China and Pakistan have together unveiled plans for $46bn in vital energy and infrastructure projects, as the nations look to strengthen their existing relationship and construct a “land corridor” between the two. China’s Xi Jinping was in Islamabad to oversee the signing of the agreement, and the plans, once completed, include a Pakistan-China Economic Corridor – or superhighway – that runs from China’s western Xinjiang region to Pakistan’s southern port of Gwadar, as well as a whole host of energy projects.
Security is very much front and centre for any party operating in Pakistan
The investment is significant insofar as it equates to some 20 percent of Pakistan’s annual GDP, and, once the projects are up and running, Pakistan’s place as an often-overlooked investment destination may well begin to fade. As it stands, investors favour neighbouring India ahead of Pakistan, though the proposed projects will do much to quash any qualms concerning the lesser-known nuclear power.
Inadequate electricity generation has blighted the economy in years past, and blackouts remain a constant threat. $37bn of the total will be dedicated to energy projects, which should generate an additional 16,400MW of additional power and more than double the country’s current capacity.
Add to that on-going fighting between local terror groups and the military, and security is very much front and centre for any party operating in Pakistan.
For China, the new trade routes will go some way towards lightening the load on a country for which energy imports are key. Trade between the two nations will also be made easier, with the China-Pakistan Economic Corridor meaning that transit will be both more direct and less treacherous. Ultimately, the deal constitutes one part of a much wider plan to improve trade relations with those in Asia and beyond.
Effective as of April 20, the People’s Bank of China (PBOC) has cut the reserve requirement for banks by one percent in a bid to boost lending and buoy China’s slowing economy. In the first quarter of this year China’s economic growth clocked in at seven percent, marking the lowest quarterly expansion since 2009 and underlining policymakers’ failure to arrest the slide.
Many see the latest RRR cut as a last ditch effort to boost lending
While the headline figure hit the central bank’s seven percent target, less-than-impressive industrial output along with a retail slump leaves due cause for concern, according to state media. Add to that a real and growing problem in the property market, together with ever-mounting piles of debt, and it would appear that the downward pressure on China’s economy is building.
By lowering the reserve requirement ratio (RRR) to 18.5 percent, down from 19.5 previously, sources at China’s central bank will be hoping that lending will step up some. As opposed to RRR cuts in years past, which have been introduced primarily as a means of keeping money in the country, this one is designed with the intention of boosting lending to the real economy.
The cut is the second this year already, and this, together with two interest rate cuts since November, demonstrates that the PBOC is serious about forcing changes to the Chinese economy. However, the measures feed into a wider debate about the usefulness of stimulus in boosting the economy, as opposed to structural reforms, which the government has promised and promised in abundance.
With the situation having shown little positive change recently, many see the latest RRR cut as a last ditch effort to boost lending before the government decides instead to pursue aggressive structural reforms.
Following a resolution passed by the country’s Council of Ministers last year, the Capital Market Authority will be permitted to allow foreign institutions to trade shares that are listed on Tadawul, the Saudi Stock Exchange. The shift is estimated to bring around $40bn of foreign capital into the economy.
The shift is estimated to bring around $40bn of foreign capital into the economy
On April 16, the CMA revealed that the $509bn stock market will be opened to the rest of the world on June 15, with the final rules due to be published on May 4.
As the self-set deadline of the first half of 2015 soon approaches, the frustration of foreign investors continues to grow due to the lack of detail and transparency given so far. With only eleven weeks to go, Riyadh-based CMA has yet to divulge how existing rules and new restrictions on foreign involvement in the Saudi business sector will be amalgamated.
The country’s ‘negative-list,’ which catalogues businesses that forbid foreign participation, will be extended to the Tadawul also. For example, the real-estate market in Islam’s holy cities, Makkah and Medina, will continue to be barred from foreign investment. Several companies have been specified so far, including Jabal Omar Development Co, Makkah Construction & Development Co and Taiba Holding Co., which, according to Gulf Times, collectively account for approximately seven percent of the Tadawul All Share Index.
Granting direct investment to foreign enterprises is part of the country’s $130bn strategy to bolster non-oil industries. As 90 percent of the Saudi economy currently relies on the energy sector, a far greater focus will be paid to diversification, particularly given the volatility of the global market and plummeting oil prices.
“Initially, you’ll see additional liquidity being injected mainly by local investors,” John Sfakianakis, the Regional Director GCC for Ashmore Group, told Bloomberg. “International investors would come in multiple phases and would provide positive momentum over the short to medium term. Overall this is very positive as it’s what international and local investors have been waiting for.”
In 1993 Ty Warner began to sell stuffed-animal toys, known as Beanie Babies. Due to the self-imposed scarcity of the product by the manufacturer – a result of Ty Warner never wanting to see his product in discount bargain bins – in the mid 90s the toys were considered collectables. Customers began reselling Beanie Babies for high prices to other speculators who imagined, as with all bubbles, the resale price would keep climbing. One such speculator purchased 20,000 of the stuffed animals for $100,000 dollars. After the bubble burst in 1999, prices never recovered. The toys now go for only a few dollars on eBay. According to Zac Bissonnette, author of The Great Beanie Baby Bubble: Mass Delusion and the Dark Side of Cute, “It was something really adorable that brought out the worst in people,” with one man serving a prison sentence in West Virginia for a murder stemming from a Beanie Baby sale gone-wrong. In an age of stock market rallies and economic optimism, people imagined everything, even stuffed animals, had high investment-potential.
Too many dollars, not enough nickel
The Poseidon bubble of 1969-1970 was also a product of its time. The Vietnam War had created a soaring demand for nickel, while industrial unrest had restricted its supply. When the Australian mining company Poseidon NL purportedly found a promising site for nickel mining in Western Australia, speculation on future profits was rife. As a result the price of Poseidon’s shares soared from $0.50 to $35. As Poseidon stock became too expensive for some investors, they began to snatch up shares in mining companies in nearby locations, often with no prospect of mining nickel. Other companies began to list to attract money from the investment frenzy, often with no intention or realistic prospect of ever mining nickel. Once it became apparent in 1970 that a lot of this stock was worthless, the bubble burst. Poseidon suffered further. When it began to mine the nickel that had started the boom, the quality was not of the grade first thought, resulting in higher extraction costs making the operation unprofitable.
The original Ponzi
Many speculative bubbles are often seen as skirting the line between frenzy and fraud. Ponzi-scheme bubbles – where the seller pays new investors with the money of old investors – sit firmly in the latter category. The originator of the Ponzi scheme was an Italian migrant to America in the early 20th century named Charles Ponzi. In 1919, his scheme was originally to purchase international postage stamps from countries where they were cheaper, exchange them for the American versions and resell at the higher American price. Operating this scheme in Boston in an age of European migration, such international postage stamps were a common feature of everyday life. The fluctuation of exchange rates and variation in international stamp prices allowed for profit to be made. Yet Ponzi went further, promising unrealistic returns to clients who would offer large investments, which Ponzi then paid back to older clients. Money poured in as people began to hear about this alleged Italian financial genius, and Ponzi’s celebrity and charisma was able to keep the charade going for a while. Saner heads soon started to question the ability to make such large profits through the sale of postal stamps, considering that much more stamps would need to be in circulation than actually were to justify the large profits Ponzi was claiming to be able to make. As the world’s first Ponzi scheme collapsed, authorities caught up with the conman, and gave him a hefty prison sentence.
Brazil’s failed industrial policy
The late 19th century was an era of industrial catch-up. From Germany, to the United States to Japan, previously agricultural nations were rapidly moving closer to the established industrial power of Great Britain. Seeing this advance, the government of Brazil was influenced to foster its own domestic industry in the late 1880s. The Brazilian state hoped to achieve this through unrestricted credit for industrial investment, increasing the money supply. The access to easy money did little to structurally transform the Brazilian economy, but rather created a financial and real estate boom. The bubble burst in the early 1890s and saw the foreign exchange value of Brazil’s currency collapse to a third of its former price.
Higher education bubble
According to some, we are in the midst of an expanding bubble right now. Higher education is one of the main political and economic concerns of our time. With rising tuition fees in much of the developed world, and increasing access to and demand for higher education in the developing world, a university degree is now often seen as a personal investment. And with all investments, there is an expectation of some sort of return. According to PayPal co-founder Peter Thiel, the higher education expansion is a bubble, primed to pop. Thiel’s argument was summarized in Tech Crunch as such: “Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.” With Americans forking out large sums of money for a university degree, the bubble will supposedly burst once it becomes apparent that the investment has not accrued the benefits promised upon purchase.
Japan’s current fiscal crisis has inflated its debt to the US Government to $1.2244trn in February, leading it to overtake the $1.2237trn owed by China.
The figures released by the Treasury Department indicated that although both countries experienced an easing of holdings in January, China’s decline was slightly bigger, thereby switching the two rankings.
China has held onto the top spot since the economic crisis in 2008
“The dynamic between Japan and China has shifted, in part due to foreign-exchange-reserve needs and the currency dynamics between the two countries,” Edward Acton, a US government-bond strategist for RBS Securities, told Bloomberg.
China has held onto the top spot since the economic crisis in 2008. As the US increased lending to foreign governments in order to prop up the international economic landscape, its own debt grew considerably. Deficit exceeded $1trn for the first term of the Obama Administration, but has shrunk each subsequent year, falling to $483bn in 2014.
Given China’s slowing economic growth and level of exports, as capital outflows also taper, fewer dollar holdings are being purchased by Beijing. Not only is this a result of less funds with which to do so, it also prevents the yuan from strengthening too much, which would place even greater pressure on China’s export market.
On the other hand, as Tokyo battles with falling inflation and a sluggish economy, capital outflows are rising. Investment overseas has been further bolstered by attractive dollar assets, which have a relatively high rate of return.
In an interesting turn of events, the positioning of Asia’s two biggest economies are rotating, with China gaining the standing that Japan had upheld for years. Historically, Japan and China have never risen at the same time: the pattern shows that as one grows, the other weakens. This latest indication seems to prove this particular lesson correct once again, as Japan bows to China in terms of economic and political clout.
Greece’s long and short-term sovereign credit ratings have been handed another blow by S&P, following the realisation that last year’s deficit was higher than initially forecast. Reduced from B-/B to CCC+/C respectively, the ratings reflect a negative outlook for both the near and far future, and, “without economic reform or further relief,” S&P expects “Greece’s debts and other financial commitments will be unsustainable.”
The credit ratings reflect a negative outlook for Greece for both the near and far future
The downgrade comes as tensions between Athens and its creditors reach boiling point, with both parties at loggerheads over the exact conditions of the country’s debt repayments. The Syriza-led coalition currently has until May 12 to meet a €750m payment, though it seems unlikely that the government will be able to pay what’s owed by the deadline.
“The downgrade reflects our view that Greece’s solvency hinges increasingly on favorable business, financial, and economic conditions,” according to an S&P statement. “In our view, these conditions have worsened due to the uncertainty stemming from the prolonged negotiations between the almost three-month-old Greek government and its official creditors.”
Ultimately, the fear is that Greece could default on its obligations and force a “Grexit”, meaning the country would leave the eurozone and, according to some sources, inflict serious pains on the economy. “We believe that the economic, social, and political ramifications for Greece of such an unprecedented step would be severe and likely be accompanied by widespread public- and private-sector payment defaults.”
The negative outlook means S&P could lower Greece’s rating within the year in the event that the government and its creditors fail to reach an agreement. Alternatively, the outlook could become stable, assuming that Greece and its creditor countries “agree on a new financial support program with policy conditions that satisfy all parties. Such a scenario could contribute to promoting political stability, tax compliance, and a gradual economic recovery in Greece.”
“Think of our industrial structure as a living thing…. and the flexing muscles and sinews of which are rubber,” proclaimed Paul W. Litchfield, then president of Goodyear Tire and Rubber, in 1939. Such claims were not without warrant; in the same year crude rubber was the largest single-imported-commodity in terms of dollar value. While humans had found various uses for rubber for thousands of years, it became a vital natural resource – and therefore valuable commodity – with the rise of modern industrial society in the 19th century.
Most natural rubber is extracted from Hevea brasiliensis trees, which are native to South America. Pre-Columbia Native Americans had used the rubber extracts from these trees to form rubber balls to play a squash-like game with. The history of rubber as a commodity begins with the European conquest of the Western hemisphere. Ships began to transport this strange substance back to Europe, creating intense interest and excitement about its potential uses. As John Tully notes in his The Devil’s Milk: A Social History of Rubber, while “[c]onsideration of the commercial and industrial possibilities of rubber date from the Enlightenment… it was not until the nineteenth century’s industrial revolution that rubber’s potential began to be realised.”
The legacy of the history of rubber is still there to
be seen
The search for reliable rubber In 1830s New York, the financially bankrupt Charles Goodyear stumbled upon the shop of the Roxbury India Rubber Company, the first American rubber manufacturer. Following a declined offer to improve a valve on one of the company’s rubber life vest jackets, Goodyear was shown racks of melted rubber products by the store manager. The store’s rubber products had been destroyed in the hot New York summer. Unable to keep its form in high temperature, the commercial potential of rubber was severely limited. This brief encounter inspired a life-long interest in the potential of this curious material. Goodyear’s finances soon saw him end up in a jail in Philadelphia and during his internment he asked his wife to provide him with raw rubber and a rolling pin, allowing him to experiment with rubber. After his release, his attempts to improve the quality of rubber continued and in 1839 he discovered that through a mix of heat of sulphur he was able to make rubber a more stable substance, allowing it to withstand extreme temperatures. This process was known as vulcanization. Yet due to a string of a bad luck and poor business talents, Goodyear was never able to turn his efforts into commercial success.
Across the Atlantic the more business-minded Thomas Hancock had also developed an interest in rubber. Its waterproof properties first attracted Hancock, who had hopes of it being used to keep patrons of his coach passenger business dry. Working with the Glaswegian chemist Charles Macintosh, the light weight waterproof coat the Macintosh was born in the 1830s. Five years after Goodyear – seemingly independent of him- Hancock also successfully vulcanized rubber. The new and improved properties of rubber saw it put to use in a variety of products integral to modern society: hoses, footwear, piston rings, railway buffers, solid rubber tyres, foot and valve pumps for ocean steamers, rollers for press printing, life belts, handgun grips, and telegraph kit, among others. In 1858 “the first transatlantic cable was laid between Ireland and Newfoundland by civil engineer Isambard Kingdom Brunel’s colossal steamship, The Great Eastern”, notes Tully. Rubber, by providing protection and insulation from the ocean water, made this possible. This precipitated a communications revolution, 200,000 nautical miles of telegraph cables being laid across the sea floor by the 1880s. According to Tully, “[b]y the 1880s, the uses of rubber seemed limitless.”
The Brazilian boom The increasing demand for rubber led to the Amazon rubber boom between the late nineteenth century and 1920. In 1872 about 8000 tons of rubber were exported from Pará, Brazil. By 1890 this had grown three-fold to 20,000 tons. Prior to the boom, 19th century rubber extraction was usually carried out by small cooperatives, funded by trading companies. However, “as soon as it was appreciated that vast amounts of money could be made,” writes John Loadman in his Tears of the Tree: The Story of Rubber, “large companies run by the great…’rubber barons’ moved in.” Brazil enjoyed a near monopoly of rubber extraction and export, selling nearly 90 percent of all commercial rubber at the time. Rubber was also increasingly in demand due to automobile mass production and the development of the pneumatic tire. This made the rubber barons of Brazil fantastically wealthy. As Felipe Tâmega Fernandes of the Harvard Business School notes, “it was said that Manaus [a Brazilian town reliant on the rubber industry] diamond consumption per capita was the largest in the world, men walked with canes topped in gold and silver, children went to school in Paris or Lausanne and almost 2,500 inhabitants took first-class tickets to Europe every year.”
Akron, Ohio at the height of its industrial success, it was said, could be smelled before seen, owing to the strong smell rubber factories produce. At the turn of the century Akron was a minor Midwestern town playing only a marginal role in the growing rubber industry. The rise of mass production automobiles in the United States saw Akron take advantage of this new demand for pneumatic rubber tires. Ohio’s relatively small rubber manufactures were surpassed by large industrial operations led by men such as William O’Neil, founder of General Tire & Rubber, Harvey Firestone Sr. and Francis Seiberling’s Goodyear Tire & Rubber Company (the latter was named in honour of the then-deceased and aforementioned Charles Goodyear.) By 1909 the India Rubber Journal estimated that Akron was probably the largest rubber manufacturing centre in the world. “Swept up in the rubber boom”, notes Tully, “Akron grew swiftly from a sleepy Midwestern town into a booming industrial city. The barons’ factories were built at a colossal scale, strung like immense brick battleships along the East Market and South Main, puffing clouds of smut and smoke into the air.”
Plantations of empire The method of extracting rubber – known as tapping – was, in the years of the Brazilian boom, very crude. It was based on extracting rubber from wild growing trees, often through the use of enslaved Amazon tribes or indentured labour. This made it rather unreliable and unsuitable as a component in the mature capitalist economies of North America and Western Europe. Yet the rubber barons of Brazil, with their virtual monopoly, maintained this primitive mode of resource extraction. What was needed was the creation of tropical plantations for rubber trees, providing a more orderly and reliable method of extraction and production, suitable for modern industrial economies.
In 1876, the explorer Henry Wickham returned to London from Brazil with 70,000 seeds for rubber producing trees, planting them in Kew Gardens. Further seeds were sent to India and other parts of the eastern British Empire, but many of the seeds at first failed to adapt to conditions or were not planted in favour of other established commodities. However, with the collapse of world commodity prices in the 1890s, gradually plantations started to plant the seeds of the now valuable commodity, with most rubber plantations located in Malaya or Sumatra. By 1913 the volume of rubber being extracted from Asian plantations for the first time outstripped the volume from the Amazon region.
Rubber is increasingly created synthetically now, through the use of petroleum. Around a of third of rubber is still produced from rubber trees. The legacy of the history of rubber is still there to be seen, with the vast majority of natural rubber sourced from Asia – the trees used being those introduced to British Empire plantations in the early 20th century. In 2013 the global market for natural rubber was worth $50bn, with “[s]ix and a half mn Tons of natural rubber…estimated to have been traded bilaterally,” according to a report by Accenture.
The history of rubber as a commodity can also be seen in Akron. This Midwestern town, like so many others, was conceived in an industrial boom. With its heyday now a distant memory after the rubber industry it relied upon was outsourced, it now forms part of the American post-industrial rustbelt. The story of rubber is reflective of the story of modern industrial society. Its awareness among Europeans coincides with the European ‘discovery’ of the Americas; its application to industrial purposes coinciding with industrial revolutions; its properties integral to modern modes of transport, communications, and production. “What people did to rubber is…fascinating” wrote Vicki Baum in her 1943 novel Weeping Wood “more interesting yet…what rubber did to people.”
China’s coal imports amounted to 49.07 million during the first three months of the year, falling by 43 percent in comparison to the same period last year. This sharp decline can be attributed to a number of reasons, the most significant being China’s recent economic slowdown. As a result, demand from the industrial sector has slumped drastically, particularly as the practice of power plants purchasing extra coal in order to build stockpiles has ceased.
Chinese suppliers continue to be inflicted by debt
and oversupply
Stricter standards recently implemented for foreign coal so as to boost the domestic market have further accentuated the fall in imports. Yet, Chinese suppliers continue to be inflicted by debt and oversupply, while prices from overseas remain competitive.
Fewer coal purchases has been coupled with stricter regulations for traditional heavy industries as authorities make a more rigorous effort to reduce pollution. “Environmental pollution is a blight on people’s quality of life and trouble that weighs on their hearts,” Premier Li Keqiang told the National People’s Congress last month. “We must fight it with all our might.”
Beijing is also implementing a number of policies to make the country less energy-dependent; such as limiting the number of fuel intensive projects in badly polluted areas. Plans to reduce the annual consumption of coal by 176 million tonnes will have a direct impact on miners from the Western states of the US and Australia; both of which have experienced soaring sales as China’s energy demands rose exponentially during the peak of its economic boom.
Furthermore, as China continues to invest heavily in diversifying its energy mix, many believe that the glory days for international coal suppliers are over. Yet Australian industry experts remain hopeful that this is not the case; as China continues to grow, the process of industrialisation and urbanisation is set to continue. According to a report published by the Minerals Council of Australia, around nine million people per annum are added to urban areas, thereby propping up China’s electricity consumption and maintaining growing demand – albeit at a slower rate.
The continuing thawing of relations between the US and Cuba took a significant step this weekend when the leaders of both countries met at the Summit of the Americans in Panama. US President Barack Obama and his Cuban counterpart Raúl Castro sat down for their first formal talks since announcing attempts to normalise relations last December.
Castro said that despite some disagreements, the renewed dialogue was encouraging
As discussed in the latest issue of World Finance, the improved relations between Cuba and its largest neighbour could see the Caribbean island’s economy undergo a dramatic transformation. Since the Cuban revolution in the late 1950s, the two countries have been at odds, with the most damaging consequence being the embargo placed on all trade by US authorities.
While the embargo has yet to be removed, the desire from both regimes to foster better relations offers a tantalising future for Cuba. The first steps of the new deal may lead to more money flowing between the two countries through remittances, which may in turn help boost Cuba’s underdeveloped private sector. US firms will also be looking at the improved relations closely, with a previously untapped market offering considerable new opportunities.
Speaking at the summit, Castro said that despite some disagreements, the renewed dialogue was encouraging. “We are disposed to talk about everything, with patience. Some things we will agree with, and others we won’t.”
Obama hailed the talks as an historic step towards cooperation with its former foe. “Wheat we have both concluded is that we can disagree with a spirit of respect and civility. Over time, it is possible for us to turn the page and develop a new relationship between our two countries.”
In step with a dismal past 12 months in which falling commodity prices have impacted both mining investment and the Australian dollar, Treasurer Joe Hockey has warned that he may be forced to write-off $25bn in revenue for the next four years if iron ore prices continue to fall. The country’s leading export is trading currently at $47 a tonne, down from $120 in 2013, and, assuming that demand fails to pick up in the years ahead, could put major names in the mining industry out of business.
Both parties have faced heavy criticism in recent months for expanding iron ore production
In an interview with The Australia Financial Review, Hockey said that there seems to be “no floor” when it comes to setting iron ore prices, which have been falling at a quite spectacular rate of late and hampering wage growth. Whereas previously Hockey was balancing the books using a price of $60 a tonne, a Chinese slowdown means that the treasurer must now factor in prices as low as $35 in order to more realistically reflect the changed economic landscape.
If prices were to reach the $35 mark, major mining names BHP Billiton and Rio Tinto would make only $1 for every tonne sold, whereas the vast majority of smaller miners would be forced to operate at a loss. Both parties have faced heavy criticism in recent months for expanding iron ore production in a time where there is a supply glut. As a result, lesser-known names are struggling to stay in a market where high-cost production is king.
According to Hockey, for every $10 taken off the iron ore price, Australia’s economy will lose $2.5bn and exacerbate the problems facing an economy already posting weaker-than-expected growth.
On April 8, five memorandums were signed between Russia and Vietnam in order to bolster trade between the two states. A high goal has been set, with plans to double annual bilateral trade to $10bn by 2016, although details of which industries will be targeted have not yet been shared.
Russia has also pledged to help Thailand’s energy sector
During the first visit of a Russian prime minister to Bangkok in 25 years, Dmitry Medvedev also offered support for a number of other sectors. Tourism is said to receive a boost – a significant facet for Thailand following a steep decline as a result of recent political unrest. Additionally, the two countries will work more closely to reduce drug trafficking and crime.
Thailand’s military coup last May triggered widespread economic consequences, which led to a contraction of GDP growth to 0.7 percent in 2014. Thanks to a calmer political environment, the Asian Development Bank predicts that this figure will rise to 3.6 percent in the coming year. Economic cooperation with Russia may indeed present the trade opportunities required to achieve this growth.
Russia has also pledged to help Thailand’s energy sector. Although Thailand is a producer of natural gas and crude oil, imports are required in order to meet the country’s growing consumption needs. Production has grown substantially in recent years, yet further investment in upstream activities in required. According to the US Energy Information Administration, Thailand is the third largest producer of biofuels in the region, thereby presenting abundant investment opportunities for Russia.
In a further bid to bring the countries closer together, Medvedev has offered a Free Trade Agreement between Thailand and the Eurasian Economic Union. Vietnam is close to concluding such a deal with the newly formed association, which currently has Russia, Belarus, Kazakhstan and Armenia as members – with Kyrgyzstan expected to join imminently.
As such, it appears Russia is on path to forming a powerful economic alliance that can turn its back on the West, as it no longer needs to rely on its cooperation.
Two years after the island nation became the first – and still the only – country in the eurozone to impose capital controls on its banking sector, Cyprus has decided finally to lift the last of its remaining restrictions. The measures were first introduced to prevent the banking population from withdrawing their funds en masse, and the decision to do away with the controls completely shows that the banking system is on the mend.
The decision to do away with the controls completely shows that the banking system is on the mend
“It is a vote of confidence in our banking system, which, now fully independent of Greek banking institutions, can move forward”, said the country’s president, Nicos Anastasiades, in a statement. Whereas beforehand a monthly cap prevented any individual from transferring more than €20,000 overseas and stopped travellers from taking anymore than €10,000 out of the country, the restrictions are no more after a steady two-year recovery.
Following in the footsteps of Argentina and Iceland, who each imposed controls to protect against their own demons, the measures were not the first of their kind – though represented an unusual take in that the island nation is without a currency to call its own. However, the restrictions were adopted in 2013 by a country hit hard by the Greek debt crisis and one for whom strict controls were required as part of a €10bn bailout from the EU and IMF.
The free flow of capital also represents a considerable part of Cyprus’ continued efforts to distance itself from Greece, and restoring normality to the banking system could well prove decisive in bringing additional investment to the country from overseas.
In the early 20th century, Boston was a popular destination for migrants from across Europe looking to work in its various manual industries. But, by the 1950s, industry was also migrating – leaving this city of migrants in search of cheaper labour in the US’s southern regions. While it enjoyed world-famous and leading universities such as Harvard, as well as good banks and hospitals, at the time these industries did not play much of role in the American economy. In the 1970s these industries became increasingly import components of the American economy. Boston, with its pre-existing comparative advantage, was able to experience an economic renaissance.
Seattle
Seattle was home to the William Boeing’s boat company. Boeing also had an interest in aircrafts. Following the Second World War, Boeing took full advantage of the jet liner boom, providing employment for many residents. In the late 1960s Boeing ran into commercial trouble and slashed around three quarters of its workforce, giving Seattle an unemployment rate of 14 percent – well above the American average at the time. Seattle’s turnaround came about due to the growth of technology industries in the 1980s. Microsoft founders Bill Gates and Paul Allen quietly moved to the city in 1979. The success of Microsoft led to a proliferation of a whole host of other technology firms in the city.
Denver
After its 1970s oil and gas boom, a fall in energy prices in the 1980s put the economy of Denver in crisis. Nearly 15,000 people working in the oil industry found themselves unemployed. As a result of overbuilding, 30 percent of office space in Denver became vacant – the highest rate in America at the time. Migration to the suburbs also resulted in Denver’s population reaching its lowest level in thirty years. In the 1990s the Rockies city began to pick up again, with its overabundance of empty and affordable office space attracting business. The initiative of city authorities to construct Denver International Airport, which opened in 1995, also made Denver a key transport hub.
New York
Once plagued by financial crisis and in the grip of spiralling crime, New York is now one of the most successful cities in the world. New York’s status as a global financial hub allowed it to take full advantage of the financial big bang of the 1980s. In the 1990s as a result of a doubling of the police force and more aggressive policing, particularly of public space gatherings, in the 1990s the city saw a decline in its crime rate, attracting young professionals and graduates to work and live in the city. Some would argue New York has been too much of a success, with spiralling rents now forcing native residents out of the city.
San Francisco
The Dot-com boom of the 1990s saw an influx of entrepreneurs and software companies to the Bay Area city. As a result, the city was badly hurt when the bubble burst, leaving behind empty offices and “For Rent” signs. The decline was short-lived, with the new boom of web 2.0 and technology and internet start-ups leading the way. San Francisco is now one of the key destinations of budding internet and technology entrepreneurs and ambitious university graduates.
Other than a brief lull in the 1890s, Americans have been paying into a progressive tax system since 1862. That those with the broadest shoulders should carry the heaviest tax burden became a fixture of the American state in the early 20th century. If Ted Cruz, the first Republican to announce his presidential candidacy for 2016, has his way, this would all change. In his candidacy announcement at Liberty University, he floated the idea of instituting a flat federal-tax rate in the United States. This would mean that all Americans, regardless of income, would pay the same percentage of income tax. Tapping into American resentment at the complicated nature of their tax codes, Cruz promises such flattening to simplify revenue collection. The presidential hopeful claimed that a flat tax would allow “every American to fill out his or her taxes on a postcard,” a reference commonly repeated by flat tax advocates. Flat tax proposals have been a recurring feature in American presidential races since the 1990s, despite its questionable economic benefit.
It seems unlikely that Ted Cruz will win the Republican nomination, but even among more hopeful (unannounced) candidates, [the idea of flat tax] remains popular
The rise of the flat tax In the United States the idea of a flat tax has increasingly become a plank of American conservative platforms. Opposition to progressive tax measures is not something new. In 1866 Republican Representative of Vermont Justin Morill claimed that progressive taxation “can only be justified on the same grounds as a Highwayman defends his acts”. But it was in 1962 that Milton Friedman, in his Capitalism and Freedom, first popularised the idea of a flat tax among what would become the American New Right. While Friedman managed to hold the ear of the Reagan administration with his ideas about monetary policy and general philosophy of rooting freedom in the freedom of markets, his flat tax advocacy made little headway in the 1980s within national politics. Although progressive taxation was “once denounced by Reagan as the invention of Karl Marx,” says Iwan Morgan, Professor of United States Studiesat UCL’s Institute of the Americas, the Reagan Presidency “left a legacy of a two-band tax system of 15 and 28 percent on incomes.”
Milton Friedman, who first popularised the idea of flat tax among what would be the American New Right
A flat tax first started to be touted in American national politics in the 1990s. In 1992 hopeful Democratic presidential nominee Jerry Brown became the first serious advocate for a flat tax, which was embraced by both the left-wing New Republic and right-wing Forbes magazines. Various other American politicians, from both sides of the bench, went on to propose various flat tax schemes. Most significant was Steve Forbes’ advocacy of a flat tax in his 1996 Republican campaign. As the American Prospect notes, soon after a flat tax became the “default option for [Republican] candidates.” So far this reached its apogee in the 2012 presidential race, which, according to Morgan, “gave the idea the most thorough airing in recent times – especially Herman Cain’s 9-9-9 tax idea.”
Render unto Creaser Although flat tax ideas have, since the Forbes presidential candidacy, been consistently floated by Republican candidates, no flat taxer has yet had the perilous task of instituting such a scheme. The current progressive tax system has a graded rate of tax between 10 percent and 39.6 percent and any flat tax would have to find a rate somewhere between these two figures. According to the editor of the Left Business Observer, Doug Henwood: “the effect would be to turn a now moderately progressive scheme (at the federal level – most state tax systems are regressive on balance) into something that would disturb even Adam Smith.”
A flat rate of, say, 20 percent (which is advocated by Texas Governor Rick Perry) would result in a tax hike for those in the 15 percent tax bracket of $8,926 to $36,250. Someone earning $30,000 pays 13.46 percent of their income in taxes; a jump to 20 percent would be crippling. There are provisions for low income earners such as Earned Income Tax Credits. Yet unless EITC – which is determined by income and dependents – and other provisions were to increase along with the increased tax burden, a significant amount of citizens in this tax band would see their income decline.
Tax rates in America are marginal, meaning that the tax-payer only pays the tax rate they are in on income earned above the top end of the tax bracket below them. Someone in the current 25 percent tax band that earns $50,000 per year would see their actual tax contributions spike from 16.59 percent to the flat 20 percent figure. Anyone earning up to around $82,000 would suffer a tax climb. The overall result would be a decline income for Americans on low to medium incomes, the much vaunted and now struggling American middle class. As Dean Baker, Co-Director of the Center for Economic and Policy Research, notes, “If the tax is, in fact, revenue neutral then it would inevitably mean a large increase in taxes on the middle class to cover the cost of a sharp reduction in taxes on the wealthy. Presumably the bottom bracket will be set high enough so that the poor will be little affected.”
Democrat Jerry Brown was the first serious advocate for a flat tax
Any flat tax scheme which would see top earners benefiting from a tax cut, meaning tax revenues would take a serious hit. When American liberals propose higher taxes for the rich, the rejoinder of conservatives is often to point out the high amount of tax that higher income earners pay compared with the rest of the taxpaying population. For instance, the top 1 percent of earners in America paid 24 percent of all Federal Income Tax generated in 2011, while the top 10 percent paid 68 percent. Taking into account just the top one percent, with their contribution to tax revenue constituting nearly a quarter, the result of this on revenue is not hard to see. Top tier earners pay the top tier income tax rate of 39.6 percent. Under a flat tax scheme of 20 percent this rate would result in a significant tax cut for this income group, resulting in a shrinking of revenue; much to the detriment of debt-ridden America.
In the long run… Of course flat tax advocates are not ignorant of such objections. The flat tax, they argue, will ultimately lead to economic growth, benefiting even those who would have a higher portion of their income gobbled up by the flattened-leviathan and filling tax coffers. The first argument is that by removing the supposed disincentive to earn more, America’s economy would see growth in the long term. People would no longer be discouraged from earning a higher income for fear of entering into a higher tax band. Relieved of the structured-leviathan, the productive potential of workers will be unleashed. However, the opposite is the case says James Livingston, Professor of History at Rutgers University. According to Livingston, a progressive and redistributive tax system creates “equal opportunity [which] ignites ambition and initiative… as every political regime in this country has recognized since Thomas Jefferson was elected in 1800.”
The argument is based on the idea that some citizens are supposedly loitering at the top end of their tax bracket, waiting to have their ambition liberated. That may be the case for some, but more significantly the American economy is suffering from a severe lack of aggregate demand; the potential benefit of loiterers-turned-strivers would most likely be cancelled out by the fall in consumer spending among lower to middle income earners – those who possess the largest marginal propensity to consume and who would take the biggest hit from the flat tax.
Steve Forbes popularised the idea of a flat tax among Republicans
The resulting tax cut for higher earners is also said to result in economic growth through giving top earners more money to invest. A flat tax, governor Rick Perry wrote in 2011, “Provides employers strong incentives to grow and create millions of jobs”. According to this restatement of trickle-down economics, if higher earners have less of their income paid to the federal government, they will have more to invest in business, boosting economic growth to the benefit of all. This asks the majority of Americans to take a hit to their income with the promise of economic benefits in the long-term, which may or may not accrue.
There is one clear benefit to the flat tax: simplicity. America’s progressive tax system, with its list of different marginal rates and breaks, is incredibly complex. The present tax code is nearly four million words long. A flat tax would simplify this, making tax returns easier for citizens and closing loopholes more viable for the government. This point is made by Jacob Sullum, Senior Editor at Reason magazine: “A simpler, flatter tax would make compliance easier and less expensive while reducing the distorting impact that the tax code has on economic decisions, whether by driving people toward politically favoured investments or by encouraging inefficient tax avoidance schemes.”
While the simplicity of a flat tax is alluring, it is a red herring. There are real benefits to a simplification of America’s byzantine tax code, but a flat tax would exacerbate the main trouble with the American economy: low wages and inequality. The real problem plaguing the American economy is on the demand side. A flat tax would see tax rises for people in lower tax brackets, eating into their income and eroding their marginal propensity to consume.
It seems unlikely that Ted Cruz will win the Republican nomination, but even among more hopeful (unannounced) candidates, the idea remains popular. Jeb Bush has expressed his openness to the idea, while Mike Huckabee is a long term advocate, as is Rand Paul, known for his economic libertarian stance. Marc Rubio, another Republican seen to be a potential presidential contender for 2016, advocates for a two-tier tax system, yet opines for an “ideal world” where a flat tax could exist. Despite the inevitability of a flat tax resulting in a tax rise for many Americans and a fall in tax revenues, for the GOP the flat tax remains an enduring dream.
Sluggish domestic demand and consumption have been hailed as the biggest impediments for South Korea’s economic recovery. While low prices persist, sales and wages remain stagnated, thereby curbing spending and investment – the mechanisms required to lift the economy.
The central bank predicts GDP growth will rise to 3.4 percent this year
According to Statistics Korea, the consumer price index was 109.38 in March, which was unchanged from February, but had risen by 0.4 percent month-on-month from the previous year.
Export levels also remain precarious; although there have been signs of improvement, largely thanks to the electronics sector, they are still low – as indicated by last month when exports had dropped by 4.3 percent in comparison with March 2014.
“Sluggish domestic demand centred around consumption is the main factor that we see harming the pace of economic recovery”, governor Lee Ju-yeol told reporters at the central bank’s headquarters on March 31.”Meanwhile looking at exports, they are expanding in terms of volume but cannot be seen as a factor that can change our economic outlook greatly”.
The continued slow pace of economic growth together with the falling inflation rate are raising strong concerns in regards to the onset of deflation, which will further strain spending and could drive the country into recession.
Currently, the central bank predicts GDP growth will rise to 3.4 percent this year, a downgrade from a previous forecast of 3.9 percent. Yet, given the country’s continued poor economic performance, experts predict that the Bank of Korea will relegate its forecast once again on April 09 when the quarterly update is due to be made.
