Connect with us


The Deficit and Devaluation Dilemma



The American economy has been hailed as the sturdiest of all; a giant defined as too huge to plummet. While many sage minds of the financial world wither at testing the veracity of this claim, the cracks in the supposedly unshakable economy are starting to appear; even as the rebound is faster than many originally predicted in the pre-covid period. However, the fallacies were starting to ebb away much before the pandemic struck the world haywire. 

The stronger US dollar might appeal to the layman; a stronger currency casting an image of a sturdy economy. However, an overvalued US dollar creates problems in the economic operation of the country. Being overvalued results in US imports being cheaper relative to the domestic produce. Similarly, US exports are perceived as relatively expensive by foreigners. This causes a trade deficit in the current account, that is, the imports exceed the exports causing a net monetary leakage from the economy. This is the rudimentary reality that has been steadily gripping the United States over multiple decades. Due to the consistent overvaluation of the US dollar, the running trade deficit has bloated by 3-fold as a percentage of the total GDP since the 1990s. 

With a currency being highly expensive, fundamentals of economics dictate the demand to shift to cheaper alternatives. This has been the main reason lacing the outpour of core manufacturing to middle-income countries. Foreign companies reap the advantage of the demand rising from the US while the US continues to lose jobs in manufacturing despite being one of the most competitive sectors of the US economy. Due to the ease of import in the manufacturing sector, it has been the prime target of heated competition from foreign companies. More than 5 million jobs were lost in the manufacturing sector in 2011 alone while the trade deficit bloomed at an unrelenting rate.

High currency valuation has been an intricate issue in the political arenas as well. Significant job losses and unstable foreign debt levels concerned the bipartisan house and the senate combined. Largely due to the fact that the fed resents any viscous debt that is hard to sell to foreign entities, managing trade deficit has continued to streamline the agendas of government and fed alike. President Donald Trump addressed the blooming trade deficit boldly. However, instead of taking the overvaluation of the US dollar into account, he resorted to adopting an offensive strategy to impose tariffs on key imports. The ineffectiveness of the strategy cleared any haze remaining since the trade deficit continued to exacerbate in his governance as well despite the extensive tariffs imposed on Vietnam on the account of favored currency devaluation as a subsidy offering by the Vietnamese regime to its companies. While the subsidized nature of the imports was cited as an unfair practice to outcompete the US counterparts, the imposition of tariffs only channeled the funds to other imports; the import bill continuing to expand and widening the hole of the trade deficit.

The nature of the trade deficit has been questionable and often contested by experienced economists around the world. Some have asserted the merits of a growing trade deficit on the basis of a consumption-driven economy. They argue that the United States is denominated by the young workforce expending on consumption goods at a voracious rate; contrary to the likes of Japan which incline towards a net surplus largely due to their relatively elder population and its higher propensity to save. However, this Blasé narrative is debunked by seasoned economists advocating a stable current account balance; even with a deficit but controlled in nature. According to the forecasts, even with the United States’ natural appetite to consume taken into consideration, the trade deficit should have been valued at 0.7% of the $21 trillion GDP of the United States in 2019. Instead, the figure stood at almost 3 times the predicted value: 2% of the total US economy, making up hundreds of billions of dollars in debt.

The appropriate strategy would be an active intervention by the fed to devalue the US dollar by 15% to 20%; cited as a legitimate valuation of the currency in the global market. However, it is easier said than done. While the federal reserve could actively buy out foreign currency by expending its dollar reserves, a swift devaluation might take the industrial sectors by surprise. Similar to the imposition of the tariffs in the Trump regime, a drastic devaluation of 20% would immediately drive up the import prices of many manufacturing essentials. This could hike up the production bill amidst a time span when the US is dealing with record unemployment rates. With unemployment pushing down demand for consumption and dollar devaluation pushing up the production costs carrying forward in prices, a manufacturing disaster could damage the US economy beyond repair.

Moreover, the fed could also tax foreign investment in the US assets. This strategy would likely discourage the excessive demand for US currency by foreign investors that would ultimately transition into a controlled devaluation of the US dollar over time. However, while the taxation would drive up the federal tax revenues, the investment institutions would most likely retaliate with a re-evaluation of their portfolios. An economic rebound after a catastrophic year, the US could hardly afford a fallout in investments that holds a prospect of an interest rate hike and a subsequent stock market decline following the quench in lenders to the US government.

The United States has historically flagged the narrative of ‘Let the market decide the exchange rate’, a policy that has been hailed as the true nature of a capitalist economy. The US has notoriously accused China of currency devaluation to compete in the global markets. A shift in the strategy, therefore, is not a pill swallowed easily. However, with a new economic advisory with President Joe Bidden, a renewed approach could be on cards. Now with the whopping $1.9 trillion stimulus package narrowly passing the senate and awaiting the final vote of the house, the propensity of consumption is expected to return to the lower- and middle-income households. With the $300 weekly allowance, rent relief and exemption of taxation for the first $10,200, and an effective vaccine rollout, manufacturing is spreading wings to outshine again. The policy and the strategy to channel the strong demand and supply without hurting other sectors or the sentiments of the investors: that’s the true challenge facing the Democrat administration.

The author is an active current affairs writer primarily analyzing the global affairs and their political, economic and social consequences. He also holds a Bachelor’s degree from Institute of Business Administration (IBA) Karachi, Pakistan.

Continue Reading


The Covid After-Effects and the Looming Skills Shortage



coronavirus people

The shock of the pandemic is changing the ways in which we think about the world and in which we analyze the future trajectories of development. The persistence of the Covid pandemic will likely accentuate this transformation and the prominence of the “green agenda” this year is just one of the facets of these changes. Market research as well as the numerous think-tanks will be accordingly re-calibrating the time horizons and the main themes of analysis. Greater attention to longer risks and fragilities is likely to take on greater prominence, with particular scrutiny being accorded to high-impact risk factors that have a non-negligible probability of materializing in the medium- to long-term. Apart from the risks of global warming other key risk factors involve the rising labour shortages, most notably in areas pertaining to human capital development.

The impact of the Covid pandemic on the labour market will have long-term implications, with “hysteresis effects” observed in both highly skilled and low-income tiers of the labour market. One of the most significant factors affecting the global labour market was the reduction in migration flows, which resulted in the exacerbation of labour shortages across the major migrant recipient countries, such as Russia. There was also a notable blow delivered by the pandemic to the spheres of human capital development such as education and healthcare, which in turn exacerbated the imbalances and shortages in these areas. In particular, according to the estimates of the World Health Organization (WHO) shortages can mount up to 9.9 million physicians, nurses and midwives globally by 2030.

In Europe, although the number of physicians and nurses has increased in general in the region by approximately 10% over the past 10 years, this increase appears to be insufficient to cover the needs of ageing populations. At the same time the WHO points to sizeable inequalities in the availability of physicians and nurses between countries, whereby there are 5 times more doctors in some countries than in others. The situation with regard to nurses is even more acute, as data show that some countries have 9 times fewer nurses than others.

In the US substantial labour shortages in the healthcare sector are also expected, with anti-crisis measures falling short of substantially reversing the ailments in the national healthcare system. In particular, data published by the AAMC (Association of American Medical Colleges), suggests that the United States could see an estimated shortage of between 37,800 and 124,000 physicians by 2034, including shortfalls in both primary and specialty care.

The blows sustained by global education from the pandemic were no less formidable. These affected first and foremost the youngest generation of the globe – according to UNESCO, “more than 1.5 billion students and youth across the planet are or have been affected by school and university closures due to the COVID-19 pandemic”. On top of the adverse effects on the younger generation (see Box 1), there is also the widening “teachers gap”, namely a worldwide shortage of well-trained teachers. According to the UNESCO Institute for Statistics (UIS), “69 million teachers must be recruited to achieve universal primary and secondary education by 2030”.

From our partner RIAC

Continue Reading


Accelerating COVID-19 Vaccine Uptake to Boost Malawi’s Economic Recovery



Lunzu market in southern Malawi. WFP/Greg Barrow

Since the onset of the COVID-19 pandemic, many countries including Malawi have struggled to mitigate its impact amid limited fiscal support and fragile health systems. The pandemic has plunged the continent into its first recession in over 25 years, and vulnerable groups such as the poor, informal sector workers, women, and youth, suffer disproportionately from reduced opportunities and unequal access to social safety nets.

Fast-tracking COVID-19 vaccine acquisition—alongside widespread testing, improved treatment, and strong health systems—are critical to protecting lives and stimulating economic recovery. In support of the African Union’s (AU) target to vaccinate 60 percent of the continent’s population by 2022, the World Bank and the AU announced a partnership to assist the Africa Vaccine Acquisition Task Team (AVATT) initiative with resources, allowing countries to purchase and deploy vaccines for up to 400 million Africans. This extraordinary effort complements COVAX and comes at a time of rising cases in the region.

I am convinced that unless every country in the world has fair, broad, and fast access to effective and safe COVID-19 vaccines, we will not stem the spread of the pandemic and set the global economy on track for a steady and inclusive recovery. The World Bank has taken unprecedented steps to ramp up financing for Malawi, and every country in Africa, to empower them with the resources to implement successful vaccination campaigns and compensate for income losses, food price increases, and service delivery disruptions.

In line with Malawi’s COVID-19 National Response and Preparedness Plan which aims to vaccinate 60 percent of the population, the World Bank approved $30 million in additional financing for the acquisition and deployment of safe and effective COVID-19 vaccines. This financing comes as a boost to Malawi’s COVID-19 Emergency Response and Health Systems Preparedness project, bringing World Bank contributions in this sector up to $37 million.

Malawi’s decision to purchase 1.8 million doses of Johnson and Johnson vaccines through the AU/African Vaccine Acquisition Trust (AVAT) with World Bank financing is a welcome development and will enable Malawi to secure additional vaccines to meet its vaccination target.

However, Malawi’s vaccination campaign has encountered challenges driven by concerns regarding safety, efficacy, religious and cultural beliefs. These concerns, combined with abundant misinformation, are fueling widespread vaccine hesitancy despite the pandemic’s impact on the health and welfare of billions of people.  The low uptake of COVID-19 vaccines is of great concern, and it remains an uphill battle to reach the target of 60 percent by the end of 2023 from the current 2.2 percent.

Government leadership remains fundamental as the country continues to address vaccine hesitancy by consistently communicating the benefits of the vaccine, releasing COVID data, and engaging communities to help them understand how this impacts them.

As we deploy targeted resources to address COVID-19, we are also working to ensure that these investments support a robust, sustainable and resilient recovery. Our support emphasizes transparency, social protection, poverty alleviation, and policy-based financing to make sure that COVID assistance gets to the people who have been hit the hardest.

For example, the Financial Inclusion and Entrepreneurship Scaling Project (FInES) in Malawi is supporting micro, small, and medium enterprises by providing them with $47 million in affordable credit through commercial banks and microfinance institutions. Eight months into implementation, approximately $8.4 million (MK6.9 billion) has been made available through three commercial banks on better terms and interest rates. Additionally, nearly 200,000 urban households have received cash transfers and urban poor now have more affordable access to water to promote COVID-19 prevention.

Furthermore, domestic mobilization of resources for the COVID-19 response are vital to ensuring the security of supply of health sector commodities needed to administer vaccinations and sustain ongoing measures. Likewise, regional approaches fostering cross-border collaboration are just as imperative as in-country efforts to prevent the spread of the virus. United Nations (UN) partners in Malawi have been instrumental in convening regional stakeholders and supporting vaccine deployment.

Taking broad, fast action to help countries like Malawi during this unprecedented crisis will save lives and prevent more people falling into poverty. We thank Malawi for their decisive action and will continue to support the country and its people to build a resilient and inclusive recovery.

This op-ed first appeared in The Nation, via World Bank

Continue Reading


An Airplane Dilemma: Convenience Versus Environment



Mr. President:  There are many consequences of COVID-19 that have changed the existing landscape due to the cumulative effects of personal behavior.  For example, the decline in the use of automobiles has been to the benefit of the environment.  A landmark study published by Nature in May 2020 confirmed a 17 percent drop in daily CO2 emissions but with the expectation that the number will bounce back as human activity returns to normal.

Yet there is hope.  We are all creatures of habit and having tried teleconferences, we are less likely to take the trouble to hop on a plane for a personal meeting, wasting time and effort.  Such is also the belief of aircraft operators.  Add to this the convenience of shopping from home and having the stuff delivered to your door and one can guess what is happening.

In short, the need for passenger planes has diminished while cargo operators face increased demand.  Fewer passenger planes also means a reduction in belly cargo capacity worsening the situation.  All of which has led to a new business with new jobs — converting passenger aircraft for cargo use.  It is not as simple as it might seem, and not just a matter of removing seats, for all unnecessary items must be removed for cargo use. They take up cargo weight and if not removed waste fuel.

After the seats and interior fittings have been removed, the cabin floor has to be strengthened.  The side windows are plugged and smoothed out.  A cargo door is cut out and the existing emergency doors are deactivated and sealed.  Also a new crew entry door has to be cut-out and installed. 

A new in-cabin cargo barrier with a sliding access door is put in, allowing best use of cargo and cockpit space and a merged carrier and crew space.  A new crew lavatory together with replacement water and waste systems replace the old, which supplied the original passenger area and are no longer needed.

The cockpit gets upgrades which include a simplified air distribution system and revised hydraulics.  At the end of it all, we have a cargo jet.  If the airlines are converting their planes, then they must believe not all the travelers will be returning after the covid crisis recedes.

Airline losses have been extraordinary.  Figures sourced from the World Bank and the International Civil Aviation Organization reveal air carriers lost $370 billion in revenues.  This includes $120 billion in the Asia-Pacific region, $100 billion in Europe and $88 billion in North America.

For many of the airlines, it is now a new business model transforming its fleet for cargo demand and launching new cargo routes.  The latter also requires obtaining regulatory approvals.

A promising development for the future is sustainable aviation fuel (SAP).  Developed by the Air France KLM Martinair consortium it reduces CO2 emissions, and cleaner air transport contributes to lessening global warming.

It is a good start since airplanes are major transportation culprits increasing air pollution and radiative forcing.  The latter being the heat reflected back to earth when it is greater than the heat radiated from the earth.  All of which should incline the environmentally conscious to avoid airplane travel — buses and trains pollute less and might be a preferred alternative for domestic travel.

Continue Reading



Reports9 mins ago

Companies may be overlooking the riskiest cyber threats of all

A majority of companies don’t have a handle on their third-party cyber risks  – risks obscured by the complexity of...

Finance1 hour ago

European Innovation Council announces new wave of start-up champions

The European Commission’s European Innovation Council has selected 65 innovative start-ups and SMEs to receive €363 million of funding for...

Middle East2 hours ago

Iran unveils new negotiation strategy

While the West is pressuring Iran for a return to the Vienna nuclear talks, the top Iranian diplomat unveiled a...

East Asia4 hours ago

Russia-Japan Relations: Were Abe’s Efforts In Vain?

Expanding the modest elements of trust in the Japan-Russia relationship, talking through reciprocal concerns before they lead to conflict, avoiding...

Russia6 hours ago

The 30th Anniversary of the Renewal of Diplomatic Relations Between Russia and Israel

Minister of Foreign Affairs of the Russian Federation Sergey V. Lavrov’s article for the Israeli Newspaper “Yedioth Ahronoth” dedicated to...

coronavirus people coronavirus people
Economy8 hours ago

The Covid After-Effects and the Looming Skills Shortage

The shock of the pandemic is changing the ways in which we think about the world and in which we...

Middle East10 hours ago

Shaping US Middle East policy amidst failing states, failed democratization and increased activism

The future of US engagement in the Middle East hangs in the balance. Two decades of forever war in Afghanistan...