that have the potential to become the world’s next global powers: Brazil, Russia, India and China. Yet these nations are struggling to live up to their promise as they each face different problems with their economies.

Brazil is South America’s largest country and economy, as well as the 6th largest economy in the world. The nation has huge potential, with two future international events set to be staged in the country in the next 4 years, a thriving industrial sector, low unemployment and lots of FDI still pouring into Brazil. Above all they can boast a reliable democracy and good institutions that instil the rule of law, none of the other BRIC nations can match this. Yet Brazil is still on a worrying path. In 2010 Brazil grew by 7.5% to great applause from the rest of the world, but in the following year slumped to just 2.7%, well below the rest of the BRIC nations and Brazils high expectations of themselves. This year Brazil have forecasted growth of 4.5%, but external sources are much more pessimistic predicting just 3.5% a figure that is too low for a country like Brazil that needs high growth to keep up with the social costs of modernising its economy. So what are the reasons behind this slump in growth? For that there are many answers; the euro crisis and a strong currency slowing down demand for Brazilian exports, falling commodity prices (which help fuel Brazil’s economy), a complex tax system (that takes a higher percentage than any other middle income country) and their government. The last factor is a big reason for their slowdown in growth as the government continues to badly manage the country’s economy. Brazil remains a nation full of inequality, this is a problem the government has failed to solve for years now, as spending has been focused on financing government projects and an over generous pension system rather than reallocating funds to the poorer regions of the country. The government has also failed to invest in infrastructure with the transport system truly a mess, though the impending World Cup could help push the government into action. This leads on the next point that the government desperately needs to reform the economy to keep boosting growth, yet seems unwilling to make any big changes while the going is still good. The main reform that is needed is to free up their economy, protectionism is still a key policy of the government (especially in the oil industry) and it keeps inefficient Brazilian firms in business that should have gone under years ago. The best option could be to sign a free trade agreement with the rest of South America, which could in turn help boost Brazilian exports like the eurozone did for Germany. Without these reforms Brazil could face low growth for the next few years yet, undermining their status as one of the BRIC nations.

Brazil showed the lowest growth last year out of the BRIC nations. 

Next is Russia, whose political corruption remains their biggest problem. Vladimir Putin recently swapped jobs with Dmitry Medvedev to once again become Russia’s president, allowing Medvedev to take up his old position of prime minister. This was greeted by mass protests on the streets, but to little effect as the Kremlin kept their control over Russia. The problem is Putin seems unwilling to reform the economy, while the corruption that is rife in Russia makes it an unlikely destination for businesses to conduct deals (ranking 143rd in the world for transparency and 120th for “ease of doing business”). Its BRIC standing creates the perception that Russia is still an emerging economy with lots of potential, but instead it has become an oil dependant nation that seems stuck in its ways. Inequality is also a big problem, where the country is split into the very rich and the very poor, with only recently a middle class looking to emerge. Still the ultra rich have too much of a say in how the country is run, with government policy dictated by how it can profit the monopolies in Russia’s markets. The city of Moscow has the largest proportion of Billionaires in the world, where conveniently power is heavily centralised, while 20% of GDP is supplied by the ultra rich in the country (again the highest percentage in the world). Putin has made some promises in changing the economy (like improving investment) but has failed to implement promised policies in the past and there are no signs that he has changed his ways. Despite this Russia still enjoyed 4.3% growth in 2011 and are projected to grow again this year by 3.6%, this will keep the market wolves at bay and as long as there aren’t any big oil crises then Russia should continue to improve. But if Russia is to really become a global power then they will need to diversify their economy away from oil and make their country more attractive to outside investment.

Russia with the second highest amount of Billionaires, beating the other BRIC members. 

Then there is India, a country with huge resources at their disposal (huge population, lots of natural resources) yet one that is not quite achieving their potential. The economy of India is still growing at levels that Europeans could only dream of, with the average growth level since 2000 being 7.4%, but this is mainly down to the radical economic reforms that India made in the 1990’s, which freed up its economy. Similar reforms are now needed again to keep up growth, but the current government seems reluctant to act. The problem is that India now has a worse current account deficit and worse debt level than they did back then, meaning if anything reforms are even more vital. The country needs to attract investment into its country first and foremost, with a recent controversial “retroactive tax” policy causing more harm than good with a damaging fight with Vodafone over the tax that the firm is suggested to owe the Indian government from the acquisition of Hutchinson’s Indian business in 2007. The tax bill came in total to $3.75 billion and has only deepened the worry that foreigners have in investing in the country, though Vodafone have confirmed they will continue an $18.6 billion investment into the country. The country relies on good FDI (foreign direct investment) to finances its current account deficit at around 4% of GDP (the country exports more than it imports), so good relations with investors are a must. There is also too much regulation over foreign investment and too much intervention into the countries markets by the government. The power production industry is still largely state run, while the telecoms, insurance and retail markets are made extremely hard to enter for foreign firms (through a mix of corruption and regulation). Add to this the fact that Western investors are now much more reluctant to throw money around and India is facing a big problem attracting investment, on which its economy is run on. For a country with one of the best manufacturing sectors and a big potential service market (with over a billion people in the country), attracting FDI should not be a problem, yet the government’s antics have made companies question such decisions. The expensive subsidies that India pays to help its local companies cost them around 2.4% of GDP, increasing an already high budget deficit of near 6% and high inflation at near 7% which show the country’s economy is potentially overheating, as it relies too heavily on foreign capital. That isn’t to say progress hasn’t been made, with 52 million people being lifted out of poverty in the last 5 years, but the fact that half of all Indians still have to defecate in the open shows there are still major problems with the country. For India high growth of at least 6% is necessary to support their burgeoning population (of which a third still live below the poverty line) and pay off their high debts, while only a rise in wages and a major improvement in the country’s infrastructure will allow India to finally achieve their status as a new world power.

India has the highest budget deficit and highest public debt to GDP ratio compared to the other BRIC members

China completes the list, with the world’s second largest economy and is widely predicted to overtake the USA in the near future to take the top spot. Yet China faces similar issue to India, with its economy slowing down and its people reliant on high growth. China’s predicted growth this year is 8.2%, a world high still but actually China’s weakest expansion in 13 years. Like India, China needs high growth to support its huge population and keep the economy running, with 8% probably the minimum requirement. The country experienced a fast decline in industrial production, construction and electricity output in the last year which has lead many critics to suggest the economy is overheating. But China’s economy is surprisingly unreliant on foreign capital and is actually financed heavily by the state, which has the nasty habit of creating barriers to entry for foreign firms but does help make China more resilient than India and less dependent on private confidence. This investment by the state into the country’s infrastructure and factories is what boosts growth more than its exports, as it counted for 48% of GDP last year. China also the capital to re-finance any banks that might go under (a serious problem in Europe) and is one of the few countries not facing a liquidity problem. China’s general population is also much older than India’s, meaning the high growth needed to supply such a hefty workforce may no longer be needed in the future. Out of all the BRIC countries China is undoubtedly the strongest and can already call itself a world power, but the country does face some issues in the future.  China will have to free up its economy sooner or later to foreign investment or risk inefficient national firms wasting the countries resources, while inequality between the countries inner and outer regions is high, something the government will have to try and fix in the long term. China also has competitors in its industrial sector; as once the cheapest option for foreign firms, countries like Vietnam can now boast cheaper costs, making China less attractive. This could be a factor in China’s current account surplus, once as high as 10% in 2007, dropping to 2.8% of GDP this year, though the main reason is probably the increased investment by the state as mentioned earlier. This is still a good surplus and in fact many countries felt China wasn’t spending enough anyway and was manipulating their currency to keep it low, but it could prove a problem if investment isn’t sustainable as many economists believe.  China’s big problem is that their population is still incredibly poor for such a big economy (China ranks 90th in the world for income per person) and the investment that causes such high growth is not a long term option, meaning China will have to free up its services and financial markets if it to continue high growth and increase the income of its population to the standing that its economy now holds.

China’s current account surplus drops from 10% to 2.6% in the last 5 years.

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