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 “Economy”

A Recovering Britain?


The new Bank of England Governor, Mark Carney, has shown impeccable timing. He leaves Canada in the best shape of the G7 members, boasting GDP at least 5% higher since the crisis began  compared to Britain, where GDP has still yet to catch up to its previous peak.  But he also leaves the country with some long term problems that he won’t have to deal with. Canada is facing a rising debt problem as more and more consumers are borrowing money they don’t have. This is compounded by Mr Carneys low interest rates, which are needed to boost growth but are now encouraging reckless borrowing. Growth is also slowing this year, with the Canadian central bank now cutting projection for the next few years.

As this graph shows, Britain is experiencing a worryingly slow recovery compared to previous years, with GDP still somewhat below the 2008 peak.  

In contrast he arrives in the UK at a possible turning point.  After five years of a deep recession followed by a failed recovery, the statistics are now finally pointing to better times. Manufacturing and construction are growing, consumer confidence is improving and new schemes to help boost lending and property buying seem to be working. GDP is set to grow at around 1% this year if the economy stays on track and unemployment is staying low compared to the rest of Europe.

Yet there is an underlying problem in Britain’s economy that will prove hard to fix for the new Governor.

The average wage in the UK has declined by 5.5% since mid 2010 when adjusted for inflation, falling further than some of the worse off countries in the EU like Spain. This won’t surprise Britons, where the cost of living is squeezing the incomes of many households. As wages have remain restricted since the recession by companies that can either not afford the higher costs or are simply taking advantage of the desperate workforce, inflation has been increasing at between 2-4% a year. This can particularly be seen in the steep rises of energy bills, which have  more than doubled in the period from 2004 to 2011. More price rises are set to happen in the future too, with some energy companies suggesting bills will be £100 more than government projections state for 2020.

As this graph shows, Wages and inflation have diverged negatively since the recession, squeezing real incomes. Found at http://www.economicshelp.org/blog/6994/economics/uk-wage-growth/

Even the new positive growth numbers hide this problem. Instead of salary rises, people are turning to borrowing again to supplement their income. Personal debt has increased by £4 billion in the last year and is worryingly becoming a necessity for families to keep up current costs, along with benefits. If growth recorded in the first quarter at 0.3% had been based on wages, it would have fallen by more than 1% and pushed Britain into recession. A real recovery will need wage growth to create real growth. Otherwise a debt inspired recovery could see interest rates start to rise, leading to costlier interest payments on the debt held by consumers, leading to more defaults and another market crash.

A worrying trend is that of the zero hour contracts, where companies do not have to stipulate what hours an employee is working each week. Additionally, they don’t have to provide the employment benefits that full time employees receive like sick pay and maternity leave. Regulation is lighter in such work places and offers no real job protection, leaving the employees less likely to spend freely if they don’t have a consistent salary or job. This can only harm the economy’s recovery at a fragile time.

Yet there are some positives. Unemployment has stayed relatively low in the UK since the recession because of the countries flexible labour market. Instead of industry wide lay-offs, companies were able to lower salaries to keep people employed. This was healthy, as employees on low wages were better than the unemployed claiming benefits. But with the economy now trying to recover, there is no longer that fear of a market crash to hold companies back from increasing wages.

Unemployment has remained steady and relatively low compared to the rest of Europe, when unemployment is more than double in Britain’s in countries like Greece and Spain. Found at http://www.goldmadesimplenews.com/analysis/unemployment-in-the-uk-rises-to-7-8-as-real-wages-have-go-down-for-nearly-5-years-in-a-row-9951/

The problem is that while consumer have been able to borrow money freely, companies are finding it a much harder task, especially the smaller and medium sized firms that employ the majority of the population. Banks, the biggest lenders to businesses, are focusing on building up their capital for new regulations, meaning they are averse to lending money to companies that don’t have the size and market share to guarantee their loans. There is a lack of a genuine back up to the banks for smaller companies, in contrast to the bigger companies that can lend from the international markets for affordable rates. This is restricting both current companies struggling to grow and new ones trying to enter the market.

 

This affects the public, as investment improves productivity which tends to influence higher wages. Right now business investment is down by a third since the recession, productivity has declined despite more people being in work and real wages have therefore fallen. Astonishingly, the UK ranks 159th in the world for its investment to GDP ratio.

The solution is therefore to improve the market for lending to small and medium businesses. This is easier said than done. Banks are still a long way off from their pre-recession lending rates; especially with two of the biggest banks still part owned by the government. People are wary to see banks go back to that sort of lending anyway, with bankers lending recklessly and risking too much money. But a middle ground must be found to provide capital to the rest of the market. Different lenders must be found as well; in America banks share a much a lower percentage of the lending market than in the UK and Europe, one example of why America has outperformed both since the recession. One such example is peer-to-peer leaning, where the two largest providers in the USA lent over $1.7 billion in the last five years. One recent improvement has been the “Funding for Lending” scheme which gives incentives to banks to lend by offering money that can only be used to lend to businesses.

Britain is further ahead than the rest of Europe in solving this problem and is thinking outside the box to improve the economies main weakness. If lending can pick up and even better without having to rely solely on the biggest banks, then investment can pick up and wages could start to grow.

It’s not the recession but how the country recovers that will come to define Britain.

The next EU Bailout?


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The Euro Crisis has died down in 2013 after a turbulent 2012. This was not because of a lack of effort by Europe’s trouble makers; Italy ground to a halt when trying to decide a government, while Cyrpus were the latest government to need a bailout. Yet the cost of borrowing for many EU countries has been decreasing gradually regardless. This has mainly been down to the statement made last year by the head of the European Central Bank to “do whatever it takes” to save the euro, hinting at the bank finally becoming a lender of last resort to the rest of the eurozone.

But tricky times lie ahead for Europe. The Euro area declined on averaged by 1% in the first quarter of the year and unemployment has reached a record 12.1%. Protests and riots have been more common in recent years (with even Sweden now experiencing public unrest) leading to many extreme parties getting more public attention, campaigning largely on their respective countries leaving the EU.

So a big question remains; who will be the next country to request a bailout?

One likely candidate is Slovenia. With a budget deficit over 5% of their GDP, their finances are in disarray. The economy retracted by over 15% in 2008/09 and is not set to return to growth until at least 2015. The largely state owned banking sector, saddled with debt, has grown to 140% of GDP, with an estimated 20% of loans considered non-performing (extremely late repayments). The public debt is still rather low at around 60% of GDP compared to much of Europe, but the interest levels Slovenia have to pay for borrowing are rather high at near 6%, if that rises much higher in the coming months they may lose access to the international markets and require external help (i.e. a bailout). Much of Slovenia’s problems come down to the credit crunch, where easy credit fuelled a construction boom similar to that in Spain that promptly burst. Another problem was the size of the state, which kept a tight grip on the bigger markets, crowding out private competition and stopping innovation. With the government now employing austerity measures, the growth of these industries have stalled, with potential buyers now a lot harder to find in a recession hit EU.

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Slovenia’s prime minister has announced a brave rejection of any bailout talks, instead talking of important reforms to the banking sector (a creation of a bad bank for the worst debts) and budget balancing austerity measures including: cuts to school subsidies, a recent 5% cut in nominal public sector wages and a new higher marginal personal income tax. Their crisis resembles more Ireland’s than Cyprus and some strong leadership is giving the country a fighting chance of avoiding an international bailout.

So if not Slovenia, who then?

Two countries that resemble Cyprus (the latest bailout victim) more closely are Malta and Luxembourg. Both are small countries with massively outsized banking sectors. Malta’s banking sector is nearly 800% of its GDP making it impossible for the government to bailout out the sector by itself if needed, while the government already has high public debt of around 70% of GDP. But Malta has relatively low unemployment and a controllable budget. Its banking sector is rather different in nature to Cyprus’s as well; instead of two big local banks full of dodgy russian money and heavily exposed to the volatile Greek economy, Malta banks are actually subsidiaries of foreign banks, with high capital ratios and profits. Luxembourg also has a large banking sector, roughly 23 times its GDP. But once again the banks are large foreign owned, differentiating it from Cyprus. The economy is also very strong; experiencing low growth in 2012 when the surrounding countries were in deep recession, holding low public debt and unemployment and possessing one of the large current account surpluses in the region. If that weren’t enough, the small country has the highest GDP per capita ratio in Europe, meaning its people enjoy a very high standard of living. Both countries are over reliant upon their financial sectors and are very exposed to shocks in the market, but neither are realistically on the brink of a bailout.

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Rather more worryingly, a much bigger economy is at risk, one which has already had to accept a bailout for its banking sector. Spain withdrew around €40 billion from European Stability Mechanism to help recapitalize their banks (a EU organism set up to offer up to €100 billion in bailout funds to member states). Yet many believe this wasn’t enough and that problems remain in the troubled Spanish banking system. Spain has had to nationalise one of its largest banks Bankia, while most others have had to make large cuts to their balance sheets. If this wasn’t enough, the economy is in serious trouble. Spaniards are seeing a deep decline in their national output, likely to fall for an eighth consecutive quarter and unlikely to see growth until after 2015. Unemployment is at a record high of 27% of the population, nearly 60% for the young. The budget remains heavily unbalanced, with a deficit of 7% of GDP, leaving public debt high (though not as high as private debt). A construction crash has lost many young spaniard an entry into the work force and has caused a lot of bad debts in the banking sector. When times were bad for the EU, Spain and Italy have faced some of the highest borrowing costs. Many see Spain as the weakest member of the big club, and any serious bailout of the economy would cause massive fractures in the EU and could possibly cause a domino effect on the likes of Italy and so forth. Fortunately, the political scene is stable, with the government in power for the foreseeable future and elected on a mandate of budget balancing and reform. Such reforms and austerity are already under way, with labours cost having dropped in contrast to rises in Frances and Germanys and a 4% drop having been achieved in the budget deficit since 2009. Progress is being made, but it needs a stable environment and a strong recovery in europe wide demand for Spain to really recover and see of the need for a bailout. That is a big ask in a continent that has become synonymous with the word crisis. A bailout for Spain is largely not talked of, precisely because of the implications it could have for the future of the EU. Yet it probably remains more likely than a bailout for Luxembourg and Malta.

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The reality is that many member states could require a bailout if matters turned for the worst, with Portugal another possibility after the rejection of austerity measures by the national courts. The lack of a proper system in place and the reluctance by the ECB to really put its money wheres it mouth is, means rich and stable countries like Germany will continue to fund the mistakes of poorer economies. A more united Europe could solve this, with the spreading of some of the debt between the member states an attractive idea, ending the vicious circle of national debts being inflated by bailouts and increasing the need for further bailouts. Politically it remains a tough sell, especially for Germany, but it would also show a strong and united Europe, something most national leaders would secretly like to see.

Slovenia are the strongest possibility for a next bailout, with markets lacking confidence in the economy and increasing the costs of borrowing to perhaps unstable levels. But a spreading of at least some of the debt  through Euro Bonds could greatly decrease the need for this guessing game.

Abenomics: A burst of energy in a country lacking it


If investors had taken a punt on the Japanese stock market six months ago, they could have seen the value of their shares go up by 70%. This was roughly about the same time that Mr Sinzo Abe, the new Prime Minister, was likely to lead the country once again. He was originally in office in 2006, before resigning within a year after a combination of poor health and low popularity. The second time round has been much more of a success, with opinion polls showing a 74% approval rating in April. It’s not hard to believe; GDP growth was up at an annualised rate of 3.5% in the first quarter, far above the likes of the USA, Britain and the eurozone (which is currently fighting recession across the region). While the yen has dropped 20% in value against the dollar, boosting Japans struggling exports that have long had to live with a strong currency making their products uncompetitive. Toyota for example are expecting net profits to increase by 40% this year.

A graph showing the incredible rise of the Japanese stock market in the last few months. Found at http://www.zerohedge.com/news/2013-05-15/bank-japan-headno-bubble-here-nikkei-rises-45-2013

Much of this is down to a massive stimulus package that Mr Abe publicized in January of ¥10.3 trillion. Earmarked to improve the infrastructure of the country and boost confidence, it is in stark contrast to the policies of America and Europe, where austerity rules the roost. Coupled with this, the Central Bank of Japan’s reigns was handed to Haruhiko Kuroda, a willing experimentalist and ally of Mr Abe. He promptly announced an inflation target of 2% (after years of deflation) to be met in the next two years, a confident claim that could prove difficult. But then that could be missing the point; it’s not about reaching the target per se, it’s about inspiring confidence to the nation and changing the atmosphere of gloom that has enveloped the country. Additionally, Mr Kuroda has committed the central bank to buying up ¥7.5 trillion in long term government bonds a month, roughly equating for 70% of the Japanese bond market. Finally he announced the institution would become the only major central bank to change its target from inflation rates to a monetary base system – the amount of money pumped into the economy.

The new governor of the bank of Japan, Haruhiko Kuroda, is taking a gamble on the economy. 

Yet there are repercussions to Abenomics. Japan is already struggling with a mass of debt on its shoulders, at over ¥1,000 trillion and set to reach 240% of GDP next year. That is by far the highest debt to GDP level in the world, while in numerical terms it is only second to America, whose economy is three times that of Japans. It is also 20 times that of current government revenue and takes up half of said revenue to service it. One solution is the expected increase of consumption tax to 8% in April next year and 10% in 2015, which was set to help achieve the lofty aims of halving the primary budget deficit by 2015 to 3.2% of GDP. The fiscal stimulus has thrown this ambition out the window, with the budget deficit now believed to have increased to 8.8% of GDP this year. Adding more debt to the pile looks risky, though the actual chance of a debt crisis is low; Japan plays very little for the money it borrows mainly because the bond market is dominated by local Japanese savers and the central bank. But this is clearly a gamble by Mr Abe, a last throw of the dice, to succeed (increase growth and revenues and start to cut into the debt pile) or fail (increase the level of debt and see the economy spiral out of control).

A graph showing the increasing rise in Japans debt over the last two decades. 

To only make matters worse, Mr Abe has inherited difficult long term problems. The first is the current energy crisis. Following the Fukushima nuclear meltdown, Japan drastically shut down the majority of its other reactors, leaving it to rely on importing energy, a costly measure. Nuclear energy accounted for 30% of the sector and was set to increase to 50% in the next two decades to account for a rising demand for energy. Mr Abe and his government are now struggling to make up for that shortfall in a resource low nation, with the possibility of electricity cuts not being discarded and a U-turn on nuclear power very unpopular. The imbalance could also push the narrow current account margin (currently 1% of GDP) into the negative, adding further strain to the budget deficit and public debt.

Only a few Nuclear stations are still online in Japan, causing an energy shortage in the country.

The second long term problem is the demography issue. There are a growing number of elderly residents in Japan that will drain the states resources in the form of pensions, health care etc. In the next 90 years, the percentage of the population past retirement will grow from one fifth to nearly half. A rapidly declining birth rate coupled with a trend for smaller families means the number of pensioners living on their own will double by 2030 based on 2005’s population numbers. While the number of available workers is shrinking, resulting in less people contributing to the economy and more people taking state handouts. This may be a global problem in the rich world, with the average age of death continually rising, but Japan is a standout indicator predicted to experience the worse of the problems. In contrast India’s population is getting younger and will boast a 250 million increase in its working age population over the next decade.

Two graphs showing India’s bulging young population, found at http://www.economist.com/blogs/graphicdetail/2013/05/daily-chart-8

Encouragingly, Mr Abe is also striving for economic reform.  He is set to release his reform policy next month which is expected to include; steps to make it easier for female participation in the workforce and a deregulation and breaking up of the energy sector. More ambitious aims could include: easing barriers to investment in the farming sector, freeing up Japans rigid labour laws and increasing visa access. Though these could be held up until after the July elections for the upper house which if his Liberal Democrat party were to win a majority in (which seems likely), Mr Abe could pass legislation without hassle, a rarity in modern Japan.

Joining the TPP (Trans-Pacific Partnership) would prove an important step as well, by expanding trade with some of Japans most important trade partners and providing a timely boost to GDP growth. Entering the discussions so soon was warned against by his advisers, but it has only seemed to have improved his image further, giving him foreign credibility and respect. Going head to head against the lobbyists for protectionism will be tough, but opening up its economy is one of the few major moves Mr Abe can play to increase long-term growth.

Increasing trade with the USA via the TPP could be a massive boost to Japan’s economy. 

Disappointingly, Japan has increasingly become isolated economically, not attracting much foreign direct investment due to high taxes (with a corporation tax of 38%) and a society reluctant to integrate with foreigners. If Japan is to avoid a future disaster it will have to really embrace globalisation. Immigration could be a real solution to their ageing population, as immigrants tend to be both younger and embrace bigger families, as shown in the USA. Attracting foreign investment is also key, as the government cannot hope to keep up its stimulus package in the long term and will need the private sector to invest much more than it currently does. Japanese firms could be forced into growth strategies if their sectors were fully opened up to global competition. Only then could the government start to reproach – as it will certainly have to at one point – and start to cut the government spending and lower the public debt levels.

A return to growth for the world’s third largest economy, one that is equal to France’s, Italy’s and Spain’s combined, is a feat to celebrate. But if Mr Abe doesn’t implement the long term reforms and embrace globalisation, then he might find (both metaphorically and literally) the economy running out of energy.

Thatcherism: One foot in the grave?


On the 8th April, Britain said goodbye to their first female Prime Minister, arguably the most famous one since Winston Churchill. The reaction has been mixed to say the least, with Baroness Thatcher a bit like marmite; you either love her or hate her. On the positive side; she ended the trade unions grip on the country, reduced the high inflation rate, created a free market approach and helped retain Britain’s global influence at a time when other super powers were rising to the top. On the other hand, she helped divide the country even further, centralised power in Westminster, reduced public investment in infrastructure and hardly made a dent in the issue of equality. She also made a lot of enemies, in particular the mining industry, civil right activists and even her own party (who still suffer under her shadow).

But no matter what you think of her personally, her economy policies have had a lasting effect on the nation and the world as a whole. Her following loosely of the ideas of Friedrich Hayek was extremely brave when the rest of the world was dominated by Maynard Keynes ideas. The idea in general was to shrink the state and its effect on the country, thereby allowing the private sector to grow. When governments enter the markets they tend to crowd out private enterprises and mange sectors poorly, so Baroness Thatcher privatised big industries in transport and energy and eliminated state controls. This improved productivity in the nation and set off a trend of privatisation throughout Europe and the wider world. Germany fully privatised its national champion Volkswagen in 1988 while even France, a country that never fully caught on to privatisation, sold off shares in Renault in 1996 (though it still holds a 15% ownership to this day). In Eastern Europe and Latin America, privatisation became extremely popular, as it encouraged outward investment into the country that the governments couldn’t hope to create by themselves. In Poland between 1990 and 2004, 5,511 public owned enterprises were privatised, while Latin America keenly accounted for 55% of global privatisation in the 1990’s. Annual revenues from global privatisation as a whole peaked in 1998 at over $100 billion, showing the extent to which “Thatcherism” had an effect on the whole world in the aftermath of her term in office.

France privatized Renault, though they still hold a 15% stake.

Yet times do appear to be changing. The world-wide recession (a caveat of the free market economy Margaret Thatcher brought in) forced many governments to resume ownership of previously private industries, especially the banking sector. The UK government partly nationalised RBS in 2008 and now owns a majority 81% stake, Holland recently nationalised bank and insurance group SNS Reaal for €10 billion, Belgium nationalised their big bank Dexia in 2011 while Spain had to request almost €40 billion in bailout funds for its four nationalised banks late last year; Bankia, Catalunya Banc, Banco Gallego and NCG Banco. This isn’t all, in South America, a region so keen on privatisation, the trend is also reversing. Argentina last year took a majority 51% stake in YPF (an oil company) without giving its parent company Repsol (a Spanish Company which held 75% of YPF) a cent. YPF aren’t alone, Ms Fernandez (Argentina’s President) also nationalised their private pension funds and a large airline, with the latter flagging (44% of Aerolíneas Argentina’s flights were not running on time last year).  If it weren’t enough for Spain to lose YPF, they also lost another company to a South American President. Evo Morales, President of Bolivia, nationalised their national power grid company of which a majority was owned by a Spanish company. Mr Morales has at least in the past offered remuneration, though often it has been below free market levels. Finally there is Venezuela, who suffered their own loss of a famous leader, Hugo Chavez. The dominant leader was beloved by his public and encouraged national patriotism by nationalising large parts of the economy. But this is possibly the worst example of nationalisation. Mr Chavez employed only those loyal to him in powerful state positions, rather than those best for the job. He gave cash handouts to the population but has had one of the worst records in the region for lifting people out of poverty.

Another fallen political leader leaves behind another controversial legacy 

Margaret Thatcher was a willing accomplice to globalisation, which has seen trade explode between nations and barriers broken down. So she would be sad to see that the WTO has cuts projections for trade this year down from 4.5% to 3.3% due to increased squabbling over trade restrictions, while protectionist policies in some studies have been suggested to have increased by 36% in 2010/11. The financial crisis’s long lasting consequence has been the setback in the expansion of integration within the world, with countries now moving towards protectionist policies more and more. In the recent EU budget talks for example, one of the few areas not to be discussed were Frances protected agriculture subsidies (where tariffs on non-EU goods have known to reach 156%). Then there was the decision by Brazilian President Dilma Rousseff to increase Industrialised products tax by 30% in 2011 for vehicles where 65% of the value added did not originate in Brazil, despite breaking WTO rules.

More worryingly, the biggest trade zone right now is facing big doubts over its future.  The EU is the biggest backer of free trade in the world, so if it were to break up, it would set the world back years. The lack of tariffs and trade caps between EU nations majorly simplifies the whole process, reducing the red tape that clogs up businesses and increasing the number of options open to the consumer. The percentage of trade in EU states between each other is falling sadly, with Germanys decreasing by nearly 10% since before the financial crisis (though there are other contributing factors). The single market also bizarrely does not include services, which account for around 71% of EU GDP but only 3.2% of intra-EU trade.

Share of intra-EU trade in Germany's total foreign trade

Thatcherism however is hardly dead. Free trade deals that many thought were long gone are starting to pop up once again. The EU and USA are discussing a “transatlantic trade and investment partnership”, which could according to some estimates boost GDP in both regions by between 0.5-1% to perhaps even triple that, depending on the amount of restrictions reduced. Tariffs only average about 3% between the regions, but other barriers to trade are aplenty and go a long way to restricting trade. Additionally there are the Trans-Pacific Partnership talks between the North American and South East Asian regions. The aim is to cut trade restrictions between 11 nations, including; USA, Mexico, Canada, Japan, South Korea, Vietnam and Australia. The countries involved account for around 30% of global trade and could improve the economies GDP’s by an estimated 1%. Neither deal is even close to being finished, but they both bring hope to the idea of free trade that Margaret Thatcher helped popularise in the 1980’s.

After the global recession, many criticised the free market approach as the main cause for the financial crisis, but the easy excuse isn’t always the right one. A free market doesn’t have to result in a lack of regulation and poor preparation, which were the real causes for the banking crash. A balance is needed for it to work, free market policies used along with guidance (not interference) from the state.

Baroness Thatcher may have passed on, but her free market policies are still alive and kicking.

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.

Joining the Club


At the end of this year, immigration restrictions within Europe are set to relax, spiking fears in Britain that a mass influx of poor immigrants will arrive from the likes of Romania and Bulgaria. Britain has form, with similar circumstances in 2004 leading to a flood of Polish Citizens arriving in the country, to the point where Polish is now the second most spoken language in the country. This situation has lead to a growth in the popularity of UKIP, who campaign on restricting immigration and leaving the EU. Semi-Success in a by-election in Eastleigh, while rather meaningless in the grand scheme of things, has proved both their popularity gain and the unrest of the public. But are these fears well founded?

UKIP take advantage of public discontent.

Unhelpfully, there isn’t really any respected statistics on how many immigrants are set to hit the shores of the UK, while the government underestimated the numbers in 2004 and are wary to make the same mistake twice (with up to 13,000 projected a year but over quarter of a million arriving after the first couple of years) . A general estimate is that immigration from Romania and Bulgaria could rise to 50,000 a year for the next few years.

But why choose Britain? The economy is spluttering along, the government is implementing tough austerity measures and the public already has a negative view of immigrants. In fact the government has been advertising this in the home nations, even going to the lengths of trashing Britain’s weather. Yet Britain remains an attractive location, with low unemployment when compared to the rest of Europe, a language spoke across the continent and a welfare system made famous by its generosity.

Unemployment figures as of April 2012. 

However if the public is expecting a repeat of 2004, they will be mistaken. The factors are different now. Britain was one of the fastest growing economies on the continent back then and importantly was one of the few large economies to fully open their borders at the time. Now Both Romanians and Bulgarians have a much wider choice in where they can travel, meaning the immigration figures should be split between the different countries. In fact, Germany in an economic sense is a lot more attractive; they have more impressive employment figures and a more stable society (whereas Britain has suffered from riots in recent history). Additionally, while their movement has been restricted, its hasn’t been completely stalled, so many Romanians for example have already emigrated, while countries like Spain had already allowed unrestricted immigration prior to this.

So while there will be an increase, it might not be as inflated as many are projecting. Either way, there will be more immigrants taking our jobs many will say. But that view is clearly wrong; many immigrants are either highly skilled and genuinely add something to the economy, or they are willing to do the low paid jobs many Britons would turn their nose up at e.g. picking vegetables.  In fact, while locals grumble about the polish “invasion”, a reputation has spread of polish immigrants being hard workers, a term that isn’t coined so easily with British workers.

But there are inevitably those that move into the country to take advantage of a welfare system that has seen benefits grow faster than average wage. This is the worst case scenario, with immigrants draining the system and sending money out of the country to families back home. But this is more rare than many think; labour participation is on average higher for immigrants than in the general population, while those that wished to move to Britain for such reasons could have already done so – the limitations have applied only to the labour market. In total, when comparing what immigrants have contributed with their costs since 2004 in the top eight European countries, immigrants have had positive effects on the country’s finances.

Welfare cuts are being implemented now to help tighten the budget.

If this wasn’t enough, the current government’s policies have not made the country very open or attractive to possible immigrants. The welfare state is being cut drastically; with benefit growth no longer being tied to inflation and a cap being introduced on entitlements to any family up to the average salary in the UK. While immigration in general is being clamped down on, with the government sticking to a target to reduce total immigration to fewer than 100,000 by 2015. David Cameron has gone about this by making it harder to obtain visas, which has unfairly fallen upon students, the sort of immigration that the country wants, young and skilled. But it has helped encourage an anti-immigration vibe in the public, where polls have shown a majority of the public wanting near zero immigration. Not that this would have an effect on immigrants from Europe anyway, unless the government was to radically defy EU law and start denying visas to such citizens.

Growth in student immigration has been a strength of Britain’s. 

So what will happen come the end of this year is still up to debate. The UK is no longer the only club in town and once you get in the locals aren’t very friendly. But then the minimum wage is fives that of Romania’s, which could be the equivalent of five more drinks…

The Myth of Successful Eurozone Austerity: Estonia


People seeking to rebut stimulus proposals often point to the example of small Baltic republic Estonia. This is the only Eurozone country to have deleveraged significantly enough to be called “Austerian”. Estonian Government Debt went from 7.2 percent to 6 percent of GDP, a remarkably high decrease. It also has a growth rate of 8%, not only one of the highest in the Eurozone, but also unique in the world.

Austerity Advocates also seem to have their private-sector oriented rationale vindicated. Estonia is a strong producer of entrepreneurs, notably including the creation of the worldwide internet calling sensation, Skype. They are also unhindered by government bureaucracy, red tape, etc. Therefore,this should surely be an example which indicates the efficacy and the desirability of austerity policies.

However, there are several chinks in the armor of that explanation. Firstly, Estonia made significant use of EU Structural Funds, borrowing 3.4 billion Euros (approximately 20% of Estonian GDP in 2011) during the years 2007-13. Now, in whichever way the government uses this money, it is effectively a Keynesian demand-side solution. In the Estonian case, however, the funds are supposed to be used to create more jobs in the entrepreneurial sector.This would therefore increase real incomes, therefore increasing consumer spending, pushing the economy forward.

Now, there are people who argue that Government spending does not push the Economy Forward. In the case of Estonia, however, it undoubtedly did do so. Historically, from 1995 until 2012, Estonia GDP Growth Rate averaged 11.6%, reaching an all time high of 4.80 Percent in March of 2000 and a record low of -5.90 Percent in December of 2008. The Estonian Economy began recovering at the start of 2009. Funnily enough, Government Spending began to kick in at the end of 2008, a month or two around the trough of the recession. Considering that Government initatives have a month or two to take effect, Estonia’s boom is more coordinated with a rise in Government Spending.

Second of all, Estonia is more export driven than any other Eurozone Economy, with 98% of it’s 2011 GDP coming from Exports of Goods and Services.This naturally means it is more dependent on foreign demand than any other of its European neighbors. One can conclude that largest catalyst that made these austerity measures work, was Estonian’s willingness to take on the hard measures needed to adopt these “belt-tightening” policies. For example, civil servants in Estonia took a 10% pay cut and ministers aswell saw 20% of their income cut. Pension age was raised, benefits cut, and job protection reduced, which points out that Estonia has unanimously accepted that times of lavish spending has finished, even the finance minister of Estonia has said that the people “understood they had to give up something”.

By Amogh Sahu & Frederick Jordaan at http://ibej.blogspot.co.uk/

An Old Italian Joke


Italy is set to hold an election that could prove pivotal to the rest of Europe. The current Prime Minister Mario Monti, while a very respectable figure, was always an unelected official, which never sat right in a democratic country. His painful reforming of the country over the last year, while very much needed, has eaten into his popularity, leaving him lagging in the polls. It is almost certain a new leader will be elected (though many hope Mario Monti could keep some sort of position in the next parliament, depending on who wins), so it will be a split race between the right, the left and the radical Five Star movement lead by a comedian.

Well I say a new leader, but somehow Mr Berlusconi has managed to veer his big ego into this election. That is despite Italy showing nearly no growth during his long terms in power, his controversial resignation in 2011 when facing criminal allegations (of which he will stand trial for after these elections) and the more recent press release stating he wouldn’t stand in this election (a decision he almost instantly reversed). He is campaigning on tax cuts and against the much maligned austerity, despite Italy holding one of the largest public debt to GDP ratio’s in Europe at nearly 130%. He is also using his considerable resources and dominance over private TV channels to grab votes from an undecided public. Even with this however, he retains only an outside chances of winning this election, with the Italians luckily holding a long memory. But even if he doesn’t win, his presence will certainly upset the balance and could stop a stable government from winning a majority.

Only Greece can boast a high Debt to GDP ratio than Italy in Europe. 

The favourite in the polls is Mr Bersani, leader of the left leaning Democratic Party. He has suggested he will keep to the same economic policies as Mr Monti, though pressures from the trade unions that support his party could lead to more frustrating postponements of reforms. His parties lead in the polls is also less than their percentage of the vote in the last election in which they lost, showing both the precarious position he holds and the split in the vote to smaller parties.

Mr Bersani looks likely to win. 

One party that has taken advantage of this is the Five Star Movement. Their anti-establishment message has a hit a cord with the voters and has seen them rise to third in the polls, with many seeing them as a dark horse. Their lack of experience holds them back however, with many doubting whether they will have the heads to handle one of the biggest economic crises’s to hit Europe in recent memory.

Beppe Grillo (a comedian) is winning support for his Five Star Movement party. 

The likely outcome is that Mr Bersani will gain enough votes to win the lower house, but could however be left lacking in the upper house (the senate), which he needs to properly govern the country. In theory, he then could form a coalition with Mr Monti’s party, the Civic Choice, which would help him gain control of the upper house and have the esteemed figure Mr Monti as part of his government, maybe as the finance minister or as “The Economist” has suggested a super-minister overseeing the economy. This would be a favourable solution to Mr Berlusconi getting back into power, who instead of providing the reforms needed during his time in office, actually changed the laws to benefit himself e.g. de-criminalising false accounting.

Whoever wins however faces a lot of tough decisions. Mr Monti did a lot of good work while in office, but has arguably ran out of time in making the biggest changes. Reforms that his government had been working on will probably not be completed, for example a much heralded constitutional requirement to balance the government budget.

The country is in recession and suffering from high unemployment of over 11%. The public sector is over bloated, with Italian MP’s some of the highest paid in the world and the parliament one of the biggest in the world. The private sector on the other hand faces stifling restrictions, with the firing of workers famously difficult due to the red tape, making it hard for new workers to break into the job market.

TOPIC RANKINGS DB 2013 Rank DB 2012 Rank Change in Rank
Starting a Business 84 76 up -8
Dealing with Construction Permits 103 100 up -3
Getting Electricity 107 109 up 2
Registering Property 39 47 up 8
Getting Credit 104 97 up -7
Protecting Investors 49 46 up -3
Paying Taxes 131 133 up 2
Trading Across Borders 55 59 up 4
Enforcing Contracts 160 160 No change
Resolving Insolvency 31 32 up 1

Italy’s ranking in “Doing Business”, found on http://www.doingbusiness.org/data/exploreeconomies/italy/

Unit labour costs (the combination of productivity and labour wage costs) have continually risen in the last decade, even while its neighbours have managed to lowers theirs since the financial crisis. This can be described as the real effective exchange rate and has seen Italian exports become extremely uncompetitive in the global market, decreasing Italy’s ability to create growth in their economy. Corruption is rife, with tax evasion one of the biggest issues in a country where public debt is soaring, but personal wealth is one of the highest in Europe. All in all this helps make Italy an unattractive country to invest in, with the FDI to GDP ratio nearly a third of the EU average from the period 2005-2010, vastly trailing the other European powerhouses.

 http://www.heritage.org/index/visualize?countries=italy|unitedkingdom&src=heatmap (this table shows the difference in corruption between Italy and the UK/USA)

There are still more twists and turns in this election to come I’m sure, but that aptly reflects the economy right now in Italy; unstable.

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.

 

North Korea’s New Years Resolution


Kim Jong-un delivered a rare public speech on New Year’s Day, the first of its kind in 19 years. Among the usual calls for North Korea to remain a strong military power, there were also calls for North Korea to become an “economic giant” and signs that they could be looking to repair ties with neighbours, South Korea. This could be in the form of a much less restricted economy, which would allow for a lot more trade and investments to pour into the country. Recent reports in Germany are even suggesting that the regime have hired German economic and legal experts to help plan for an opening up of the economy. These reports have suggested North Korea will follow Vietnam’s model, with specific companies chosen for investment.

This seemed impossible only a few years ago under Kim Jong-un’s father (who passed away a year ago), as North Korea has been the most secluded country in the world. Its people are heavily controlled by the government; entry and exit from the country are extremely hard to come by, information is censored so much that the public knows little about the outside world and human right violations are common especially in the prison system. Alongside this the country is relatively broke, relying massively on the financial support of China and aid from South Korea and America to feed its people.

Leaving North Korea can prove a little tricky…

This is the where cynics are worried about Kim Jong-un’s motives. North Korea have made promises to stop nuclear weapon development in the past to help attain food aid from America, only to then renegade on said promises afterwards. North Korea are again in such a position with masses of their population starving, so critics are arguing Obama shouldn’t fall for such tricks again. To add insult to injury, North Korea launched a rocket on the 12 December to put a satellite in space, despite violating clear UN rules. The rocket showed the progress North Korea are making in creating Nuclear weapons, though there are no signs of the re-entry technology needed, let alone the capability to attach a nuclear bomb. Such actions betray the words of unity Kim Jong-un delivered in his New Years Speech.

North Korea’s missile range, as found on the Economist.

Yet the timing is good. Kim Jong-un has just completed his first year in power and looks a more passive figure than his father. He has the chance to change his countries fortunes and is still in the infancy of his reign, which is important because as times passes by the chances of Kim Jong-un changing the regime that so many deplore will diminish. Alongside this, South Korea has just elected a new president, the conservative female Park Geun-hye. This means the departure of Lee Myung-bak, who was a particularly hated figure in North Korea, and the start of a new more welcoming government in South Korea.  President Park’s stance has been a halfway point between optimism and pessimism, stating that her agenda is to start with some small projects between the two countries and then see how Kim Jong-un reacts. If he follows his own speech then more unity between the two countries could begin.

South Korea’s first female president makes it onto the Times Front cover. 

This would be extremely important to North Korea’s chances of success in opening up their economy, as its neighbours have been extraordinarily successful in expanding theirs. South Korea was one of the poorest countries in the world in the sixties, now they are ranked in the top 20. They are in fact the only nation to have gone from being a major recipient of aid to a major donor. If North Korea could gain access to such a lucrative market, then they could revolutionize their economy.

In 2011, South Korea were the 15th largest economy in the world in nominal GDP terms. 

If they needed a model to follow then they should look no further than Myanmar. The nation was in a similar situation to North Korea only a couple of years ago, with little hope for change in the future. But as quick as you click your fingers, Myanmar have begun dramatic reforms to their country; opening up their economy, relaxing press censorship and even freeing the pro-democracy leader Aung San Suu Kyi. These reforms have seen improved growth for Myanmar, with its leaders now aiming to triple GDP per capita by 2016. North Korea on the other hand saw GDP shrink by a half in the 90’s, with little or no recovery since. By opening up its economy, North Korea could see real growth just like Myanmar, which could help lift a large proportion of its people out of poverty over the long run.

This graph found at the Washington Post, shows South Korea improvement and North Korea’s stagnation in GDP per capita terms. 

Alas, this is just hopeful talk right now. If the north and south were ever to unite truly, it would cost the richer south a lot of money and time to integrate the deprived north – just look at the re-unification of Germany. While South Korea are more likely to be worried about North Korea’s nuclear weapon ambitions, with the two countries still technically at war and the country the most likely target of any attack. This makes Ms Park’s stance more understandable, as she remains cautious on fully accepting North Korea yet. For the same reasons America will remain weary to invest in North Korea if they did open up their economy, as the money could be directed into Nuclear Weapons development. All this also ignores the current UN sanctions on the country because of their continued violation of international rules. This puts the opening up of North Korea’s economy beyond just their control.

A New Year and a new leader could see the development of a new North Korea. But by continuing along the path to Nuclear Weapons, they could be shutting off the path for economic freedom.

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