Tag Archives: Economic Development

Is the circular economy a utopian concept?

Recently at work I have been asked to look at the concept of the circular economy (CE) for an upcoming project.  You may have heard of the concept via the media, in fact you have probably been bombarded with advertisements with one of the most successful CE business models each day.  Studies even predict that the adoption of CE business models within the EU could lead to net materials cost savings worth up to $630 billion per year by 2025.  However, the more I read into the CE, the more I question whether it is a quasi-utopian concept.

So what is the circular economy?

Well, for the past one hundred or so years economic growth has relied on the ever increasing consumption of cheap and abundant natural resources.  In today’s economy resources are extracted, turned into products and eventually discarded.  This so-called linear economy, has been criticised as unsustainable by a number of economists.  For instance, in the UK alone 80% of products are discarded after a single use.

The CE is an attempt to decouple economic growth and prosperity from resource consumption.  In a CE, large amounts of raw materials are captured and reused within the economy, in what are termed resource loops. The system mimics self sustaining processes within the natural world whereby one organism’s waste is another’s food.

One of the key ideas behind the CE is that material flows can be differentiated into two types:

  • biological nutrients – which are non-toxic and can be readily returned to the biosphere, and
  • technical nutrients – which are designed to circulate at high quality without entering the biosphere

The fundamental principle here is that there is no waste.  Hence biological materials are simply composted whilst man made materials are designed to be used again with minimal energy and the highest level of quality retention.  This is where the concept differs from just recycling.  CE begins at the design phase where waste is ‘designed out’ of the final product and the product’s value is maintained over a number of uses.  On the other hand, recycling refers generally to a process whereby there is a reduction in quality and the material is returned as feedstock.

Access-over-ownership

One of the most interesting aspects of the circular economy is the concept of access-over-ownership.  Essentially this concept states as individuals we only require the services that goods provide, not ownership.  Renting and leasing are therefore key components of the model whereby the business retains ownership of the good and the consumer accesses the service it provides.  This not only incentivises the manufacturer to provide a high quality and durable good, but also reduces the quantity of the goods manufactured thus reducing the consumption of raw materials.

Mud Jeans is one business pioneering this type of access-over-ownership model.  Within the model, customers can rent jeans for €5 a month and after one year the users have three options: either swap their jeans for a new pair; pay an extra deposit of €20 and keep the jeans indefinitely; or return the jeans and end the contract.  For those that decide to keep the jeans there are added financial incentives to return them to Mud after usage.

The jeans are made with 30% recycled content and 70% organic cotton.  Once returned the jeans are processed in three ways.  If they are in good condition they are cleaned and re-used. If they are repairable the company will carry out the repairs and resell the items.  If they are beyond repair, the jeans will be returned to manufacturer whereby the materials are recycled.  The model thus divorces usage and ownership whilst simultaneously reducing the need for raw materials.

The problems

Whilst I have been generally intrigued with the idea of the CE I do have a number of reservations about the feasibility of such a concept.  Although Felix Preston rightly points out that mass paradigm shifts have happened in the past, such as the transitions to mass and flexible production, I believe a change of this magnitude would require, what is termed in development economics as a ‘big push’.  In this sense I believe our current path on a linear economy can be seen as a coordination failure i.e. many individuals want to invest in the CE approaches but the true benefits of doing so are only realised when others do the same.  As Preston points out (on page 15), for business moving towards a CE:

..there will inevitably be significant up-front investment costs and risks for businesses – e.g. retooling machines, relocating whole factories, building new distribution and logistics arrangements and retraining staff

Such high up front costs and risk may lock companies and industries into a linear economic model, unless there is concerted drive by economic actors to move to the CE.  To think of it in a more general way ask yourself the following question: why would I as a company invest heavily in a risky CE business model, when my competitors are not going to do the same?  It can therefore be argued that there is a need for governments to legislate and invest in a ‘big push’ towards the CE (something of which has arguably yet to happen).

Aside from this there is also the issue of developing countries.  According to McKinsey, developing countries account for 70 to 85% of the global resource productivity potential. However, although countries such as China are making strides towards promoting resource efficiency and the CE, there is still a lot to be done.  I feel one issue here is that the concept of CE could be seen as asking developing countries to forego a economic model that has brought prosperity to the developed world.

Developing countries may ask why they should pay, through investments in CE, when today’s developed economies harnessed the linear economy during their periods of industrialisation.  That is not to say that there aren’t benefits to moving to the CE for developing countries, but I do believe this could be a major stumbling block in the short term.  The issue is further compounded by the fact that the developed world already exports a significant amount of its waste to developing countries.

 Final word

This post has looked briefly at the aims and theory behind the CE.  It has also taken a short look at what I see as two of the biggest obstacles to its implementation.  It should be noted that in addition to these obstacles there are a number of political and logistical hurdles that have not been mentioned (Felix Preston’s paper summarises these well).

Although the title might suggest otherwise, this post should not be seen as an attack on the CE but rather a questioning of the concept’s feasibility in the real world.  It has also been intended to promote discussion of the topic and look at ways of circumnavigating the obstacles stated above – so if you have taken the time to read this post please feel free to leave your thoughts below.

 Photo courtesy of  woodleywonderworks

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How the economic machine works

This video by Ray Dalio is probably one of the most informative I have seen for a long time and it gives those without a background in economics a very simple and easy to understand model of what has been driving the recent financial crisis. It should be noted however that the model is very simplistic and doesn’t take into account a number of other factors such as international trade.

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What do all those numbers mean? Stock markets and their importance

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They feature in nearly every news bulletin, paper and website. Their ups and downs, bubbles and crashes are reported on a daily basis. Yesterday for instance saw a dramatic plunge in the values of stock markets across the world. However the reality is that for many people unfamiliar with the world of finance, ‘a one point increase in the NASDAQ’ remains an alien phrase. This post will attempt to provide a basic understanding of what stock markets are and what the indices mean for you and me.

Stock markets fulfill two main roles. Firstly they allow companies to raise extra funds by issuing shares without the need for commercial loans. The stock market brings together companies wishing to expand their operations and potential investors looking to gain a return on their savings. Stock markets are therefore an important source of investment for firms. Historically they have allowed for the expansion of today’s largest corporations such as Coca Cola, Microsoft and ExxonMobil.

Secondly stock markets act as a platform for individuals to buy and sell shares through the use of stock brokers. The ease at which shares can be brought and sold is one of the main attractions of the market. This is in contrast to other less liquid forms of investment such as real estate – which can not always be as rapidly sold without loss of value.

Stock markets therefore have a positive effect on the economy in a number of ways:

  • Firstly they allow companies to expand, creating jobs and new products for the real economy.
  • They mobilize savings by allowing private individuals to invest their idle cash or bank deposits into profitable enterprises.
  • Stock exchanges facilitate improved corporate governance. This is because public limited companies have to meet the demands of a more diverse range of shareholders and the regulations set out by the stock exchanges themselves to remain listed.
  • Stock markets allow for governments to raise capital by issuing government bonds (government loans in the form of an IOU) to fund different economic development programs such as infrastructure building.

An economy with a growing and sophisticated stock market is therefore generally associated with a highly developed industrial and service sector.

So what do those numbers in the news mean?

Generally in the news you will see a list of the differing indices which are used to gauge trends within the stock markets. Instead of looking at the value of just one company, indices attempt capture the value of a number of companies or a sector listed at the stock exchange. It therefore allows us to see any movements in the combined aggregate value of these companies. The value of such companies or sectors is measured in two ways.

The first most common method measures total market capitalization (the total market values  of all the shares of the companies e.g. price of share x number of shares) and then uses a mathematical transformation to bring the number into a more manageable range. This is because many companies have market capitalization values listed in the range of tens of billions of dollars. The impact of the change in a companies share price on the index is therefore proportional the companies overall market value.

The second less common method only takes into account the price of the shares. In this type of index each company makes up a fraction of the index proportional to the price of its stock. This type of measure however ignores the size of each company and has therefore been subject to criticism. The Dow Jones Industrial Average is an example of this type of index.

Now I am not going to become bogged down explaining how these indices are mathematically calculated as many methods exist and all are subject to their different critiques. The main point to take from this is that an index reflects a transformed aggregate value for a number of companies within the stock market with reference to a base year.

A rise in a stock market index therefore reflects a increase in the total market value of the companies in the index. Similarly a fall in the index reflects a decline of a the total market value of the companies in the index.

Indices also differ in their coverage. Some attempt to capture the trends of the global market such as the S & P Global index. Other measures attempt to capture the performance of national stock markets. For example, in the UK the main index used is the FTSE100. This index measures and weights the values of the countries top 100 companies. Inaugurated in 1984 at the base level of 1000, the graph below shows the various progression in the value of the UK’s top 100 companies since the index began.

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 Some indexes go further and attempt to capture the whole market. The Wiltshire 5000 index represents the market value of all publicly traded stocks in the US. Such an index is known as a total market index. Lastly, some indexes measure specific sectors such as biotechnology or real estate.

Interpreting the indices for the wider economy

Generally stock market indices are regarded as a barometer of economic development. When the economy is strong and growing, the stock market is assumed to be flourishing. Similarly when the economy shrinks, it is assumed the stock markets will be struggling.

However although this makes sense logically for many reasons this is not always the case and it should be remembered that the stock market and the economy are not the same thing.

For these reasons it is entirely possible that you may have a booming stock market within a struggling economy. This has been the case recently in the UK where the stock market has seen an upward trend whilst the economy has been sluggish. Consequently we must be very careful when interpreting the stock market and utilizing it as a barometer for the economy.

Instead the stock market indices reflect the views of investors and these views are hard to interpret. As Adam Davison of the NY Times rightly states a stock purchase form does not come with a ‘reason’ field. This problem is further compounded by the existence of ‘herd’ behavior in markets which can lead to market bubbles. Investors may purchase stocks just because they see others doing so thereby increasing the price of the stock. This in turn inflates the index of the market and if investors find they have invested in an bad asset (such as with the sub-prime mortgage crisis) it can lead to crash.

In summary, stock markets are an important mechanism for facilitating investment in the growth of firms. Stock indices commonly reflect the performance of a specific sector, a whole market or a number of influential companies. However due to the nature of trading and the narrow scope of many indices caution must be taken when relating such markets to the wider economy.

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Thatcherism – Some hard truths

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In recent news I have been particularly concerned by the vast outpouring of sentiment for Margaret Thatcher over the past day or so. The same rhetoric has been repeated over and over again such as, “She changed the world” and, “the greatest prime minister in modern peace time“. However the most astonishing comment has to be from a fellow named David Cameron who proclaimed, “She saved our country“.

Now I am against the need to follow the standard cultural etiquette of not speaking against someone just because they have passed away. Individuals, particularly influential individuals should be judged on their contribution whether dead or alive. The ability to do this however has non-surprisingly been attacked by many Tory affiliates, for instance former Tory MP Louise Mensch has tweeted, “Pygmies of the left so predictably embarrassing yourselves, know this: not a one of your leaders will ever be globally mourned like her”.

So lets look at the facts, in 1979 when she came to power the country was experiencing double digit inflation, many major industries were in decline and trade unions had brought the country to a standstill in instances such as the winter of discontent. However by a combination of sweeping changes such as privatization, deregulation, industrial relations reform, taxation and deflationary measures the country began to find its feet again. After an initial recession the end result was what has be termed an economic miracle. The graph below shows the change in both inflation and GDP since Thatcher was elected.

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This is what David Cameron was referring to when he proclaimed Thatcher saved the nation, GDP growth averaged 3.09% in the 1980s compared to 2.07% in the 1970s. Meanwhile inflation was reduced significantly to single digit values. However all too often politicians, the media and economists focus on such indicators as a sign of development and prosperity. There is a large debate within economics whether GDP is indicator we should be targeting when considering development and well-being. For instance, economist Richard Easterlin discovered empirically that found differences in income across countries and time did not signify a change in levels of happiness and well being. However he found within countries levels of income did positively correspond with levels of happiness.  The findings which became known as the “Easterlin Paradox” led Easterlin to theorize that changes in income do not affect happiness and well-being, relative income is what really matters. In this sense individuals derive happiness from being more well off than their peers, human beings are therefore constantly trying to “Keep up with the Jones”.

In this sense it could be argued that income inequality would be a better indicator to judge Thatcher’s economic performance. During her time in power the UK’s gini coefficient, a measure of income inequality with 0 representing a situation of perfect equality and 100 a situation of perfect inequality, increased from 27.39 in 1979 to 30.54 in 1980. Now this may not seem a great amount but in comparison from 1963 to 1979 (the furthest back the data goes) income inequality had only increased from 26.3 to 27.39 despite surges in inflation.

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Other measures of income inequality by the IFS estimate the rise in income inequality to be even higher (gini coefficients and inequality measurements are usually dependent on the method used and can vary considerably).

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In the above graph we can see that the level of inequality increased by nearly 8 points from 25.3 in 1979 to 33.9 in 1990. In addition to this the level of poverty also increased substantially during Thatchers reign.

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The graph above shows that the percentage of people living below 60% of the median income increased from 13.4% in 1979 to 22.2% by the end of her reign in 1990. The webpage from which these graphs came paints an even grimmer picture such as a rising gender pay gap and record unemployment.

Thatcher’s policies such as the deregulation of the financial markets; the weakening of the trade unions; income tax cuts and the adjustment of industrial policy have all been highlighted by a number of authors as contributing to a wider gap between rich and poor. Although her policies promoted economic growth, this growth was not inclusive and the majority of the benefits accrued to the top end of the income scale. Furthermore it could be argued that the her legacy of promoting the deregulation of financial markets started a inevitable slide towards the 2008 financial crisis.

The death of Margaret Thatcher therefore leaves us to look at how we judge economic performance and development. If economic growth is all that matters then Thatcher’s reign could be considered a relative success. However if we are more concerned with the wider benefits of such growth issues of income inequality should become more prioritized.  Unfortunately this seems to have bypassed our current leader who unquestioned claimed that Margaret Thatcher saved the country. The reality is however, that in the long term, Thatcher’s policies led to a sustained increase in income inequality, decreases in social cohesion and arguably an inevitable road to economic collapse.

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Combating Deflation – The Japanese Experience

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The recent announcement by Japan’s new central bank governor Haruhiko Kuroda to engage in a new round of quantitative easing and combat deflation has been met with a rather positive response. This round will increase the monetary base by around 60 to 70 trillion yen a year. The monetary base will increase from the current 29 per cent of GDP to 55 per cent by the end of 2014,  but such a policy does not come without risks.

Firstly we must ask why deflation is such a problem. In the scheme of things a falling price level is good for everyone, right? Well unfortunately deflation can lead to a spiral of reduced demand, production and prices, known as an deflationary spiral. If prices are falling one might ask themselves, “why should I buy now when next week or even next year the price of the item will be lower?” This may lead consumers to withhold demand, lower demand in effect leads to lower prices and at lower prices businesses will be willing to produce less. This in turn leads to lower wages and again decreased demand and the process continues…

Policy makers further fear deflation because it typically renders traditional fiscal policy ineffective. To boost the aggregate demand and prices, central banks will lower nominal interest rates to stimulate investment and make saving less attractive. However if deflation is present the real rate of interest, that is the nominal rate minus the level of inflation, may become negative. This is because the central bank can only lower interest rates to a floor of 0% and not beyond. Doing so would mean that banks would be effectively paying borrowers to borrow from them. Consequently traditional methods of monetary policy become ineffective when interest rates reach 0% in the face of deflation.

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Japan’s experience with deflation began in the 1990s after it the collapse of the real estate and stock asset bubble in 1990. During the 1980s the Japanese economy had been booming and this had led to a substantial increase in the amount of available credit. As a result assets such as stocks and real estate inflated well above their intrinsic values whilst banks continued to lend to investors. When the prices collapsed in 1990 triggered by the an interest rate hike, many banks were left with a large proportion of bad loans. The economic slump meant many firms could not repay their loans and furthermore the the banks could not retrieve the full value of their loans because the price of the collateral (real estate) had declined sharply. Instead of accepting these losses and liquidating these malinvestments the banks were propped up by the government in the hope that asset prices would recover. This in effect tied up essential economic resources and led to a marked decrease in domestic investment. This is the beginning of what most commentators have began to call the lost decade.

Since this crisis Japan has been marred by further crises which have hit aggregate demand and thus put deflationary pressure upon prices. Such crises include the Japanese financial crisis and Asian financial crisis in the latter half of the 1990s; the collapse of the US dot com bubble in the early 2000s and most recently the 2008 global financial crisis. All of which have damaged the Japanese financial system and its ability to provide capital.

In addition to this other factors have hurt demand whilst supply has increased. For instance, the rising cost of imports for many Japanese firms has meant that they have been forced to streamline operations and cut costs. This has meant many job losses despite increases in labour productivity. As the graph below shows, taken from Musha research, wages have fallen significant since 1990 despite increased productivity which goes strictly against micro economic theory.

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Japanese firms have realised that they can cut investments in labour because productivity has increased. The result is an excess supply of labour which has driven down wages and ultimately consumption. The above factors have all contributed to the deflationary output gap, meaning aggregate supply is outpacing aggregate demand.

To deal with deflation the Japanese have resorted to a unconventional form of monetary policy named quantitative easing. Quantitative easing works through the central bank purchasing financial assets such as bonds, in an effort to increase the reserves of the banks and hence the money supply. The main difference from traditional open market operations is that the purchases made are long-term rather than short-term bonds and that it has a money supply target rather than an interest rate target in mind.

The Japanese government’s goal here is to stimulate investment and spending in the economy. Furthermore it hopes by increasing the money supply the value of the Yen will decrease thus making Japanese exports more competitive. However as noted earlier the policy has risks both for Japan and the wider global economy.

Firstly if the inflation generated by quantitative easing rises more steeply than wages this could reduce both Japanese living standards and consumption. Devaluing the currency by increasing the money supply could push up the price of Japan’s principle imports – oil and gas. As a result the cost of heating, transportation and lighting would increase thus damaging consumption of other goods. In the worst case scenario the policy of quantitative might  lead to higher than expected inflation or even hyperinflation if too much money is created. Furthermore there little is known about how to stop the process once it does begin to work.

Secondly the such inflationary pressure could increase potentially lead to an increase in interest rates. If this were to happen the cost of servicing Japanese debt could increase considerably making the fiscal position unsustainable. This is extremely relevant for an economy such as Japan with gross national debt sitting at 229.773% of GDP .

However on a more fundamental and global level the policy could lead to a race to the bottom or currency war as other countries rush to devalue their currencies. Japan has now joined both the US and UK in delivering such a policy and other members of the international community have already begun to expressed their concern. Currency wars as seen from history lead to no winners as such crises cause uncertainty and therefore reduce international trade.

In conclusion, it seems that this policy is a short-medium term remedy for Japan’s longer term problems. The country must look at the structural causes of it’s economic stagnation, for instance the “demographic time bomb”, policy mismanagement and issues of accountability and transparency. Japanese business is renown for investing in long term solutions perhaps its time the government took the same approach.

 

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Slovenia and Luxembourg – the next victims of Cyprus contagion?

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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.

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 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.

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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.

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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.

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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.

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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.

company-worker-working-on-connet-pipeline-at-the-construction-site-outside-of-kyaukmaeThe construction of the new Shwe gas pipeline to China is expected to earn Burma $29 billion over the next 30 years.

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.

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