Democracy struggles in the global recovery

Democracy has never been so popular. The Arab summer saw dictatorships overthrown and replaced with democratic intentions while in Africa the percentage of democratic countries has increased from 7% in 1990 to nearly 40% last year. The two giants in South America; Brazil and Argentina, have even managed to elect female leaders, something the USA has still yet to achieve. In the world as a whole, democracies roughly account for 60% of the world’s 196 countries, nearly doubling in the last two decades.

So the public should be happy right?

Wrong. The definition of a democracy is vague and the differences between elections in one continent to the next can be staggering. Some “democratic” countries are rather misleading as well; for example Hugo Chavez won consecutive elections, but was an autocratic dictator in all but name, widely considered to have rigged elections and bought votes. Russia as well holds elections, but the chances of President Putin losing an election are slim to none, with the Kremlin wielding a tight fist over the polling system.  That lowers the level of truly democratic countries to a less impressive 25% according to some statistics.

The Financial Times graph shows the election results that awarded the presidency to Vladimir Putin were controversial to say the least. 

Even those countries are now facing troubles. The global recession sprouted protest movements like “Occupy Wall Street” and started a trend that has culminated in the widespread trouble many countries are now experiencing. Brazil angered their people by overspending on the world cup, which has vastly trumped the costs for the South African World Cup, while neglecting the public services that will be so key to the a successful tournament. Turkey’s suppressive leader, Prime Minister Erdogan, has pushed his people too far, putting into law tight rules on alcohol and arresting journalists at a higher rate than that of China. Egypt meanwhile democratically elected the Muslim Brotherhoods front man Mohammed Morsi, who promptly handed himself dictator like powers and refused to listen to the secular opposition.

The world cup stadiums have come at too high a cost for most Brazilians, when the quality of living is nowhere near to that of the stadiums.

In the last two examples there can be seen a link, with both the Turkish and Egyptian leaders exploiting the lack of important institutions and constitutions to grant themselves greater control of the country. Winning majorities in the elections seemed to suggest a remit to do as they liked, without consulting the public, especially the percentage that didn’t vote for them. It’s not a coincidence that Brazil has seen the least hostile protests, with President Dilma Rousseff agreeing with the public’s right to peaceful protests (while quite rightly criticizing the small minority that turned violent).

Yet even the Western countries with stable democracies have seen unrest. Southern Europeans have become frustrated with the levels of austerity being enforced upon them by Brussels and Berlin. Greece has been the main recipient, but even the likes of France are starting to feel the tension, with the approval rating of President Hollande diving to a lowly 24%. Britain suffered more in 2011, when riots in London spread across the country and caused national panic. Though the origin was most likely the austerity the coalition was embracing to cut Britain’s large budget deficit, racial tensions were a common thread, with the London Met still dominated by the white British (around 80%) in a city where that is now considered a minority.

The British riots caused major panic, as some feared the country was spiraling out of control.

The USA however managed to largely bypass these protests, mainly by keeping up their spending levels and kicking the austerity can down the road. Only this year has Barack Obama actually looked to cut down the trillion dollar deficit he had been running consecutively in his first term, with the automatic sequester cutting budgets by $85 billion in 2013. Yet democracy hasn’t looked too rosy for the USA either. The deadlock between the president and congress has become a serious problem, with a polarised government failing to put policies through. A small tightening of the gun laws this year was rejected by the republican dominated congress mostly out of spite, while a recent farming bill (consisting of subsidies for farmers and food stamps) was rejected for the second year running despite holding policies both sides have traditionally liked. Even worse, both sides nearly forced each other to walk off the fiscal cliff at the start of the year, with the president reluctant to cut spending and the congress incessant on not raising taxes. Luckily both sides managed to reach a bipartisan agreement, though if anything this has emboldened both parties beliefs that their way is the only way.

The inability to agree with the more popular President Obama has seen Congress’s approval rating fall sharply to record lows. 

In the last 5 years democracy has taken a bashing, that much is easy to see. For every success like Myanmar, there is a monumental failure like Syria to counter balance it. Yet, many countries still strive for the democracy that the west has enfamed. Giving the public the ability to choose its leaders is a right many in the west take for granted, but something many societies go without. The protests are simply another form of democracy, giving a voice to a cause that the government might be ignoring or missing. In the three biggest protests right now, you can rank Brazil as the most democratic and Egypt as the least. Egypt could have stopped the protests that started last year by listening to the public and engaging them, rather than trying to stamp them down. Turkey started off in a similar vein, but has now tried negotiating with the protesters, especially with the Kurds, who threatened to take the protests to another scale. Brazil however, have largely allowed the protests to take place, and allowing for some violent episodes have seen the least chaos. The government is also opening up a dialogue with the protesters, agreeing to some of their demands for increased funding to the public services. The country still has a long way to go, and could have foreseen the public out roar that was building, but have so far acted in the most democratic fashion.

The protests might be shocking to see, but they are easily trumped by the actions of say the Chinese government in Tiananmen Square, or the conditions of the North Korean people who are denied any access to the outside world. Such dictatorship allows for such short term protests to be stamped down on quickly, but encourages longer term distrust and anger toward the controlling governments. The answer for the countries facing public unrest is for more democracy not less. Allowing the public to voice its frustrations can let off steam and negate anger building up and people acting out in frustration.  In the USA’s situation, more democratic bipartisan talks between the two parties would result in much higher success rate for important policies. The immigration reform coming through shows signs of this much needed bipartisan agreement, but party politics could still derail negotiations.

It must be remembered that there are much worse scenario’s than the current protests hitting democracy.

As Winston Churchill famously said “It has been said that democracy is the worst form of government except all the others that have been tried”.

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.

2013 Economic Trends

2013 is set to be a crucial year for a lot of countries, with Obama starting a tough second term at loggerheads with the Republicans over the Fiscal cliff, Europe implementing a set of reforms that could spark the end of the Euro crisis and China’s new leaders hinting at political reform in a economy that could overtake America in a few years. But some more important long term trends are also starting to take effect, which could change how the world economy works.

Hu Jintao’s new reign as the leader of China has sparked talk of political reform. 

One sector where big change is taking place is in manufacturing, where the location and tools are set to transform. For the latter the trend over the last decade has been for manufacturing jobs in the West to be outsourced to China. The Chinese labour force were willing to work for a fraction of their Western counterparts salaries, boasted colossal human capital and had a very underrated infrastructure that allowed for such goods to be transported quickly and efficiently. This helped fuel China’s lightning growth which has seen it transform from a developing country to a developed country in record time. But this has also seen a middle class emerge in China that has new demands. More emphasis now needs to be placed on the service sector for the economy to keep expanding at the same pace, as China’s grip on manufacturing is no longer as tight as it once was. Wages in the sector have been rising in the country, at around 20% a year, while China’s currency that had for so long been artificially kept weak, has been allowed to appreciate in the last few years. It now faces competition from its regional neighbours, as Vietnam and Bangladesh boast low cost workers waiting to be exploited by firms. But these countries don’t possess the same supply lines and pure number of workers as China, making them less serious rivals. Instead China’s biggest rival now lies below its biggest customer. Mexico is an attractive option for firms with its competitive costs (lower than China’s), large supply of workers and close proximity to America. The nation has come a long way, improving its infrastructure and enforcing its laws to a much higher degree than it did a decade ago. Of the $19.4 billion it gained in foreign direct investment in 2011, around half was gained in the manufacturing sector, while it has become the second largest supplier of electronic goods to the USA. HSBC even predicts that Mexico will overtake China and Canada as the biggest exporters to the USA by 2018. So next time you buy a product, you might not be surprised to see it originated in El Mexico.

Mexico’s PMI – which measures manufacturing output e.g anything over 50 is an increase and anything under is a decrease – has increased impressively over the last year. 

The second big change to the manufacturing sector which could kick off this year is the much heralded 3D printing. The ability to replicate products without fault could dramatically change the manufacturing sector just like robotic machinery once did. It could displace a lot of workers, as the need for humans to graft products would no longer be needed. Instead there would only be a need for employees who could operate the 3D printers, reducing the labour force considerably. That would have the knock on effect of reducing the need for out-sourcing (already on the wane) as the cost of manufacturing products would no longer depend on the wages of the local population. Instead it would make far more sense for 3D printing factories to be established in the home markets of the Western world, so that goods could be delivered fast and have access to modern technology far easier. The “ink” needed could also be very cheap for some products, as old products could be recycled to create the base materials for the 3D printed objects. While printing unique products for different customers would be rather easy, allowing for more artistic licence without the usual added costs. Alas, 3D printing is not yet ready for mass production, while some products would indeed remain cheaper to make from scratch rather than printing copied versions. But this could be the year it kicks off, as most of the ingredients are ready for factories to start trialing 3D printing in producing goods. 2013 might be the year where replicating products was proved to be viable and yet another nail in the coffin for the 20^th century manufacturing techniques.

The final economic trend for 2013 will be the battle between austerity and stimulus that has been building up since the financial crisis. Stimulus packages were the order of the day initially after the crisis to help economies lift themselves out of recession. But austerity then took over as governments looked to try and gain control over their inflated debts and deficits. Nowhere more than Europe has austerity been so devoutly defended, with Germany and the EU enforcing tough austerity measures upon the countries that received bailouts. This has had mixed success though, with Greece clearly in need of controlling its debts, but the likes of Spain actually rather in control of its finances until it started to implement poorly thought out austerity measures. At the end of the year, one of bailed out nations, Ireland will return to the bonds markets, after managing to return to a current account surplus and get its economy growing in 2011 and 2012. Ireland remain the model case for Austerity in Europe; after requiring a bailout in 2010, they have implemented tough austerity measures and repaired their economy (despite a still high budget deficit), so a return to the bond market would help prove austerity works when implemented well. But they remain the only working example right now, with most countries contracting badly from austerity measures, with Spain still not expected to exit recession this year. On the other hand, some countries have turned to stimulating their economy instead, banking that the resulting uplift in the economy will outweigh the debt added and help pay it off in the long run. For example Japan have recently announced a stimulus package equivalent to $116 billion, to try and lift the economy out of recession by spending government money on improving the country’s infrastructure; which provides jobs and also attracts businesses to the country. Critics suggest the money won’t be spent efficiently, while the stimulus package will only add to Japan’s considerable debt, already at 200% of GDP. But they aren’t the only country that have thought to spend their way out of their debts, with China and Brazil both launching stimulus packages last year to help reignite their economies after falling world demand for their exports. Maybe the best example to use is the USA, who largely ignored their considerable debt during Barack Obama’s first term (actually adding trillions of dollars onto it) but are now being forced to consider austerity. The looming fiscal cliff at the start of the year would have forced through considerable cuts in America budgets equal to 5% of their GDP, instead Obama and Congress were able to come to a short term solution to avoid such measures. But the debt ceiling must be re-negotiated soon and the long term problem of America’s rising medical costs must be dealt with sooner or later. This means America will be looking to implement austerity measures to help deal with their rising debt this year, probably with a mixture of spending cuts and tax increases if the democrats and republicans can ever agree. So if a conclusion is to be reached this year over Austerity or Stimulus in the battle to control countries debts, then America may be the deciding vote. If austerity can help America bring down its budget deficit and public debt, without tipping the economy into recession, then it might just snatch the win.

More talks like these are to be expected as America looks to battle its debts by enforcing austerity measures. 

 

2012 was an eventful year, containing the Olympics, the election Mr Hollande as France’s first Socialist President in decades, the election of Mr Morsi in Egypt as the Muslim Brotherhood’s first big win in an election, the re-election of Mr Obama  in the USA and the first example of a private firm venturing into space in the form of SpaceX. 2013 will have a lot to live up to, but if these trends prove correct, then it could prove just as eventful (hopefully minus an apocalypse this year).

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.

A Happy New Year?

As we head towards Christmas and the New Year, now is a good time to evaluate which economies are heading for troubling times in 2013. This isn’t so hard, with the world economy not exactly working in top gear, and the likes of even China appearing to slow down. But I have picked three countries that I believe are facing an especially tough and defining 2013.

First up is a struggling EU economy that could define how the rest of Europe solves the Euro crisis. No, it’s not Greece. It’s not even Spain or Italy. The country I believe is in considerable danger is France. One of the leading economies in the euro, its fate has large repercussions on the rest of the European Union. France has a host of problems; High unemployment at over 10% of the population, miserable GDP growth of just 0.1% this year and just 0.8% forecasted in 2013 (which is in itself seen as optimistic) and a budget deficit of 4.5% of GDP that needs to be brought down. Yet already the 2013 budget target of 3% of GDP seems unlikely. But worse than that is the longer running trend of the French economy.  France has over the last decades lost competitiveness to countries like Germany, with their products now either upmarket or non-existent. Even their food production is only surviving due to large subsidies from the French government and EU budget. Alongside this the French government is one of the biggest spenders in Europe, spending the highest proportion of its GDP  in Europe (57%) and racking up billions of public debt (equivalent to  90% of its GDP). But even these problems could be solved with significant reforms and cost cutting. The fact is however, that the French government doesn’t seem ready for such hardship. President Hollande campaigned on making the rich pay (with his famous 75% top income tax rate), not cutting budgets. While the likes of Italy and Britain employ heavy austerity measures and hard labour reforms to help fix their economies, France seems to be satisfied to keep an inflated government and unproductive economy. For now the nation remains under the radar of the markets, but this could quickly change in 2013, just ask Italy or Spain. President Hollande has only just started a 5 year term, if he doesn’t act now with time on his side, when will he?

Graph found at the Economist: http://www.economist.com/news/special-report/21566238-how-regain-competitiveness-doing-so-so. Shows Frances high public spending and low competitiveness. 

Next up on the list is one of the famed BRIC economies that seems to have lost its way. It may seem ridiculous to be picking a country that is set to have grown this year by 5.8% but India are in uncertain times. Inflation has been uncomfortably high for the last few years (currently near 10%) and is hurting the poor population of India. The Indian population relies on high growth of around 6% a year to keep lifting millions out of poverty, so the current slowdown of growth to just under 6% is worrying for the nation. This slowdown has occurred because India’s government is very badly run. It intervenes in the private market far too much, running important industries like the energy sector inefficiently. Corruption is also rife, leading to much of the money meant for those in poverty going into the pockets of local officials. The final nail in the coffin is a complete lack of reform in the last few years, with many markets rigid and inaccessible by foreign firms, leading to poorly run Indian firm producing below average goods and services. India’s growth was started by a series of reforms in the past that lead to greater competition and opportunities for the Indian population. A return to these policies would reignite the economy. But what makes me place India in this list is the complete lack of push for any such policies. Recent movements towards have creating greater competition in the country have lead to large protests and a standstill in the government. Even worse, the election in 2014 isn’t set to change anything, with the opposition just as bad if not worse than the current officials in charge. Change is not wanted, yet is exactly what is needed for the Indian economy to keep progressing forward. Standing still is going backwards.

India has a larger budget deficit and public debt than any other BRIC country in 2012. 

Finally, to complete my list, I end with South Africa. For so long the kings of Africa, their dominance is slowly fading. Growth of just 2.4%, high unemployment at 25% and a current account deficit (imports minus exports) of over 6% shows a leading country underperforming. Its crown is challenged by an oil backed Nigeria and a resurgent Egypt, while the smaller nations like Rwanda and Botswana are showing the larger nations how to successfully run an economy. Even its reputation as one of the most sophisticated nations in Africa is losing its shine, as the recent mining strikes show a deep unrest within the country. South Africa remains highly unequal, with a white South African (accounting for only 9% of the population) on average earning eight times more than a black South African. Its Gini coefficient (measuring inequality) has incredibly risen in the last decades from 0.59 to 0.63 (0=Perfect Equality, 1= Perfect Inequality). Education also remains a tragic failure, where the government has somehow managed to outspend every other African country yet still have one of the worst educational systems. Corruption has infested the current government, and with the next general election not till 2014, it seems unlikely anything will change in the next year for the good. Unemployment and poverty remain the big problem (with half the country still under the poverty line), but the problems are all interlinked. A poor educational systems produces unskilled labour, while high inequality keeps millions in poverty. If South Africa doesn’t start investing wisely into education, job creation and equality it is certainly set for a poor future. Don’t look now but South Africa’s crown may be slipping.

Unemployment in South Africa has been incredibly high for the last decade, one of many problems the country faces in 2013. 

There were a few more obvious candidates; Greece and the USA. But I decided against them for a few key reasons. Greece are forecasted to suffer another year of serious decline, but the IMF and the EU seem set on keeping Greece running, which in my view could help keep the economy progressing towards a better run state (with them already running a primary surplus). The USA could face a sudden recession with the fiscal cliff, but the problems are clear and I just can’t see America letting themselves go over the figurative cliff (even if that means kicking the can down the road).

The warnings of the fiscal cliff have been clear enough for America to avoid it. 

Even with my choices there are signs of progress. In France recently a report on the poor competitiveness of the country seems to have hit home, with President Hollande perhaps realising the true extent of problems he needs to overcome. While a crucial vote was won in the Indian Parliament that will open the retail sector to foreign competition.

Important steps maybe, but more is needed to avoid a year to forget.

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 29^th. 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.

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 http://www.palestine-primer.com/Palestine_Primer/Economy.html 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.

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 – http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/10/31/interactive-make-mitt-romneys-tax-plan-add-up/) . 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.

The Final Debate

For the last presidential debate in America, the subject was focused on Foreign Policy. Though if you consider all the foreign issues America has to deal with, it was a shame that the questions were fully focused upon just the Middle East and China. Iraq was mentioned, Iran was debated, Afghanistan was agreed on, Iran was debated some more, Syria received some sympathy, China was criticised and Libya was touched upon in parts (though Libya had already been discussed somewhat in the last debate).  The Euro crisis didn’t even get a sound bite despite having a large impact on the future of the American economy, the troubles in Africa and South America were hardly mentioned (though at least Mali’s troubles with an Al Qaeda based group taking over half their country were referred to) while the futures of possible danger countries like North Korea, Russia and China were largely ignored.

A touchy subject is avoided.

This didn’t come as a major surprise really, the debate was always going to be focused upon the latest media stories and the candidates can only answer the questions put in front of them (though they rarely stayed on subject anyway). But some more varied debate could have seen the American public learn more about how each candidate plans to lead America in the future.

Getting back to the debate, it seemed to end in a draw with some positives for each candidate, though both remained expectedly cautious. Barack Obama perhaps got in some “zingers”, like when he caught Mitt Romney out on his criticism of America’s decline in the size of the navy by pointing out America also had less horses and Bayonets and that their current navy was measured more on their capabilities than number of boats. But how did each candidate do respectively?

Starting with Barack Obama, he managed to perform a good debate; avoiding mistakes (a consistency he manages well), appearing experienced in his Commander-in-Chief role and providing a clear answer to the big Iran question. But it wasn’t all rosy, as he didn’t manage to catch out Mitt Romney on any major issues and surprisingly managed to become too aggressive at times (at stark contrast to his timid first debate). He did state clearly that he wouldn’t allow a nuclear Iran during his next term in office, would back Israel if attacked and would pull out soldiers from Afghanistan in 2014. But he was less clear on how he planned to stop President Assad from slaughtering his own people and didn’t offer any detail on how he was going to prevent Iran from gaining Nuclear weapons without using military intervention (with economic sanctions yet to have the required effect). He managed some cheap shot at Mr Romney’s past connections with Chinese companies stealing American jobs and at Mr Romney’s lack of experience in foreign policy. But when you consider this was Mitt Romney’s weakest area of debate, that Barack Obama had the killing of Osama Bin Laden to parade about and had 4 years of experience as Commander-in-Chief, then it was disappointing he didn’t win by a more convincing amount like Mitt Romney had managed in the economic debate.

The chaos in Syria continues, with neither candidate having a clear solution. 

Mitt Romney, as stated before, was facing his hardest debate. He doesn’t have any experience with the armed forces, chose a running mate with similar inexperience and has based his election campaign on America’s economy. So it was little surprise that he tried to bring the subject around to the economy when answering tough questions. He repeatedly suggested America was looking weak to the rest of the world because of its weakened economy and high debt, stating China didn’t respect America because of the amount of money America owed them. This wasn’t a bad argument, but his second point to try and suggest that Obama’s policies were appearing weak and apologetic, did not work quite as well. The argument lacked evidence when you consider Barack Obama had managed to play a hand in toppling Gadaffi (though he overstated America involvement) and had authorised the killing of Osama Bin Laden. Mitt Romney was persuasive though when he managed to direct the argument towards the economy, bringing up a good argument for investing more time with South America as their economy on the whole is as big as China’s and also again pointing out Barack Obama’s increase to the budget deficit. On other subjects Mitt Romney decided to stay conservative, vague and basically agree with Barack Obama, which may not have pumped up Republicans, but could have ensured undecided voters keep him in mind. In fact he managed to completely change his opinion on Afghanistan by agreeing that the troops should leave by 2014 (perhaps based on the heavy criticism Paul Ryan received in the vice presidential debate) and seemed reluctant to attack Barack Obama on the Libya fiasco (again maybe after the criticism he received in the previous debate). The only subject he mainly differed from Barack Obama was on China, where he surprisingly remained consistent in stating he would call them a currency manipulator. There could be drawbacks to this action, with some suggesting it could start a trade war, but again when confronted with this he managed to bring the argument back to economic terms and provide a convincing argument that the current trade deficit with China means it is in China’s favour to refrain from doing so.

Chart showing the trade deficit America has with China. 

So what have these debates resulted in?

The first debate saw Mitt Romney gain a big turnaround in the poles. His performance was good, but the real cause of the boost was the lack of confidence displayed by Barack Obama and the lowly position Mitt Romney had previously held (giving him an almost underdog status). Such low expectations meant that his good performance was perceived as a great one, with vice versa for Barack Obama. The second debate saw Barack Obama act more like his old self, challenging Mitt Romney on his tax numbers and goading him into some costly mistakes (like for example challenging Mr Obama’s word on how he described the killing of an American ambassador – resulting in Mr Romney looking petty). Barack Obama probably edged a victory, though again it was more in the context of his previously poor performance. That brought us to this final debate, where both candidates were rather cautious and nothing new was found out. It was probably a draw, with Barack Obama getting the more headline worthy lines, but Mitt Romney perhaps looking more attractive to the undecided voters than he had previously.

It’s hard to know the effect these debates will have on the actual election in two weeks time, though history suggests they can have a big effect, with Al Gore famously losing to George Bush after being outperformed in the election debates. But despite Mitt Romney probably doing better out of these recent debates (with his polls numbers decisively better off than before the first debate), Barack Obama is still just edging the race, which is how many had predicted the race to be previous to the debates, a tight and narrow win for Mr Obama.

Gallup found that after the first debate, Mitt Romney drew even with Barack Obama in the polls.

So while each debate was entertaining, I suspect not many have actually changed their mind on who they are going to vote for (if at all). Mitt Romney promises a better economy based on his vast experience in the private sector, but remains frustratingly vague on his budget plan and flips flops between policies. While Barack Obama promises more clear policies but continually has to defend a poor economic record during his first term. I believe Obama will win as his main weakness can still be blamed on the previous president and his policies, but he will have a lot to prove in his next term if he is to leave the White House with a respectable legacy.

Daily chart: The maths behind the madness | The Economist

Daily chart: The maths behind the madness | The Economist.

A great graph by the economist showing the different debt levels of countries and what the IMF is predicting in the next few years.