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Analysis News

Russian Aggression in Georgia and Ukraine: Powerful and Worrying Parallels

Introduction

Ever since Ukraine was attacked on 24 February, the Georgian people have expressed their full support for the besieged country through protests, volunteering, donations, etc. Ukrainian flags can be seen hung on every balcony, window and door in the downtown area, the suburbs, and so on. Every evening, thousands gather in the city center to display solidarity with Ukraine.

Parallels between the invasion of Ukraine and Georgia (2008)

For many Georgians, including myself, this invasion of Ukraine is eerily similar to that of the Russian invasion of Georgia in 2008. The parallels are indismisible. During the 2008 war, Russia recognised two Georgian breakaway regions – Abkhazia and South Ossetia – and stationed its troops there. Since then, Tbilisi has pushed even more strongly for closer integration with the West, via closer ties to the European Union (EU) and the North Atlantic Treaty Organization (NATO), even if membership in neither body seemed immediately likely. Similarly, in Ukraine in 2022, Russia recognized the independence of two breakaway regions, Luhansk and Donetsk. In order to “defend” the two proclaimed independent states, Russia then conducted a “special military operation,” which lead to the current situation.

Georgia’s reaction

Despite these parallels and the broad public backing for Ukraine, the Georgian government has tiptoed around the crisis, fearing the consequences of provoking its powerful northern neighbor, Russia. The day after Russia invaded, Georgian Prime Minister Irakli Gharibashvili said his government would refuse to join any Western sanctions on Moscow, dismissing them as unproductive. Despite citizens’ anger, Gharibashvili has remained cautious. This is partly due to the real economic crisis that could occur if Georgia imposes sanctions, as well as the Georgian Dream Party’s proclivity to support Russian actions. But despite the government’s hesitance, its divisions with the Kremlin are increasingly on display. On 28 February, the National Bank of Georgia said it would act “in accordance with the international resolutions and standards and cannot and will not help evading implementing these sanctions”. On 3 March, Georgia, along with Moldova, followed Ukraine’s lead in filing a formal application for EU membership.

While building more contacts with Russia, Georgia has been feeling increasingly frustrated with the lack of real prospects of joining the EU or NATO. Since 2014, when Georgia signed an Association Agreement with the EU, it started adjusting its laws and economic policies to meet Europe’s criteria for accession. In an attempt to build support among NATO powers for its bid to join the alliance, Georgia kept its troops in Afghanistan until the very last weeks before the U.S. withdrawal. But these investments were not enough to overcome resistance among European and U.S. officials and politicians who see the downsides of Georgian membership in either organization as outweighing any benefits. Many existing members argue that Georgian membership would anger the Kremlin and deepen its conflict with the West, reducing rather than increasing security for all.

Conclusion

Georgians can feel the agony that a Russian invasion brings, having fought our own war with Russia almost fourteen years ago. But many in the country’s leadership believe saber-rattling and diplomatic protests could put Georgia high on President Vladimir Putin’s radar, leading to problems in the long-term. Hours before Russian tanks rolled into Ukraine, a senior Georgian official told civil society representatives that the leadership often has to choose between a “bad option and a worse option. Unfortunately, this is our reality”.Russia can easily, cheaply and effectively harm Georgian stability by leveraging its influence in the breakaway regions whose pursuit of self-rule Moscow champions and where its troops are already stationed. Its border guards patrol the South Ossetian line of separation with Georgia, including within a few hundred meters of a major highway linking Tbilisi to Georgia’s Black Sea coast and in close proximity to the Baku-Tbilisi-Supsa pipeline that delivers oil from Azerbaijan to Europe and elsewhere. The line of separation in this area seems to be creeping steadily forward into the Georgian government-held areas – and there may be little Georgians can do about it.

These aggressive tactics make the Tbilisi leadership wary. A small shift of the line that brings more territory under the control of the breakaway regions could displace thousands of people. Even more worrying to Georgian officials is the possibility that Moscow could exploit any small incident along the line to resume a military invasion and take even more Georgian territory. Georgia, like several other former Soviet states, can ill afford, militarily or economically, to pick a fight with Russia. Despite the show of Western resolve over Ukraine, as far as sanctions and military equipment are concerned, Georgia, smaller, less significant and farther away, fears being left alone to face Russia.

Sources

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Analysis News

Sanctions imposed on Russia: a big change to daily life

Introduction

This year, on the 24th of February, the world witnessed the Russian invasion of Ukraine. After rising tensions, the Russian Government decided to start the ‘special military operation’ which has since claimed thousands of lives. As a result of this conflict, many countries were quick to impose strict economic sanctions on Russia, which have already had their effect on the Russian economy. But what are the consequences of such sanctions on daily life in Russia?

What sanctions have been imposed?

Many countries, among them the US, UK, New Zealand, and the EU member countries, immediately imposed different sanctions to try and stop Russia from further military actions. The more or less immediate reaction of the US government was to ban the export of certain technologies to Russia, which would “make it harder… to modernize [Russia’s] oil refineries.” (Al Jazeera) However, one of the most significant actions the US took was banning Russian oil, which is one of Russia’s biggest exports. Among many others, the EU froze the European assets of Russian President Vladimir Putin and his foreign minister Sergey Lavrov. Russia’s ally country, Belarus, also suffered some consequences as the EU banned imports of products from tobacco, mineral fuels, cement, steel, iron, etc. Many different companies such as IKEA, Spotify, and Apple have also decided to leave Russia. Among them are also Visa and Mastercard who have suspended operations in Russia. This has already had its effects on the Russian economy because people are unable to complete transactions.

Impacts on daily life in Russia

When the war started and the sanctions were imposed, the Russian rouble “plummeted…, leading many retailers to raise their prices.” People living in Moscow believe that while food may not disappear, prices will probably rise exponentially. “On 20 February I ordered groceries for 5,500 roubles [about $57; £44] and now the same basket costs 8,000,” says an EU citizen living in Moscow. While certain retailers are simply limiting the amount of products people can buy, others have “agreed to limit price rises on some staples to 5%”. Moreover, there has been a more than 10% increase in the prices of smartphones and televisions, but many of them quickly sold out before the companies left the Russian market.

International impacts

Perhaps one of the most significant sanctions was one imposed by the US when it banned imports of oil and gas from Russia. The UK has also followed in the US’s steps and has started to “phase out oil imports”. The European Union said it would “move to end its reliance on Russian gas”. 

Why is this important? Along with Iran and Qatar, Russia is home to the largest reserves of natural gas. Half of the world’s natural gas reserves in 2020 were accounted for by the three aforementioned countries. In 2021, 45% of the EU’s gas imports and 40% of its entire gas consumption came from Russia. Despite the EU and other countries announcing plans for ending their reliance on Russian oil and gas, it seems as though these sanctions will have certain long-lasting consequences. As soon as the US stopped such imports from Russia, oil and gas prices started to rise and the same is expected in other countries that have imposed similar bans.

Conclusion

Sanctions imposed on Russia have so far affected its citizens much more than the people with the power to stop the war in Ukraine. However, their long-lasting effects on the conflict remain to be seen. It is true though, that bans on Russian oil and gas from some of the major countries in the world will have great consequences for the world’s economy as people are realizing their economic dependence on Russia and governments who support Ukraine will try to distance themselves from such policies and trade in the future. Daily life in Russia, although already hard, is expected to get harder, as products disappear and soon enough, jobs might also vanish. In this case, Russia will have a very hard time getting its economy back on track and the lives of its citizens back to normal.

Sources

Al Jazeera Staff. “Infographic: How Much of Your Country’s Gas Comes from Russia?” Www.aljazeera.com, 17 Mar. 2022, http://www.aljazeera.com/news/2022/3/17/infographic-how-much-of-your-countrys-gas-comes-from-russia-interactive. Accessed 19 Mar. 2022.

—. “List of Sanctions against Russia after Ukraine’s Invasion.” Www.aljazeera.com, 3 Mar. 2022, http://www.aljazeera.com/news/2022/2/25/list-of-sanctions-on-russia-after-invasion.

—. “US Bans Russian Oil: What Is next for Oil and Gas Prices?” Aljazeera.com, Al Jazeera, 9 Mar. 2022, http://www.aljazeera.com/news/2022/3/9/us-bans-russian-oil-what-does-this-mean-for-oil-prices.

Badshah, Nadeem. “Visa and Mastercard Will Both Suspend Operations in Russia.” The Guardian, 5 Mar. 2022, http://www.theguardian.com/world/2022/mar/05/visa-and-mastercard-will-both-suspend-operations-in-russia. Accessed 19 Mar. 2022.

Hanbury, Mary, et al. “Here Are the Major US and European Companies Pulling out of Russia Following the Invasion of Ukraine.” Business Insider, 10 Mar. 2022, http://www.businessinsider.com/list-all-the-companies-pulling-out-of-russia-ukraine-war-2022-3#28-tiktok-28. Accessed 19 Mar. 2022.

Shamina, Olga, and Jessy Kaner. “Russia Sanctions: How the Measures Have Changed Daily Life.” BBC News, 13 Mar. 2022, http://www.bbc.com/news/world-europe-60647543.

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Analysis News

Political Stability Continues to Rock Haiti

Background Information

Haiti’s political climate has been nothing short of troubled essentially since its independence. A result of a weak economy brought on by 17th-century colonial tactics and compounded by numerous natural disasters, Haiti is home to one of the most corrupt and turbulent governments in the world. It is this climate that gave rise to President Jovenel Moise, a man whose presidency was consistently marred with accusations of corruption and dictatorial tendencies. It is also this climate that led to Moise’s eventual assassination at the hands of still at-large gunmen on July 7, 2021. Tensions began to rise immediately afterward, with the line of political succession being called into question. Soon after, on August 12th, a large earthquake rocked Haiti, adding a humanitarian crisis to the already existing political crisis in Haiti.

The Interim Government

Ever since July 2021, an interim government headed by Prime Minister Ariel Henry has been running Haiti. This interim government has also faced massive scrutiny as it works to heal the nation. There have been accusations that Prime Minister Henry was supposedly involved in President Moise’s death, along with accusations of corruption. This interim government‒ and therefore the government officials’ terms‒ ended on February 7, 2022 as this was the day when President Jovenel’s term was supposed to end (he had vowed to step down on this day). While it has been relatively calm since then, it is evident tensions are rising again as various civil organizations call for different plans of action.

The Rise of Civil Society

Following the events of Summer 2021, gang violence began to completely take over many Haitian communities. With the nation’s government in such a weak place, citizens began to turn more and more towards civil society groups to do something about the chaos around them. One of the more prolific of these groups is known as “The Commission for the Search for a Haitian Solution to the Crisis.” The main goal of this group is to restore Haiti’s democracy. They are planning to do this by firstly calling for a two-year transition government, holding fair and safe elections in 2023, and by restoring public order by, in part, dealing with the gang crisis. The detailed plan they published for this is known as the Montana Accord.

What Comes Next for Haiti?

Prime Minister Henry along with the rest of this government have stated that they are planning and organizing elections and adopting a new constitution. However, people are naturally questioning the legitimacy and fairness of these elections. Additionally, many are saying that anything Prime Minister Henry and the rest of his government do is not valid anymore as all of their terms officially ended on the 7th. On the other hand, the Prime Minister’s supporters are saying that he and everyone else that he works with can only be legally be removed by Parliament, which is currently not running as the previous members’ terms expired without new elections being held. 

Either way, the current Prime Minister’s plans are evidently at odds with the Montana group’s plans, which has already decided on who they want their interim President and Prime Minister to be. They have announced their choice of Jean Fritz to be the interim President and Steven Benoît to be the interim Prime Minister, along with several other people in a paired-back version of the current government. 

On top of all of this, the United Nations has chimed in, stating that it would like to see an election in the island nation before the end of the year. As for what comes next? All bets are off with Haiti seeming to venture farther and farther into an era defined by instability.

Sources

https://www.cfr.org/in-brief/assassination-haitian-president-jovenel-moise-what-know 2/19/22

https://www.france24.com/en/americas/20210916-haiti-government-begins-unraveling-as-newly-accused-pm-fires-justice-minister 2/19/22

https://www.nytimes.com/2021/07/19/world/americas/claude-joseph-haiti-stepping-down.html 2/19/22

https://news.un.org/en/story/2022/02/1112262 2/19/22

https://www.wlrn.org/news/2021-09-28/civil-society-solution-can-non-governmental-groups-fix-haitis-governmental-crisis 2/19/22

https://theglobalamericans.org/2022/02/haiti-betting-on-the-montana-accord/ 2/19/22

https://www.miamiherald.com/news/nation-world/world/americas/haiti/article258543193.html 2/19/22

https://www.reuters.com/world/americas/haitis-henry-urges-elections-amid-calls-transition-government-2022-02-07/ 2/19/22

https://www.nytimes.com/2022/02/06/world/americas/haiti-opposition-group-montana-accord.html 2/19/22

Categories
Analysis

Evaluating the effectiveness of a tax on a good with an inelastic demand

Introduction

Price elasticity of demand (PED) refers to the responsiveness of quantity demanded to a change in price. A type of price elasticity of demand is inelastic PED. Inelastic PED displays a low responsiveness of quantity demanded to a change in price (Inelastic PED = % change in price / % change in quantity demanded).

Cigarette Taxes

Governments are making an effort to reduce smoking by substantially increasing taxes on cigarettes. Taxes is a type of price control which has the responsibility to decrease the production and consumption of goods. A tax would be shown on a market diagram through a leftward shift of the supply curve. This indicates that the quantity supplied would decrease and would create a new equilibrium with the same demand curve at a new point where the price would be higher and both quantity supplied and demanded would be lower. The increase in price is explained as taxes are placed on the factors of production, which increases the cost of production. This in turn decreases the quantity that can be supplied at a limited cost. Therefore, an increase in price would be due to an increase in the cost of production to supply the goods, in this example, tobacco. 

However, it is important to note that Tobacco is assumed to have an inelastic demand. As mentioned before, this is because tobacco is addictive and consumers, especially those with a high income, would choose to purchase similar amounts of tobacco even if the price increased. However, there still would be a responsiveness, as low income consumers’ ability to purchase tobacco decreases as tobacco now makes up a higher percentage of their income. Therefore, the responsiveness of quantity demanded would change, but it stays significantly low compared to the change in price. 

Tobacco as a Demerit Good

Additionally, tobacco is a demerit good. A demerit good is a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves. Most demerit goods are addictive goods, and therefore, tend  to have an inelastic demand. This means that if the price increases, the quantity demanded would decrease by a lower rate — only a very small percentage of consumers would choose to no longer buy the good. These people would likely be those who are no longer able to afford the good after the price increased (low income consumers).

Tobacco having an inelastic demand displays why the government’s efforts of reducing smoking would not be effective. This is because a good with an inelastic demand would only increase the profit that suppliers receive, and the consumers would pay more because the quantity demanded would go down by a small percentage only. And therefore, placing a tax on a good with an inelastic demand would not be effective and would not reduce smoking, causing the government’s goal to not be achieved.  Alternative measures that would rather be more effective would possibly include education campaigns. A lot of people who buy cigarettes do not understand the harmful impacts of the demerit good. If people understand the effect it holds on a human body, there may be a greater change in the quantity demanded of tobacco than a change in price would. Additionally, governments should possibly promote the use of alternatives by subsidizing them, such as nicotine patches or electronic vapes. These alternatives could help consumers reduce their dependence/addiction on/of the demerit goods. This overall would be a more effective way governments could possibly best reduce smoking.

Sources

  1. Wikipedia
  2. Elasticity vs. Inelasticity of Demand: What’s the Difference?https://www.investopedia.com › … › Microeconomics
  3. Tax Definition & Meaning – Merriam-Websterhttps://www.merriam-webster.com › dictionary › tax

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Analysis

Turkey’s Financial Setback

What happened?

Istanbul: State data revealed that the annual inflation rate in Turkey has surged to a 20-year high of 48.7% despite months of assurances by President Recep Tayyip Erdogan that the soaring figures were just temporary and that his government could ease the pain on Turks weighed down by rising living costs. Turkish citizens are the most affected since prices of consumer goods rose by 11.1% from December to January, according to the Turkish Statistical Institute. Analysts predicted that the prices of consumer goods increased between 9% and 10%.

Moreover, the Turkish lira (Turkey’s currency), lost 44% of its value in 2021 in a rout driven by the president’s refusal to raise interest rates as the inflation consistently climbed. Evidently, the currency’s turbulence has hit Turks hard, as the value of their salaries dropped and costs of goods and energy dramatically increased. The president has prioritized credit and exports, while constantly arguing against economic orthodoxy that raising interest rates worsens inflation rather than taming it. 

How did this happen?

Nations around the world have been grappling with price spikes caused by supply chain snarls and shortages of raw materials due to COVID-19. However, inflation in Turkey has been exacerbated by a dramatic fall in the value of the Turkish lira, which lost more than 40 percent of its value against the United States dollar last year. The lira’s crash in the final quarter of 2021 was triggered by a series of central bank interest rate cuts championed by Turkish President Recep Tayyip Erdogan, who still insists that lower interest rates combat rising inflation – a view that runs opposite to mainstream economic theory, which holds that lower borrowing costs typically increases price pressures thus leading to lower purchasing power in all.

“We are in sorrow to see our yearly inflation hitting 36 percent,” said Erdogan. “Nevertheless, as a government that managed to decrease inflation to 6 percent, we will repeat our success to protect Turkish citizens from financial troubles.”

Attempt to combat inflation by increasing minimum wage

To help cushion the blow of rising prices, the Turkish government raised the minimum wage by 50 percent and boosted the government match on private contributions to public pensions. 

However, the minimum wage hike was also accompanied by price increases in regulated sectors of the economy. Electricity tariffs have shot up by 125 percent for higher-demand customers and 50 percent for lower-demand residential customers. Natural gas prices have gone up 50 percent for industrial use and 25 percent for residential use. The cost of public transportation in Istanbul has also seen a drastic increase by 36 percent.

Therefore, the government has attempted to assist the poor in this financial crisis while the burden has partially fallen on middle-class consumers.

Politics and Inflation

Turkey’s opposition parties have seized upon the variation between official TurkStat inflation numbers and what many members of the public and experts think. Ali Babacan, a former Erdogan ally who served under him as finance minister and now heads the Democracy and Progress Party, called TurkStat the “Institute for Adjusting Numbers” in a tweet shortly after the December inflation figures were announced.

Last month, during a live television broadcast, the head of the largest opposition party, Kemal Kılıçdaroğlu, attempted to visit TurkStat’s head offices in the capital Ankara to inquire about how inflation is being calculated, only to be turned away. Thus, it is evident that the Turkish government  is trying to hide their numbers while reassuring the citizens through futile attempts.

A new economic model?

Treasury and Finance Minister Nureddin Nebati outlined Turkey’s new economic path to investors in London, pledging to keep the exchange rate stable, bring inflation down to single digits and keep dollarization at bay.

Speaking to investors and bankers in meetings, Nebati also said that the government would soon announce a new scheme to get households to convert holdings of gold into Turkish lira.

President Recep Tayyip Erdoğan has been endorsing a model based on lower borrowing costs, which he says will boost production, employment and exports, and also eventually help Turkey solve its chronic current account deficit problem and contribute to stabilizing the Turkish lira.

Gold Savings Scheme

Two investors who attended meetings said the minister had told them about the plans to ensure part of the $250 billion-$350 billion worth of gold held by Turkish households would find its way into the domestic savings system.

“The important thing for us is the stabilization in the exchange rates. With this package, we will have put the gold under-the-mattress into the system, which is estimated to be around 5,000 tons of gold equivalent to 250-350 billion US dollars (the “under-the-mattress” term refers to a long-held tradition in Turkey of turning to gold to safeguard wealth and storing it at home).

A certain amount of this will support the Central Bank of the Republic of Turkey (CBRT) and meet the need for foreign exchange, he noted. “But most importantly, it will shore up the Turkish lira, which forms the basis of our model.” The government will make announcements soon on how to convince people to let go of their gold holdings. An investor stated that if the gold finds its way back into the banking system, it will certainly help to broaden the monetary base in terms of the Turkish lira.

Borrowing

Investors are also eyeing Ankara’s foreign borrowing plans. The Treasury did not immediately comment on the possible sale. According to Refinitiv data, Turkey is due to pay off a $2 billion eurobond on February 21th and a $1.1 billion domestic bond on February 25th.

Nebati also said at investor meetings that the government had held very productive talks with Abu Dhabi, Saudi Arabia and Israel in recent days, and swap lines were being agreed upon. He declined to give further details.

In conclusion, more details on the new economic model are yet to arrive. Most of the government’s efforts have gone in vain – the Turkish citizens have been hit hard due to this crisis with a hike in the prices of basic necessities such as gas, food and transportation.

Sources

https://www.dailysabah.com/business/economy/turkey-pitches-new-economic-model-signals-new-steps-to-shore-up-lira

https://www.aljazeera.com/economy/2022/1/7/just-how-bad-is-inflation-in-turkey-it-depends-on-who-you-ask#:~:text=The%20lira’s%20crash%20in%20the,ho

https://www.dailysabah.com/business/economy/turkeys-inflation-highest-since-2002-hitting-487

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Analysis

Bottleneck Recession in Germany: when will the situation improve?

Introduction

It is no surprise that the COVID-19 pandemic has damaged many of the world’s biggest economies. Last year in Germany, however, economists started predicting something called a “bottleneck recession”. Many of the materials that German firms need for production of goods are in short supply, hence harming the supply chain of the economy. But when will the German economy bounce back? And what will be the consequences of such a recession?

What are supply bottlenecks?

One of the most important issues to consider here are supply bottlenecks. A simple analogy for a ‘bottleneck’ would be a machine that is not working efficiently, and hence a long waiting period appears until the final result is delivered. 

In general, this occurs when price increases (inflation) result in an increase in the price of wages as well as raw materials. This causes a decrease in aggregate supply (amount of total production) of an economy. And because the demand for goods does not change (meaning people still want the same amount of goods as before), firms have to increase prices of the goods. The effect is that the increased cost of production is passed onto the consumers by firms.

Recent developments

Global supply chain bottlenecks have been one of the biggest problems in 2021 for many countries. One of the most affected economies was Germany because exports of cars, machine tools and other goods make up approximately half of its economic output. In the US, economic output depends on only 12% of  these types of exports. This sort of dependence on manufacturing and trade makes countries like Germany more susceptible to issues in the supply chain. 

Put simply, if factories do not have the necessary raw materials for production of goods, their economic output and amount of exports will decrease and hence harm the economy. 

It should be mentioned that economic output may have increased in November of 2021, but it also decreased by that same amount in December 2021, hence canceling out any growth seen in the German economy. And with the current Omicron outbreak, it is unlikely the situation will improve anytime soon. Production cuts, staff shortages and restrictions are all results of rising infection rates. Combine this with increasing costs of energy and the country’s going into the aforementioned bottleneck recession. 
However, the future isn’t all uncertain for Germany’s economy. Many think spring will “mark a resumption in the pandemic rebound”. It is expected that “energy prices [will be] digested and supply-chain problems [may be] eased by then” which would lead to growth in the second and third quarters of 2022.

Impacts

Germany already faced consequences of the supply chain bottleneck in 2021 with its car sales rapidly shrinking and “Volkswagen AG deliveries [dropping] to the lowest in a decade, despite robust orders” 

4.1% was the earlier estimate of growth in Germany in 2022, which has now been lessened to 3.6%, mainly because tensions between Russia and Ukraine may result in augmented energy prices, even more so than beforehand. 

All of this was and will be the result of the bottleneck recession in Germany. However, such bottleneck issues in many economies can lead to “corrective behavioral changes over time”. Instead of focusing on efficiency, many countries that did go through supply chain bottlenecks this past year, will hopefully focus on making their economies more resilient as well, to avoid such setbacks in the future.

Conclusion

Today, Germany’s economy is still struggling because of supply shortages, with economic growth declining and the inflation rate increasing in 2021. But there is much hope for the next few years. Germany’s economy is expected to pick back up in the spring of 2022 as infection rates will hopefully decrease and make way for the gains that will likely take place in 2023.

Sources

Deutsche Welle. “Germany’s Bundesbank Lowers 2022 Economic Growth Forecast | DW | 17.12.2021.” DW.COM, 17 Dec. 2021, http://www.dw.com/en/germanys-bundesbank-lowers-2022-economic-growth-forecast/a-60156000.

Ewing, Jack. “Fears of a ‘Bottleneck Recession’: How Shortages Are Hurting Germany.” The New York Times, 5 Oct. 2021, http://www.nytimes.com/2021/10/05/world/fears-of-a-bottleneck-recession-how-shortages-are-hurting-germany.html.

Kenton, Will. “Cost-Push Inflation.” Investopedia, 30 Sept. 2020, http://www.investopedia.com/terms/c/costpushinflation.asp#:~:text=Cost%2Dpush%20inflation%20occurs%20when. Accessed 9 Feb. 2022.

Randow, Jana. “Bloomberg – Are You a Robot?” Www.bloomberg.com, 14 Jan. 2022, http://www.bloomberg.com/news/articles/2022-01-14/german-economy-heads-for-recession-after-shrinking-last-quarter. Accessed 9 Feb. 2022.

Rees, Daniel, and Phurichai Rungcharoenkitkul. BIS Bulletin No 48 Bottlenecks: Causes and Macroeconomic Implications. 2021.

Weber, Alexander. “Omicron, Supply Shortages Risk Pushing Germany into Recession.” Www.aljazeera.com, 28 Jan. 2022, http://www.aljazeera.com/economy/2022/1/28/omicron-supply-shortages-risk-pushing-germany-into-recession. Accessed 9 Feb. 2022.

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Analysis

Georgia’s Ambitions for a Regional Transit Hub

Introduction

Since the dawn of time, Georgia has remained at the crossroads of Europe and Asia. It lies in the Caucasus and is the only country in the region that has access to the sea. The government of Georgia has realized the full potential of turning Georgia into a transit powerhouse. 

Over the past few years, Georgia has been heavily investing in improving it’s connectivity with its neighbors, including Russia, by building higher capacity highways and repaving pothole-ridden roads. By 2032, it is expected that Georgia’s main economic artery, the E60, will be motorized. This corridor will allow for more traffic on the E60, or S1, the only artery that links west to east Georgia. 

A picture of the E60 currently in Zestafoni. 

Present Situation

Currently, the E60 is full of heavy duty trucks while being an open access two-lane road. The road is prone to damage and often closed due to the weather. This weakens Georgia’s main economic artery as it limits the ability to exchange capital and goods. Therefore, it also raises the costs of companies to ship across the country or to other countries. This results in many shortcomings such as limiting Georgian exports and hampering the prospects for many companies here.

In turn, this makes Georgia reliant on foreign imports, which means that Georgia consistently runs a current account deficit. To be honest, Georgia has been running a trade deficit since gaining independence. Therefore, the Georgian Lari must be strong in order to make imports cheaper, otherwise there will be imported inflation triggered by rising import prices. 

Plans of the Georgian Government

With this in mind, the Government of Georgia has decided to convert the E60 into a motorway which will allow for faster transits between Azerbaijan and Turkey, as well as improving the Georgian military road S3. 

Current roadmap of Georgia 

This will reduce the cost of transportation of goods and capital, therefore, reducing the likelihood of imported inflation, along with increased competitiveness of Georgian firms as costs will be reduced. Other smaller upgrades on the S12 and S2 are underway which will further reduce the costs of transportation in Georgia which will help Georgian firms and make Georgia a transit powerhouse in the Caucasus.

Conclusion

A comparison of Georgia to its neighbors. 

Regardless, there is much work to be done as shown above. This can be touted as a success in increasing the potential output of Georgia, but it is hard to say this will help increase it to its full potential as Georgia still needs a lot of work in many areas of infrastructure which the Government, in its new 10 year plan, has laid out. With further improvements in these fields, it is safe to assume Georgia will increase its potential output and keep growing at a rapid pace. 

Sources

https://tradingeconomics.com/georgia/current-account

https://agenda.ge/en/news/2021/2082

https://www.oecd-ilibrary.org/sites/c9c594ac-en/index.html?itemId=/content/component/c9c594a%20c-en

Categories
Analysis

Evaluating different measures of economic development

Introduction

Economic development is an improvement in the general standard of living in a country achieved through better education and medical services, improved infrastructure, a more equitable income distribution, and protection of the environment (sustainability). Economists have long attempted to measure the level of economic development in a country. In 1990, the human development index (HDI) was developed. Since then, further economic development indicators have been developed as well. In this article, I will look at three popular methods of measuring economic development: the human development index, the happy planet index, and the gender-related development index.

Human Development Index (HDI)

During the creation of the HDI, there was an emphasis that “people and their capabilities should be the ultimate criteria for assessing the development of a country.” The HDI assesses the health factor by the average life expectancy at birth, the standard of living factor by the gross national income (GNI) per capita, and the education factor by the “mean years of schooling for adults” and the “expected years of schooling for school-aged children starting school.” 

Some critics have argued that there are problems with the way the HDI is measured. For example, economists have criticized that the HDI “correlates factors that are more common in developed countries.” Including only one of these correlated values — such as a higher level of education leading to a higher GNI per capita — may give a better representation of a country’s well-being. Furthermore, there are possible ethical issues with the HDI not taking into account factors such as inequality, poverty, and gender equality. Lastly, some believe that the structure of the HDI implies that a person’s life expectancy has economic value, which would be unethical.

Happy Planet Index (HPI)

The Happy Planet Index (HPI) measures the level of sustainable wellbeing in a country. More precisely, it gives economists an indication of how likely it is that a nation’s population will be able to lead a long, happy, and sustainable life. The HPI is calculated by multiplying a country’s well-being by the life expectancy and dividing by the ecological footprint of a country. According to its proponents, the HPI has the advantages of offering a clear path to a sustainable and fair future by “combining life satisfaction with ecological aspects” and being relatively easy to comprehend.

However, there have also been criticisms of the HPI, most notably that the HPI completely disregards political freedom, human rights, and labour rights. Some argue that the concept of the CO2 footprint itself is controversial as it only focuses on CO2 emissions and disregards other activities like water consumption. Lastly, “happiness” and “satisfaction” are heavily subjective, culturally dependent, and perhaps difficult to influence by politics. Thus, the question of whether the HPI should be used to measure political measures — such as action against climate change — arises.

The Gender-related development index (GDI) was developed to measure “gender gaps” in human development achievements. To evaluate possible disparities between men and women, the GDI covers three dimensions of human development: health (life expectancy), knowledge (expected years of schooling and mean years of schooling), and living standards (GNI per capita). For all 167 countries, the GDI is calculated for men and women, but for all countries — based on the GDI — gender inequality still exists. 

Recently, some critics pointed out that for some countries there are no gender-specific data points available, which means that many assumptions are made while calculating the GDI. Additionally, inconsistencies with the rounding up and down in calculations have been identified. There has also been debate over the components that were chosen to calculate the GDI.

Conclusion

The above examples of ways in which economic development can be measured (HDI, HPI, and GDI) are only a small sample of the indexes used. While the human development index (HDI) may be the most well-known, there are problems with the measurement. It is very likely that as economists pursue further research in development economics, more indexes will be developed that represent the true situation in countries more accurately.

Sources

United Nations Development Programme. “Human Development Index (HDI)”. Available at http://hdr.undp.org/en/content/human-development-index-hdi (Accessed 3 December 2021).

Investopedia Team, 2021. “What are the Criticisms of the Human Development Index (HDI)?”. Available at https://www.investopedia.com/ask/answers/042815/are-there-critics-human-development-index-hdi.asp (Accessed 3 December 2021).

Wellbeing Economy Alliance, 2021. “How Happy is the Planet?” Available at https://happyplanetindex.org/wp-content/themes/hpi/public/downloads/happy-planet-index-briefing-paper.pdf (Accessed 3 December 2021).

Meinert, Sascha and Stollt, Michael, 2010. “Bruttoinlandsglück — Auf der Suche nach qualitativer Entwicklung”. 

United Nations Development Programme. “Gender Development Index (GDI)”. Available at http://hdr.undp.org/en/content/gender-development-index-gdi (Accessed 3 December 2021).


Stanton, Elizabeth, 2007. “Engendering Human Development: A Critique of the UNDP’s Gender-Related Development Index”. Available at https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1104&context=peri_workingpapers (Accessed 5 December 2021).

Categories
Analysis

The Impact of Taxes and Subsidies on the Market Price and Supply of a Product

Introduction

Taxes are a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending and various public expenditures. Taxes can be both indirect and direct.  A direct tax is one that the taxpayer pays directly to the government. These taxes cannot be shifted to any other person or group. An indirect tax is one that can be passed on or shifted to another person or group by the person or business that owes the tax.

Taxes

Taxes are placed on the price of a good or service, which leads the consumer to pay more for the good/service. Therefore, the imposition of a tax leads to an increase in the price of a good or service, making it look less attractive to consumers. Moreover, the introduction of taxes also impacts producers, as these taxes are also placed on the factors of production that are used to supply these goods and services. This would eventually increase the cost of production for firms, leading to a decrease in quantity supplied. As a whole, the introduction of a tax on a good/service would increase the market price and decrease the market quantity. As seen in figure 1, the increase in cost of production, led to a decrease in quantity supplied. This is shown through a leftward shift in the market diagram. With the leftward shift from SS to S1S1 we can see that the price increases from Pe1 to Pe2, whereas the quantity decreases from Qe1 to Qe2.

Subsidies

Subsidies are a form of financial aid or support extended to an economic sector, generally with the aim of promoting economic and social policy. It can also be done to ensure that a firm stays in business and to protect jobs as a whole. A subsidy is an amount of money that governments give to encourage producers and consumers to consume or produce a good or service. The amount of money is used to increase the price producers receive, while reducing the price a consumer pays for the product. Therefore, with a decrease in the price, the goods or service would look more attractive to a consumer. And with the money that producers have received they can use it to produce more goods or services. As a whole, the introduction of a subsidy would decrease the market price and increase the market quantity. As seen in figure 2, the subsidies lead to an increase in quantity supplied, which is shown through a rightward shift in the market diagram. With the rightward shift from SS to S1S1 we can see that the price decreases from Pe1 to Pe2, whereas the quantity increases from Qe1 to Qe2.

Conclusion

This concludes that taxes lead to an increase in the market price and decrease in market supply. This means that consumers have to pay more for a good or service due to the increase in the cost of production. On the contrary, subsidies lead to a decrease in the market price and increase in the market supply as the governmental organizations decrease the price that consumers pay through giving producers money to produce more of their goods and services.

Sources

  1. https://saylordotorg.github.io/text_introduction-to-economic-analysis/s06-01-effects-of-taxes.html
  2. https://www.investopedia.com/terms/i/indirecttax.asp
  3. https://www.investopedia.com/ask/answers/060215/how-do-government-subsidies-help-industry.asp
Categories
Analysis

Is it possible to over-regulate the banking system?

Introduction

Since the days first banks were opened, debates over how the banking system should be regulated have persisted. After the mortgage crisis of 2008, the debates reached a peaking point because the crisis was mostly caused by the actions of the banks. In my opinion, it is definitely possible to over regulate the banks.

Why banks should not be regulated

A major reason why banks should not be regulated too strictly is that it would violate free market principles. Banks are an essential component of a market economy, and by controlling their work, there is a danger that the government will gain too much control of the market. In other words, because governments could set the loan rates — that have a huge influence on the cost of production — governments would be able to regulate the prices of most domestically produced goods. Of course the Central Bank already has a large influence on banks because it controls the loan rates, which are given to the banks. Thus, the Central Bank indirectly influences the deposit and credit rates. However, central banks do not use this instrument frequently, in fact mostly only during times of soaring inflation.

Moreover, if the government has too much control over the banking system, people lose the desire to invest in the country. The high concentration of power in the hands of the government, and thus the likely lack of a free market, disincentivize potential investors. In other words, people are scared that governments can make decisions that are beneficial only to the government itself. Of course the more power the government has, the easier this is for the government to overrule the banking system. When the government controls the economic life of a country, it starts to become authoritarian. This was explained by professors James Robinson and Daron Acemoglu in their book “Why Nations Fail?”. Robinson and Acemoglu state that countries fail if the government has too much control over the economy. People are unlikely to invest money if they are unsure of whether the money will be returned to them. The book also explains that having strict governmental control of the economy can have a positive effect in the near future but is destructive in the long-term.

Conclusion

However, not regulating the banking system at all is a false narrative in my opinion. Banks are keen to maximize their revenues and, thus, can make decisions that are not beneficial to a country’s economy. For example, banks may decide to give out loans to people who they know cannot afford them. This means that the purchasing ability of the entire population decreases. To minimize their risks, banks can transform the credits and mortgages into obligations and sell them. This way, they do not carry the risks themselves but even increase their revenues instead. Such actions caused the mortgage crisis of 2008, which had absolutely horrible consequences to the world economy. To conclude, I think that the banking system should not be over-regulated.