Tag Archives: International Development

Are Hungary’s Unorthodox Economic Policies working?

In 2010, Hungary elected the Fidesz party and its leader Viktor Orban into power. Since then the government has implemented a range of unorthodox economic reforms which have drawn criticism from economists and financial analysts alike. However recent reports indicate that the Hungarian economy may have finally exited a year long period of negative growth. The Hungarian Central Statistics Office estimates that the gross domestic product of Hungary ‘increased by 0.5% in the second quarter of 2013 compared to the corresponding period of the previous year’.  In addition the budget deficit now sits at 1.9% of GDP, well under EU mandated target of 3%. This means that Hungary now displays one of the lowest deficits among the EU 27 and is free from the EU’s Excessive Deficit Procedure monitoring procedures.

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Inflation has also dropped to a record low. The Hungarian Consumer Price Index now sits at the lowest level since Hungary’s transition to a market economy. In July it fell unexpectedly to a new low of 1.8% (year on year) compared to 1.9% in June.  When this drop is decomposed we can see that food prices declined by 1.4 percent from the previous month in July, whilst household energy costs fell by 0.4 percent.

Naturally the Fidesz government has claimed that its unorthodox policies are at the heart of this change. What I find interesting about such policies is that they could prove very popular in many European countries, such as my own, where there is a feeling that many banks ‘got let off the hook’.

Since coming to power Orban has introduced biggest tax in Europe on banks and financial companies and imposed large levies upon energy, retail and telecommunications companies. In addition Orban has announced plans to fix the exchange rate for loans taken by individuals in Swiss Francs. In particular, this attempt to lessen the debt burden for such individuals could lead to losses in the banking sector of up to 4.1 billion. In another popular move the government forced energy firms in January to slash their prices by 10% with the promise of another imposed 10% cut in October. Further unorthodox policies include interfering with central bank independence, nationalizing $14 billion in assets from private pensions and a steep 18% hike in the minimum wage.

However there are many who question whether such policies are sustainable in the long run.  Many economists are concerned that such policies will threaten foreign direct investment (FDI) into the country. The general argument is that the current regulatory unpredictability (i.e. high taxes on banks) may damage investor’s confidence and lead to large outflows of capital. This is significant because Hungary’s economy is heavily dependent upon foreign direct investment. For instance UNCTAD’s new inward FDI contribution index, which measures the importance of FDI to a country’s economy, ranks Hungary first among the 79 nations studied.

As discussed by the IMF, the large levies placed upon banks may place an additional drag upon growth. Hungary’s financial sector is heavily dependent upon foreign funding which is worth around €35–40 billion annually. To put this into perspective, foreign firms account for 90% and 70% of the insurance sector and investment banking sectors respectively. The deleveraging process now present in many financial institutions has meant that Hungary has experienced negative credit growth for the last several years and the IMF predicts this could further hinder economic growth.

In addition to this some economists are concerned that the new central bank chief Gyorgy Matolcsy (regarded as Orban’s ‘right hand man’) will opt for a plan of quantitative easing in order to stimulate the economy. This could be problematic because injecting money into the economy may increase imports and the debt burden whilst, at the same time, foreign capital is leaving the country. This could significantly affect Hungary’s ability to finance itself.

Despite these concerns there are still some positive signs for the economy. Germany, which accounts for 24.7% of Hungarian exports, has registered strong growth in the last quarter and now many expect the economy to return to a steady rate. The Hungarian economy will also receive a boost from the opening of a new Audi plant in Gyor which equates to €900 million in additional investment. Other investors have also expressed their desire to keep operating in the country despite regulatory pressures. In a recent interview with FDI Intelligience magazine,  Rhydian Pountney of the UK based engineering company Renishaw PLC stated that,

We are acutely aware of the political issues of the regime but we take the long view and we are not likely to be scared off by the ups and downs of politics,”

Could economists be wrong about the impending crash in FDI? Data from the OECD also suggests otherwise. According to preliminary estimates FDI inflows are now above pre-crisis levels at $13.5 billion. Conjointly the data shows that FDI outflows have also increased in 2012, to $10.6 billion – however this figure is still $2.9 billion below inflows.

Although I do not agree with many of the Fidesz party’s other policies, I believe it will be interesting to observe whether its economic policies will pay off in the long run. If so, it would be interesting to see how the economic community accounts for the success of a number of policies which have aimed to boost consumption at the expense of inward investment.

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Removing the World Bank Blinkers – Income Categories and Foreign Aid

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In one of my very first posts I looked at the recent decision by the UK government to cut foreign aid to India. One of the main justifications used by policy makers was that India had now reached a level of development which enabled it to fight poverty on its own. Arguably the main driving force behind this opinion was India’s graduation to middle income country status (MIC) in 2007. However these average income based measures adopted by the World Bank and OECD have rarely come under close scrutiny. Whilst income has always been highly correlated with many other development indicators, such measures can still mask many important macro level issues.

In a 2011 publication by the ODI, Jonathan Glennie highlights some of the main problems which can evolve from using such measures. Firstly, although low income countries (LICs) tend to have larger proportions of people living in poverty, the bulk of the world’s poor live in MICs. For instance in 1990 94.4% of those living on less than $1 a day were situated in LICs, however by 2008 this number had diminished to just 23.3%. This shift has been mainly attributed to the five major countries known as the PICNIs who recently graduated from LIC to MIC status. The group includes China (which reached MIC status in 1999), Indonesia (1999), India (2007), Nigeria (2008) and Pakistan (2008); all which combined account for 70% of the world’s poorest individuals.

Next Glennie explains that such measures have been criticized for being arbitrarily set with bandwidths that exhibit little rationale. For instance in table 1 we can see that the MIC category has an extremely large bandwidth.

Table 1. World Bank Income Categories

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This means that for at country at one end of the spectrum can be up to 12 times more richer than those at the the lower end. Unfortunately, as highlighted by Glennie, such categorizations can lead to countries receiving less in aid once they cross over into the MIC category. Prominent examples include Japan which has reduced the proportion of its total aid dedicated to MICs from 66% to around 34% over a ten year period. Similarly countries such as Canada and the Netherlands have cut theirs by around a third.

This highlights a worrying trend whereby aid is being shifted away from MICs despite the fact that they contain the highest number of poor individuals. The Economist also stresses this issue by stating that policymakers may soon face a dilemma where global poverty is mostly focused in countries which may be seen as rich enough to not require aid. Naturally, with the current economic difficulties,  policymakers and the media in the west will look to these arbitrary categories to justify cuts in aid.  In contrast, if more multidimensional indicators of development were accounted for such cuts would be more difficult to justify.

For instance former international secretary Andrew Mitchell has recently proposed for aid to be withdrawn from Ghana, Uganda and Zambia by stating,

“The aim of aid is to do itself out of business so it should not be needed any more. Ghana, Uganda and Zambia are countries making significant progress and are candidates.”

Both Ghana and Zambia achieved middle income country status in 2011 and Uganda is expected to reach the threshold by 2017. On this basis alone it would be easy to accept Mr Mitchell’s claim. After all the word ‘middle’ conjures up connotations of faring okay or not doing too bad. Its the center ground, not too poor but still striving for top. However look at a multidimensional indicator of development such as the UN’s Human Development Index, which takes into account statistics such as life expectancy and education, and the picture changes dramatically.

In the latest 2012 rankings all three countries rank outside of the top 100 countries, Ghana ranks 135th, Uganda 161st and Zambia 165th. With a total of 186 countries included in the measure these countries no longer reflect the middle ground. Likewise it is hard to justify that these countries are making ‘significant progress’ in relation to the rest of the world. If you click on the graph below you can also see that the countries also exhibit high levels of poverty (Y Axis),  in Zambia for instance 68.5% of the population live on less than $1.25, and score among the highest for gender inequality (X Axis) – I also added India’s position on the graph to further highlight how misleading the MIC classification can be.

Graph 1. HDI Data showing headcount poverty and gender inequality measures.

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Source: UN HDI Website

After observing these statistics it is extremely hard to accept that these countries are prime candidates for the immediate withdrawal of aid. Although they may be exhibiting high levels of economic growth and a middle income status these countries still have a long way to go when we look at a broader definition of development.

A new focus is therefore needed, policymakers must shrug their dated view that most poor people live in poor countries, this is no longer the case. Aid allocation models should no longer be modeled upon World Bank income categories. Instead they should take into account absolute levels of poverty and other social indicators of deprivation. In this sense aid should be focused on the poorest and most deprived individuals not the poorest sovereign states. After all this is the key principle for giving aid in the first place.

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When Economists Get It Wrong! The Worst Economic Predictions Of All Time

Economics is often described as the ‘dismal science’. Unlike other traditional sciences, economics rarely provides a simple solution to present day issues. Furthermore economists have a poor record of predicting the future. Even notable economists such as Joe Stiglitz agree that economists only get it right at best around 3 or 4 times out of ten. However it should be acknowledged that economic forecasting is a difficult art at best – human behavior is forever changing and the economy is a complex mechanism with many working parts. Nevertheless I thought it would be entertaining to highlight some of the most wildly inaccurate forecasts in recent times. Here are some of the best…

1. The Great Depression

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Almost every economist failed to predict the great crash of 1929. Most famously the economist Irvine Fisher (who Milton Friedman regarded as “the greatest economist the United States has ever produced”) predicted that stock market prices had reached “what looked like a permanently high plateau”. A week later the stock market crashed and didn’t bottom out until 1932, with the Dow Jones recording a 88% total loss in value.

Even the great John Maynard Keynes failed to see the fore-coming shock allegedly stating in 1927 that “We will not have any more crashes in our time.” 

2. The Japanese Automobile Industry

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In 1968 the BusinessWeek magazine stated that, “With over 15 types of foreign cars already on sale here, the Japanese auto industry isn’t likely to carve out a big share of the market for itself.” Fast forward to the present day and Japanese car manufactures now account for around 36% of the total US car market. Add in other Asian car makers and this figure jumps spectacularly to around 49.9%

3. The Soviet Economy

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In 1989 nobel winning economist Paul Samuelson asserted in his best selling textbook Economics that, “The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.” Two years later the Soviet economy collapsed.

4. Dot Com Bubble

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Numerous predictions failed to foresee the dot com bubble. For instance in 1999 Smart Money magazine highlighted AOL, Yahoo and MCI WorldCom as some of its top picks for the forthcoming year. By 2001 AOL had lost 70% of its stock value after its merger with Time Warner. Later in 2002, MCI WorldCom became involved in one of the largest bankruptcy cases the US had ever seen.

However no prediction about the Dot Com boom was as profound as that made by James Glassman and Kevin Hassett in 1999. In their book, “Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market”  Glassman and Hassett argued that the Dow Jones Industrial Average may rise to 36,000 within just a few years.  After reaching an initial high of 1,750.28 in January 2000, the Dow Jones fell to a low of low of 7,286.27 in October 2002. Even today the average remains still below 15,000. Glassman and Hassett’s book can now be found on Amazon for $0.01.

5. The Credit Crunch and Financial Crisis.

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In 2008 the sub prime mortgage crisis led to the collapse of a number of financial institutions and a global economic recession. However before 2008 many economists had an optimistic outlook for oncoming years, growth had been steady and inflation was finally under control. Despite the impending financial crisis many economists and policymakers were contend with the health of the banking sector. 

For instance in 2005 Alan Greenspan declared, “The use of a growing array of derivatives and … more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions … Derivatives have permitted the unbundling of financial risks”.  

Similar optimism was forwarded by individuals such as David Lereah, chief economist for the National Association of Realtors, who in February 2006 published “Why the Real Estate Boom Will Not Bust,” which was essentially a guide for homeowners on how to profit from the expanding real estate market!

However these predictions fall short in comparison to the statement made by Federal Reserve Chairman Ben Bernanke  in 2007 who famously declared that, “The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”

 

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Opening Pandora’s box – the G8 turns to Nestle and Monsanto to combat hunger

So the London Hunger Summit has culminated in a doubling of funds devoted to tackling hunger. The summit has promised to increase annual funding from rich countries to $900 million (currently $418 million) by 2020, equating to a total of $4.15 billion to tackle malnutrition. Eradicating extreme hunger by 2015 is one of the key Millennium Development Goals set out by the developed world. As of present, malnutrition accounts for 3.1 million child deaths per year, furthermore it is a major cause of stunted growth which has been shown to have implications for both a child’s future education and health prospects.

Although this agreement is being hailed as a ‘historic moment’ in the battle against hunger, the new commitment still falls short of the mark whilst creating a smokescreen for more damaging projects which have already been initiated. Firstly, the respected medical journal The Lancet claims that an extra $9.6 billion is needed to effectively reduce the level of malnutrition by 1 million. Clearly again when it comes to aid, we are falling short. For instance, in 1970 rich countries promised to give 0.7% of their total income as aid. However only 5 countries have met this target, known as the G07 these countries include Norway, Sweden, the Netherlands, Denmark and Luxembourg.

Secondly despite this lack of apparent aid there is another more worrying trend at work, governments are turning to the market to solve problems of agricultural underdevelopment. Whilst David Cameron would like us to focus on this new deal, the announcement overshadows other talks which may in fact worsen the problem of hunger in Africa.

In 2012 the G8 launched its new so called alliance for food security and nutrition. This alliance involves new deals between some of the largest multinational companies in the world and African governments. In a nutshell this initiative is designed to loosen up regulatory constraints on international capital flows and thus stimulate investment into African agriculture. The aim is to stimulate a so-called second ‘Green Revolution’ whereby African farmers benefit from improved access to inputs and regional markets.

African agriculture in general is described as inefficient by many economists. The continent has an abundance of fertile land however the sector is mainly dominated by many small farmers who produce for themselves and sell their surpluses mainly at the local markets. Consequently productivity remains stubbornly low due to a lack of capital, and the necessary infrastructure. Many multinational companies therefore see Africa as new frontier to make profits. So far companies such as Monsanto, Syngenta, Yara International, Cargill, DuPont, and PepsiCo have pledged to invest $3.5 billion in the African agriculture sector.

But hang on a second haven’t we been here before. In the past Western governments have dictated the terms of many aid agreements and promoted the freeing up of markets with disastrous results – just observe the results of previous IMF and World Bank led structural adjustment programs. Furthermore such past programs left many African governments cash strapped therefore making them more willing to accept any new influxes of investment. This means that the new alliance has undermined and bypassed democratically agreed initiatives such as Maputo declaration. This is particularly evident from the recent letter  addressed to the African Union by 15 African Farmer Federations against the new initiative. 

Likewise the takeover of thousands of hectares of land by multinational companies could have a significant impact upon farming communities. These commonly named ‘land grabs’ have been criticized for their negative impacts upon small scale farmers. In many African countries there is a lack of enforced private land ownership, a world bank study for instance found that only between 2 and 10% of the land is held under formal land tenure. As a result large land acquisitions by MNCs in the past have tended to displace small local farmers to less fertile lands or destroy their livelihoods completely. A special UN report further argues that large scale land acquisitions can heighten the problem of rural to urban migration forcing many into urban slums in search of work.

For me this new paradigm shift to the private sector represents a serious threat to international development. As argued by Sophia Murphy’s blog, companies are not charities, they are there to make a profit. Furthermore although they are bound by law they are not as Sophia argues bound by public interest. This is most pertinently shown by the one of the cooperation frameworks in Mozambique which requires the Mozambique government to,

1) Systematically cease distribution of free and unimproved seeds except for pre-identified staple crops in emergency situations.

This, as argued by a recent guardian article, condition will no doubt serve to lock farmers into buying expensive seeds from the private sector and corporate monopolies.

The proposals therefore reflect to me the burgeoning influence of large cooperations in every aspect of our policy making today. More importantly it reflects an attempt by the G8 to offload the burden of global food security and mask its failure to meet the targets it set in the past.

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The Next Global Crisis – The Carbon Bubble

The Next Global Crisis – The Carbon Bubble

This combined video and graphic provides an clear insight into what could potentially bring about another global economic crisis – the so called carbon bubble. As more and more investors continue to inflate the prices of fossil fuels, trillions of dollars are becoming increasingly at risk as these resources may remain in the ground permanently. If the bubble bursts it could plunge major financial centers such as London and New York into crisis with widespread effects for the global economy.

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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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