Monthly Archives: March 2013

Slovenia and Luxembourg – the next victims of Cyprus contagion?

Image

Since the debacle in Cyprus one question has been at the back of every commentators mind: who’s next? Naturally those countries with the same characteristics as Cyprus have been main contenders – those with a large financial sector relative to their economy.

Slovenia in particular has been singled out as the next potential recipient of a bail out by the Euro zone  The country has a large financial sector equaling around 130% of GDP. Although at much smaller level than Cyprus at 700%, the IMF estimates that up 20% of the loans in Slovenia’s biggest banks are non-performing or near default. This could put more pressure on the Slovenian government to help bail out the sector. The markets have already reacted to such foreseen events. Ten year bond yields rose to a record 6.8% yesterday, whilst two year yields have tripled in the past week rising from 1.2% to 4.26%. Furthermore the cost of insuring debt against default has significantly increased as shown by the graph below.

Image

 These movements show that investors are factoring in the higher risk of government default and contagion from Cyprus. Such increases mean higher costs for government borrowing which will in turn make raising any funds to recapitalize banks harder to obtain. To further confound the situation, the IMF has predicted that the economy will decline this year by 2% and the recent political turmoil has done little to reassure investors.

Luxembourg too may become another victim of the Cyprus contagion. As the graph below shows Luxembourg’s banking assets sit above 2,500% of GDP by far the largest of any other Euro zone member.

Image

As the Cyprus situation unravels investors will look to other euro zone economies which they may consider to have unsustainable large financial sectors. In this sense they are unsustainable because the sectors have become so large that the government would not be able to fund a bailout. Luxembourg however does have one advantage, most of the banks in the country are foreign owned subsidiaries, with domestic banks only accounting for 8% of the sector. This means in the event of a major banking crisis these banks may be aided by their parent banks. Nevertheless, the risk still exists and such support is never guaranteed especially if such parent banks are facing difficulties in their own countries.

One thing has become evidently clear from the crises in both Cyprus and previously Iceland. Promoting yourself as a tax haven for large financial companies and allowing the sector to far outgrow the size of the economy is an unsustainable development strategy. The risks of a banking sector collapse certainly outweigh the benefits as shown by the current situation in Cyprus. Furthermore promoting this strategy in a currency union further confounds the problem, when the ability to ease monetary policy is foregone.

Unfortunately the handling of the Cyprus situation, most importantly the deposit tax, has made investors even more wary of leaving their money in such countries. The Euro zone now finds that although it may have solved one crisis, the length of time and the conditions applied now mean that more crises are bound to appear elsewhere.

Advertisements
Tagged , , , , , , , , , ,

Japanese Gender Inequality and the Demographic Time Bomb – The Costs of Hard Work

Japan consistently ranks as one of the most developed countries in the world, however it may be a surprise to many that large and persistent gender inequalities still exist. Although Japan has seen increased levels of female education participation this has not translated into gender equality in the labour market. The country consistently ranks low on a number of gender equality measures. Most recently the country fell 3 places to 101st out of 135 counties in a recent survey by the World Economic Forum. The OECD reports that the gender pay gap remains high at 15% and this rises to 40% for older workers – this is the second highest rate among OECD countries. Female labour force participation sits at around 63% in comparison to 83% for men, if the current trend continues it could lead to a reduction in the size of the labour force by 10% over the next 20 years. Furthermore senior Japanese business women are a rare occurrence, the OECD shows that Japanese women only account for 3.9% of listed company board members this again ranks second lowest among OECD countries.

Such inequalities are compounding because gender equality is considered beneficial to many areas of economic development. Increasing female employment in general increases the size of the labour force and thus GDP. In addition gender inequality may lead to labour market distortions whereby men are employed in positions where women could be more productive. Recent estimates by Kathy Matsui of Goldman Sachs, finds that closing the gender employment gap could expand the Japanese workforce by 8.2 million. This she asserts could lead to a increase in Japan’s GDP of around 15%. Coupled with this some studies have found that in general women tend to save more than men. For instance Sequino and Sagrario Floro (2003) find that a one percentage point increase women’s share of the total wage bill tends to increase aggregate savings by approximately one quarter of a percentage point. This means for countries such as Japan that increased female labour force participation could lead to higher rates of saving and hence increased investment.

So what are the problems Japan faces? One of the most potent statistics is that 70% of women in Japan leave the workforce as soon as they have their first child. The ratio of Japanese mothers with children under six who work (34%) remains extremely low compared to 76% in Sweden, 61% in the US, 55% in the UK, and 53% in Germany. Matsui’s report suggests that once Japanese women leave the workforce they generally find themselves returning to limited part time employment due to increased responsibilities  She explains the “typical” lifestyle for a Japanese women is as follows;

  1.  Graduate from high school or university and find a job (average age: 18-22 years)
  2.  Get married (age: 25-29 years)
  3.  Become pregnant, then drop out of workforce in order to raise the child(ren) (age: 30-39 years) 
  4. Once the child(ren) become(s) independent, resume work (approximate age: 45+ years) 
  5. Even if work is resumed after age 45, it is typically limited to part-time employment, since by this stage either her husband’s or her own parents often begin requiring convalescent support.

A particular issue is that of lack of available and affordable daycare. For instance Tokyo government statistics show that there are more than 20,000 children waiting for daycare places in the city. In addition to this the work culture in Japan means that men tend to devote less time aiding in childcare. The graph below from Matsui’s report shows the average number of hours spend by men on household activities and childcare.

Image

The graph shows that on average Japanese men spend less than an hour on these combined activities. To further compound this problem only 2.63% of men take paternity leave due to the fear of losing their jobs. Such statistics show the increased pressures placed upon Japanese mothers to leave the labour market.

In addition, these issues have led to two principle problems, firstly women who are having children are not working. Secondly those that are working are  not having children. Consequently Japan now has one of the lowest birth rates in the world with 1.3 births per women and now faces the prospect of seeing its population decline by a third over the next century if trends continue.

The irony of such problems is that Japan’s famed work culture and ethic which once drove the country’s rapid development  is now partly responsible. The pressures of long hours and vigorous commitment mean that the country is now facing a demographic time bomb whilst many of its potential female workers remain under utilized. However government policy to provide more daycare centres and child bearing incentives is only one half of the solution. As a recent survey by the The Yomiuri Shimbun shows the share of Japanese who thought wives should stay at home jumped 10.3 percentage points to 51.6 percent between 2009 and 2012. The dilemma therefore is therefore not only policy problem but also a cultural issue as well.

Tagged , , , , , , ,

Facing the resource curse: The Challenge for Burma

 

Burma is a country with vast reserves of natural resources. It’s territory includes substantial reserves of natural gas, oil and minerals. Despite this Burma remains one of the poorest countries in the world. However the establishment of democracy within the country has now meant many international sanctions have been lifted and the country is now open for business. Dependence on resource wealth however may limit Burma’s progress towards development.

The resource curse, coined by the economist Richard Auty in 1993, describes the observation that resource dependent countries tend to under perform on a number of development indicators compared to their resource poor counterparts. For instance GNP per capita decreased by 1.3% per year in the OPEC countries during the period 1965-98 compared with a 2.2% average per capita growth in all lower to middle income countries.

Burma has already contracted one of the symptoms of the resource curse – the Dutch Disease. The disease describes how the increases in wealth brought about by a resource boom may cause an appreciation in the real exchange rate in turn decreasing the competitiveness of other exports such as manufactured goods. Burma presents a clear example of this, natural resources have helped drive up the value of the country’s currency, the kyat, from over 1400 to the U.S. dollar in 2007 to less than 700 in 2011.

In addition to this much of the valuable land and resources are controlled by the military and political elite. Although Burma has established democracy, there is a significant lack of transparency regarding resource earnings and how they are spent. The government does not report annual figures regarding resource revenues and foreign oil companies do not publish how much and how they pay the established military regime. The military still operates firmly outside the law in Burma, the constitution means that the one quarter of all government seats are reserved for members of the army. As a result levels of corruption are particularly high in Burma. Transparency International’s Corruption Perceptions Index (CPI) ranked Burma 172nd out 174 countries, showing the perceived extent of the problem.

This poor institutional and economic environment means that upcoming expansions in the oil and gas industry could further hamper development and fuel corruption. With many western countries lifting economic sanctions upon Burma, the increased levels of trade could further drive up the value of kyat prolonging the effects of the dutch disease. In addition the characteristics of such industries mean that they typically provide few benefits for the wider population. Oil and gas extraction tends to be highly capital intensive employing a small number of workers and concentrate wealth in the hands of the few.

On a broader scale such industries can decrease the need for high quality education. Notable economist Thorvaldur Gylfason argues that resource rich countries tend to neglect education because resource extraction is primarily low skilled. This can have a knock on effect for the development of more labour intensive industries such as manufacturing which require higher levels of education. Furthermore a recent article in the guardian reports that many families are now buying plots of land in oil rich regions with the hope of striking lucky. This has meant that many children now find themselves working in oil fields with obvious consequences for their education and health.

Although such abundance of resources should be a blessing for Burma in the long run it could be a substantial burden. The country lacks the institutional framework and regulation to successful reinvest the earnings of such industries into development. Its inefficient tax regime means little of the wealth generated by the resources ends up in the hands of the poor. On the other hand the high levels of corruption and state control mean such wealth is destined to end up in the hands of the influential few.

Burma could learn a lot from the case of  Botswana which is one of the few countries that has beaten the resource curse. This success has been directly attributed to its good governance and the integrity of its public institutions. The country has good levels of democratic accountability, an independent judicial system and a free media. All of which have contributed to Botswana exhibiting low levels of corruption – the country ranks 30th on Transparency International’s CPI outperforming even some western countries such as Spain.

Despite signing up to the Extractive Industries Transparency Initiative, Burma still has a long way to go. There is a strong need for the development of a robust institutional and legal framework to help utilize resource wealth for poverty reduction. Until this is established the opening of trade and construction of more gas pipelines could further hamper efforts towards such development goals.

Tagged , , , , , , , , , , , , , ,

Visualizing Income Inequality in the UK

Image

I thought I would share this image as it was the first to really draw my attention to income inequality and the massive wealth disparities in the UK. The image above taken from an article by The Atlantic represents a famous picture of income inequality construed by the Dutch economist Jan Pen. Using data from the UK in 1971, he asked us to visualize a parade of people which would take one hour to pass, however this parade would have two intriguing features. Firstly the people involved would be arranged by their levels of income – the poorest at the front leading to the richest at the back. Secondly the heights of the people in this parade would be directly proportional to what they earn. Pen asserted that the following parade would look rather peculiar. Instead of a steady progression of people with increasing heights during parade, we would observe mostly a continuous line of dwarfs and then unimaginably tall giants at the very end.

The unfortunate part about this story is that since Pen came up with this image the number of dwarfs has increased, whilst the giants have become even larger. Since the data he compiled in 1971, the UK’s level of income inequality has risen considerably. The UK’s gini coefficient, which takes a value between 0 (perfect equality) and 1 (perfect inequality), sat at 0.26 in 1979 whilst the last estimate in 2005 put the score at 0.34 (Data from UNWIDER). When the next inequality figures come out the gini coefficient is surely set to rise whilst the some early reports have suggested that income inequality is now at its highest since the 1930s. Substantial cuts to welfare, rising inflation and tax breaks for the top earners will all further add to this problem and ultimately lead to negative effects both socially and economically.

 

Tagged , , , , , , , , ,

Convergence: The African Evidence?

Image

So this is only a short post today because I have been working the last 8 days in a row. The graph above, taken from the Economist, shows the recent forecasts by the IMF on African economic growth in the next 5 years. What is surprising from this graph is that 7 of the 10 fastest growing economies in the world are forecast to be African over the years 2011-2015. Could this be further evidence of the Solow growth model’s prediction of convergence? This model predicts that poor countries will tend to catch up or converge to the income levels of rich countries in the long run. Put simply, this is because in capital scarce countries an extra unit of capital increases productivity by a larger amount in comparison to a capital rich country. To visualize this, imagine a company with many workers but no machines, the addition of one machine will increase productivity more relative to the addition of that same machine to a workforce which already has many machines – this is known as the law of diminishing returns.

Transfer this to a global scale and in theory the greatest returns to capital investments should be in those countries abundant in labor but with low levels of capital.  Africa seems to be fulfilling this prediction, the graph predicts that Africa will soon overtake Asia as the fastest growing continent, whilst the western industrialized economies struggle. Whilst much of this growth has been attributed mainly to commodity price increases others have argued that the general macroeconomic climate in Africa is improving . An article  by the McKinsey Global Institute suggests that investment is now increasing due to the fact that governments have undertaken macro and micro economic reforms to increase investment. Additionally it argues the ending of many hostilities has enabled political stability and a safer environment for investment both internally and from overseas.

However Africa’s continued growth and eventual convergence is dependent on a number of conditions. Firstly many African economies are highly geared to natural resource production. Recovering commodity prices since the 2008 global crisis have been a leading driver of growth in many African economies, however such prices are vulnerable  to collapse and exhibit high levels of volatility.

Secondly many African countries are still lacking the institutional frameworks to sustain long term growth. Corruption, anti-competitive practices and state capture are still rife over the continent and this needs to be addressed. However this is improving with 36 out of 46 governments making it easier to conduct business in their respective countries according to the World Bank.

Lastly climate change may pose a significant challenge to this continuing growth. It is believed that such change is making farmland more arid and wet areas wetter. The world bank forecasts that 9-20% of Africa’s arable land will become less farmable by 2080. Furthermore increased incidences of flooding may cause substantial economic damage. For example in the year 2000 flooding in Mozambique cost the country an estimated $550 million and lowered the national GDP by 1.5 percent.

Tagged , , , , , , , , , , ,