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The silent revolution

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Jamaica is well known for its beautiful beaches, Bob Marley, and reggae music. But what is less known is that the Caribbean island started a silent revolution after being one of the most indebted developing countries in the world. Jamaica has shown a macroeconomic turnaround that is quite extraordinary.

As Bob Marley said, “It takes a revolution to make a solution”. After decades of high debt and low growth Jamaica has changed its growth trajectory, with positive economic growth for 16 consecutive quarters and growth getting closer to two per cent.

During that period, the Jamaica Stock Exchange went up more than 380 per cent.The credit agency Fitch upgraded the island’s debt to B+ rating with a stable fiscal outlook, and unemployment hit eight per cent in January, the lowest in decades.

The Government had a wake-up call when its debt overhang peaked at almost 150 per cent of GDP in 2013. With the support of the International Monetary Fund, the World Bank and the Inter-American Development Bank, the country embarked on an ambitious reform programme. These efforts have paid off. Jamaica is now one of the few countries that has successfully cut public debt by the equivalent of half its gross domestic product in a short time frame.

The fiscal turnaround and economic transformation were possible because of the strong commitment across political parties over two competing administrations and electoral cycles. The country also critically benefited from a sustained social consensus for change and the strong backing of the private sector.

The country has generated primary fiscal surpluses of at least seven per cent of GDP for the last six years, and remains steadfast in its commitment to fiscal discipline. These fiscal results make Jamaica a top performer internationally.

For this silent revolution to continue and bring greater prosperity to all its people, Jamaica will need to further boost the investment climate, strengthen economic and climate resilience and invest more in its people to build human capital. These are necessary complements to the maintenance of a strong macroeconomic framework and would help boost economic growth and job creation. There are encouraging signs that Jamaica is taking action in these areas.

With regard to the business climate, the National Competitiveness Council has adopted a road map to fast-track reforms to improve the business environment. Jamaica features in the top 20 countries in the world for its comprehensive credit reporting systems and ranks among the best globally in the area of starting a business, according to the World Bank’s 2019 Doing Business report. It only takes two procedures and three days for an entrepreneur to start and formally operate a business.

There have been advancements on public-private partnership investments. For instance, the Norman Manley International Airport public-private partnership was recently completed with advisory support from the International Finance Corporation — the private sector arm of the World Bank Group.

Jamaica is also a front-runner among Caribbean countries in promoting climate and financial resilience in the face of natural disasters. The economic cost of these disasters for the Caribbean is substantial, exceeding US$22 billion between 1950 and 2016, compared with US$58 billion for similar disasters globally. One serious storm or natural disaster could set back the country’s growth prospects and development achievements of recent years. To tackle this, the Government has adopted a Public Financial Management Policy Framework for Natural Disaster Risk Financing to facilitate the availability of dedicated resources for recovery in the face of disaster risks.

In order to further support Jamaica in its efforts to strengthen the economy, build resilience, and support human capital development, the World Bank will expand its financing by US$140 million. This financing package will be for a series of two operations to help Jamaica be better prepared to mitigate the financial impact of natural disasters and build stronger infrastructure, and an additional project to strengthen social protection.

Despite unemployment at a new low, still too many young people are struggling to find a job. For Jamaica to continue to grow and prosper, it also needs to develop the skills for the workforce of tomorrow, especially in the areas of technology and digitalisation. This requires a sharp focus on creating the conditions for youths to strive and succeed in the modern business world and close cooperation with the private sector in this respect.

Today, more than ever before, young Jamaicans can dream of a brighter future where “every little thing is gonna be alright”. This is the generation that must aim higher and can write a new chapter for its country.

As we celebrate the 55th anniversary of the World Bank-Jamaica partnership, we look forward to working together to build on the success of the past few years and promote growth, jobs and resilience for Jamaica.

World Bank

Economy

Euro – 20 years on: Who won and who lost?

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The common European currency – the euro – came into being 20 years ago. Since January 1, 1999, the euro has been widely used in cashless money transfers. On January 1, 2002, banknotes and coins were introduced into circulation. How did the European countries benefit from the single currency? How many profited from its introduction?

In the early 1990s, the European Community entered a new stage of development which was characterized by a transition to a higher level of integration within it and expansion to include more members. This was provided by the Treaty on European Union, which was signed on February 7, 1992 in the Dutch city of Maastricht and entered into force on November 1, 1993. The Maastricht agreements and the subsequent decisions of the EU’s governing bodies – the European Council and the Council of the EU –formed a groundwork for a gradual, stage-by-stage creation of a monetary union and the introduction of a single currency, the euro.

At the time the decision on the introduction of the euro came into effect it was believed that the main objectives of the transition to a single monetary policy and the replacement of national banknotes with a single European one were the following. First of all, a monetary union was supposed to put the finishing touches to the formation of a common market and was to transform the EU territory into an economic space with equal opportunities for all players. A single currency was expected to facilitate the transition of the EU to a common economic policy, which, in turn, was seen as indispensable for moving to a new level of political integration. Many also viewed a single currency as vital for cementing European integration and a symbol of the economic and political integrity of the region. It was assumed that the euro would keep European countries “in the same harness” even in times of crisis and would help them to overcome differences and even resist outbursts of nationalism.

The second goal was to prevent losses caused by continuous fluctuations in the rates of Western European currencies. Once the euro was established, risk payments for possible losses in different-currency transactions became a thing of the past. It was assumed that stable and low interest rates would bring down inflation and stimulate economic growth. Thirdly, it was thought that fixed exchange rates within the euro zone with no more fluctuations would boost investment activity and, as a result, would improve the situation on the labor market. In addition, a better economic performance was to make it easier for countries to enter the EU and adapt to the new reality. A better economic performance was supposed to make European products more competitive in world markets.

Fourth, a single currency was supposed to significantly cut circulation costs. At the end of the 1990s, the existence of various national currencies cost the EU countries 20-25 billion ECU (26-33 billion dollars) annually, including the cost of keeping records of currency transactions, insuring currency risks, conducting exchange operations, drawing up the price lists in various currencies, etc. Finally, fifthly, the initiators of the single currency hoped that the euro would become one of the international reserve currencies. The introduction of the euro was supposed to change the balance of strength between the United States and united Europe in favor of the latter. In the long run, it boiled down to ensuring more independence of the EU economic policy since interest rates on long-term loans would be less dependent on American ones.

What is happening at present? Not surprisingly, the greatest difficulties emerged  while grappling with the most pressing and large-scale agenda involving the ambitious plans of the political and economic transformation of the EU and the strengthening of its global geo-economic role. Indeed, since the late 1990s, the economic and financial spheres of the EU have undergone dramatic changes. In 2004 and 2007, the majority of Central and Eastern European countries joined the Union (an increase in social dumping). The current EU “bears little resemblance” to that of 20 years ago. “Not only the currency has become different, but the entire European economy has changed.”

Nevertheless, as predicted by those who criticized the approved version of transition to a single European currency, chances for meeting the criteria of eurozone membership in case the global economy followed an unfavorable scenario are pretty slim for most countries of the eurozone. As economic and financial crises sweep Europe one after another, the presence of the euro and the unprecedentedly high level of the European Central Bank’s autonomy and its extensive powers are restricted by the “possibility of influencing the economy” of separate states. Since inflation rates vary from country to country, the interest rate suggested by the ECB (about 2%) turns out to be too low for countries with high inflation (which leads to financial bubbles) and too high for countries with low inflation (which has a negative impact on investments).

As a result, the economic slowdown in European economies in the 2000s through 2010s led to increases in budget deficits. According to the requirements of the eurozone, governments have to raise taxes or cut spending, even if it damages national economy. Formally, there exists a procedure to tackle economic upheavals in this or that country of the eurozone to minimize their consequences for other members. From the point of view of abstract macroeconomic indicators this procedure is functioning well. But, judging by what happened in Spain, and then in Greece and Italy, its social, economic and subsequently, political costs are too high. In the first place, we talk about social upheavals, which became one the main reasons for the rise of “right-wing populists” across Europe.

The euro is running into problems mainly because it hinges on politics, rather than economics. On the one hand, it is this that largely keeps it from the collapse. The EU leadership is ready to sustain any financial or economic losses to preserve the single currency.  However, from the economic viewpoint, the ECB’s readiness for currency interventions has ruined market discipline. In March this year the German Wirtschafts Woche stated that the euro had failed to become either an effective currency or an EU stability enhancing tool. What proves it is the fact that without “billions and billions in financial injections on the part of the European Central Bank and European governments to save the euro the single currency would have long sunk dead”. The 2008 financial crunch quickly triggered the crisis of the eurozone which culminated in the Greek debt crisis of 2010. As a result, “the dispute over how to save the single currency laid bare purely political differences across Europe”.

As skeptics forecast, membership in the eurozone, sought by countries with different levels of economic development regardless of the tough requirements and selection criteria, resulted in a situation in which a setback in the global economic performance hit weaker members the hardest. Citing the IMF, Le Figaro points out that “the euro exchange rate is too high for France and Italy (which deals a blow on their competitiveness), and is too low for Germany (by about 20%)”.  This provided the German economy with a clear edge over other EU members and secured a “huge foreign trade proficit”. Moreover, in the course of the eurozone crisis in 2009 there emerged a vicious circle: Germany’s domineering position in the EU enabled Berlin to dictate its policy of austere budgetary measures to the greater part of the rest of Europe, which, in turn, gave rise to an outburst of anti-German sentiment in a whole range of countries, including Greece and Italy.

Therefore, in 20 years of its existence the euro has made Germany yet more powerful economically than it used to be. Simultaneously, it has become a major factor that contributed to Germany’s isolation in Europe. Critics say that while drafting the euro project its authors meant to weaken Germany. Instead, the single currency “strengthened it, providing it with competitive advantages through a “weak” euro”. Central Europe has become a supplier of spare parts for German businesses thereby putting into practice the Mitteleuropa Doctrine in the 21st century. The rest of the EU countries have become a market for German goods. Meanwhile, Germany has to pay for economic failures of an ever greater number of its EU partners. In such a way, Germany’s economic might has all but become a major threat to European integration. Pessimists fear the current economic and geopolitical trends will sooner or later push the Germans into pursuing a more “egoistic” and “aggressive” policy, in every sense of the word. Everyone remembers what this kind of policy ended with in a period from the mid19th to the mid20th century.

As for the second and third points of the objectives of a single currency, the results are contradictory. Inflation in the eurozone is indeed at an all-time low. There has occurred a unification of the common market of goods, capitals and workforce. At the same time, measures which are being taken by the European Central Bank to fight low inflation have more than once driven a number of EU countries into recession and sovereign debt crises. Living standards in EU countries have not been growing steadily over the past few years. A rise in wages has turned out to be much smaller than predicted in the late 1990s.  Most European banks still prefer holding debt obligations of their countries only, which, in case of financial crisis, is fraught with banking problems and could ruin national economy. As for competitiveness, the appearance of a single market “in the first place, aggravated competition between  EU countries”. Simultaneously, the introduction of the same standards and requirements for all countries of the eurozone “cemented their differences, rather than brought them together”.

The fourth point can be considered fully implemented. Economic transactions have been simplified, cost less and have got rid of exchange-related risks. According to the British The Economist, three out of five residents of eurozone countries consider the euro useful for their country. And 75% of Europeans are sure that the single currency benefits the EU. Meanwhile, the removal of barriers to capital movements has led to a significant imbalance in investments, especially in the industrial sector. The main benefits went to countries located in the center of the EU while the geographical “periphery” of the eurozone has lost some of its former investment attractiveness. But the presence of the euro makes it impossible for the less fortunate countries to stimulate the economy by bringing down the currency value.

As for the fifth point, some of the ambitious plans have been implemented. The euro has already made a significant contribution to the weakening of the position of the US dollar in the global economy. According to the European Commission, one-fifth of the world’s currency reserves are denominated in the single European currency. “340 million citizens use it daily, 60 countries and territories link their currency to it”. On the other hand, 10 years of 20 years of its history the eurozone has devoted to the struggle against an “unprecedented crisis”. By now, experts say there has been a “fragile recovery.” Nevertheless, unlike its main competitors, the dollar and the yuan, the euro has no solid foundation. The EU budget is used mainly for paying subsidies to member countries, while the years-long disputes over prospects for creating a common EU ministry of finance all but fuel differences between 19 eurozone governments.

Thus, according to optimists, criticism of the euro is first of all the result of profound differences on the fundamental issues of European economic policy. The single currency consolidated the leaders of Europe, provided them with the common goal of creating a more integrated, a more attractive for trade and business, and a globally competitive, economy. However, a further stable existence of a single currency mechanism in Europe calls for urgent reforms, which European politicians are either not ready for or are not capable of. According to critics, the single currency has driven the different economies of the EU countries into the Procrustean bed of all-fitting standard format. The single currency mechanism completely ignores, if not completely denies, the geographical, historical and cultural specifics of the member states. Overall, the current model of economic and monetary integration in the EU mindlessly forces countries whose national economies do not match the general format “to carry out endless reforms,” which all but aggravate their long-standing inherent problems.

 First published in our partner International Affairs

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Afreximbank Meets Ahead of Russia-Africa Summit

Kester Kenn Klomegah

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The African Export-Import Bank (Afreximbank) plans to hold its 26th annual meeting in Moscow on 18-22 June. A series of closed sessions will be held as part of the event including the meeting of Board of Directors of Afreximbank and a meeting of Shareholders of Afreximbank, as well as the open Russia-Africa Economic Conference.

The African Export-Import Bank, the Roscongress Foundation, the Ministry of Finance of the Russian Federation, and the Russian Export Centre are the key organizers of this event. The Afreximbank Annual Meetings is a high-level event, bringing together political and business leaders from across Africa to discuss the issues of trade, industrialization, export, and financial stability and efficacy.

Key themes planned for the economic conference are: State of Russia-Africa Relations: An Overview; Mining Industry: An Integrated Approach to the Fields Development; Prospects for Multilateralism in an Era of Protectionism; Railways Infrastructure as the Key Element for Development in Africa; South-South Trade: Path for Africa Integration into the Global Economy.

The other topics are Emerging Trends in Sovereign Reserves Management; Reflections on the Transformative Power of South-South Trade; Launch Afreximbank ETC Strategy; Cyber Solutions and Cyber Security for Solving Governmental and Municipals Tasks; Financing South-South Trade in Difficult Global Financing Conditions; The Future of South-South Trade and Infrastructure Financing.

Over 1,500 delegates are expected to attend the economic conference, including shareholders and bank partners, government representatives, members of the business community and media representatives. The conference will be a crucial stage in preparation for the full-scale Russia-Africa political summit and the accompanying economic forum, scheduled for October 2019 in Sochi.

“Russian and African countries are basically on the track of bilateral strategic partnership and alliance based on openness and trust. The fact that the Afreximbank Annual Meeting is to be held in our country gives a positive momentum for the mutually beneficial cooperation of the parties ahead of the full-scale Russia-Africa Political Summit that will take place in Sochi in October, and will add to the inclusive nature of the events,” emphasized Anton Kobyakov, Advisor to the President of Russian Federation.

Following the setup of the Organizing Committee for the Russia – Africa summit and other Russia–Africa events in Russia in 2019, Russian officials have described that this year truly as a year of Africa for Russia.

“We witness the clear growing interests from the both sides to establish the new level of relationships, which means a perfect timing to boost the economic agenda. All economic events planned for this year will become a platform to vocalize these ideas and draw a strong roadmap for the future,” Russian Export Center’s CEO, Andrei Slepnev, argued in an emailed interview with Buziness Africa.

In December 2017, Russian Export Center became a shareholder of Afreximbank. Russian Export Center is a specialized state development institution, created to provide any assistance, both financial and non-financial, for Russian exporters looking for widening their business abroad.

On March 19, the Organizing Committee on Russia-Africa held its first meeting in Moscow. President Vladimir Putin put forward the Russia-Africa initiative at the BRICS summit (Russia, Brazil, India, China, and South Africa) in Johannesburg in July 2018.

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With or without sanctions, Iran needs to say goodbye to oil money

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Except Norway, almost all oil producing countries have made themselves more or less reliant on oil money.

Only oil producing countries with a small population, such as Kuwait and Qatar which is also a great gas exporter, have so been safe from fluctuations in the oil market. But, countries with large population, such as Iran, are prone to volatility in the oil market, let alone the mad sanctions introduced against the country.

There is no doubt that oil money has affected politics, economy, management system, culture, spending and consumption habits and many other issues in oil rich countries.

For example, Iran now has one of the cheapest energy prices in the world. This has led to an extravagant use of energy, especially an excessive use of private car, in the country.

Let’s make an example to clarify that oil money is not the road to progress and a vibrant economy. In the 1970s, Iran was more developed than South Korea, but now South Korea is much more successful than Iran in terms of economy and technology. South Korea does not have oil, but it has provided an opportunity for a competitive economy and capitalized on its talents.

It is true that the war imposed on Iran in the 1980s hindered Iran’s progress and inflicted about 1 trillion dollar in damages on the country, yet officials failed to take serious steps toward creating a competitive economic atmosphere with a focus on research and technology. The oil money has been the main blame for such an economic approach.

According to the successive five-year development plans which end on 2021, Iran had to reduce dependence on oil to a great extent, however, successive administrations, with varying degrees, did not fully act based on the development plan.

Iran is now subject to the toughest ever illegal sanctions by the Trump administration. Just on April 22, the United States ended sanctions waivers on Iran’s exports and announced it wants to zero out Iran’s oil exports by May 1.

Whether the Trump administration succeeds or not to implement its oil threats is an issue that we should wait and see, but it is necessary that Iran take a departure from oil export how much painful it will be.

Sorena Sattari, a graduate of Sharif University of Technology who serves as vice president for scientific affairs, told a meeting in Hamedan on Tuesday that sanctions have provided an opportunity that knowledge-based companies to intensify their efforts. Sattari also said plans have been drawn up to manufacture equipment and machinery that are subject to sanctions. 

Also, whether we like it or not, fossil fuels, especially crude oil, are losing their importance as renewable energy resources are gradually taking the center stage.

Saying goodbye to easily-gained oil revenues is a bitter pill that Iran should swallow. To do so, though very difficult under tough sanctions, officials need to find other sources of income.

They can invest on tourism as Iran is among the top countries in hosting touristic sites, establish an environment for a transparent competitive economy, close loopholes of corruption, involve competent persons in managerial posts, introduce a sound and workable tax system, end unnecessary subsidies, and more importantly prioritize research and development (R&D).

First published in our partner Tehran Times

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