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Deutsche Bank Crisis and German Exceptionalism

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During the last two weeks, Deutsche Bank (DB) the largest German Bank (identical to our State Bank of India) making headlines in financial press because of the downward slide of its share value to the record low. A fall by 65 % in share price that has not only erased more than half of its market value but is likely to lead to a closure of 25% of its branches and loss of job for over 2,000 staff. Financial circles are afraid that DB once a triple-A-rated bank is likely to be the next Lehman Brothers which caused the famous US financial crisis.

This is not a speculation but a likely event pregnant distinct certainty because rating agency Standard & Poor, has already lowered DB’s rating even lower than what was that of Lehman Brother three months prior to the historical debacle in 2008. It was then the US Government had to bail out the US financial sector by burning tax payers 13 Trillion Dollars. The DB crisis is more serious because this time the context is radically different. Unlike Lehman Brothers in the United States, it is DB in Germany. And the primary difference is the core German economic philosophy called the Ordo-liberalism which does not permit any state intervention in the market once having laid the rules.

As the Nobel Prize winner economist Paul Krugman has said in one of his articles in Fortune magazine, “Germans are sticklers for principles, while Americans are philosophical and personally “sloppy”. Today, it looks like the German self-righteousness which is holding a hanging sword on the “project unified Europe” is also likely to lead to some kind of self-harm if not self-destruction for the Germany itself.

German Chancellor Angela Merkel has a hard choice to make between devil and deep sea. On one hand, she has gone to the town with Ordo-liberalism as the panacea for ailing European member states of south and taken hard line against state aid in other European nations (remember Greek crisis) and on the other side is the likely domino effect the DB failure will have on the European financial markets besides her domestic political compulsions.

In a way, it may not be too much of a bad throw at the dartboard if we say that chickens have started coming home to roost for Angela Markel which may see her eventual exit from the political center stage of European Union.

The Iron lady of European Union has for last five years been riding roughshod over democratically elected European Union member states of south; the PIGS (Portugal, Italy, Greece and Spain) in pursuit of austerity measures and fiscal discipline. Her consistent message to these member states has been to bring about a policy convergence of their economies around the best practice policy template, used by Germany which has made it the most successful economy in the EU. This German bullying is interpreted by some as pursuit of its narrow nationalistic interest above collective interest of the EU on account of its strong economy and capital surplus but more serious minded intellectuals treat this as the typical German approach to economic policy making traditionally called as the Ordo-liberalism.

It may be useful to do bit of theoretical heavy lifting out of the way by understanding what Ordo-liberalism broadly means. It is the German intellectual tradition of liberal economy originally developed by the famous Freiburg school. It evolved in the context of the bitter experience of rising inflation and mass unemployment in Weimar German during the interim period of two world wars. Ordo-liberalism expects that the role of the state is to create an economic and legal framework to enable the market to work efficiently. Ordo-liberalism opposes intervention into the normal course of the economy and staunchly opposes expansionary fiscal and monetary policy during an economic downturn and to stabilize the business cycle in a recession.

Ordo-liberalism forged the template of German growth in post war period where state maintained framework of austerity, balance budgets and price stability and encouraged firms to grow through exports and country gained positive current account surplus. Experts feel that Ordo-liberalism normally succeeds in a more stable economic environment with growing economies something that world witnessed following second world war period up to Eighties. During this period this approach helped Germans build formidable competitive manufacturing sector and enviable current account surplus.

However, Germany is a part of European Monetary Union ( EMU) and the German current account surplus reflected in current account deficit of Southern European members of Union. Close to third of Germany’s current account surpluses are on account of its intra-EU trade. Hence, while Germany has run current account surpluses of more than 7 percent of its GDP, Greece, Portugal and Spain have experienced current account deficits of 10 percent of GDP. And large current account deficits thus lead to quickly rising external debt. This has been partly the genesis of Euro problem.

On this background the DB crisis acquires special ideological connotation. Americans as pragmatic they are, were quick to accept fallibility of their system and resorted to a bail out, no matter the American tax payer had to pick the tab. This was in a way better than letting the economy fail and entire society collectively suffering endless miseries by of unemployment hunger and deprivation. So the Americans swallowed the bitter pill reminding themselves the famous argument of “Too big to Fail”.

On the contrary, Germans have taken all along a “Holier than though” stance and deprived crisis ridden nations of south any state sponsored economic initiative. Mostly it was done because of their sincere belief in their economic philosophy of Ordo-liberalism. The philosophy which not only built the might of Post war German State but as EU leader and chief protagonist of the Union, gave it the moral right to force down the throat its Economic approach to member states across the community. Now when the financial crisis is knocking on its own door, it will be interesting to see if Germany finds some creative solution from its Ordo-liberal tool box retrieving once again the high moral ground or does the famous American flip flop. In a way, it will not be only a defining moment for Angela Merkel but the entire German state and its economic policy based on Ordo-liberalism.

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Economy

Côte d’Ivoire: Robust growth under the looming threat of climate change impacts

MD Staff

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According to the Economic Update for Côte d’Ivoire, published today, the short- and medium-term outlook for the Ivorian economy remains positive. The economy is expected to maintain a steady trajectory, with GDP growth of 7 to 7.5% in the coming years. Titled “So Tomorrow Never Dies: Côte d’Ivoire and Climate Change,” the report highlights the urgent need to implement measures to ensure that climate change impacts do not imperil this economic progress and plunge millions of Ivorians into poverty.

“The solid performance of the Ivorian economy, which registered growth of almost 8% in 2017, is essentially due to the agricultural sector, which experienced positive climate conditions. The economy also benefited from a period of calm after the political and social instability of the first half of 2017 and from more favorable conditions on international markets,” said Jacques Morisset, Program Leader for Côte d’Ivoire and Lead Author of the report. “The Government also successfully managed its accounts, with a lower-than-expected deficit of 4.2% of GDP, while continuing its ambitious investment policy, partly financed by a judicious debt policy on financial markets.

However, the report notes that private sector activity slowed in 2017 compared with 2016 and especially 2015, which may curb the pace of growth of the Ivorian economy in the coming years. Against the backdrop of fiscal adjustment projected for 2018 and 2019, it is critical that the private sector remain dynamic and become the main driver of growth. This is particularly important in light of the uncertainty associated with the upcoming elections in 2020, which could prompt investors to adopt a wait-and-see approach.

As economic growth in Côte d’Ivoire relies in part on use of its natural resource base, the authors of the report devote a chapter to the impact of climate change on the economy. They raise an alarming point: the stock of natural resources is believed to have diminished by 26% between 1990 and 2014. Several visible phenomena attest to this degradation, such as deforestation, the depletion of water reserves, and coastal erosion. According to the Intergovernmental Panel on Climate Change (IPCC), climate change could reduce GDP across Africa by 2% to 4% by 2040 and by 10% to 25% by 2100. For Côte d’Ivoire, this would correspond to a loss of some CFAF 380 billion to 770 billion in 2040.

This report sounds an alarm in order to spark a rapid and collective wake-up call,” said Pierre Laporte, World Bank Country Director for Côte d’Ivoire. “Combating climate change will require prompt decisions and must become a priority for the country to maintain accelerated and sustainable growth over time.”

The report pays special attention to coastal erosion and to the cocoa sector, which represents one third of the country’s exports and directly affects over 5 million people. With 566 km of coast, Côte d’Ivoire now boasts a coastal population of almost 7.5 million people, who produce close to 80% of the national GDP. Two thirds of this coast is affected by coastal erosion, with severe consequences for the communities and the country’s economy.

The Ivorian Government, which is already aware of this challenge and has prepared a strategy to confront it, must expedite its implementation. This would have the two-fold effect of developing a “green” economy and creating new jobs.

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A future of work based on sustainable production and employment

Simel Esim

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On the first Saturday of July each year, the international community celebrates the International Day of Cooperatives. This year’s theme, Sustainable consumption and production of goods and services is timely, as the ILO works towards a future of work that is based on sustainable production and employment models.

As head of the ILO’s Cooperative Unit, I have witnessed firsthand the positive impact of cooperatives’ commitment to sustainable consumption and production.

In Northern Sri Lanka, for instance, after years of civil war, I saw how cooperatives helped build the resilience of local communities.

A rapid assessment at the start of the ILO’s Local Empowerment through Economic Development project (LEED) indicated that cooperatives were the only “stable” structures present in Northern Sri Lanka before, during, and after the conflict. Since 2010, the project has been supporting agriculture and fishery cooperatives by securing fair trade certification for their products and helping them establish market links.

I’ve also listened to inspiring stories from other parts of the world of how cooperatives have joined forces to contribute to sustainable consumption, production and decent work – often through cooperative-to-cooperative trade.

Some of these stories were shared at a recent meeting in Geneva of cooperative and ethical trade movements.

We heard how Kenyan producer cooperatives’ coffee has found its way on the shelves of Coop Denmark and how biological pineapples from a Togolese youth cooperative are being sold in retail cooperatives across Italy. We heard how consumer cooperatives in East Asia have developed organic and ecolabel products, while educating their members about the working conditions of producers and workers, as well as on reducing food waste and plastic consumption. We also shared ILO experiences in supporting constituents in the field.

The emerging consensus from the meeting was that cooperative-to-cooperative trade can help lower the costs of trade, while ensuring fairer prices and better incomes for cooperative members and their communities. Opportunities exist not only in agricultural supply chains, but also in ready-made garments and other sectors.

Cooperatives at both ends of the supply chain have been joining forces to shorten value chains, improve product traceability and adopt environmentally-friendly practices. At the ILO we have been working with our constituents to improve the social and environmental footprint of cooperatives around the world.

As the ILO continues to promote a future of work that is based on sustainable production and employment models, a priority for us in the coming years is to facilitate the development of linkages between ILO constituents and cooperatives. The aim is to encourage joint action towards responsible production and consumption practices, the advancement of green and circular economies and the promotion of decent work across supply chains.

Source: ILO

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Economy

Mongolia’s Growth Prospects Remain Positive but More Efficient Public Investment Needed

MD Staff

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Mongolia’s economic performance has improved dramatically with GDP growth increasing from 1.2 percent in 2016 to 5.1 percent in 2017 and 6.1 percent in the first quarter of 2018. While short- and medium-term economic prospects remain positive, Mongolia faces core structural vulnerabilities that hinder its potential, according to Mongolia Economic Update, the latest World Bank report on Mongolia’s economy launched here today. The report also highlights the importance of improving efficiency of its public investment programs given extensive consequences from the overambitious and unrealistic investment programs implemented in the past.

“Last year was a good year for Mongolia with favorable commodities prices and the successful implementation of the government’s economic recovery program,” said Dr. Jean-Pascal N. Nganou, World Bank Senior Economist for Mongolia and Team Leader of the report. “This resulted in improved fiscal and external balances, triggering a slight decline of the country’s public debt.

The recovery is expected to accelerate with a GDP growth rate averaging more than 6 percent between 2019 and 2020, driven by large foreign direct investments in mining. Other than agriculture, which was severely affected by harsh weather conditions during the winter, most major sectors including manufacturing, trade, and transport are expected to expand significantly. On the back of increasing exports and higher commodity prices, economic growth will continue to have a strong positive impact on government revenue, contributing to the reduction of the fiscal deficit.

The unemployment rate dropped to 7.3 percent in the last quarter of 2017, compared to 8.6 percent a year earlier. Still, it increased to 9.7 percent in the first quarter of this year, reflecting Mongolia’s highly seasonal employment patterns due to difficult working conditions in the winter, especially in construction, agriculture, and mining.

The report highlights possible short- and medium-term risks including political risks, regional instability, climate shocks, and natural disasters. The most critical risk identified is a sudden relaxation of the government’s commitment to full implementation of its economic adjustment program supported by development partners.

In addition, the economy remains vulnerable to fluctuations in global commodity prices and a productivity gap. The best long-term protection against these two vulnerabilities is the diversification of the Mongolian economy.

To create a strong buffer against economic vulnerabilities, the government and donors should give a high priority to economic diversification that helps counter the ups and downs of the mining sector. Investing in human capital and strengthening the country’s institutions are the best way to support diversification, together with sound investments in crucial infrastructure,” said James Anderson, World Bank Country Manager for Mongolia.

The report takes a closer look at public investment programs implemented over the past five years, which surged until 2015, contributing to large increases in public finance deficits and the public debt. Mongolia needs to review and reshape its public investment policies and decision-making processes to improve efficiency of public spending, including clear project selection and prioritization criteria, as well as proper maintenance of existing assets.

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