Tag: GDP

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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

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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

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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

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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

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Analysis

A look at Bhutan’s carbon-negative economy

An introduction to Bhutan

Bhutan is a small country in the Himalayas, located right in between India and China. It is a bit ironic that India and China are two of the most populated countries on Earth, but there are less than one million Bhutanese. A Buddhist country by constitution, Buddhism plays a central role in Bhutan. Healthcare and education are completely free, and although Bhutan is officially a democracy, the King — who is required to retire at the age of 65 — still plays a central role in Bhutan. These things all make Bhutan unique, but the way in which Bhutan’s economy is structured is also very unique.

What it means to be carbon-negative

Bhutan is the only country in the world that is carbon-neutral. Actually, Bhutan’s economy is carbon-negative, which means that the forests in Bhutan absorb more carbon dioxide (around seven million tons of carbon dioxide a year) than the country of Bhutan produces (only around two million tons of carbon dioxide a year). In fact, over 70% of Bhutan is covered in trees, and their constitution demands that at least 60% of Bhutan’s land will always be covered by forests, making Bhutan a “carbon sink.”

In addition to mandating that 60% of Bhutan will always be covered by trees in the constitution, Bhutan has taken a series of other steps to ensure that its economy will remain carbon-negative, to keep the promise Bhutan made at the United Nations Climate Change Conference in Copenhagen in 2009. These steps include banning log exports, providing free electricity for rural farmers, and using Bhutan’s many rivers to generate hydroelectric power, which is exported to Bhutan’s neighboring countries. This means that Bhutan is not only promoting the use of renewable energy sources within its own borders but also in its neighboring countries.

GDP vs. GNH

Bhutan’s GDP was roughly 2.5 billion US dollars in 2019, but this is not the most important indicator for the Bhutanese government. Instead, Bhutan focuses on “Gross National Happiness,” GNH for short, which is defined as “development with values.” Although economic development is important to the Bhutanese government, sustainable economic growth and ensuring the happiness of their population is equally, if not even more important to Bhutan. With mental health issues on the rise around the world, introducing the concept of GNH to other countries could be an important step. 

Conclusion

Bhutan is unique in many different ways. Although it is a very small country and actually one of the smallest economies in the world, Bhutan has big ambitions for the future. Bhutan is hoping to produce zero net greenhouse gas emissions and to produce zero waste by 2030 and was aiming to export enough electricity produced by hydropower to offset 17 million tons of carbon dioxide. If you are interested, I strongly recommend you to watch the TED talk at the link below (the second source).

Sources

  1. https://www.gvi.co.uk/blog/bhutan-carbon-negative-country-world/#:~:text=Bhutan%20absorbs%20roughly%20seven%20million,millions%20of%20tons%20each%20year.
  2. https://www.youtube.com/watch?v=7Lc_dlVrg5M

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Discussion

Should housework be included in the GDP?

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. However, it doesn’t include a broad fraction of human labour. In SNA terminology, unpaid labor corresponds to the category of ‘own-account services.’ This includes activities such as childcare, cleaning, meal preparation, and care for the sick and elderly. All of those are excluded from GDP as they are repetitive actions, which are not contributing to actual production.

What is your opinion? Do you think GDP measurements should be changed?

Additional reading:

  1. https://www.newstatesman.com/culture/2015/03/much-womens-work-unpaid-without-it-economy-would-crumble
  2. https://www.e-ir.info/2019/01/11/unpaid-work-and-the-governance-of-gdp-measurement/
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Analysis

The Georgian Miracle (Opinion)

After the collapse of the USSR, Georgia experienced an economic crisis. In the USSR, it was known as one of the most beautiful republics of the Soviet Union. The cobblestone-lined streets of Tbilisi and the scenic mountain views of Kazbegi, attracted millions. However, after the downfall, there were no tourists. This was just a piece of what Georgia lost, of course it lost Abkhazia and South Ossetia too. The country slipped into civil war, millions lost their jobs, factories closed, and inflation rose exponentially. 

GDP Deflator, Inflation, World Bank, CC BY-4.0

GDP Per Capita [PPP], current US$, World Bank, CC BY-4.0

This led to most of the economy shutting down, and millions going hungry. After 1993, Georgia went through en masse political unrest, and there were some reforms, but it was after the Rose Revolution that the economy witnessed severe changes. During Saakashvili’s reign, he made sure he grew the economy and this is seen by GDP per Capita rising. It was then that investment into Georgia rose, tourist arrivals, and the lost industry developed. Shown by the graphs below.

International Tourist Arrivals, Data from World Bank, CC BY-4.0

FDI Inflows into Georgia [in % of GDP], World Bank, CC BY-4.0

Saakashvili promised economic reforms and delivered, however, he did turn into a totalitarian, Draconian dictator. In 2008, Georgia fought over its territory. Nonetheless, one of his most important legacies were reducing corruption, increased trade, development — e.g., making it easy to do business — and cooperation with the west. Then came another party, which continued his legacy, and continued to develop Georgia with the same tactics he had used — for example the IT sector, and exports. [Happened because of the country’s low crime rate increasing investor psyche, therefore giving them the thumbs up to invest].

Georgia’s trade rating 2005-2013, [1 = low, 6 = high], World Bank, CC BY-4.0

Georgia’s Exports in Billions [current US$], World Bank, CC BY-4.0

Two years ago, Georgia crossed into the very high HDI category. This marks a new era as the country prepares to potentially enter the European Union in the future, and enhances its relations with Brussels. But it stands testament to the Georgian miracle. By far, Georgia is not like the Korean, Singaporean or Japanese miracles, but its fast rise from a war-torn nation in the 1990s to a modern, prosperous, free republic in the Caucasus is miraculous albeit a small victory, but compared to other former-soviet states, and one with no resources, Georgia is a celebratory success story.