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What will happen as a result of the Turkish Lira crisis?

Giancarlo Elia Valori

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As often happens in these cases, the financial structure of the current Turkish crisis was quite simple initially: as is always the case during an electoral period, credit to businesses and families was “pumped” to such a point that, before the outbreak of the crisis, the Turkish inflation rate had already reached 16%.

Again during the campaign for the general election of June 24 last, President RecepTayyp Erdogan promised strong investment in infrastructure.

It is the usual, old theory of Napoleon III, quand le bâtimentva, tout va – but currently investment in infrastructure has a relatively low multiplier (1.9 on average) and is increasingly capital intensive rather than labour intensive.

Furthermore, the return on investment over time and the future average return, if any, become technically unpredictable.

Certainly the modern economic theory tells us that also higher infrastructure costs lead to net increases in sectors which are not directly dependent on infrastructure – such as the classic examples of the ferry cost and the restaurant owner’s profit on an island. Nevertheless the money borrowed for these operations is little or is such as to create short and relevant returns -and this can never happen.

President Erdogan’s electoral promises, however, were inevitable: according to the latest internal polls before June 24, 60% of the people who traditionally voted for AKP (Adaletve Kalkınma Partisi, the Justice and Development Party) were already loyal and stable, above all vis-à-vis the Party’s Leader. However, 30-40% of the old AKP voters were dissatisfied, to the point of calling their vote for President Erdogan into question, and 10-15% were fed up with the AKP and its Leader.

It would be the end if, God forbid, the United States sought President Erdogan’s economic destabilization to punish “the tyrant” – ideological nonsense in which it only believes – or if the European Union thought to destroy the “fascist” Erdogan to free the Turkish people, thus destabilizing a ‘huge and essential area for the European security. The uncontrolled migration would turn into an invasion and the direct contact between the EU strategic nothingness and the Middle East jihad would become lethal, but only for Europe.

During the campaign for the general elections of last June, President Erdogan had also promised public investment (and nowadays the globalized economy is such as not to allow to make promises on private investment, without funding State’s investment). He was faced with an unprecedented united front of the four opposition parties against the AKP, which did not augur well for the founder of the first Party in power.

Hence “international markets” need to become aware of it in time: without promises you can never win elections and without some electoral public spending there is no consensus. This holds true for both the West and the East. The Jordanian uprising of last spring is acase in point: nowadays springs are economic  and destabilize a larger area than the purely political ones of 2011.

“Communication”, manipulative spin, and taking some extra erotic “liberties” are no longer enough to win elections – as still happens, but not for much longer, in some Western countries.

People want and will always want employment, security, infrastructure, wages and pensions, and above all stability.

The problem, which also applies to Italy, is that the current capital is post-national and pays taxes nowhere, while the average incomes have been falling for eleven years and cannot be further attacked by tax authorities.

Hence, since we cannot generate inflation – considering that the “markets” are only interested in it – we do no longer understand where we should find the resources, even limited, to give the masses what they have always asked from politicians since the times of Marcus Agrippa.

Hence there is also the Turkish leader’s electoral reference to the figure of Atatürk – that is strange even within a traditionally neo-Ottoman and Sunni project and narrative like the ones of  President Erdogan’s Party – which would have been impossible years before. During the electoral campaign, President Erdogan also underlined the further Turkish engagement in Syria, another clearly nationalistic and even secular factor that no one would find in President Erdogan’s initial storytelling. Finally he also referred to the Turkish ties with the European Union.

Clearly the European Union currently becomes the natural strategic and economic counterpart, faced with the crisis with the United States, an old tension due to the presence of Fethüllah Gülen in the USA.

Gülen is a Turkish preacher and political scientist, allied with Erdogan until 2013, but since 1999 he has been living in the forests of Pennsylvania.

With his movement, namely Hizmit (“Service”), Fethullah Gülenis supposed to be the figure who traditionally inspired the strong penetration of the Turkish AKP bureaucracies’ into the intelligence services and Armed Forces, in particular, as well as the Turkish coup of July 15, 2016.

Probably, the United States has always looked to the Western political scientist and sapiential preacher it hosts as a sort of threat to Turkey, a sword of Damocles enabling America to prompt an “Arab spring” in Turkey or even a “colour revolution” where needed.

Islamic esoteric sects, sapiential and secret networks, halfway between coup and Revelation, often connected with the most refined Western culture and politics, as well as relations between politics, intelligence and esotericism.

Nil sub sole novi: when Italy still counted for something, even the Grand Orient of Italy was the only cover chosen by the “Young Turks”, who organized their political and military action within the ranks of the Italian Lodges of Alexandria of Egypt, Istanbul and Thessaloniki.

However, let us revert to the economy: in spite of everything, the debt-GDP ratio – the obsession of the poor-quality economists so fashionable today – is very low in Turkey (a mere 28%).

However, Turkey currently records a high trade deficit of current accounts, which amounts to 6%. Hence the private debt has risen to over 50% of GDP, thus obviously putting the currency in difficulties.

In early July, all foreign investors expected a sharp rise in the Turkish Lira interest rates- and it was a “rational expectation”.

But obviously Erdogan, who is above all a politician, a leader who, like everyone else, seeks re-election – as the political scientists of the Rational Choice school of thought maintain  – blocked the interest rates downwards, with a view to avoiding impacts on domestic consumption and on the cost of loans.

Apart from Erdogan’s direct and institutional-family influence on the Turkish Central Bank, the idea is that the interest rate growth is generated by high inflation – as maintained by the neoclassical economic theories currently fashionable everywhere. And if the opposite were true? Here the arrow of time is of great importance.

The impact was predictably negative: inflation rose very rapidly, considering that many goods and services came from abroad. Investors got scared and only at that juncture  President Trump’s new duties materialized, just to top it all off.

Furthermore, Turkish companies have always been asking for money, especially abroad, to be considered reliable, given that – like all the recent dangerous economic success stories – the AKP-led Turkey has configured itself as an almost exclusively export-oriented country.

Einaudi’s economic wisdom would recommend a balance between the internal market and the external market dimension. Today, however, everyone superficially read the fashionable manuals, where equations seem to be written for theoretical cases, not for real economies.

Apart from President Trump’s duties, which kill a dead man– as we will see later on – the critical structure of the Turkish economy is made up of the following issues, which are all still on the table: a) the free fall of the Turkish Lira, the primary index of foreign investors’ sentiment; the Turkish currency that fell for twelve days in a row as against the dollar; the longest “fall” of the Turkish lira since 1999, the year when Gülen took refuge in the United States and the International Monetary Fund had to intervene with a bailout in dollars.

Considering that Turkey lives on many strong currency imports as against an export-regulated economy, which must be based on a weak currency to have the size necessary for reaching equilibrium and break even. Hence always keeping the Turkish currency artificially “weak”, a Weimarian inflation rapidly emerged.

  1. b) The financial burdens which, as always happens in these cases, have risen more than inflation, because investors are asking for a guarantee both to offset inflation and to be hedged against the collapse of the currency.
  2. c) As to the current accounts – another structural problem – it is still obvious that, under these conditions, Turkey must attract capital from abroad with very high rates of return – only to balance the economy and break even.

This triggers an imbalance that is resolved as in the case of a drug addict: much foreign capital marginally ever harder to repay, even only for the interest share.

Later, as in a well-known Dürer’s print, the scourge of the greater incidence of foreign debt materializes, just when buying  “good” currency only with the Turkish Lira has a higher cost. Other scourges materialize such as the growth of non-performing loans and the complete Turkish dependence on foreign oil and gas, which are sold in dollars and, incidentally, are increasing their unit price.

As already seen, apart from the current situation, the structure of the Turkish economy is strictly export-oriented, with domestic imports that depend directly on the oil and natural gas prices.

The steadily increasing prices of oil and natural gas rapidly led to a Turkish trade balance deficit equal to 57 billion US dollars in the period between March 2017 and March 2018.

There is virtually no propensity for domestic savings (whereas the high rate of domestic savings is exactly what is rescuing and will rescue Italy) and therefore the Turkish dependence on foreign loans has become chronic. This dependence feeds on the low value of the Turkish lira, which is however the main problem when debt must be repaid.

The foreign debt incurred in 2018 already amounts to 240 billion US dollars.

Obviously, under these conditions, the Turkish companies operating abroad do not repatriate their profits, which remain in the most profitable markets, while the solvency of Turkish banks is exacerbating.

Finally, however, the Turkish Central Bank reacted according to the too little too late classic rule, when the lira reached 4.9290 as against the dollar, thus restricting – only at that juncture – the monetary base and finally increasing interest rates.

Hence who is bearing the brunt of the crisis in Turkey? All the many people who have taken on debts in dollars or euros, but workers are certainly not better off.

Indirect taxation on employees’ incomes now accounts for 65% of their total salaries. Obviously unemployment (and hence the “cost of the politics”) increases and finally Turkish exports will also be devalued for a period covering at least the difference between the pre-crisis levels and those of the point in which markets will declare that the great Turkish inflation is over – inflation they have triggered off by taking advantage of Turkey’s mistakes.

Inflation resulting from the forced repayment of foreign debt, which was politically excessive. A precisely Weimarian structure.

The so-called Vision 2023, which Erdogan had made public in 2011, the year of the “Arab Springs”, will be probably put to an end.

Is it possible that after the stalemate in the Syrian crisis now won by Assad and Putin, the era of “Arab springs” has come, induced by the economic crisis rather than by the “democratic rebellions”, usually managed by the Muslim Brotherhood or by some fundamentalist group, with the agreement of the major Western democracies?

The Turkish crisis as if it were a sort of Egyptian, but only financial Tahrir Square, is a hypothesis not to be ruled out.

According to Erdogan’ statements, Vision 2023 aimed at a strong growth of average incomes and at an average per capita GDP of at least 25,000 US dollars, thus enabling Turkey to rank 10th in the world economy, to triple exports up to 500 billion dollars and create ten “global” Turkish brands (a good idea, which would apply also to Italy). Finally, the idea was to solve the long-standing issue of EU membership.

The Association Agreement between the EU and Turkey was signed in 1964.

The Final Stage of said agreement concerned a complete customs agreement between Turkey and the European Union. Later, in 1999, the “pre-accession policy” came, which imposed, inter alia, the constitutional change of relations between the Armed Forces and the political system, thus ensuring the rapid Islamization of the country. Was it a blind or silly strategy? We do not know the answer to this question.

In 2004 the EU still urged to open negotiations with Turkey – negotiations which are still underway. In 2016, a few days before the coup of July 15, there was a Declaration which “reaffirmed the commitment to implement the action plan as defined on November 29, 2015”, while the Parties agreed that the accession process should be “revitalized”.

Just lip service, as the opponents of the Soviet regime used to say, when they read the CPSU’s official statements.

Reverting to the economy, even the now unlikely Turkish plan for 2023 becomes possible only if a strong and long growth is recorded, or if we seriously increase – first and foremost – domestic savings. Investment and not consumption induced by strong currency regions must be generated, while the dependence of the Turkish lira on foreign capital must be reduced.

The shift between the dollar and the euro would be possible in Turkey, considering that now 70% of Foreign Direct Investment in the country comes from the EU, which is also a sort of legal, sociological and humanitarian minuet.

This will be possible if the Turkish economy is partially dedollarized and investment comes from areas such as the EU, in particular, as well as from the Russian Federation and its friends of the  Shanghai Cooperation Organization (SCO), and hence from China.

However, for the NATO’s second Armed Force, this means a radical change of strategic planning.

For China, Turkey should stop supporting the Turkmen jihadists of Xinjiang – something which, however, it is doing ever less. It should also seriously favour Russian operations in Syria, with the guarantee of the territorial non-continuity of the future Kurdish Rojava between Northern Syria and the Anatolian territory – but currently the Kurds fight together with the Syrians in Idlib. Finally, for the future Turkey, it should buy oil and natural gas in roubles and renminbi from China and Russia, with “branded” investment to enter the Central Asian and Far East markets.

A clear link between economic reconstruction and strategic repositioning, a new vision of the Atlantic Pact to the East, which would find itself bare vis-à-vis the Persian Gulf and deprived of areas enabling it to control the Russian Federation to the South.

A fundamental defeat of NATO, faced with the increase of US duties for Turkish goods. Pure madness.

Currently, however, Erdogan has also other certainties. He knows that we need to rely ever less on the Sunni Arab world (even if Vision 2023 seems to be almost similar to the one – bearing almost the same name – drafted by the Saudi Prince, Mohammad bin Salman), considering that Saudi Arabia has other things to think about and is already welcome in the world of high public debt held by foreign investors.

Erdogan is still convinced that Russia remains an unreliable and – in any case, considering the size of its economy – unable to support Turkey, which is floundering in a crisis. He is also convinced that China has other strategic priorities in the Mediterranean and that Africa, where Erdogan invested significantly, is still a tiny market.

There would also be the EU 18th-century-style minuet, but we do not see a way out between a declaration of intent and the other.

Hence is this game worth the risk of President Trump’s increase in duties?

Let us analyse the situation. Pending the Turkish lira crisis, President Trump stated that the US import duties on the Turkish steel would increase by 50% and those on aluminium by 20%.

There is also the usual issue of Gülen in the tension between the USA and Turkey, as well as the new tension regarding the detention in Ankara of a North American Protestant pastor, Andrew Branson, accused by the Turkish Police and intelligence services of espionage in favour of the Kurds.

Considering the US intelligence services’ long tradition of use of their religious sects, this charge may be plausible.

Besides President Trump’s unpredictable tariff geoeconomics, there is also the FED’s action.

Since the 2008 Lehman crisis, the Federal Reserve has been buying and stabilizing with derivatives the sovereign and major banks’ bonds and securities issued or deposited in a phase on the verge of bankruptcy.

In 2017, however, the FED decided to “normalize” the budgets, thus leaving to the markets the already acquired securities of sovereign or non-sovereign entities, still in danger but stabilized and hence having a higher price. It sells them at a low price, but it earns more.

The FED’s portfolio of such bonds and securities is supposed to decrease by 315 billion US dollars in 2018 and by additional 437 billion US dollars in 2019.

A mass of paper that will revive short-term investment and markets’ “hit-and-run” transactions and operations.

Hence there are obvious effects prolonging the general crisis and the high absorption of capital by entities such as FED – capital that could instead be used for the economic recovery of the current peripheral areas of the world market.

What about the effects on the euro? There will be many effects, considering the presence of European economies in Turkey.

Hence a strong and stable pressure of the dollar on the euro cannot be ruled out, which will have geopolitical effects that are easy to predict.

The time needed to recover from the Turkish crisis will be measured as against the time needed for the Turkish domestic savings to recover and on the basis of the possible shift of the Turkish debt between the US currency and the currency of the EU, which is only partially a payer of last resort.

When Turkey has more money, there will be another inflationary squeeze caused by the leaders’ often inevitable political choices. And the carousel will start again.

A ride that is structurally ready, especially for the EU Southern economies.

Germany’s position on the Turkish crisis, which is fully strategic and obsessed with the migration issue, makes us lean towards this equation.

Germany will help Turkey, but with a view to opposing the USA (which will soon attack the German trade surplus with the “markets”) and, in any case, by severely restricting the Turkish exporting area, which shall anyway adapt to the German “value chains”.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs "La Centrale Finanziaria Generale Spa", he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group and member of the Ayan-Holding Board. In 1992 he was appointed Officier de la Légion d'Honneur de la République Francaise, with this motivation: "A man who can see across borders to understand the world” and in 2002 he received the title of "Honorable" of the Académie des Sciences de l'Institut de France

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Economy

Is Your Neighborhood Store Safe? Amazon and Store Closings

Meena Miriam Yust

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Amazon has reached the far corners of the earth… and the highest elevations.  Delivery men venture 11,562 feet up in the Himalayas to leave a package.  While the company may serve a useful purpose in remote regions, its phenomenal growth also reveals that no town is immune from its less desirable consequences.  The online retailer’s omnipresence has been all too apparent in Chicago, New York, and London in recent months, where stores have been closing in droves.

Treasure Island Foods of Chicago, a family-owned business started by Christ Kamberos in 1963, announced at the end of September that after 55 years it was closing all remaining stores in just two weeks.  Now, the lights are out and the shadows empty shelves are all that remain, with the scent of fresh sourdough and gyros cooking on the spit only in shoppers’ reminiscences as they walk by the darkened windows.

Julia Child once described Treasure Island as “America’s Most European Supermarket.”  In my memory, it was unforgettable.  The stores always had treasure troves for every season, from delicious green picholine olives from France, to liver pâté and English Blue Stilton at Christmas, and of course, Marmite.  Not to mention exotic cookies and chocolates from all over the world: marzipan and chocolate from Switzerland and Austria, shortbread from Scotland, and crisp butter wafers from the Netherlands are a few examples.  It was a haven for special gifts during the holidays.

Treasure Island was not alone in the struggle to survive amidst food delivery apps and Amazon.  Not only were customers buying goods online, but Amazon was also shifting into the grocery market by taking over Whole Foods.  Not surprisingly, Chicago’s other local grocery chain Dominick’s closed in 2014.  The city lost one of its most beloved bakeries too in 2017 when the Swedish Bakery closed after 88 years in business.  Gone were the days of mouth-watering rum balls, Princess Torte laden with green marzipan, and toska cake.  In its final days an estimated 500 customers per day flocked in to have one last tasty treat.

Purchasing items online might be convenient but the trend has serious costs for many industries, not only food.  Retail has been hit hard.  Sears recently filed for bankruptcy and is closing 142 stores.  So did Toys R Us, shuttering its outlets last summer.  Luxury goods retailer Henri Bendel announced in September that its stores will be closing too, after 123 years.

What’s more the change is not just in the United States.  In the UK, Marks & Spencer plans to close 100 stores by 2022.  Debenhams and House of Fraser in London are also in trouble.  In March of 2018, Sweden’s H & M reported the lowest first quarter profits in more than a decade, down 62%.  When large international stores are being squeezed, one can understand how local shops are struggling to keep afloat.  A recent Atlantic article observes that Manhattan is becoming a “rich ghost town.”  So many store fronts once filled with interesting items are now empty, a trend that the author predicts will move to other cities.  Will the choices for future shoppers be restricted to chain stores and dark unrented windows?  Local small retailers unable to afford high rents are gradually being nudged out of existence.  They need help.

Could Local Currencies Save Our Neighborhood Stores?

The answer may be introducing local currencies.  Studies have shown that municipal currencies stimulate the local economy.  They serve as shock absorbers and protect in times of recession.

Switzerland has had the WIR since 1934 and Ithaca, New York introduced its own currency known as Ithaca Hours in 1991.  Ithaca Hours started out with 90 individuals who were willing to accept the currency as a payment for their work, and expanded to become one of the largest local currency systems in the U.S.  Ithaca’s example was an inspiration for municipal systems in Madison, Wisconsin, and Corvallis, Oregon.

The UK also has several local currencies including the Bristol Pound.  The former Mayor of Bristol accepted his entire salary in Bristol Pounds, and more than 800 businesses accept the local currency.

Once local currencies are in circulation, consumers can continue using their national currency to purchase from large retailers and from online giants like Amazon.  Their local currency, though, is typically used at local businesses.

As an example, were a Chicago currency implemented, consumers might use their U.S. dollars to purchase goods online but would use their Chicago currency to buy locally.  Legislators and communities could thus lend a helping hand to local gems that remain in our towns.  Lutz Cafe and Pastry Shop, for instance, established in 1948, is unique to Chicago, and creates some of the most delicious cakes in the world.

By 2003, there were over 1,000 local currencies in North America and Europe.  Yet this is a mere fraction of the total number of cities.  If local currencies expanded to a majority of towns, perhaps our beloved neighborhood stores would be able to survive the online onslaught.

The Benefits of Preserving Local Shops

Consumers lose a service every time a small shop shuts down.  A local paint store, for instance, can provide advice on what paint to use for a particular purpose, how to use it, etc.  Nowadays, in many towns, these stores have closed.  Consumers’ options are limited to buying online without input from an expert, or from a large national chain, where they will be lucky to find advice comparable to that from a specialized store.  The same holds true for many kinds of home repair.

Then there is the charm of familiar faces at the corner store.  Growing up near Treasure Island as a child, I could scarcely forget the cherry-cheeked cherub-like server at the deli counter.  After noticing this eight-year-old’s tendency to gorge on free olive samples once a week, he would always laugh heartily with those chubby cheeks and remark with a chuckle that I would end up eating all the olives before reaching the check out line.  Ordering specialty olives online is just not the same.  There may be no checkout line, but also no one to talk or joke with.  The same is true for the automated Amazon Go stores.  The nice deli server today is out of a job after decades of service.

Another hidden cost of online purchases is environmental.  Aside from fossil fuel emissions, delivery of a parcel requires packaging, and often bubble wrap, made of low-density polyethylene, a form of plastic that comprises 20% of global plastic pollution.  Reusable bags and a neighborhood store within walking distance are clearly better for the environment.

Amazon’s reach extends to places like Leh, India, high in the snow-covered Himalayas, where many of its goods may not be available in town.  And one can appreciate and understand the value of online purchases in such rural communities.  In fact that was exactly the original purpose of Sears with its iconic catalogue.

Yet in cities where one can readily buy the same items in stores nearby, we have to try to refrain from the convenience of one-click shopping.  The more we purchase online items, the more we pollute the environment and kill local stores.  Without small businesses, cities will eventually become homogenized with block after block of chain retailers, or dark empty windows, as has started to happen in Manhattan.  The character of a quaint town or a trendy metropolis becomes obsolete.

Gone will be the unique gift shops and the luxury tailor.  When the British high street becomes indistinguishable from U.S. ghost towns and when the only place to eat is a chain burger joint, the fun of traveling and the adventure of new places will be lost forever.  The vibrant world of new flavors and experiences will be no more.

So please think twice before clicking an online purchase.  You may be signing your local store’s death warrant.

Author’s note: this piece first appeared in CounterPunch.org

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Azerbaijan: Just-in-time support for the economy

MD Staff

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Over the last two decades, oil has been the defining factor for Azerbaijan; not only for its economic growth but also for its development. During the first ten years of the millennium, Azerbaijan experienced an explosion in wealth. As oil GDP, comprising half of the sectoral share of the economy, grew by an average of 21 percent per year, fueled by global upsurge of oil prices and increased production. Total GDP grew more than tenfold: from US$6 bn to US$66 bn.  This was accompanied by rapid decline in poverty, from 49.6% to 7.6%, increase in real wages, and middle-class growth.

However, after the decline in global oil prices in 2014, nearly by half, the reduction of oil revenue caused a domino effect in the economy. The double devaluation of the Azerbaijani manat in 2015 erased half of the manat’s value against US dollar. and subsequent fiscal adjustment together with ongoing banking sector distress led to a 3.8% contraction in GDP (2016). This was accompanied with the rising of traditionally low levels of government debt (from 8.5% in 2014 to 22% in early 2018) primarily due to devaluation of manat.

On December sixth, 2016, Azerbaijani President Ilham Aliyev has signed a decree approving the “Strategic roadmaps for the national economy and main economic sectors.” The decree for reforms spanned across 11 sectors, from tourism to agriculture, and aimed to decrease the over-reliance to the oil and gas sector.

Azerbaijan – World Bank Partnership

Under very tight deadlines, Azerbaijani ministry of finance started working on a roadmap, that would reform the economy which had been impaired by a number of negative shocks such as lower oil prices, weak regional growth, currency devaluations in Azerbaijan’s main trading partners, and a contraction in hydrocarbon production. As a long-term partner of the World Bank Group (WBG), they reached out for support in developing a public finance strategy for the medium term at the beginning of 2016. To be able to broach such a broad project, different teams within WBG worked together closely to provide just-in-time support and to cover various facets of the macro-fiscal framework. Government Debt and Risk Management (GDRM) Program, a World Bank Treasury initiative targeting middle income countries funded by countries funded by the Swiss State Secretariat for Economic Affairs (SECO) worked on the debt management portion of the issue. The Macroeconomics, Trade and Investment Global Practice advised on macroeconomic and fiscal framework and debt sustainability analysis.

Providing a macro-fiscal outlook, analyzing debt sustainability and proposing debt management reforms

The ministry of finance and WBG joint teams had a thorough review of the macro-fiscal and borrowing conditions and honed in three interlinked issues:

  • The need for sustainable financing: While the level of direct debt was expected to remain modest, the sharp increase in the issuance of public guarantees would lead the public and publicly-guaranteed (PPG) debt trajectory to be higher in the next five years.
  • Fiscal Rules: Azerbaijan was exploring fiscal rules involving the use of the country’s oil assets, based on recommendations from the IMF.
  • The country was facing high exchange-rate and interest-rate risks, due to 98% of the central government debt being in foreign currency and two thirds in variable interest rates.

With that in mind, the teams tested different borrowing strategies to cover the 2017-2021 period under baseline and different shock scenarios, analyzing debt sustainability, and the composition of the public debt portfolio weighing it against the national risk tolerance. They also recommended several measures to better enable the debt management operations: revising and submitting the Debt Management Law to parliament; improving the reporting system; improving the coordination between the ministry of finance; the central bank and the Sovereign Oil Fund; developing a credit risk assessment capacity in the ministry and improving the IT system, and eventually looking at developing a domestic debt market.

Azerbaijan develops the public finance strategy

In December 2017 Azerbaijan ministry of finance shared the debt management strategy, with the President’s office. The proposed strategy comprised a macroeconomic policy framework, a borrowing plan, and associated institutional and legal reforms. In August 2018, President Aliyev enacted and published the “Medium to long term debt management strategy for Azerbaijan Republic’s public debt”. The strategy outlines the main directions of the government borrowing during 2018-2025 based on sound analysis. It puts a limit of 30% of GDP for the public debt in the medium term, with a moderation to 20% of GDP by 2025. The authorities also envisage gradual rise in domestic debt, to develop the local currency government bond market. To reflect the changing macroeconomic outlook and financial conditions, the strategy document will be updated every two years.

“As World Bank, our mission is ending extreme poverty and building shared prosperity,” said Elena Bondarenko, the Macroeconomics and Fiscal Management team member. “It is our privilege to provide just-in-time support to our member countries when they most need it. Especially if we can help build resilience to the economy before further shocks cause major damage.”. “The work doesn’t stop here,” said GDRM Program Task Team Leader Cigdem Aslan. “The GDRM Program will continue its support through the implementation phase of the recommendation and help build capacity for the development of the domestic market for government securities.”

World Bank

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Knowledge economy and Human Capital: What is the impact of social investment paradigm on employment?

Gunel Abdullayeva

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Social policy advocates claim the development of the European welfare state model on three phases as follows: traditional welfare state until 1970s; neo-liberal welfare state until the mid-1990s and finally social investment state model afterwards of the mid-1990s.  At the first time, on the European Union level, to bring the social investment policy to the political agendas after the 1990s economic hardship, the European Council adopted the Lisbon Strategy in 2000. In fact, the Lisbon Strategy was successful with respect to the employment. In the latter, the social investment state paradigm has fostered once more in the Europe with the “Social Investment Package: Towards Social Investment for Growth and Cohesion” in 2013 by the European Commission that targeted to “prepare” individuals, families and societies for the competitive knowledge economy by investing in human capital from an early childhood together with increase female participation in the workforce.

Generally, social investment idea emerged as a link between social insurance and activation in employment policies and upgrading human capital. Hemerijck (2014) defined the concept of the social investment state to facilitate the “flow” of labour market transitions, raising the quality of human capital “stock” and upkeeping strong minimum income guarantee as social protection and economic stabilization “buffers”. The underlying idea of the social investment strategy has been argued to modernize the traditional welfare states and guarantee their sustainability in line with the response to the “new social risks” such as skill erosion, flexible market, insufficient social insurance and job insecurity.

Economic aim of social investment paradigm is divided into two types by Ahn& Kim (2014),in the following way:The social democratic approach based on the example of the Nordic countries and the liberal approach of the Anglo-American countries. To make the distinguish more clear, the social democratic approach aims to increase the employment for all working classes and strength human capital. On the other hand, liberal approach applies selective strategy which is more workfare policy oriented and covers vulnerable class. In this regard, cross country analyses show that the Scandinavian countries have been the forerunners of social investment and perform the childcare and vulnerable group targeted policies at their best.

Studies have viewed the social investment state approach as a new form of the welfare state and reshaped social policy objectives that addressed to promote labour market participation for a sustainable employment rather than simply to fight against unemployment. Since the beginning, the social investment strategy directs to protect individuals from social and economic threats by investing in human capital through labour market trainings, female (family – career) and child care policies, provision of universal access to education from the childhood. On doing so, the social investment as a long term strategy aims to reduce the risk of future neediness in contrast to the traditional benefit oriented welfare state that focuses on short term mitigation of risks. Or to put it differently, the social investment “prepares” children and families against to economic and social challenges rather than “repair” their positions in such problems later. In short, social investment policies are characterized as a predictor rather than a recoverer. Mainstream social investment argument is that redesigned welfare state model more focuses on work and care reconciliation policy as strengthening parental employment in the labour market is an important factor to exit poverty and support families especially mothers. On the other hand, human capital measures such as education and trainings improve life course employability, particularly for market outsiders as well as human investment guarantees better job security in today`s more flexible job market.

In reality, an economic development and employment is friendly to each other. Thus, income comes from the market through employment as a paid employment is foundation of household welfare. Likewise, a welfare is purchased in the markets. Arguably, unemployment leads to the poverty and social exclusion in the societies. Hereby, work based policy regarded as a sustainable anti-poverty strategy. The welfare states in order to guarantee households` net income and well-being in the post industrialized labour market have turned to invest in preventive measures such as human capital. The human capital (cognitive development and educational attainments) is a must for the dynamic and competitive knowledge economy. Educational expenditures yield on a dividend because they may/make citizens more productive but we need to push the logic much further (Andersen, 2002). In fact, social investment state by being more female and child care policy oriented predicts an importance of the education for a well-being of society and more developed economy in the future. Thus, employment policies need to link with family policies to be more effective in response to the unemployment, poverty and social exclusion. Social investment state as a new shape of the active employment policies invests in education particularly of women and children to prevent unemployment and poverty from the beginning. One hand, addresses to the ageing problem of European societies social investment strategies aim to mobilize motherhood with an employment. On the other hand, by promoting family polices, social investment strategy directs to reduce child poverty and safeguard child welfare in the line with better social and economic conditions of childhood.

What is certain that, social investment state implies human capital strategy. To increase an employment and long term productivity of individuals, social investment policies interchanged with the provision of social insurance. In other words, the social service policies took over the place of the cash benefit oriented policies. It is probably fair to say, the human capital strategies link social investment policies to employment outcomes. Simply, to see the correlation between the social investment paradigm and employment, human capital policy measures (education and trainings) are needed to be checked as a direct labour market value.  Since they are the most effective activation measures in skill investment to respond to the knowledge economy, more educated and skilled manpower boosts the labour supply in turn results income equality which is a traditional goal of the social democracy.  In this context, social investment state is addressed to reach high quality employment by its human investment orientation. As Andersen, (2002) argues, “We no longer live in a world in which low-skilled workers can support the entire family. The basic requisite for a good life is increasingly strong cognitive skills and professional qualifications”.

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