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.

 

Daily chart: If China catches a cold | The Economist

Daily chart: If China catches a cold | The Economist.

Interesting Graph on China’s effect on its trading partners.

The Economic Medals

With the Olympics coming to an end, I thought it would be in the spirit of the times to award some medals to countries based on their economic performances in 2012. With it only halfway through the year, some figures will be based on predictions for the year 2012. I will also only include modern economies, thereby discounting a lot of African countries that are heavily reliant on aid and countries in the middle east that still recovering from civil or foreign war. A trend of Asian economies succeeding goes right through the different departments, while a few countries can count multiple medals.

First up is the big one, GDP Growth – the annual increase in the market value of everything a country produces. In bronze position is Thailand with a predicted 6% growth this year, after recovering from their worst floods in nearly 70 years in 2011. Just ahead of them in silver position is India with 6.6% growth, as the country continues to expand its economy to keep up with a burgeoning population. A recent mass power cut however showed the insecurities in their infrastructure, which could possibly hurt future growth for the country. Out in front is China with 8.1% growth predicted for the year, as the country strives to surpass the USA in the record books as top dog.

1st China – 2nd India – 3rd Thailand

Graph showing China’s growth over the years. 

The next event is Unemployment, where the nations are competing on their ability to get people into work. After getting bronze in the last event, Thailand comfortably wins the gold here, with the percentage of the population unemployed at an extremely low rate of 0.9%. This is contested however with Thailand accused of not seasonally adjusting their numbers (as farmers are out of work for long periods). If that is proven correct then the current runner up, Singapore would be awarded gold, with unemployment at 2%. The government has achieved this by both having a very stringent benefits policy and by having a low population of just over 5 million. In the fight for the Bronze medal, Switzerland just beats off competition from Malaysia and Norway. With unemployment at 2.9%, Switzerland has done well by having strict visa rules which can be adjusted to help keep employment high.

1st Thailand – 2nd Singapore –  3rd Switzerland

Graph showing Thailand’s unemployment rate since 2010. 

The third event is the Current Account Balance as a percentage of GDP. This is the balance between Imports and Exports, with the best countries exporting more than they are importing, therefore having a current account surplus. After narrowly missing out on a medal in unemployment, Norway capture Bronze with a current account surplus of 14.1% of GDP. This is thanks to their vast Oil and Natural Gas resources, with global prices increasing in recent times. Ahead of them in second place is once again Singapore, who boasts a strong current account surplus of 17.9% of GDP. This is because Singapore contains the busiest port in the world, allowing the country to become a global trade hub. Taking Gold in this event is Saudi Arabia; whose enormous oil reserves (the largest exporter of oil in the world) has allowed it to build up a current account surplus of 22.7% of GDP.

1st Saudi Arabia – 2nd Singapore – 3rd Norway

Graph showing the current account balance of Saudi Arabia 

Following this is the National Budget Balancing event. In this the best countries are able to make money from tax revenues after taking away government expenditure, thereby producing a budget surplus. In Gold and Silver positions are Norway with a budget surplus of 14.3% of GDP and Saudi Arabia with a budget surplus of 11.1% of GDP. These two top the pile because of the same reason as their high current accounts, they have vast Oil and Natural Gas reserves. Unlike Singapore whose high current account came from their successful port, the exportation of raw materials has boosted Norway’s and Saudi Arabia’s budgets by observable amounts. In a far off bronze position is Chile, who government has worked well to possess a budget surplus of 1.5%. This is partly down to the efficient running of the country by the government but is also down to a rise in the copper prices, of which the Chilean economy is highly sensitive towards.

1st Norway – 2nd Saudi Arabia – 3rd Chile

Graph showing Norway’s superiority over the rest of Europe with its high budget surplus. 

Finally, to finish off the medal ceremony is the government’s 10 year bond yields. These are the interest rates that each government must pay to loan money on the international markets, where the lower the number is, the more secure international creditors believe you are. For example Spain is currently facing very high interest rates, while the likes of Greece are not even able to borrow money on the international markets (leaving them reliant of bail outs). In Bronze position, Japan is able to borrow very cheaply in the long run with interest rates at 0.81%. These figures are somewhat distorted though as the government puts pressure on Japanese banks to buy their bonds, helping to drive down the bond yield rates. In silver position, Hong Kong boasts an even cheaper rate of 0.74% on long term loans. With a AAA credit status and heavy links to China (where heavy capital controls restrict international investment) the city state has become very popular in the bond markets as a secure investment. But in Gold position and winner of the event is Switzerland with interest rates of 0.63% on long term bonds. Switzerland are treated to such low interest rates namely because of the euro crisis, as the countries surrounding Switzerland face the ever present danger of a euro collapse. Switzerland (not in the EU) is therefore seen as a safe haven in a sea of chaos called Europe.

1st Switzerland – 2nd Hong Kong – 3rd Japan

Table showing the worlds lowest bond yields on the 1st June 2012. Since then Hong Kong has overtaken Denmark and Japan into second place

London’s time to shine?

 

The Olympics are upon us and the excitement is palpable as sportsmen across the country get ready to compete for their nation. Great Britain did great at the Beijing Olympics to finish with 47 medals (Finishing fourth in the table) and with countries on average winning 54% more medals when hosting the Olympics themselves, Britain could win an outstanding 72 medals (a record for the country if achieved).

But what sort of impact will staging the Olympics have on the City of London and the country itself?

In terms of the legacy it will leave behind, the London Olympics objective seems confused at best. Most countries use it to improve the hosting city or country in general, with Barcelona in 1992 a great example of how a city can use the Olympics to its advantage. Barcelona improved its infrastructure and created a new modern image of itself, which lead to the number of visitors to the city doubling in the decades since – a true legacy. London has repeated this to a degree in revamping the Lower Lee Valley into the modern Olympic park (a much better use of the space) and improving the image of a shabby part of East London. But the city is not in a similar state to the Barcelona of 1992. London is already the most visited city in Europe, is a centre of wealth in the world and has good infrastructure (discounting an overused public transport system that the Olympics is only set to make worse). So what legacy is London trying to leave behind? By the logos up all around the city it could be to promote better fitness and sport participation in an overweight nation by getting the public involved in the Olympics. But this has had little success if the case, with statistics showing no significant change in the nation or in London (though the Olympics could have a more long term effect in this respect). That leaves the reformed areas around the east end, where a new shopping centre and better transport systems have improved the area, but critics suggest the government hasn’t gone far enough in renovating the area while the target of creating jobs has yet to happen. It seems the Government is trying to both improve the rural areas of London and create a sporting atmosphere in the country, a tough combination that could leave either a great legacy or a feeling of regret at not concentrating on one or the other.

The other effect to consider is the economic impact. When the Olympic bid was won Britain was a rich, successful country that could afford such a big outlay on hosting an international tournament. Now the country is in a much weaker state, where three consecutive quarters of GDP decline have seen the economy become smaller than when the coalition government first took over. The costs of hosting the event have come under the £9.3 billion budget set, but this is only because the budget was increased drastically in 2007 from the original budget of £2.4 billion. But this sounds worse than it is, most countries go over budgets when staging the Olympics while China’s cost reached around $45 billion in 2008. On top of this the International Olympic Committee has raised a third of the budget by selling broadcasting and sponsorship rights for the London Olympics. The right to use the Olympic logo in advertising was sold to eleven big sponsors (notably Coca Cola) and brought in just over £600 million pounds over the last three years. In effect these companies (including Panasonic and MacDonald’s) are paying to advertise the Olympics, as boards and adverts that would have already been in place are now including the Olympics logo, in effect advertising the games for London at the company’s cost. Companies do this to either get good publicity or to prove themselves as the top of their markets, though this backfired for G4S who found they had completely underestimated the number of security they would need at the Olympics and consequently saw their share prices nose dive in value. Broadcasting deals meanwhile brought in £2.5 billion over the last three years and £1.6 billion in the three years before that.

But this still works out as a loss for the government in the short term, meaning the longer term impact will need to be positive for the government to make a profit out of this huge expenditure. The Prime Minister, David Cameron had suggested Britain could make £13 billion over the next four years, but many see this as a laughable estimation, with the figures not accounting for the negative effects that the Olympics will bring, such as the impact of people leaving the country to get away from all the crowds etc. This has been proven slightly with hotels claiming that the demand for rooms in London during the Olympics have been markedly weaker than expected. While the money spent on the Olympic structures might never generate a return on its investment. The Olympic stadium cost over £500 million to construct, nearly double what China paid for their “Bird’s Nest” stadium (mainly due to lower labour costs) and nearly double the original estimate of £282 million that was made back in 2004. Its future lies in the balance as a London football club, West Ham United, awaits a decision on whether it can rent the stadium to use as its home ground, with controversial issues remaining about the track field around the pitch and the sharing of the stadium with other tenants. But without tenants like West Ham United, the stadium would make little recuperation on the money spent on it, with the football club along with other tenants expected to pay around £2 million a year on rent to the stadium, which would help offset the maintenance costs of around £5 million a year. Without West Ham United, £50 million would have to be spent to alter the structure to a smaller size for use in future athletics like the world championships in 2017. Then there are other structures like the Olympic Aquatic centre, which at £269 million is very expensive for what equates to a luxury swimming pool. These Olympic structures threaten to become white elephants after the event, expensive relics that lose their usefulness in a months’ time.

Nonetheless, the Bank of England expects the economy to receive a boost in the third quarter by about 0.2% (roughly £5 billion), while another fiscal watchdog has worked out that the 8.8 million tickets sold should give a boost of 0.1% in the third quarter (roughly £2.5 billion). Then there is the boost to morale across the country; where the carrying of the torch helped bring the nation together and the opening ceremony reminded most people of the eccentricity of Britain. This is rather immeasurable, but a timely boost to a country low on confidence with a lot of issues to worry about. For the government it has become an advert to the multinationals of the world, an appeal to global businesses to come to London and spend your money in Britain. For the public it has become just another complaint against the government, joining the current angst against the NHS changes and University fee caps.

But whatever the Olympics has become for London and for Britain, it will hopefully be remembered for the moments in history it creates, rather than the costs it brings and issues it leaves behind.

Daily chart Olympics: Going flat out | The Economist

Daily chart Olympics: Going flat out | The Economist.

Really interesting graph on whats possible in the coming racing events for the Olympics.

Why there’s more in Draghi’s may-day speech than markets realise | Economics Intelligence

Why there’s more in Draghi’s may-day speech than markets realise | Economics Intelligence.

 

Great piece on what Draghi really said.

Australia in Gold position

Australia has yet to set the world alight in the Olympics so far, but in economic terms they remain a model to follow for other nations. The IMF has predicted they will be the best performing advanced economy over the next two years; with GDP growth forecasts for 2012 estimated at 3.3%, unemployment currently low at 5.2% and a low budget deficit of 0.7% (Britain’s deficit is 8.2% in comparison). In GDP per capita terms, Australia is ranked fifth in the world, higher than both Germany and Britain. In the UN’s Human Development Index (a measurement of the standard of living) Australia ranked second last year, in fact Australia had eight times as many adults earning over $100,000 than the World-wide average. On top of this the nation’s Public Debt to GDP ratio is currently 24%, the lowest among the OECD countries.

The left table shows Australia in second place in the UN’s Human Development Index. 

So how is Australia doing so well in such difficult times?

One major reason is the mining boom the country is currently experiencing. Australia is rich in mineral wealth and has a large mining industry that is pushing the economy forward. Australia’s close proximity to China has seen the two countries develop a good relationship, where China’s unprecedented demand for raw materials helped fuel the mining boom. This and the combination of high commodity prices helped Australia weather the financial crisis and keep unemployment low.  Australia has now become the leading producers of minerals in the world, with mineral exports accounting for half of all of Australia’s exports. The mining sector also accounts for 9% of Australia’s GDP (roughly the same as manufacturing) and from 2006 to 2011 the value of mining exports more than doubled. The fear is that China’s recent signs of slowing down could have an impact on the future of Australia’s mining industry, which would certainly slow down the strong growth that the country has been experiencing.  The sharp fall in commodity prices won’t help either, so Australia might have to work on diversifying their economy more to help lower the impact of a decline in the mining industry.

This graph shows the big increase in exports of Iron and Coal, as Australia experienced a mining boom. 

Another factor is the strength of the Australian currency. The Australian dollar has grown in value since the financial crisis and has seen the country become a haven for investors. With the EU set to implode and the USA facing a fiscal cliff at the end of the year, Australia remains one of the only AAA credit countries with a stable future outlook from all three of the top credit agencies. They offer secure government bonds with high yields; a ten year Australian bond yields 3.05% compared to Britain’s (another AAA credit nation) ten year bonds which only yield 1.48%. This is seeing more and more cash running through Australia and investors putting their money into Australian assets. The decline in commodity prices could weaken the Australian dollar, but even then that would give a timely boost to Australian exports, as foreign companies would be able to buy Australian goods for cheaper.

The Economist’s index based on the prices of McDonald Big macs over different countries shows Australia’s currency has increased in value by 22%.

Another factor in Australia’s success has been in attracting talent to the country. Since 2007 Australia has slowed down the total number of visa’s it offers, but importantly has increased the number offered to skilled workers by 23,000. Australia now offers nearly as many visas to skilled workers as the USA despite having a much smaller population (22.5 million compared to 311.6 million). This has meant an influx of talented, useful immigrants have come into the country and improved Australia’s productivity and employment figures.

But there are hidden problems. Australia has been criticised as a two speed economy, where sectors that aren’t linked to the mining boom are said to be in very slow speed or could even be going backwards. There is evidence supporting this idea, with Fairfax (a media company) announcing 1,900 job cuts and Hastie Group going into administration losing the country 2,000 jobs, while starts of new building constructions fell by 11% in 2011. Another problem is the Labour government currently in power, headed by Prime Minister Julia Gillard. They are deeply unpopular after releasing a new carbon tax on the public, despite it having good intentions and the fact that Australia is one of the least taxed advanced economies. The parties polls show that just one in four Australians are prepared to vote them back in at the next elections. This leaves companies wary of any promises being made by the current government, as the rival parties seem sure to reverse some key polices like the aforementioned carbon tax.  Finally, the country also has a problem with its current account (imports and exports); publishing a deficit of 3.5%. This has long been a problem for Australia, as they lack a successful export orientated manufacturing industry. Improvements in this area could prove a big step to diversifying their economy away from the dependence on a mining boom.

This graph shows the current account deficit problem that Australia have had to deal with for a while now. 

But despite the potential problems they face, the country stands in a great position – they are the envy of America and a pipe dream for Europe. If this was the Olympics we were talking about, Australia would be gold medallists by now.

Yuri Milner’s Fundamental Physics Prize: Back to basics | The Economist

Yuri Milner’s Fundamental Physics Prize: Back to basics | The Economist.

Sounds like an excellent idea, will support creativity in physics much better