I find it is extremely ironic that the likes of congressman Paul Ryan, who fancies himself an expert on economics and is the highest ranking member on the House’s Finance Committee, lately has been sounding the alarm for his fellow citizens, warning them that if they are not careful with the national debt and budget (read that as austerity for the poor and the dismantling of the social programs while simultaneously cutting taxes for the rich) and if they do not implement urgent reforms, they will inexorably go the way of Greece and find themselves with a financial disaster on their hands. This of course is sweet sounding music to Putin’s ears who would like nothing better than to see such a scenario come to fruition.
Not being an economist or an expert in financial matters, far be it from me to critique the honorable Ryan’s analysis or even impugn the integrity of his intentions, but, given the Republicans’ and Ryan’s previous track record, it must be said that it smells as a partisan one sided, biased analysis having little to do with objective economic realities. To say so is not me, but none other than a Nobel Prize winner in economics, professor of economics at Princeton University and New York Times columnist Paul Krugman who recently has accused Republicans of supporting policies that are “likely to deliver a Greek-style economic disaster here to America.” Krugman maintains that if a disaster does indeed occur, and it is a big if, it will be due to the bad analysis and policies of the Republicans in Congress and academia.
What Kruger argues, and convincingly so, is that the Greek “formula for disaster” involved the toxic combination of austerity with hard to get money, and that most of the Republican Party wants to “impose that kind of toxic policy mix on America.” It is exactly because America did not embrace austerity as the only solution that it finds itself in a better financial position than the struggling democracies on the other side of the Atlantic being manipulated by their bankers.
For example, Krugman goes on: “just about everyone in the GOP demands that we reduce government spending, especially aid to lower-income families,” while at the same time they are “incessantly attacking the Federal Reserve for its efforts to boost the economy, delivering solemn lectures on the evils of ‘debasing’ the dollar.” Some of them even “hanker for a return to the gold standard, which would effectively put us into a euro-like straitjacket.” Which means that instead of worrying that the United States might happen to “turn into Greece, you should really focus your concern on America’s right,” who are actively pursuing policies to ensure that it will.
As Krugman explains it in purely economic terms, to understand the real lessons of Greece, you need to be aware of two crucial points. The first is that the “We’re Greece!” crowd has a truly disastrously remarkable track record when it comes to economic forecasting: They’ve been wrong about everything, year after year, but refuse to learn from their mistakes. The people now saying that Greece offers an object lesson in the dangers of government debt, and that America is headed down the same road, are the same people who predicted soaring interest rates and runaway inflation in 2010; then, when it didn’t happen, they predicted soaring rates and runaway inflation in 2011; then, well, you get the picture. It’s like a mantra: even when things seem to get better they keep repeating: it’s all Obama’s fault.
The second is that the story you’ve heard about Greece — that it borrowed too much, and its excessive debt led to the current crisis — is seriously incomplete. Greece did indeed run up too much debt (with a lot of help from irresponsible lenders). But its debt, while high, wasn’t that high by historical standards. What turned Greek debt troubles into catastrophe was Greece’s inability, thanks to the euro, to do what countries with large debts usually do: impose some fiscal discipline and austerity, yes, but offset it with easy money that could circulate and start new business ventures.
In effect, what Krugman is warning us about is that it is conservative economics, the sort that has been practiced on Greece in the last few years by the EU’s bankers and bureaucrats with its apparent consequences, that will in effect turn the USA into another Greek disaster on a major scale, with all its disastrous implications for the global economy. We have ample reason to be skeptical that Republicans in Congress will respect science and listen attentively to the expert voice of a distinguished economist. Indeed, precious few listened to Cassandra on that fateful day on the Trojan beach, but Marx, who was wrong on some issues was certainly right in prophesying that those who do not learn from their history are bound to repeat it.
Note: This article has already appeared in Ovi Magazine on 7/18/2015.
Transitioning from least developed country status: Are countries better off?
The Least Developed Countries (LDCs) are an internationally defined group of highly vulnerable and structurally constrained economies with extreme levels of poverty. Since the category was created in 1971, on the basis of selected vulnerability indicators, only five countries have graduated and the number of LDCs has doubled. One would intuitively have thought that graduation from LDC status would be something that all LDCs would want to achieve since it seems to suggest that transitioning countries are likely to benefit from increased economic growth, improved human development and reduced susceptibility to natural disasters and trade shocks.
However, when countries graduate they lose international support measures (ISMs) provided by the international community. There is no established institutional mechanism for the phasing out of LDC country-specific benefits. As a result, entities such as the World Bank and the International Monetary Fund may not always be able to support a country’s smooth transition process.
Currently, 14 out of 53 members of the Commonwealth are classified as LDCs and the number is likely to reduce as Bangladesh, Solomon Islands and Vanuatu transition from LDC status by 2021. The three criteria used to assess LDC transition are: Economic Vulnerability Index (EVI), Human Assets Index (HAI) and Gross National Income per capita (GNI). Many of the forthcoming LDC graduates will transition based only on their GNI. This GNI level is normally set at US $ 1,230 but if the GNI reaches twice this level at US $ 2,460 a country can graduate.
So what’s the issue? A recent Commonwealth – Trade Hot Topic publication confirms that most countries graduate only on the basis of their GNI, some of which have not attained significant improvements in human development (HAI) and even more of which fall below the graduation threshold for economic development due to persistent vulnerabilities (EVI). This latter aspect raises the question as to whether transitioning countries will, actually, be better off after they graduate.
Given the loss of ISMs and the persistent economic vulnerabilities of many LDCs, it is no surprise that some countries are actually seeking to delay graduation, Kiribati and Tuvalu being two such Commonwealth countries despite easily surpassing twice the GNI threshold for graduation.
How is it possible that a country can achieve economic growth but not have appreciable improvements in resilience to economic vulnerability? Based on a statistical analysis discussed in the Trade Hot Topic paper, a regression model, based on all forty-seven LDCs, was produced. The model revealed that there was no statistically significant relationship between economic vulnerability and gross national income per capita. The analysis was repeated just for Commonwealth countries and similar results were obtained.
Most importantly, analysis revealed that there was a positive relationship between GNI and EVI. In other words, increases in wealth (using GNI as a proxy) is likely to result in an increase in economic vulnerability. This latter result is counterintuitive since one would expect more wealth to result in less economic vulnerability.
So what’s the take away?
The statistical results do not necessarily imply that improving the factors affecting economic vulnerability cannot result in improvements to economic prosperity. It does suggest, however, that either insufficient efforts have gone into effecting such improvements or that there are natural limits to the extent to which such improvements can be effected.
One thing is clear, the multilateral lending agencies should revisit the removal of measures supporting climate change or other vulnerabilities for LDCs on graduation, since the empirical evidence suggests that countries could fall back into LDC status or stagnate and be unable to achieve sustainable development. Whilst transitioning from LDC status should be desirable, it should not be an end in itself. Rather than to transition and remain extremely vulnerable, countries should be resistant to such change or continue to receive more targeted support until vulnerabilities are reduced to more acceptable levels.
What are your thoughts?
U.S. policy and the Turkish Economic Crisis: Lessons for Pakistan
Over the last week, the Turkish Lira has been dominating headlines the world over as the currency continues to plunge against the US dollar. Currently at the dead center of a series of verbal ripostes between Presidents Donald Trump and Recep Tayyip Erdogan, the rapidly depreciating Lira has taken center stage amidst deteriorating US-Turkey relations that are wreaking havoc across international financial markets. Considering Pakistan’s current economic predicament, the events unfolding in Turkey offer important lessons to the dangers of unsustainable and unrealistic economic policies, within a dramatically changing international scenario. This holds particular importance for Pak-US relations within the context of the impending IMF bailout.
In his most recent statements, Mr. Erdogan has attributed his economy’s dire state of affairs as an ‘Economic War’ being waged against it by the United States. President Trump too has made it evident that the latest rounds of US sanctions that have been placed on Turkey are directly linked to its dissatisfaction with Ankara for detaining American Pastor Andrew Brunson. Mr Bruson along with dozens of others has been charged with terrorism and espionage for his purported links to the 2016 attempted coup against President Erdogan and his government. There is thus a modicum of truth to Mr. Erdogan’s claims that the US sanctions are in fact, being used as leverage against the weakening Lira and the Turkish economy as part of a broader US policy.
However, to say that the latest US sanctions alone are the sole cause of Turkey’s economic woes is a gross understatement. The Lira has for some time remained the worst performing currency in the world; losing half of its value in a year, and dropping by another 20% in just the last week. Just to put the scale of this loss in to perspective, the embattled currency was trading at about 2 Liras to the dollar in mid-2014. The day before yesterday, it was trading at about 7 Liras to the dollar.
While the Pakistani Rupee has also depreciated quite considerably over the last few months, its recent drop (-17% against the dollar over the past 12 months) pales in comparison to the sustained and exponential downfall of the Lira. Yet, both the Turkish and Pakistani economies are at a point where they are experiencing an alarming dearth of foreign exchange reserves that have in turn dramatically increased their international debt obligations.
The ongoing financial crises in both Turkey and Pakistan are similar to the extent that both countries have pursued unsustainable economic policies for the last few years. These have been centered on increased borrowing on the back of overvalued currencies. While this approach had allowed both governments to finance a series of government investments in various projects, the long term implications of this accumulating debt has now caught up with them dramatically. As a result, both countries may soon desperately require IMF assistance; assistance, that in recent times, has become even more overtly conditional on meeting certain US foreign policy requirements.
In the case of Pakistan, these objectives may coincide with recent US pressures to ‘do more’ regarding the Haqqani network; or a deeper examination of the scale and viability of the China- Pakistan Economic Corridor. With regards to the latter, US Secretary of State Mike Pompeo has clearly stated that American Dollars, in the form of IMF funds, to Pakistan should not be used to bailout Chinese investors. The rationale being that a cash-strapped Pakistan is more likely to adversely affect Chinese interests as opposed to US interests in the region at the present. The politics behind the ongoing US-China trade war add even further relevance to this argument.
In the case of Turkey however, which is a major NATO ally, an important emerging market, and a deeply integrated part of the European financial system, there is a lot more at stake in terms of US interests. Turkey’s main lenders comprise largely of Spanish, French and Italian banks whose exposure to the Lira has caused a drastic knock on effect on the Euro. The ensuing uncertainty and volatility that has arisen is likely to prove detrimental to the US’s allies in the EU as well as in key emerging markets across South America, Africa and Asia. This marks the latest example of the US’s departure from maintaining and ensuring the health of the global financial system, as a leading economic power.
Yet, what’s even more unsettling is the fact that while the US is wholly cognizant of these wide-ranging impacts, it remains unfazed in pursuing its unilateral objectives. This is perhaps most evident in the diminishing sanctity of the NATO alliance as a direct outcome of these actions. After the US, Turkey is the second biggest contributor of troops within the NATO framework. As relations between both members continue to deteriorate, Turkey has been more inclined to gravitate towards expanding Russian influence. In effect, contributing to the very anti-thesis of the NATO alliance. The recent dialogues between Presidents Erdogan and Putin, in the wake of US sanctions point markedly towards this dramatic shift.
Based on the above, it has become increasingly evident that US actions have come to stand in direct contrast to the Post-Cold War status quo, which it had itself help set up and maintain over the last three decades. It is rather, the US’s unilateral interests that have now taken increasing precedence over its commitments and leadership of major multilateral frameworks such as the NATO, and the Bretton Woods institutions. This approach while allowing greater flexibility to the US has however come at the cost of ceding space to a fast rising China and an increasingly assertive Russia. The acceleration of both Pak-China and Russo-Turkish cooperation present poignant examples of these developments.
However, while it remains unclear as to how much international influence US policy-makers are willing to cede to the likes of China and Russia over the long-term, their actions have made it clear that US policy and the pursuit of its unilateral objectives would no longer be made hostage to the Geo-Politics of key regions. These include key states at the cross-roads of the world’s potential flash-points such as Turkey and Pakistan.
Therefore, both Turkey and Pakistan would be well advised to factor in these reasons behind the US’s disinterest in their economic and financial predicaments. Especially since both Russia and China are still quite a way from being able to completely supplant the US’s financial and military influence across the world; perhaps a greater modicum of self-sufficiency and sustainability is in order to weather through these shifting dynamics.
Social Mobility and Stronger Private Sector Role are Keys to Growth in the Arab World
In spite of unprecedented improvements in technological readiness, the Arab World continues to struggle to innovate and create broad-based opportunities for its youth. Government-led investment alone will not suffice to channel the energies of society toward more private sector initiative, better education and ultimately more productive jobs and increased social mobility. The Arab World Competitiveness Report 2018 published by the World Economic Forum and the World Bank Group outlines recommendations for the Arab countries to prepare for a new economic context.
The gap between the competitiveness of the Gulf Cooperation Council (GCC) and of the other economies of the region, especially the ones affected by conflict and violence, has further increased over the last decade. However, similarities exist as the drop in oil prices of the past few years has forced even the most affluent countries in the region to question their existing social and economic models. Across the entire region, education is currently not rewarded with better opportunities to the point where the more educated the Arab youth is, the more likely they are to remain unemployed. Financial resources, while available through banks, are rarely distributed out of a small circle of large and established companies; and a complex legal system limits access to resources locked in place and distorts private initiative.
At the same time, a number of countries in the region are trying out new solutions to previously existing barriers to competitiveness.
- In ten years, Morocco has nearly halved its average import tariff from 18.9 to 10.5 percent, facilitated trade and investment and benefited from sustained growth.
- The United Arab Emirates has increased equity investment in technology firms from 100 million to 1.7 billion USD in just two years.
- Bahrain is piloting a new flexi-permit for foreign workers to go beyond the usual sponsorship system that has segmented and created inefficiencies in the labour market of most GCC countries.
- Saudi Arabia has committed to significant changes to its economy and society as part of its Vision 2030 reform plan, and Algeria has tripled internet access among its population in just five years.
“We hope that the 2018 Arab World Competitiveness Report will stimulate discussions resulting in government reforms that could unlock the entrepreneurial potential of the region and its youth,” said Philippe Le Houérou, IFC’s CEO. “We must accelerate progress toward an innovation-driven economic model that creates productive jobs and widespread opportunities.”
“The world is adapting to unprecedented technological changes, shifts in income distribution and the need for more sustainable pathways to economic growth, “added Mirek Dusek, Deputy Head of Geopolitical and Regional Affairs at the World Economic Forum. “Diversification and entrepreneurship are important in generating opportunities for the Arab youth and preparing their countries for the Fourth Industrial Revolution.”
With a few exceptions, such as Jordan, Tunisia and Lebanon, most Arab countries have much less diversified economies than countries in other regions with a similar level of income. For all of them, the way toward less oil-dependent economies is through robust macroeconomic policies that facilitate investment and trade, promotion of exports, improvements in education and initiatives to increase innovation and technological adoption among firms.
Entrepreneurship and broad-based private sector initiative must be a key ingredient to any diversification recipe.
The Arab Competitiveness Report 2018 also features country profiles, available here: Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, United Arab Emirates.
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