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 month “November, 2012”

Palestine: a matter of time?

Relations between Israel and Palestine are deteriorating as both sides land destructive blows upon each other. Israel managed to kill Hamas’s military commander Ahmad Jabari and destroyed multiple long range missiles that had been stockpiled by a more extremist group in Gaza. Hamas meanwhile (the governing party of Gaza) managed to successfully strike at the heart of Tel Aviv (Israel’s capital city in all but name). Israel now threatens to put troops on the ground as matters seem to be getting out of hand.

Meanwhile, in the background of all this fighting, Mahmoud Abbas (the Palestinian leader of the West Bank) is set to apply for an upgraded “observer” status within the UN on November 29th. This would allow Palestine to participate somewhat in the UN’s activities and despite objections by Israel, is predicted to win such a vote on the international stage. This could be the road to Palestine establishing itself as a truly separate state.

Mahmoud Abbas is all set to upgrade Palestine’s UN status. 

But could they really survive as a new state?

Well in Gaza, they had been experiencing an economic boom of sorts. Growth in the constructions sector had been kick started by the smuggling of materials in underground tunnels from Egypt (a major backer of Palestine) and less strict economic sanctions from Israel in 2010. GDP grew by 20% in 2011 alone, while unemployment dropped from 45% to 28% in Gaza. Recently economic activity had started to slow in the west bank (controlled by the PA) to just 5% last year, down from the double digits of the previous years, though growth in the Gaza strip remains at around 10%. International investment has also helped improve the private sector, with Qatar a keen investor in the Gaza strip, investing around $400 million dollars and creating nearly 10,000 new jobs.

Palestinian GDP

This graph from the Financial Time shows the Palestinian GDP over the last few years. An economic boom now seems to be slowing down.

But there are still many problems economically for the Palestinians. They are reliant upon foreign aid, with it accounting for around 30% of their GDP. This has become a problem as aid money from the Arab world has dried up drastically, leaving a large gap in the PA’s (Palestinian Authority’s) budget of a suggested $400 million this year. Stemming from the problem, the PA has had to increasingly borrow money from its local banks, rising from half a billion dollars to $1.2 billion, roughly equivalent to just under 100% of the bank’s equity. The other large problem is Israel’s continued economic sanctions, which still restricts a large majority of trade in and out of Palestine. Israel collects custom duties and value added tax for Palestine and then transfers over the funds, but refuses to release all the information and is suggested to have held money back over the years ranging from $200 million to $450 million a year (depending on who you believe). They also hold the power to freeze these funds, which leads onto the current problem. Last time the PA tried to apply for observer status with the UN, Israel froze the tax funds to the country and has threatened to do so again this time around. Even worse, the finance minister has warned that Israel might just stop collecting such taxes, meaning a complete loss of the much needed funds for the Palestinians. This seems an empty threat in truth, as Israel has transferred over hundreds of millions of dollars already to help keep the PA ticking over, but such talk will not help already frayed relations between the two sides.Alongside this Israel continues to build upon Palestinian land and divides up the population with border controls, which has had a large effect on East Jerusalem, where nearly 80% of the people are suggested to live in poverty.

This table found at shows how occupied Palestinian territories have declined in GDP per person. 

So could the country survive independently? It is very difficult to suggest while the Israeli government has such a tight hold upon the Palestinian people and economy. Such restrictions have made it near impossible for the Palestinian private sector to grow, a necessary action for any economy to become sustainable. Palestine will need to be released to really see if it can grow into the sort of economy Israel currently boasts.

Even more important could be the USA and Egypt’s role in this divide. Israeli Prime Minister, Mr Netanyahu, was close friends with Mitt Romney and would have favoured his election, as his comments on the Palestinians economic problems being down to cultural differences showed a dislike of the country. Mr Obama’s re-election could see renewed peace talks between Israel and Palestine and more equality between the two sides. While America will need to put quiet pressure on their close allies, Israel, to not allow this current fighting to escalate. Egypt’s President, Mr Morsi, is a member of the Muslim Brotherhood and backs Palestine more than his predecessor. He is already brokering peace talks between the two sides and his countries ties with the Palestinian held territories (via underground tunnels) are an essential economic link to any future prosperity.

Mr Morsi and Mr Obama could hold the key to helping Palestine grow. 

If Palestine does achieve an observer status with the UN, it could be the start of a great journey towards independence. But fewer restrictions by Israel and closer links to Egypt will be needed; otherwise it could unravel before it has even begun.


Could Marijuana be an Economy’s Best Friend?

Could Marijuana be an Economy’s Best Friend?.

Very interesting take on Marijuana in America and its effect on the economy. I recommend reading it.

Altruistic Britain

Britain has recently declared that it will steadily end its £280 million a year aid package to India by 2015 and is also reviewing its current aid scheme towards Rwanda in Africa. Both have good reasons; India is currently growing faster than Britain and has its own aid and space program (which costs £750 million a year), while Rwanda has repeatedly been accused of human rights abuses and has a repressive government. When you then consider Britain has just come out of a recession and is struggling to cut its large budget deficit, it becomes hard to believe for the general public that billions of pounds are leaving the country with no tangible reward.

Paul Kagame, the controversial leader of Rwanda, after many allegations of human right abuses. 

This isn’t just India and Rwanda, Britain is one of the largest aid donors in the world in comparative terms. It donates three times more than America as a percentage of GDP and attaches far less strings than for example the IMF does for its loans to Greece. Britain’s whole aid program last year totalled around £8.5 billion and is split between direct aid to governments (bilateral aid) and funds given to international bodies like the UN and IMF (multilateral aid). Alongside India, Bangladesh and Ethiopia receive the two other largest amounts of bilateral aid, at £219 million and £324 million a year respectively. The countries aid programme is also one of the few public spending measures not to be cut, relieving it of the austerity that the NHS has had to face.

This graph from the economist shows British aid as a percentage of GDP compared to other countries in 2010. It lies only behind the Scandinavian states. 

Critics of aid suggest it does more harm than good. The money given to countries governments can tend to be “lost” on the way to those in poverty, usually lining the pockets of those in power. This is a big deterrence, as donors argue rightly they don’t want to be financing the corrupt governments that allow their people to live in such dire conditions. Another problem is that it can lead to countries become dependent on aid, shutting out private businesses and stifling real solutions to the poverty problem.  A good example of this is Afghanistan, whose economy has become overwhelmingly dependent on foreign aid, accounting for 100% of GDP last year.

Another graph from the economist shows Afghanistan’s foreign aid reaching 100% of GDP last year. 

So has British aid yet to adjust to Britain’s dwindling influence in the world? And is the cutting of India’s aid a sign of things to come?

I would suggest it shouldn’t be. While the aid given to India sounds unneeded, the country actually contains a third of the world’s poorest people (which its current tax system cannot deal with alone). With Rwanda, the country has become known for spending its aid money very efficiently (cutting the poverty rate drastically in the last decade) despite its moral ambiguity. In other countries, British aid is a welcome necessity for the very poor and gives the bonus of improving Britain’s image across the world. While the DFID (Department for International development) is restricted by law from making aid decisions based on Britain’s best interests, it aid plans do help improve trade links between Britain and other countries, a welcome boost when British exports aren’t as strong as they used to be. Plus despite all the criticism of British money flowing out of the country, development aid still only accounts for 0.56% of British GDP. On top of that, the DFID is one of the most transparent branches of British government, detailing online where each bit of their budget is spent.

Found here  If Britain reached the current o.7% target for aid spending, then only 1.6p of every pound would go towards aid. 

Britain has become one of the most giving countries in the world despite its lower economic and military status. This should be praised, it’s one of the few government programmes that is truly altruistic and does a lot of good. Britain could cut back on its aid development schemes and become a more background figure in the world stage once again. Or it could continue to lead the way in helping poor countries bring millions out of poverty each year and become a country to be truly respected again. I know which direction I would prefer.

The best man for the job?

America will decide on Tuesday the leader of their country for the next 4 years. The choice is between Barack Obama, the current President and Mitt Romney, the challenging governor. Both have run expensive campaigns on vastly different policies, yet the polls are evenly split. This is because neither candidate has particularly won over the American public and seem to be campaigning more on the criticisms of their opponents than their own positive attributes.

Barack Obama has already held the office for 4 years to mixed results. His campaign for re-election is largely going to be decided on this first term and whether the American public are happy for a continuation in current policy. So it seems best to assess how he has done is his first term.

In economic terms he has brought growth back to America (albeit very slow), reversed the mass job losses (though unemployment is still high) and saved the car industry (an important supplier of jobs). But the huge budget deficit that Mr Obama promised to cut, currently at 7% of GDP, has only increased as the Obama administration spent their way out of recession. Each of his 4 years in charge has seen trillion dollar budget deficits and it has lead to America’s public debt to GDP ratio expanding to over 100%. This has been the weak link in Barack Obama’s campaign, as many American’s worry the huge debts owed to the likes of China are weakening America’s position as the world’s strongest economy. In foreign policy, Barack Obama holds a much stronger argument. He can boast the killing of Osama Bin Laden and Colonel Gaddafi, the pulling out of Iraq and (soon) Afghanistan and in general the more peaceful and calm image he has created of America. Even with the upcoming problems facing the USA, including the Syrian civil war and Iranian Nuclear program, Mr Obama has shown a strong confidence in his decisions. He has promised to the world that Iran will not attain Nuclear weapons and has backed that up with strong economic sanctions that are only now beginning to take a real affect. In social policy Barack Obama has helped improve work conditions for women, supports gay marriage and is pro-choice (an opinion I share). While he has also brought in a new healthcare program nicknamed ObamaCare, a much needed reform that has solved America’s problem of having millions of people without any sort of healthcare.

This paints a picture of a successful Commander-in-Chief, but a weak leader of the economy. Yet this could be a harsh assessment as Barack Obama took over when the American economy was suffering one of its worst recessions in its history. Confidence was low, banks were under capitalised and large industries were falling apart. Even considering one of his main weaknesses, the large deficit and public debt, there are some mitigating circumstances. The Obama administration decided that a large stimulus was needed to get the economy growing and that deep cuts into the budget would only disrupt the recovery. In countries like Spain and Britain, where austerity has caused new recessions in their economies, it’s fair to say a delay in the much needed cuts might have been a correct decision. Barack Obama has essentially campaigned on this argument, that the economy could have been a lot worse than it has been.
But it also could have been a lot better. Barack Obama has completely failed to work alongside the Republicans during his first term in office and it has lead to the impending fiscal cliff in January, where an array of spending cuts and tax increases could cause a 5% decline in GDP and a return to recession for America if both sides can’t agree on how to cut the deficit. Mr Obama has also showed a poor understanding of private sector; continually criticizing big businesses and investment firms, strangling credit with heavy regulation and making poor choices on which firms to invest government money in. Finally, his legacy policy –ObamaCare – has failed to solve the big problem with healthcare, mainly that is unaffordable and only growing in costs.

The fiscal cliff that America is facing.

Mitt Romney in contrast offers something completely new. He has heavy experience in the private sector and has based his campaign around creating jobs for the millions of Americans out of work. He also boasts experience of working alongside democrats during his governorship, a clear weakness of Mr Obama’s. He even chose a popular running mate in Paul Ryan, whose budget plan Mitt Romney has chosen to use in his campaign. This entails cutting taxes, transferring more responsibility to state level and shrinking the public sector to allow private industries to grow. Fundamentally he is a great candidate to run against Barack Obama.

But this would only be describing one side of Mitt Romney. The candidate has flip flopped between so many different policies it’s hard to know what he will do when in power. He has regularly adopted contradicting policies, remains vague on subjects such as abortion and has recently changed his mind completely on when to pull out of Afghanistan (copying Mr Obama’s point of view). This extends to his famous five point plan and tax plan, where he states he will cut taxes on the middle class, cut corporation tax, increase military spending and yet still manage to reduce the huge budget deficit (A great interactive game for this issue – . He smartly ducts questions on how he will actually manage to do this and vaguely states he will close loopholes, but he will clearly have to break at least some of his promises if he really wants to deal with the deficit problem. Another less attractive side of Mr Romney is his link to the extreme views of his Republican party. Though he himself rarely states his own opinion, his has yet to denounce other republicans views that abortion be made illegal even in extreme cases of rape(including his own running mate Paul Ryan) and was actually caught out on video when a gay war veteran asked him about his views on gay marriage. Then there are his plans for healthcare, where he constantly denounces ObamaCare (a plan identical to one he implemented in his own state) and plans to bring in a “voucher” based system where old aged Americans would receive vouchers that they could use for healthcare costs. The criticisms are that they wouldn’t be inflation adjusted and become too small to pay off rising costs, while the overall plan doesn’t actually seem to stop rising healthcare costs, America’s main healthcare problem.

Neither candidate therefore has much of a leg to stand on. This can be seen in the mud-slinging campaign battles that we have had to witness over the last few months. Both candidates have cut into each other, broadcasting extremely negative adverts (with it found that only around 10-15% of each candidate’s adverts being positive). Barack Obama actually started this early by producing negative adverts on Mitt Romney while he was still campaigning for Republican nomination. This was hoped to paint the picture of a rich, greedy millionaire who too distant from middle America to lead it. This ended up backfiring though when it came to the presidential debates, an important part of any presidential election. Mitt Romney had a great first debate and appeared much more likable than the Obama Campaign had made him appear. This underdog status helped him surge back up the polls, while Barack Obama appeared nervous and reluctant to challenge Mitt Romney on his policies. The next two debates saw a more even performance from both candidates, but the damage had already been done; Mitt Romney was not the evil CEO he had been made out to be. Now both candidates are neck and neck in the polls and have a decent chance of winning.

Mitt Romney convincingly wins the first debate.

So who should win?

For me it would be Barack Obama. He may not have delivered on the mass hype that surrounded him in the last election, but he has managed over a sustained recovery after being given a downward spiralling economy. He deserves a second term to really complete the promises he made about cutting the deficit and creating jobs for the American public. Internationally he is favoured heavily over Mitt Romney and has helped improve America’s image immeasurably after the destructive Bush years. With such impending foreign crisis’s like Iran gaining Nuclear weapons, Barack Obama seems a much wiser and cooler head than Mitt Romney possess. While domestically what America really needs now is continuity not change, some of Barack Obama’s policies are only starting to take effect now and his future plans are a lot clearer than those of Mitt Romney. Indeed Mitt Romney’s best policies could only work if you discount some of the other policies he has promised, making him a tough candidate to believe in. Much like the Obama campaign message, voting for Mitt Romney could see America end up a lot worse than it is now.

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