Monday 18 July 2011

The euro's real trouble (The ECONOMIST)

ANYONE struggling to understand why Europe has proved incapable of putting an end to the euro’s crisis might find answers in a bad-tempered dinner at a summit on October 28th 2010. The argument was over a demand by the leaders of Germany and France, made days earlier at Deauville, for a treaty change to create a permanent system to rescue countries unable to pay their debts. Everyone groaned. It had taken years of tribulation to agree on the European Union’s Lisbon treaty, which had only recently come into effect. But they bowed to Angela Merkel, the German chancellor, who wanted to prevent any challenge to the new system by Germany’s constitutional court.


However, Jean-Claude Trichet, president of the European Central Bank (ECB), worried about something else: her demand that future bail-outs must include “adequate participation of private creditors”, meaning losses for bondholders. That could only alarm the markets, he thought, still jittery after the Greek crisis in the spring. “You don’t realise the gravity of the situation…” began Mr Trichet. But he was cut off by the French president, Nicolas Sarkozy, who interjected, one Frenchman to another: “Perhaps you speak to bankers. We, we are answerable to our citizens.” Mrs Merkel chimed in: taxpayers could not be asked to foot the whole bill, not when they had just paid to save the banks.
The politicians won the day. But Mr Trichet’s worries have also been vindicated, as contagion has spread and is now engulfing Italy (see article). The dinner-table row illustrates how, throughout the sovereign-debt crisis, the requirements of financial crisis-management have collided with political, legal and emotional priorities. Indeed, the euro’s woes are as much about politics as about finance. European officials such as Mr Trichet parrot that the euro zone’s overall debt and deficit are sounder than America’s. Yet Europe lacks the big federal budgets and financial institutions to redistribute income and absorb economic shocks. And it has no single polity to mediate tensions within and between member countries. It is hard enough to get Californians to save Wall Street bankers; no wonder Germans bristle when they are asked to rescue Greek bureaucrats.

READ THE REST AT:
http://www.economist.com/node/18959279

Sunday 17 July 2011

GLOBAL MUMBO JUMBO

While I prefer and rather enjoy writing on local happenings, I can’t help but join the rest of the world in gazing at the biggest markets, The United States of America and European Union, as they struggle with debt. Euro zone countries are battling with collapsing economies and debt ridden states while the US is in denial of a $14 trillion debt of which is in need of debt ceiling revision, otherwise, the US economy will face severe shocks pulling the global financial markets with it.
The EU is experiencing a situation of uncontrollable debt crisis; we have seen countries like Greece, Portugal, Ireland, Spain, all in huge debt and now Italy with one of the world's highest levels of public debt - at around 120% of gross domestic product, second only to Greece in the euro zone.

The US’s debt ceiling is ever changing, ranging from 60% as a percentage of GDP during Bill Clinton’s second term to 80% during George Bush’s term and now reaching a 100% of GDP. The US has a debt ceiling law which allows Congress to increase or lower the debt limit. The US is in this situation because the government spends more (than it receives) on bailouts, medicare, military supply, and social welfare and receives fewer taxes than can be attained. The public debt is the people’s money, and today, the people are coming up short. Shrinking the public debt means shrinking more than just the services the government is expected to provide. It means shrinking the money supply itself, along with the ability to provide the jobs, wages and purchasing power necessary for a thriving economy.’ Ellen Brown, on the current situation of the US.
As per Wednesday 13/07/11, there was a deadlock on how the US would reduce its debt, there are basically 2 positions; 1. Punish the poor and save the rich or 2. Punish the rich and save the poor. It’s very clear that both wings need to come to a compromise to deal with this issue. In the mean time, we analyze potential problems facing the US and the rest of the world 
should a compromise not be reached soon.

If no agreement is reached, If the government subsequently admitted that it would be unable to meet some of its obligations, then confidence in the United States would evaporate overnight (the US losing its triple-A rating, leading to a massive crash in the dollar, dramatically higher interest rates (due to a loss of creditworthiness) and a crash in equities markets. Thus, global banking and financial market liquidity could dry up. Lending between institutions and people or businesses could possibly cease altogether or become cost prohibitive. Further, the US government will effectively start to run out of money to pay civil servants, government contractors, pensioners or holders of government debt.

The shock would quickly spread throughout the world and would very likely lead to a serious global recession, possibly worse than the one seen a few years ago. Lest we all forget the challenges brought forth by the crisis, but in case you forgot; most notable to us in Botswana is the tightening of consumer spending on luxuries, decline in diamond revenues and subsequently government revenues. Our economy is government driven and any cuts in government spending we have seen cause a big uproar from the civil servants and of course our local economy-tenderpreneurs suffer the most.

The debt ceiling is simply a cap on how much money the government can owe both locally and internationally. For instance, debt ceiling for Botswana is 20% of GDP, and currently we are around 18% and we know of  government efforts in trying to reduce the deficit by not only increasing revenues but by reducing government spending. Money is an inflow and outflow of debits and credits, the liabilities of the government are the assets of the private economy; the national debt is what backs the money supply. While this may be, we should be careful not to let it get out of control; many lessons are to be learnt from the ‘superpower’ economies.

Friday 1 July 2011

It's a (WO)Men's Business World

In the past week, I had the privilege of meeting Mrs Michelle Obama, the First Lady of the United Stated of America, and some 75 extraordinary young women leaders from across Africa, in Johannesburg. While I could go on and on about our discussions, I will focus on some of my thoughts provoked by the discussion on women in business and economic development.
All over Africa, the majority of women owned businesses are in the informal sector. In Botswana, a 2007 study estimated around 67% of informal businesses to be owned by women. Further, we know that formal businesses sprout from the informal and thus those in the informal sector are drivers of the economy; an IMF report on Women and Men in the Informal Sector indicates that there are estimates of the contribution of the informal economy as a whole to GDP and that the average (un-weighted) share of informal sector in non-agricultural GDP varies from a low of 27% in Northern Africa, 29% for Latin America, and 31% for Asia to a high of 41% for sub-Saharan Africa. While some economists say that people are in the informal sector because of choice, most (me included) acknowledge that sometimes it’s by necessity. There is a significant, but not complete overlap, between working informally and being poor; especially in the lowest-return activities where the link is stronger for women than for men.
Although the informal economy is good for start-ups, there is need to encourage these setups to legalise and make their operations formal. Growth of the formal sector not only reflects growth of output in the economy but taxes which fund public services and improves the standard of living of the nations. Many of the self-employed would welcome efforts to reduce barriers to registration and related transaction costs especially if they were to receive the benefits of formalizing, such as written and enforceable commercial contracts as well as access to financial resources and market information.
There are some questions that keep coming up in my discussions; ‘what do we need to do to ensure that those in the informal sector grow to join the formal sector? For example; how do we transform the woman’s hair dressing business from under a tree to a fully fledged salon? How do we transform that one salon to a chain business?’ when one starts, the hope is to grow big and in most times, the business environment is not welcoming; the regulatory environment is a main hindrance, paper work is dubious and entry just becomes very difficult. As a precursor to attract informal sector to formalise, we need to see an increase in incentives to legalize business; lower costs and lessened hassles in business start-up, provide service and let there be equitable distribution of resources. But till then, maybe there is more to learn from the Kiosk economy in Kenya; the art of vicious negotiation, high aggression to business pursuits and the spirit of team building.
 In order for our country to reach new heights of equitable and sustained development, the ingenuity and energies of both men and women must be fully harnessed in social and economic development. I hope for more participation of women in the formal business sector, and development initiatives that fully embrace the role of women in economic and business activities and that in Botswana and worldwide, governments will start or strengthen their policies to ensure that women attain their full measure as equal partners in nation building.