Nils Pratley in The Guardian recently wrote a piece on Standard & Poor’s move to put the US’s first-rate credit rating on “negative alert” for the first time since 1941. This startled a lot of markets as credit rating agencies don’t normally confront a country which commands the world’s only reserve currency; and investors had assumed that S&P would do the decent thing and wait until the 2012 Presidential was over before displaying its concerns. However they are basically saying that the US debt position is so poor that it can’t wait any longer and significant measures steps must be taken by 2013.
But it’s speculation to pretend that Republicans and Democrats will be able to bury their differences in fiscal thinking. The hope is that a sense of crisis, and more costly yields on US treasuries will change the political calculatons. But a looming election will proably only embed disagreements. There’s is no harm in S&P issuing a heads-up but you wouldn’t assume it will make any difference to the workings of the US Political system.
A hat tip to colleague Richard Wells for this cool website. Put together by FedEx all you need to do is mouse over each country to find out how it measures on the happiness index out of 10. However, as shown below, they adjust the size of the country so that it correlates to its level of happiness. Click here to go to the site.
Quite like this cartoon from The Guardian about the Irish economy – eventhough I am Irish myself. How life can change in the space of 3 years. When I was there in 2007 people were incredibly buoyant about the state of the economy and thought that it would never end. But recessionary interest rates set by the ECB allowed Irish bank executives to borrow huge sums, which they lent to their chums in the property business. When Anglo Irish Bank called in the goververnment in December 2008, it had lent 15 people more than €500m each. Property prices in Dublin were, by the early the early 2000′s, higher than those in London – and that word called leverage was very evident. As we know it couldn’t be maintained and the rest is history. A good read is Fintan O’Toole’s book – Ship of Fools.
Here is another graphic from The Economist which shows the value of exports of individual economies to China.
% of exports to China – 2009
Australia – 21.8%
Japan – 18.9%
Brazil – 12.5%
South Africa – 10.3%
Thus exports to China are only 3.4% of GDP in Australia, 2.2% in Japan, 2% in South Africa and 1.2% in Brazil (see below). Export earnings can, of course, have a ripple effect throughout an economy but the multiplier effect is rarely higher than 1.5 or 2 – this means that they hardly ever double the contribution to GDP.
Recently, the Bank Credit Analyst, an independent research firm, asked what would happen if China suffered a “hard landing”. Its answer to this “apocalyptic” question was quite “benign”. As it pointed out, Japan at the start of the 1990s accounted for a bigger share of GDP than China does today. Its growth slowed from about 5% to 1% in the first half of the 1990s without any discernible effect on global trends.
Here is a great piece from the BBC and also on the Tutor2u blog. During the late 1980s and early 1990s, the price of everything in Brazil went up at least once a week and usually several times – in fact inflation was just under 3,000% in 1990. With this is mind shop owners colour-coded certain items that they felt wouldn’t sell straight away. With CD’s, for example, it was easier to update the colour-coded chart than to change price-tags on every item. Of course, all this changed abruptly in July 1994 with an inflation-busting economic plan that included the introduction of Brazil’s current currency, the real. Click here for the full article.
Just finishing off Development Economics with my CIE A2 class and below is an interesting clip from the Commanding Heights DVD series. Peruvian economist Hernando de Soto sees a main obstacle to the development of markets and capitalism within developing countries being linked with the lack of property rights. The result of this is that most people’s resources are commercially and financially invisible. Nobody knows who owns what or where, who is accountable for the performance of obligations, who is responsible for losses and fraud, or what mechanisms are available to enforce payment for services and goods delivered. Consequently, most potential assets in these countries have not been identified or realized; there is little accessible capital, and the exchange economy is constrained and sluggish. However in the West, where property rights and other legal documentation exist, assets take on a role of securing loans and credit for a variety of purposes – building capital with capital.
De Soto estimates that about 85% of urban parcels in Third World and former communist nations, and between 40 and 53 % of rural parcels, are held in such a way that they cannot be used to create capital. The total value of the real estate held but not legally owned by the poor of these countries is at least $9.3 trillion. This is approximately twice as much as the total circulating U.S. money supply and nearly as much as the total value of all the companies listed on the main stock exchanges of the world’s twenty most developed countries. The lack of such an integrated system of property rights in today’s developing nations makes it impossible for the poor to leverage their now informal ownerships into capital (as collateral for credit), which de Soto claims would form the basis for entrepreneurship. However, in reality, it cannot be seen as the panacea. Titling must be followed by a series of politically challenging steps. Improving the efficiency of judicial systems, rewriting bankruptcy codes, restructuring financial market regulations, and similar reforms will involve much more difficult choices by policymakers.
On 11th January 2010 Chile accepted membership of the Organisation for Economic Cooperation and Development (OECD) proof that Chile is one of the strongest democracies in the world. It is the first country in South America, and 31st overall, to be a member of the international organization. The fact that it has been accepted into the Paris-based club ahead of Brazil, the continent’s emerging political and economic powerhouse, is a source of pride for the Andean nation.
The OECD was established in 1961 with a mission to bring together governments “committed to democracy and the market economy,” to encourage sharing policy experiences and to promote economic growth and development.
Such a transition from developing to developed country last happened more than a generation ago eg. Ireland and South Korea. No one is exactly sure of the timing for Chile. But economists say this country of 17 million will become the first Latin American country to switch categories sometime in the next decade. For much of the 20th century, Chile’s copper-based economy staggered between by boom-bust cycles. Today, Pinochet-era reforms such as a policy of privatisation and low import tariffs remain in place. While Chile made the largest savings in the region – see below:
Chile consistently ranks as the least corrupt government in Latin America and under new president Sebastián Pinera one wonders if there will be many changes to the free-market policies that have cemented Chile as a beacon of economic stability in the emerging world. However, there is no doubt that the private sector will be very prominent in furthering economic growth in the world’s top copper producer, promising to revamp government businesses and introduce further tax breaks to create employment.
Until the global financial crisis struck, Ireland was heralded as a shining example of how to run a successful modern economy. But it has fallen harder than most during the recession and the banking system and the economy are in a mess. So what has gone wrong?
The Irish economy is once again in an horrendous state. Unemployment has surged from 4.6% in 2007 to 11.6% in 2009 and the vision of mass immigration haunts the Emerald Isle. While Ireland has been poor for much of its history this time it comes after a period at the top of the economic rankings. In 1988 “The Economist” referred to it as the “Poorest of the rich” European countries yet by 2006 it was the richest per head of any European country after Luxembourg (see table below).
When you think of Australia you’re most likely to associate it with the Sydney Opera
House, vast areas of desert, a few tinies (cans of beer), a barbie (BBQ not doll), and of
course Ricky Ponting – the captain of the Australian cricket team. However, 2009 has
been a year of incredible resilience for its economy. As the rest of the industrialized
world hemorrhaged into a period of recession, which threatened depression, the
Australian economy moved in the other direction and actually recorded an increase in
The end of 2008 (December quarter GDP) saw a contraction of the economy of -0.6% but
the March Quarter 2009 actually recorded a positive growth period of +0.4% which
defied earlier expectations that a contraction was close to certain. Sure enough
publications like that of The Economist and The New York Times made assumptions that
the recessionary phase would be a certainty for the Australian economy. The surprise
result meant that Australia has escaped two consecutive quarters of economic contraction
- the definition used by some economists for a technical recession. This is all the more
astonishing when you think that in the first quarter of 2009 the US economy contracted
by around 1.6 per cent, Canada by 1.4 per cent, Germany 3.8 per cent and Japan 4.0 per