Categories
Analysis

Singapore’s Economic Transformation

Introduction

In the 1960s, Singapore was an underdeveloped country with scarce resources after being a British colony for more than 100 years. Today, Singapore is one of the fastest-growing economies in the world and has transformed into a modern city with the second-highest population density in the world and a skyline full of skyscrapers. How was this possible?

Singapore immediately after gaining independence

After gaining independence in 1965, Yusof bin Ishak served as Singapore’s first president and Lee Kuan Yew was Singapore’s first prime minister. At the time Singapore was facing many problems. Most of Singapore’s 3 million inhabitants were unemployed and more than two-thirds of Singaporeans were living in slums or so-called squatter settlements in the fringe part of the city. Singapore’s immediate neighbors, Malaysia and Indonesia, were initially not friendly towards Singapore. Additionally, Singapore lacked access to natural resources, a clean water supply, proper sanitation, and infrastructure. Originally, the prime minister at the time, Lee Kuan Yew, hoped to modernize Singapore through foreign aid, but no country showed interest in helping Singapore.

Singapore and globalization

While a member of the British colonies, Singapore’s economy was focussed mainly on the entrepôt trade. However, there was very little perspective for the future of this industry. Therefore, politicians decided to focus on industrialization, specifically developing labor-intensive industries. This was a big step as Singapore had undergone very little industrialization before. Once production started, Singapore was forced to adapt once again as its neighbors (Malaysia and Indonesia) did not want to trade with it. Therefore, Singapore started looking into globalization as an opportunity to trade with the “developed” world. To attract foreign investment, Lee Kuan Yew worked to create a Singapore that was safe, corruption-free and had low taxes, putting in place harsh penalties — even including the death sentence — for people who disobeyed the law. Furthermore, all independent labor unions were also meshed to form the National Trade Union Congress (NTUC). These new measures helped Singapore become attractive for multinational corporations, especially because Singapore’s political system was very stable.

Singapore and foreign direct investment

Singapore was hugely successful in attracting multinational corporations. In fact, by the end of 1972, “one-quarter of Singapore’s manufacturing firms were either foreign-owned or joint-venture companies” (according to ThoughtCo.). Among the foreign investors, Japan and the U.S. were especially influential. All of the cash flowing into Singapore meant that between 1965 and 1972, Singapore was able to achieve annual double-digit GDP growth every single year. In order to maintain their growth, the government decided to start heavily investing in education. Technical schools were set up and the multinational corporations investing in Singapore were encouraged to train their unskilled workers. People who couldn’t find jobs were given jobs in sectors such as the tourism and transportation industry by the government.

Singapore today

Today, Singapore’s port has become the second-busiest in the world, only behind Shanghai. Before the outbreak of COVID-19, more than 10 million visitors came to Singapore annually. Aside from the shipping and tourism industries, Singapore’s medical industry has also grown significantly, alongside the banking industry. Despite its small size and comparatively recent economic transformation, Singapore is now the 15th largest trading partner of the United States. In 2019 there were over 3,000 multinational corporations that operated in Singapore. If you don’t mind abiding by some comparatively strict laws, Singapore is one of the best places to live these days, offering its citizens the third-highest life expectancy in the world. Singapore really has become a “powerful and financial center” (according to the BBC) of the world.

More recently, Singapore has had to grapple with an increasing number of unemployed due to the outbreak of COVID-19. Aid packages and policies have been put in place by the government to protect jobs and create opportunities for people. However, Leila Lai states that in order to survive, “Singapore will need to accelerator economic transformation and establish itself as a key player in the Asian and global realms of technology, innovation, and enterprise.” Although there is hope, only time will tell to what extent Singapore will be able to recover from the effects of the pandemic.

Sources

  1. https://www.thoughtco.com/singapores-economic-development-1434565
  2. https://www.bbc.com/news/business-32028693
  3. https://www.businesstimes.com.sg/government-economy/economic-transformation-must-speed-up-for-singapores-survival-beyond-covid-19

Categories
Analysis

Discussing the Global Minimum Tax Rate

Introduction

Last month, the leaders of the Group of Seven (G7) met in Cornwall and revealed a new agreement to introduce a global minimum corporate tax rate of at least 15%. This tax would have to be paid by all corporations, regardless of where they locate their headquarters and was created in an effort to stop large multinationals from shifting their profits into tax-havens to avoid paying corporate taxes. 

Why is it necessary?

Finance leaders around the world have stated that, as of late, corporations in global commerce are trying to get the tax rate as low as possible: “We’ve had a global race to the bottom in corporate taxation and we hope to put an end to that,” Treasury Secretary Janet Yellen said in late March. Major developed economies around the world, such as Britain and the US, have wanted to raise corporate taxes and find methods to tax large tech giants at higher rates, but this is extremely difficult to do when these corporations are international but taxes are national. Essentially, no economy would be able to pass legislation to raise taxes when every other economy in the world remained at their relatively lower tax rates — not only is this controversial but it is also futile as large corporations are skilled enough to know how to move their profits into locations where the corporate tax is little to none. The global minimum rate will, ideally, ensure that all corporations around the world are taxed at the same base rate and thus create an even playing field. 

Problems that may arise

This initiative does not come without its critics. Republicans have argued that this decision will inevitably reduce the competitiveness of American corporations, which was counteracted by the fact that all countries will have the same base rate. Regardless, they are still reluctant to changes in the tax code and are in favour of minimised government intervention in the economy. The Biden administration has been pushing for a hike in the corporate tax rate, as this supports the President’s plan to raise the US rate from 21% to 28% to fund his large-scale infrastructure plan. Additionally, although Biden is clearly pushing for the change, it will be an obstacle for him and his administration to get this plan through to the thinly divided Congress in which Republicans will resist changes to the tax system. 

Some of the G7 delegations are in fact insistent on this tax rate being flexible, in order to ensure it can be pushed even higher in the future. Although several nations are highly supportive of this agreement, it only includes 7 nations. The G7 — Britain, Canada, France, Germany, Italy, Japan and the United States — plans to extend this proposal to the G20 as well later this year. 

This tax also incorporates stricter taxation for huge multinationals, notably US tech corporations, who have avoided taxes in spite of the considerable profits they gain from operating in several locations. 

Conclusion

All in all, this tax definitely levels out the playing field for global corporations, and could even help improve the budgets of some countries that will benefit from greater tax revenue. Although it disadvantages smaller economies that have thrived due to low taxes, such as Ireland, further planning and proposals to a greater variety of nations indicate a promising future for equitable taxation. 

Sources:

Categories
Analysis News

Should the Tokyo 2020 Olympics take place?

Introduction

The Japanese government and the International Olympic Committee (IOC) have officially declared that the 2020 Olympics will take place from July 23rd, 2021 onward. The decision is very controversial around the world, especially in the host country, Japan, because of the COVID-19 situation. Should the Olympics really take place? Or should they be canceled? In this article, I will cover two different perspectives: the individual perspective and a business/economics perspective.

Individual Perspective: First of all, what do people in Japan think about the Olympics? 

The above graph is the survey that asked more than 9000 Japanese citizens what they thought about the Olympics. The graph shows that Japanese citizens’ opinions about the opening of the Olympics are very spread. In August 2020, about 50% of the interviewees said that the Olympics could take place without any postponement. However, in June of 2021, only 36% of interviewees said so, and about 35% of the people interviewed thought that the Olympics should be canceled. As time goes by, it seems that more people are against the Olympics going ahead.

 In the background of such a result of the survey, from an individual perspective, there is almost no merit in the Olympics taking place this summer because simply, allowing all Olympics players from abroad means we have to expect more covid cases will occur in Tokyo. In addition, the IOC and JOC (Japanese Olympic Committee) have made rules that all players do not need to be quarantined for 2 weeks even though other foreigners who do not relate to the Olympics do. And, they also set a rule that players are allowed to bring, buy alcohol whenever they want to even though the Japanese Government prohibits stores from serving alcohol after 9 pm in Tokyo. Such “special treatments” increase the dissatisfaction of Japanese citizens. In Japan, just like other countries in the world, people try to spend time in their home as much as they can even though most of them want to travel or hang out with friends. In such circumstances, making special rules just for Olympics players make people think that this is unfair and feel disrespected.

Business perspective

On the other hand, from a business perspective, the Olympics can benefit not only a country but also some companies. The organizing committee announced that the economic effect of the Olympics can be estimated as 16,365,000,000 dollars. It means that if the Olympics are canceled, the amount of money will be lost in some ways. For the Japanese government, they spent large amounts of money to maintain places such as Japan National Stadium and Olympic Village because they thought all budgets they spent could be taken back by taking place the Olympics so that they certainly want to take place the Olympics no matter what. The Olympics also affect domestic companies a lot. The below graph shows what 4,092 companies will think if the Olympics is canceled. It shows that about 41% of them think that it is better to cancel the Olympics in terms of companies’ profits prediction. However, about 59% of them think that they will get more profit if the Olympics takes place. It means that about 60% of companies in Japan think that the Olympics will somehow benefit them even though foreigners will not visit Japan. Companies think this way because even though people from foreign countries are not able to come to Japan, the Olympics itself has a large impact on companies, especially hotels, restaurants, and airline companies because people take planes to come to Tokyo, eat meals at the restaurants, and then stay at the hotels. 

Conclusion

The Olympics should be a sports festival that everyone in the world enjoys. However, because of the spread of the pandemic, people argue who is responsible if the Olympics do not succeed, not how to make the Olympics better. In the background, many Japanese people disagree with the opening of the Olympics mainly for two reasons.

  1. They are concerned that the number of COVID cases will skyrocket once players around the world enter Japan.
  2. They feel they are treated unfairly by the government based on the special treatment that the government has made for Olympics players.

On the other hand, many companies in Japan think that they are able to take advantage of the Olympics as a chance to gain their profits while some of them don’t consider the Olympics as a big opportunity due to the prohibition of foreigners to enter Japan. It is interesting to see the different reactions toward the Olympics between citizens, and companies due to their consideration from different perspectives. Anyhow, the Olympics will begin in about 3 weeks from now. I hope the Olympics will succeed without any problems related to coronavirus and give hope to those who have suffered from the virus…

Sources

  1. https://www.tsr-net.co.jp/news/analysis/20210615_03.html
  2. https://www.nri.com/jp/knowledge/blog/lst/2021/fis/kiuchi/0525

What do you think? Let us know in the comments!

Categories
Analysis

Economic Sustainability

What is economic sustainability?

Economic sustainability is a way of thinking. It includes putting in place practices that support long-term economic growth without having negative impacts on social, environmental, and cultural aspects. We can relate this to the “recycling resources” plan whose target is to recycle and then reproduce all the materials that have been used by people, using the notion of a Circular Economy – a system that makes all products anew, ‘x’ times as functional and effective.

Economic sustainability does not simply refer to gross national product, exchange rates, inflation, and profit, but it relates to the production, distribution, and consumption of goods and services (Mohamed and Antia, 1998). However, the movement and transfer of goods and services have a noteworthy effect on environmental ecosystems because those ecosystems are the source of unmanufactured or unused materials and the stockrooms for rejected goods.

Organizations and sustainable development (SusDev)

Short financial gains have been the motivation behind much of the un-SusDev that has happened. Organizations will adopt SusDev concepts if it is demonstrated that sustainable solutions are not costly. To evaluate SusDev, we must consider the economic losses due to the reduction and degradation of the environmental ecosystem used and develop a plan to mitigate both short-term and long-term environmental impacts. Traditional decision-making analyses account for only the costs and benefits of resource exploitation and do not consider the inherent cost of the environmental degradation of air, water, or soil, nor do they consider the cost of discarding an item after the end of its useful life, which includes that of the remediation a society has to incur, which limits its financial resources (United Nations et al., 2003). Once a shift has occurred in economic cost-benefit analyses that would account for environmental costs, SusDev would be recognized to be of more economical benefits than current solutions and designs (Paleologos, 2008).

SusDev and the protection of the environment

In view of Principle 4 of the Rio Declaration and Development, environmental protection is an essential part of the SusDev process. This is unlike out-of-date models that first emphasize the financial aspects of the project and then develop remedial measures to the resultant environmental problems. Such a process is shown in Fig. 1.2 (Mohamed and Antia, 1998), in which “(1) the ambient physical environment, ecosystem, and natural resources represent the natural system (NatSys), and (2) the features of production of goods and services represent the economic system (EcoSys).” As a result, the typical use of the NatSys by the EcoSys would lead to a substantial reduction in natural resources and an upsurge in environmental problems and associated costs, such as air pollution, surface water, and groundwater pollution, marine and ecosystems pollution, the generation of solid and liquid waste, and above all, greenhouse gas and global warming. The resultant impacts on the NatSys would vary as a result of the geographical location; the existing environmental status involves the natural environment and the current economy.

Figure 1.2. Interface between main driving systems and resultant environment impacts.

From Mohamed, A.M.O., Paleologos, E.K., 2018. Foundations of Geo-Environmental Engineering – Basic Soil Properties of Relevance to Different Remedial Techniques, Elsevier, New York, NY, ISBN: 978-0-12-804830-6, pp. 688; Mohamed, A.M.O., Antia, H.E., 1998. Geoenvironmental Engineering. Elsevier, Amsterdam, The Netherlands, pp. 707.

Re-defining Economics Sustainability (EcoSus)

In addition, as noted by Goodland and Daly (1995), EcoSus involves the consumption of interest rather than capital and is defined as the amount one consumes during a period and still be as well off at the end of the period. Notably, the preceding description focused only on man-made capital; however, it could be extended to include the natural capital. Therefore, by integrating the economy with the environment, the EcoSus could be redefined (Mohamed and Antia, 1998) as the maintenance of capital in general, both man-made and natural. The word “environment” currently means integration of the environmental system with the economic system in which current economic principles apply. Researchers are adopting environmental values that are external to the classic economic system and developing innovative methods to account for monetary values on intangible non-market (and non-marketable) components of the environment.

Sources

  1. Sustainable pollution assessment practices (last accessed on 2nd of July 2021)
  2. Pollution Assessment for Sustainable Practices in Applied Sciences and Engineering by Abdel-Mohsen O. Mohamed, Evan K. Paleologos, 2021. accessed through Science Direct

Categories
Analysis

How the pandemic affected the crude oil industry

Introduction

One of the most important and significant commodities in the history of the modern world has been oil. Crude oil was so essential at one point that it was the basis of one of the largest monopolies in history: the Standard Oil Company. After the Second Industrial Revolution, which led to the popularization and availability of machinery and electricity in general, oil became an almost priceless product that seemed to keep the world spinning. Despite its importance decreasing since then, oil still remains an incredibly valuable resource. Nonetheless, the outbreak of COVID-19 and subsequent lockdown policies gave the oil industry an incredible blow.

The pandemic and crude oil

The pandemic took its toll on many industries, but oil was among those that suffered the most. In the United States, oil mainly hovered around the price of $60 and $70 per barrel in the first quarter of 2020 and seemed to be steadily increasing. However, in March, when the stricter pandemic guidelines were first put in place in the United States, the prices of oil began to fall dramatically. In fact, the prices fell so suddenly that towards the end of April, oil prices were actually negative. While there were many factors that contributed to this drop, the largest and most obvious was the lack of demand. Although there may be a limited amount of oil in the world, there is still an incredible amount of it being produced on a daily basis. During the pandemic, the production of crude oil (i.e. the supply) did not decrease by much, but the demand fell remarkably. Fear of being infected with the virus discouraged many people from leaving their homes unless they absolutely needed to. This meant that vehicles, most of which rely heavily on oil, were being used significantly less. In turn, this relative abandonment of vehicles led to the price of crude oil falling dramatically, not just in the United States but on a global scale as well. 

Outlook towards the future

There is now a hope that the pandemic will be over soon. Many restrictions have been lifted in countries around the world, and the price of oil has changed as a direct result of this. As restrictions were slowly lifted throughout the second half of 2020 and the first half of 2021, the prices of oil have made an incredible recovery. So far, this recovery shows no immediate signs of ending any time soon. While an increase in the production of electric cars will certainly hurt the oil industry in the future, increases in oil prices seem to be unstoppable as oil prices now approach $75 per barrel in the United States. This is significantly higher than the price of oil just before the pandemic hit. Many analysts expect prices to reach $80 per barrel before the Summer ends, and some even believe that prices will reach $100 per barrel within the next two years. This just goes to show that volatility in the economy often follows volatility in the rest of the world. In this individual case, in response to a global pandemic, oil prices dropped to improbable lows and then increased to unbelievable highs all within the span of a single year.

Sources

  1. https://www.cnbc.com/2021/06/02/it-could-be-a-hot-summer-ahead-for-oil-prices.html
  2. https://www.wsj.com/articles/investors-bet-green-energy-focus-will-push-up-oil-prices-11623656321

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Analysis

To what extent is MBS’s Vision 2030 achievable?

What is Vision 2030?

Vision 2030 is crown prince Mohammed Bin Salman’s — or MBS as the western media calls him — crown jewel. The kingdom is slowly starting to tip the iceberg and moving towards a more diversified economy and developing its economy, which today is mostly selling oil. To understand the motives of Vision 2030 and evaluate its effectiveness, we must dial back in time. 


The country that is now Saudi Arabia has its origins in the 1900s when a country popped out of nowhere in the Arabian peninsula and proclaimed its independence. It was a very poor country. In fact, very poor could be an understatement. The Kingdom of Saudi Arabia was struggling to fund itself and make ends meet (Almtairi).

The discovery of “black gold”

It was during this time that British geologists started to see that the Arabian/Persian gulf had something that can power machines en masse: black gold. Across the gulf, the British had struck a contract with the Persians to let them extract oil in Abadan. Even though the initial investors were private citizens, the onset of world war one brought about changes in the British attitude about oil. Due to oil having a higher energy density than coal, and it being more reliable, the British government became the spearhead for the Anglo-Persian oil company (Lumen Learning). 


In 1938, this black gold was found in a field near Dammam by an American-owned firm. The firm saw that Saudi Arabia could have billions buried under its surface. This company was later to be Chevron (National Geographic). In the 1940s, the US started to invest in the Kingdom of Saudi Arabia and developed ties. This was when the largest oil field in the world was found, causing the country to rise to prominence on the world stage. Saudi Arabia has remained there ever since. The newly exploited black gold littered the country with investment, which was funneled into developing the country. Roads were built, pipelines were built and the people started becoming rich (Council on Foreign Relations).

The formation of OPEC

Diagram which illustrates the oil boom by Paasha Mahdavi

The steady stream of investments pouring into the country was the start of the ‘good times’. The Kingdom got richer and as the world demand for oil skyrocketed, its stage on the world stage rose, too. Saudi Arabia later formed the OPEC, an organization which consists of oil exporting countries. OPEC, economically speaking, is an example of an oligopolistic firm: colluding in the free-market to influence the price of oil. 

Diagram representing profit maximization by a price-fixing cartel.

By the establishment of OPEC, Saudi Arabia and other middle eastern nations were able to exploit the oil market by fixing prices in accordance to what they wanted. This is illegal in most countries, but on a global scale, this is very normal and common. The organization would sell their oil at a price of P1 on the market, and the quantity sold would be QPROFIT. The sketched area represents the profit made by the OPEC. Now imagine this on a global scale. This is what brought immense wealth to the Saudis; and many thought that this system would hold (National Geographic). 

However, this idea was flawed. Oil is a scarce resource and with ever growing demand, it is being exhausted quickly. However, the bigger issue is that now there are two threats to the economy: the demand for oil has tapered off in developed countries causing crashes in oil prices and secondly, oil deposits, nonetheless, are running out. This is a dilemma Riyadh faces. The country, despite being extremely blessed with oil and wealth, has started to face shortages in cash due to the falling oil prices. Falling prices mean that it is harder for oil-based countries to break even. This means that they are more likely to have deficits and build up debt. This is not in the interests of the central bank, and neither is it good for the economy in the long-run. Secondly, with the fall in demand from countries such as the US, Canada and the EU, the oil market is being over-supplied more often which, possibly increases the chances of lower oil prices. 

How Saudi Arabia has responded to decreasing oil prices

With price wars, falling demand for oil, and oil being cheaper-than-ever-before in history, Saudi Arabia has realized that this phenomenon of black gold is fading, and that they should revolutionize their economy to respond appropriately. According to MBS and the published plan, the plan is to:

  1. Turn Saudi Arabia into a powerhouse for investment.
  2. Use the Kingdom’s geographic location to diversify the economy. 
  3. Open a relatively closed-off-state to one that is open and inviting to all. 

MBS and the team behind Vision 2030 are highly ambitious. They want to change how Saudi Arabia functions and runs. Everything mentioned in the plan are regular government-adverts for investment, however, what is striking is that the Kingdom is trying to invest elsewhere and move away from oil. This shows us that the government realizes that oil is a dying resource and is seeking to industrialize Saudi Arabia — not fueled by oil, but by pure willpower and costs. 

With COVID-19 impacting oil demand, and since oil accounts for most of the Saudi budget, it can be argued that the Kingdom has had the first major setback when it comes to Vision 2030. Nonetheless, they are making progress. MBS has been at work fixing issues and making Saudi Arabia more open. For example, the easing of visa restrictions will make it very easy to visit the nation and invest in it. However, with the advent of the pandemic, it can be questioned how effective the policy will be. Will it lead Saudi Arabia out of the oil trap, or fail to? Only time will tell.

Sources

  1. https://digital.library.unt.edu/ark:/67531/metadc503872/m2/1/high_res_d/1002775662-Almtairi.pdf
  2. https://courses.lumenlearning.com/suny-hccc-worldhistory2/chapter/the-discovery-of-oil-in-the-middle-east/
  3. https://www.nationalgeographic.org/thisday/mar3/oil-discovered-saudi-arabia/educator/

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Analysis

A look into the Big Mac Index

Introduction

The Big Mac Index is an informal measurement of PPP which was developed by The Economist in 1986. Purchasing Power Parity (PPP) is a method of comparing price levels in different countries and compares different currencies through a “basket of goods” approach. However, taking a basket of goods is quite an inaccurate way to represent the average prices of all goods and services in a country because each country has drastically varying baskets and a multitude of factors that can impact this very basket. Therefore, The Big Mac Index allows us to take a fairly standardized good — an example is a McDonald’s Big Mac, which is available in most countries — and use it to evaluate and compare currency exchange rates. 

The theory of PPP states that in the long run, exchange rates should naturally adjust and move towards the rate that would make the price of the market basket, or in this case a Big Mac, equal in both countries. You can see all the latest data for the Big Mac Index in different countries here

Calculations

The way these values are calculated are as follows:

  • Divide the price of one Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency); eg. Indonesia = 34,000 IDR & United States = 5.66 USD ∴ the implied exchange rate or PPP = 34,000/5.66 = 6007.07 
  • Compare this value with the actual exchange rate; eg. 14,125 → The difference between this and the implied exchange rate from our calculation suggests the Indonesian rupiah is 57.5% undervalued. 

“Undervalued” and “overvalued”

So what exactly do these terms “undervalued” or “overvalued” mean? An undervalued currency, for example, the Indonesian rupiah, means that the currency is worth less than its market value. This essentially indicates that the price of goods and services is lower in the target country, Indonesia, than in the base country, the United States. An overvalued currency, on the other hand, means that the currency is worth more than its market value and the exchange rate exceeds what the market is willing to pay; goods are relatively more expensive in that country. Overvalued exchange rates make imports cheaper than domestically produced goods and therefore tend to discourage domestic demand and encourage spending on imported goods. According to The Economist’s data for 2021, the countries with overvalued currencies when compared to the USD (not adjusted for GDP) are the Swedish krona, Norweigan krone, and Swiss franc. 

Problems with the Big Mac Index

Although the Big Mac Index provides a simple and casual method to assess currencies and their relative values against each other and the global market, it is not without its flaws. Firstly, the Big Mac is not available in all countries, which limits the ability for global comparisons and has subsequently caused the rise of alternative indices, such as the KFC Index for African countries. Other factors which can limit the extent to which the Big Mac Index can serve as an accurate representation of currency values include demand, accompanied by the price elasticity of demand, of Big Macs. In certain countries, it is inevitable that the demand for a product like the Big Mac would be significantly lower than its demand in the United States. The index can also be impacted by the purchasing power of domestic consumers, how many hours they must work in order to afford a Big Mac, rates of taxation, domestic competition, factor input costs, and so on.

An interesting example to note is how the Russian ruble is calculated by the BMI as one of the most undervalued currencies as the Russian Big Mac is one of the cheapest. However, Moscow is one of the most expensive cities in the world! This could be due to the fact that although domestic food factor inputs are relatively cheap, restaurants suitable for business dinners with English-speaking staff are expensive.

Conclusion

All in all, the Big Mac Index is an insightful and easy-to-understand method for learning the basics of currency valuation and why it is important in global markets. However, it is worthwhile to note that this data must definitely be taken with a grain of salt, or perhaps a pinch of it, for your fries…? 

Sources

Categories
Analysis

What is soft power?

Hard power vs. soft power

In international relations, there are two main types of power: hard power and soft power. Hard power is related to the traditional image people have when they hear the word “power.” The definition of hard power is “power deployed in the form of coercion;” this can be using force, threatening the use of force, and putting in place economic sanctions or inducements of payment. Soft power, meanwhile, refers to the “use of positive attraction and persuasion to achieve foreign policy objectives.” This means that the main aim of a “soft power” foreign policy is to become influential rather than using any form of “real” (or hard) power.

The origin of soft power

The concept of soft power was first proposed by Joseph Nye in the late 1980s. Joseph Nye originally described three sources of soft power, namely political values, culture, and foreign policy. After World War II ended, the basis of U.S. soft power was the spread of ideas and values like democracy, a free-market economy, and human rights. People and countries looked up to the United States of America as a role model and wanted to be like them. Therefore, these people and countries were more willing to put these ideas like a democratic government and a free-market economy into place in their own countries as they had seen how well these worked for the USA. In the period immediately after the end of the Cold War, the concept of “soft power” caught fire among politicians, with some even claiming that soft power “defined” the period immediately after the Cold War.

Soft power today

Although hard power has been used more frequently again by countries again nowadays — an example is North Korea building nuclear weapons — China has increasingly been using soft power. In Joseph Nye’s original article on soft power, China was hardly mentioned. Nowadays, China is the world’ biggest trading country. Examples such as China’s Belt and Road Initiative — through which the Chinese government aims to encourage economic growth in other countries by providing the necessary infrastructure — serve as evidence of China’s new approach to international relations.

Sources

  1. https://softpower30.com/what-is-soft-power/
  2. https://foreignpolicy.com/2018/08/20/the-rise-and-fall-of-soft-power/
Categories
Analysis

The economic situation of Africa in 2020-21

Africa’s growth performance and outlook to the COVID-19 pandemic situation

Economic activity in Africa was constrained in 2020 by an unprecedented global pandemic due to COVID–19. Real GDP in Africa grew by 3.4 percent in 2021, after contracting by 2.1 percent in 2020. This projected recovery from the worst recession in more than half a century will be underpinned by a resumption of tourism, a rebound in commodity prices, and the rollback of pandemic-induced restrictions. Nevertheless, the outlook is subject to great uncertainty from both external and domestic risks.

Debt dynamics and consequences

The COVID–19 pandemic has caused a surge in government financing needs in Africa. Since the COVID–19 pandemic began in early 2020, governments have announced fiscal stimulus packages ranging in cost from about 0.02 percent of the GDP in South Sudan to about 10.4 percent of the GDP in South Africa. These fiscal stimulus packages have had immediate and direct implications for budgetary balances, borrowing needs, and debt levels. However, the World Bank estimates that African governments need additional gross financing of about 154 billion dollars in 2020/21 to respond to the crisis. 

Debt resolution and the nexus between governance and growth

Debt resolution in Africa has often been disorderly protracted, with bad economic consequences. The economic consequences of sovereign debt restructuring are less severe in countries that act pre-emptively and collaboratively and in those countries where economic governance is stronger. However,  recent debt resolution in Africa has been delayed by long-lasting litigation with private and official creditors. The absence of orderly and successful sovereign debt resolution, especially with private creditors, makes the prospects of debt distress worrisome for African economies.

Adapting to climate change and building climate resilience

By 2021 The Next Generation ACBP has set out a blueprint to help Sub-Saharan African economies achieve low carbon and climate-resilient outcomes. The World Bank has used this new Climate Plan to build on a strong track record under the original plan in which the Bank supported 346 projects with more than $33 billion. In East Africa, the World Bank is also helping affected communities and households cope with the worst locust plague in decades. 

Accelerating the high-tech and digital economy

The World Bank is supporting Africa’s vision to achieve universal and affordable access to information and communications technology. In Malawi, the Digital Foundations Project complements government efforts on digital transformation by supporting improvements to the legal framework and building human capacity, promoting high-quality internet access for all, and building the government’s ability to deliver services to citizens and conduct business digitally. Across the continent, the Bank has led Digital Economy Country Diagnostics (DE4A) in over 20 countries (completed and FY20 in progress) to assess the current state of the digital economy, with 15 more countries requesting diagnostics in FY20. The World Bank also has 15 active and 29 pipeline investment operations in Africa that contribute to the operationalization of the DE4A initiative that includes a broadband infrastructure component totaling over $5.5 billion in investment.

Harnessing technological developments are key to improve access to clean and reliable energy. The Bank is supporting operations in Africa to increase access through grid extension and expansion of transmission networks, innovative off-grid electrification solutions, expansions of renewable generation capacity, development of regional power pools, and improvement of service efficiency. Across Africa, many World Bank-financed projects, such as the Azito Power Project in Cote d’Ivoire, are crowding in private capital and reducing public debt as well as lowering the overall costs of service for electricity. Furthermore, the World Bank is also supporting the development of new technologies such as solar storage solutions, smart meters, mobile utility payments, satellite mapping, and imaging, high-voltage DC transmission, and solar home systems and mini-grids.

Supporting inclusive governance and transforming economies

It is important to enable efficient and inclusive delivery of services, such as judicial courts, waste management, and safety nets, and to build institutions and systems which are resilient to economic, social, and environmental pressures. These pressures can pose challenges to the World Bank’s work on governance and inclusion in Africa. By creating sound conditions for investment and establishing continuity of state services, businesses can thrive and citizens can access much-needed services, thereby achieving greater stability. Technology has also affected how governments operate and interact with citizens, increasing transparency and service delivery. The region continues to work to connect every African individual, business, and government to the Internet by 2030.

In March 2020, Somalia began receiving debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, which will help Somalia reduce its initial debt of $5.2 billion (end of 2018) to $557 million once it reaches the HIPC Completion Point. The Bank played a major role in helping Somalia reduce its debts by providing $140 million in Pre-Arrears Clearance Grants in FY19 and $375 million in development policy financing to strengthen state capacity, financial management, transparency, and promote inclusive private sector-led growth. Additionally, the World Bank has also provided nearly $400 million in financing since March to help tackle the urgent crises facing Somalia while planning for long-term reforms and development goals.

  

Sources

  1. https://www.worldbank.org/en/programs/africa-climate-business-plan
  2. https://www.worldbank.org/en/topic/the-world-bank-group-and-the-desert-locust-outbreak
  3. https://www.worldbank.org/en/news/feature/2020/07/23/the-secret-to-cote-divoires-electric-success
  4. https://www.worldbank.org/en/news/feature/2020/10/01/reengaging-with-somalia-for-long-lasting-development-outcomes
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Analysis

The Flaws of the Chinese Model

Historical Context

In the 1970s, Beijing liberalized the economy, opening it up to foreigners, and adopting policies that promoted free trade. These were similar to glasnost and perestroika, which were implemented in the USSR. The hope was that millions of Chinese could be lifted out of poverty and into prosperity. While Deng’s reforms started in agriculture, he slowly branched out to include industry as well. A perfect example is Shenzhen, now a bustling metropolis, back then it was a shanty-town. He decided that the Pearl River delta should spearhead the liberalization. The PRC created special economic zones with little oversight, where foreign firms could trade freely with minimal interference from Beijing. This was adopted throughout China as the try-outs were successful, accelerating China’s economic growth.

Analysis

China progressed and grew — to the shock of many economists as no country on earth had ever grown at the rates China did. This raised the net output of firms in the economy, therefore increasing the GDP. As the Chinese adopted friendlier policies, the GDP rose further as China became a lucrative investment destination ceteris paribus. Mathematically speaking, as GDP is Consumer Spending, Investment, Government Expenditure, and Net Exports (Total Exports – Total Imports) added together, as China grew its reputation on the world stage and investments from abroad grew raised the GDP, imports remained stagnant due to an uncompetitive Yuan. Meanwhile, exports also increased, raising Net Exports (Total Exports – Total Imports), having a ripple effect on the GDP too.

GDP of China [PPP] from the World Bank Database (CC BY-4.0)

 As China started to industrialize, the wages grew at rates never seen before. It looked like China had the perfect deck of cards to become an industrialized nation, which it did — as China is a newly industrialized country. However, this came with many downsides: externalities and inequality.

Externalities are a cost or benefit placed on a third party. They can be positive or — as in China’s case —  negative. The costs to produce outweigh the cost to society from the production in markets. Therefore, there is a welfare loss. As there is a welfare loss, society is worse off — this can be in the forms of pollution, increased health risks, lower life expectancies, or otherwise. The welfare loss exposes the public to harmful particles and extreme air pollution. Now, this leads us to question how well-off are the Chinese?
Even though rapid economic growth has increased wages and lifted many out of poverty, and the effect of increased GDP has had direct consequences on the Chinese, nonetheless, one result of rapid unchecked growth is inequality. As The Economist reported in 2015 and 2019, education is highly unequal. Access to education helps individuals earn more due to the development of skilled labor and allows firms larger access to a larger pool of individuals with specialized skills. However, as stated in both the articles, most Chinese schools are now jam-packed with elite, wealthy kids; and uneven wealth distribution, like in the United States, has led to the degradation of the quality of education received by rural Chinese. This can cause them to struggle in the gaokao, an all-important university exam, viewed by many rural Chinese as their only way out. However, the government has been attempting to fix this. Beijing has suggested that educational reforms are needed. There is also the big North-South divide. Farmers in the north cannot earn enough to live, so they migrate to the south to become laborers or factory workers. As they live in poor neighborhoods, this increases the chances of their children scoring poorly on the gaokao.

Conclusion

Nonetheless, China has had tremendous success in eliminating poverty. Its people — once some of the world’s poorest — are now living in a modern country. However, many challenges are facing the Chinese. The ones discussed here are scratching the surface; some others include depopulation, firms’ inefficiency, unemployment, and an overheating economy.

Sources