America's Prison Population

According to drugwarfacts.com, almost 20% of America's prison population is being held for drug offences. What an economic drain on society, we are in an economic crisis but continue to put people in prison for seemingly victimless crimes. Sure there are side effects to legalizing or decriminalizing drugs but Holland seems to be managing quite well. They are probably making a little revenue in the process - taxing it. This random thought was inspired by a chart I saw posted on the Economist web site. Take a look and see what you think.

How Will the Financial Crisis Affect Social Spending and Development Aid?

The answer really depends on how deep and prolong the economic crisis is. Several industrialized nations have responded by passing large scale stimulus packages, the US has approved nearly $800 billion with a portion of that slated for social programs; provision in the package extend unemployment benefits and increase money for food stamps. Various emerging market economies have pushed through stimulus packages of their own, China will pump $586 billion into its economy (an estimated 14% of GDP for 2009) to fund a variety of projects including some that provide low income housing, healthcare and education. Brazil has tried to offset its decreasing industrial output by funding infrastructure projects and continuing their conditional cash transfer program Bolsa Familia – a program that rewards families for getting their children vaccinated and making them go to school – which was initially meant to bring down Brazil’s high income inequality but now the program is acting like a social safety net for 11million poor Brazilians. Oxfam estimates that the total amount spent worldwide on fiscal stimulus and company bailouts is nearing $3 trillion which could be an encouraging indication for how social programs will fare in the crisis.

The response to the current financial crisis appears to signal an ideological shift which is a positive development for social programs. Fiscal stimulus seems to contradict the neo-liberal/ orthodox approach that has dominated development strategy for the past several decades. Milton Freedman and the University of Chicago’s Economics Department were an extremely influential group; they were strong advocates for free market principles like privatization, minimal government intervention and a balanced budget. They were so influential that international institutions like the IMF and World Bank saw their recommendation as almost divine.

In 1998 the IMF responded to the Asian Financial Crisis by forcing counties to privatize state owned corporations, dramatically cut expenditures (reduce the size of government) and balance the budget. In most cases social programs were the first to go. Sometimes these decisions had unintended consequences, budget cuts often resulted in political backlash that exacerbated economic problems by seriously compromising the country’s political stability. Former Indonesian President/ Dictator General Suharto was force to resign after the IMF made him cut food and cooking oil subsidies. These cuts were a huge blow to low income people; it was just the time when those social programs were the most needed. Most people didn’t take the change lightly and filled the streets in protest. Investors saw that the government could not control its people and took their investments out of the country, causing a positive feedback loop that destroyed Indonesia’s economy.

Some could say the current response (fiscal stimulus) is hypocritical, that politically an industrialized county like the US would never follow the prescriptions the IMF gave during previous crises. However, there is some evidence to contradict that, Former US President Ronald Reagan took somewhat of an orthodox approach in response to the recession in the 1980’s; he lowered taxes and cut government spending across the board – a lot of which was for social programs. The 1980s recession was smaller but I still believe the recent response was a significant ideological swing.

The swing went from Adam Smith’s invisible hand to Keynesian economics where deficit spending and bigger government became acceptable. This is relatively good for social programs but more importantly it makes good economic sense. Several well respected economists like former Noble-Prize-Winner Paul Krugman and former Clinton White-House-Aid Jeffrey Sachs advocated for increased government spending. They point out that government spending on social programs will have a higher multiplier than simply giving tax cuts. In a study by Mark Zandi, Chief Economist at Moody's Economy.com, Zandi estimates the multiplier for the following US programs: temporarily increasing food stamps (a $1.73 GDP increase per dollar); extending unemployment benefits ($1.63); increasing infrastructure spending ($1.59); this is compared to giving a corporate tax cut which only yield $0.30 to GDP.

With industrialized countries spending so much on domestic programs, development advocates question whether donor countries can and will keep their aid commitments. There is reason to be worried. September 2000, UN member states set in motion The Millennium Development Goals (MDG) attempting to cut poverty in half by 2015. The MDG are eight specific goals targeting human development, ending poverty and hunger; providing universal education; striving for gender equality; ensuring child and maternal health, combating HIV/AIDS; promoting environmental sustainability; and global partnership. However funding for MDG has not been steady and the goals are not on track to be accomplished by 2015. This is concerning because the MDG were established during “good” economic times. Barak Obama has said the US will keep its commitments but there is no telling what will happen if the crisis is prolonged.

If donor countries no longer contribute, it could have serous consequences; developing counties are fragile and could be vulnerable to collapse without access to IMF or World Bank funds. In the near term needs should be met, recently in London at the G20 conference, donor countries pledged over $1 trillion to the IMF. A positive sign is that Brazil – an emerging market country and a recipient of IMF funding between 1998 and 2003 – made $10billion available at the G20 conference then recently added an additional 4.5 billion for emergency loans. This shows that successful emerging market economies are willing to step up to the needs of developing countries.

But the IMF is not in the business of funding social programs, they’re probably just less likely to require cuts as a condition for obtaining a loan. Poverty alleviation is generally the job of The World Bank. The World Bank seems to be doing well and will make an additional $3 billion available (up from $1billion) for healthcare. This was a necessary move to keep health-services unaffected because not only will the financial crisis make more people reliant on government assistance, but exports (a key determinant of the exchange rate) have plummeted in virtually all developing countries. When the value of a country’s currency declines relative to foreign exchange (dollars or euros used to pay for imports) it makes importing pharmaceuticals or other medical necessities more expensive. Joy Phumaphi, World Bank Vice-President for Human Development, urged donor countries to honor their foreign aid commitments, saying, "This financial crisis could unravel many of the hard-fought gains in health over previous decades unless we all hold the line on the flow of development aid and health spending." Estimates are that for every 1% drop in Gross Domestic Product, 20 million more people are pushed into poverty, making it extremely important that leaders from industrialized countries keep their promises.

In the short run a combination of domestic stimulus and donor countries keeping their aid commitments should not result in catastrophic cuts for government sponsored social programs. However, not all social programs are funded by governments and several of the poorest countries – mainly in Africa – do not have governments that are institutionalized enough to qualify for IMF or World Bank funds. Increasingly Non-Governmental-Organizations (NGOs) are providing social services for the world’s poorest countries.

In the current economic climate, NGOs are finding it difficult to operate; private donations are down because donors are concerned with their own financial situation. Plummeting stock prices have reduced the size of endowments and government grants could be in jeopardy if the economic crisis continues. Virtually all non-profits are feeling the pinch but AIDS foundations are particularly worried. This may-be because there are legacy costs involved with treating AIDS patients, they must take antiviral medications for the duration of their lives and the effectiveness of those medications can be minimized by taking them on an empty stomach so increased poverty compounds the problem. And this couldn’t have come at a worse time, AIDS programs have been making considerable progress in recent years. In 2001, there were 2.2million new infections each year in Sub-Saharan Africa but that number decreased to 1.7 million in 2007. There has also been dramatic progress in treatment with widespread access to the antiviral “cocktail” but many experts fear results may reverse.

Disease has ripple effect on development and several of Africa’s poorest countries are plagued by a high rate of malaria and AIDS, this decreases a county’s productive capacity and strains limited government resources. Without international assistance the result could be devastating for economic as well as human development. Julian Schweitzer, World Bank official, believes that tens of thousands of preventable deaths could occur if countries do not keep funding commitments aimed at the poor.

Globalization has allowed governments, intergovernmental organizations and Non-Governmental Organizations to coordinate extremely effective social programs that reach even the most remote areas of the globe but globalization has also spread the crisis to those same remote areas. The economic downturn is impacting just about everything, in every country. Social programs have and will continue to be affected by the crisis as demand for assistance out-paces supply but this will likely be temporarily, the institutions seem to be resilient and will likely rebound with the broader economy.

World Bank Loans Mexico $205million for Swine Flu

Just what Mexico did not need, Mexico is already experiencing tough economic times and being hit with swine flu hurts an already fragile economy. The World Bank just announced a loan package worth $205million to help Mexico with the costs associated with controlling the potential pandemic. Hopefully this will be enough to not only control the disease in Mexico but prevent the transmission to other countries, a scenario that could result in further economic problems.

Economics is Fun...

This picture of Larry Summers shows just how much fun economics is!

Can the IMF Make a Productive Response to the Economic Crisis?

After G20 countries allotted the IMF $1tillion a few weeks ago, there are concerns that they will not be able to deliver the policies needed to make sure developing countries make it through the economic crisis. This is not surprising, IMF policies after the Asian Financial Crisis were seen as failures. They had a one size fits all philosophy to economic problems - there were reports that the wrong country was found imbedded in the paperwork because they had cut-and-pasted the text from rescue package to rescue package - even when economic conditions were considerably different from country to country.

Will Development Zuma Zoom Zoom in South Africa?

Will the election of Jacob Zuma be positive for South African development? This is unclear; Zuma and the ANC are extremely popular – obtaining 65% of the vote this week – despite Zuma's several political obstacles including: practicing polygamy (currently has 6 wives), a bizarre concept of AIDS treatment (said a shower would wash away the AIDS virus), charges of rape, corruption, racketeering, tax-evasion, money-laundering and fraud. Zuma is charismatic and has been able to shake the accusations. Popular support among average South Africans may come from his populist retoric but this makes the white minority – who control a major portion of South African assets – a bit nervous. Already an estimated 800,000 have left since 1994 and the election of Zuma could lead to more emigration out of South Africa, further adding to a shortage of skilled workers in the country.

I Want to be a Teacher Now... $125,000 a Year

Education is extremely important to development and most industrial countries and several emerging market countries are out performing US students in math and science. Is boosting teacher salaries and streamlining the staffing process a good way to get test scores up and America’s education system back on track? A charter school in New York is conducting an experiment, paying teachers $125,000 a year but cutting support and consulting positions to compensate for the high annual salary. In a few years, it will be interesting to see the results.

Redistribution and Taxing the Rich

This was a chart posted on the Economist.com, most were what I would expect but I was surprised to see how much China taxes.

Pirates, Pirates, Pirates...

The recent hostage situation involving Somali pirates taking over an American ship was tragic but the result of a larger problem. Analysts are commenting that we are having a piracy problem but really it is the lack of other economic opportunities in Somalia that has lead to a piracy problem. Somalia is a failed state with one of the lowest GDPs in the world. Unless the global community can spur economic develop in the area, piracy will likely continue.

Lil Kim Launches Rocket

Over the weekend Kim Jong Il or Lil Kim – as I like to call him - unsuccessfully launched a rocket, that North Korea called peaceful but the international community deemed a threat. Even though the rocket did not successfully make it into orbit – instead crashed in the ocean – it did give the crumbling nation some bargaining power when disarmament talks eventually resume but will add to public suffering in the short term, as further sanctions will likely be imposed. Although I’m not sure there is much more the international community can do, North Korea is already one of the most economically depressed countries in the world, regularly unable to produce enough to feed its population but I'm sure UN member nations will try to make them suffer meanwhile Lil Kim will continue to sip Cognac surrounded by Swedish "ladies."

G20 Come Through With a Trillion for IMF/World Bank

Today at the G20 conference in London, rich countries have agreed to give the IMF and World Bank a trillion dollars to fund developing countries as they struggle through tough economic times. Brazil and several other emerging market countries have seen a sharp decrease in tax receipts – Brazil alone saw tax revenue drop by 4.7% in December. This money will hopefully cushion the blow and allow governments to operate without making massive spending cuts that would hurt the poor and potentially cause civil unrest.

The Global Middle Class

February 14th, the Economist published a series of articles on the global middle class; among the topics were how important the middle class is for emerging market economies to successfully develop. This is because the middle class takes on certain characteristics depending on its overall size. High commodity prices and a large volume of exports fueled the economic boom that allowed so many individuals in emerging markets to move up into the middle class. But the financial crisis could have serious consequences for the new middle class as the recession hits harder and businessmen are forced to cut production and reduced the size of their workforce.

Currently, the middle class makes up over half the world’s population with 80 million more added each year. But the term “global middle class” is relatively broad; it can mean income levels of anywhere from the equivalent of $10-100 a day. For this reason many economists consider there to be two different middle classes, those that would be considered middle class in any country and those that would be considered middle class only in developing countries. The second definition is basically a measure of how many people live just above the poverty line and are able to purchase items other than basic necessities. This group makes up a largest portion of the “new middle class” and is the most vulnerable to shifts in the global economy. Their margin from middle class to poverty is relatively small therefore once a fraction of their income is taken away or if they lose their job, a significant portion of the new middle class could once again fall back below the poverty line.

Although their level of affluence is much lower, the new middle class has become the consumers driving emerging market economies. An increasing consumer base has allowed a variety of businesses to proliferate including those producing things like cell phones, cars, cloths, prepared meals and private education. When the consumer base increases, the industrial sector expands to provide more jobs for more people. The result is a larger portion of the population climbing up the income latter and into the new global middle class.

After WWII the American middle class expanded rapidly leading the way for unprecedented levels of wealth and innovation. Middle class populations tend to boom rather than incrementally expand with growth, for instance the Chinese middle class made up just 15% of the population in 1990 but reached 62% in 2005. The size of the group is important; middle class behavior takes on different attributes depending on its relative size within the economy. A relatively small middle class will tend to emulate the rich - who typically are more risk averse. This is because the rich are comfortable with their current income level and want to protect their lifestyle rather than see new people enter their ranks to possibly compete with them. This is compared to a larger middle class, who take on their own set of characteristics. When the size of the middle class reaches a certain point – there’s not a definite number - they start feed off each others’ success. The result is the middle class becomes more innovative, entrepreneurial and driven by competition.

The entrepreneurial spirit associate with the middle class is a key component to development success. Entrepreneurs generally start up small and medium size corporations that in the aggregate employ a large portion of the population. These smaller businesses also tend to be more competitive than large inefficient firms that dominate the business landscape when the middle class does not represent a good portion of the economy. In a capitalist system healthy competition often leads to innovation and the desire to move up the value added latter, from small storefronts or simple textile manufacturing - characteristic of sweat shops - to more technical consumer electronics and industrial goods. Taiwan and South Korea are prefect examples of countries that moved up that value added latter and into well functioning economies.

Also important, is the middle classes’ desire for self improvement, when families move into the middle class category, they generally become healthier and better educated; increasing the country’s human capital, and making for a more productive workforce. The middle class generally take the philosophy that a rising tide raises all boats and are more willing to support universal education. The rich on the other hand oppose educating the masses and instead advocate for private education for their children – this is also probably related to competition.

There is no doubt the middle class is important to development but the economic crisis is threatening their ability to grow and possibly maintain their current numbers. The economic crisis started in the US but has reached to almost every economy in the world. Some emerging market economies like Brazil thought they would escape the problems, believing that they had decoupled from the global economy; a few months ago when asked about how the crisis will affect Brazil, President Lula responded “go ask Bush… it is his crisis, not mine.” However this has not been the case for Brazil and several other emerging markets, globalization has connected just about all economies – except for maybe North Korea.

The economic crisis has affected emerging markets - with susceptible middle classes - in a variety of ways. The most obvious is decrease output, many emerging market economies depend on exports for continued economic growth - with the US being the primary destination for finished goods. As the recession becomes deeper, demand for their goods decreases therefore business are forced to cut production and eventually cut middle class jobs. The situation is becoming so bad that the World Bank is forecasting that global trade will decrease for the first time since 1982.

The banking system is a very important component to economic growth and because the current crisis started in the banking system, the credit markets are virtually frozen. Companies and individuals are finding it difficult to get access to credit because emerging markets are seen as a risky investment. But businesses need access to credit so they can stock shelves or buy inputs for production; consumers need credit to purchase big ticket items like cars or refrigerators and with a lack capital in the system emerging market economies will not be able to continue at their current pace. Banks in some counties like Brazil isolated themselves from sub-prime investments but their bank spread – number of points between federal funds rate and hat is actually charged to the customer – are extremely high, making it difficult to get loans out to the people who need them.

To conclude, the middle class continues to play an important role in development and will hopefully remain resilient even through these tough economic times. The middle class is what makes a society great, the author of one of the Economist articles “Beyond Wisteria Lane” says it best: the middle class create a “society in which people hope their children will do better than they have done themselves; which believes in merit, not privilege; competition not inheritance; thrift not conspicuous consumption and which applauds personal effort rather than collective endeavor.”

Could Solar Power Africa???

The Center for Global Development’s website features the book Africa’s Private Sector: What’s Wrong with the Business Environment and What to do about it. The central thesis looks at Africa’s solar potential and how their development efforts have been cut short because of a lack of consistent electricity. Obviously electricity is not the only impediment to Africa’s development success – war and corruption to name just two - but it could be a way for African countries to increase their economic activity. The author projects that Africa has the capacity to generate six times more solar power than Europe, enough to provide for all the continent’s needs and be able to export the surplus. As global warming awareness increases and the search for clean energy solutions on the rises, this could be the ticket African countries need to jump start their economies.

Axis of Evil to Upheaval???

As unemployment and political discontents escalate, a prolonged global economic crisis increases the likelihood of future failed states. Foreign Policy Magazine recently published an article “Axis of Upheaval” that argues the US should be more concerned with economic problems in a few underdeveloped countries than the three states former president Bush named as "The Axis of Evil" – Iran, Iraq and North Korea. One of the countries mentioned is a major concern for the US because of its close proximity and the potential for violence to spill over the border. Mexico has been ravaged by a multi-front war between the government and drug cartels; the violence has become so serious that it has called into question the legitimacy of Mexico’s government to handle the issue. This could have disastrous consequences for the second largest economy in Latin America – violence makes investors uneasy, increasing the likelihood they may pull money out of the economy, adding to country's economic problems.

Corruption and Underdevelopment

Corruption is a major contributor to underdevelopment and the cycle of poverty that plagues a host of developing countries. The Economist recently ran an article featuring the subject of aid, political graft and how large amounts of money get funneled by into western banks. Rather than putting all the blame on corrupt officials, the author says much of the blame should be placed on banks that enable and even court corrupt leaders. Paul Collier, author of The Bottom Billion, calls such banks “pimps” because they profit from the large sums of money that enter their institutions. America’s Riggs Bank – ironically had honest Abe Lincoln as a former customer – was mentioned for stashing away millions for former Chilean dictator Augusto Pinochet.

Will the Microfinance Industry Get More “Micro” as a Result of the Financial Crisis?

Since Mohammed Yunnis won the Nobel Peace Prize in 2006 for creating the Grameen Bank – a micro-lending institution that has lifted hundreds of thousands of people out of abject poverty - microfinance has increased in popularity. But will micro-lending programs be able to survive throughout the current financial crisis? Microfinance is the act of lending small sums of money to people that would otherwise be ineligible for conventional loans, allowing individuals to purchase capital equipment/ supplies so they can earn a living. The first micro-lending institutions were developed for philanthropic reasons but the industry has increasingly become commercialized. Since microfinance has shifted from charity to more of a business, the industry is more dependent on world capital markets. And because there are two types of institutions, those that are for-profit and those that are non-profit, experts are divided on how microfinance will react to the current economic crisis.

A good place to start this analysis is by looking at history. The most relevant example is to see how well microfinance did during the Asian Financial Crisis? In a report published by The Foundation for Development Cooperation, Paul McGuire and John Conroy make some interesting observations regarding financial crises in general, noting that recession leads to increased unemployment in the formal employment sector, therefore more candidates for microfinance in the informal sector. Sounds good for microfinance but things are not that simple, recession also means people have less purchasing power and more people trying eek out a living on the streets means there is more competition. But what actually occurred?

David Roodman of Center for Global Development notes that in Indonesia “while large companies and rich people defaulted left and right, the 2.6 million micro-credit borrowers of the Bank Rakyat Indonesia hardly skipped a beat.” This is not surprising since many micro-loan programs, like the Grameen Bank, are structured around group lending where there is communal pressure to repay. Although there may have been some problems, micro-credit faired pretty well in this particular instance.

Seeing how micro-finance reacted to the Asian Financial Crisis is a good barometer for how things might turn out but current circumstances are unique. For instance, the Asian Financial Crisis was relegated to emerging markets compared to the current economic crisis which stems from problems in US financial system. So the debate really comes from the unique nature of the current crisis and how the micro-credit industry has evolved since the last crisis.

There are people on both sides of the debate, Muhammad Yunus is a vocal advocate of the micro-credit industry and publicly announced “The financial crisis has not hit the microfinance system” and that “in the middle of all these bad news: microfinance still works.” Bill Clinton believes investors should look to microfinance saying “consider the poor of developing nations as viable investment alternatives to today’s turbulent markets.”

Besides believing celebrity advocates like Dr. Yunus and Bill Clinton, there are structural reasons why one could be optimistic about the future of microfinance. David Roodman points to the fact that most foreign investment still comes from those who are motivated by charity and willing to accept the risks involved with lending to the poor. Others like Benjamin Kahn and Tor Jansson of The Inter-American Development Bank (IDB) argue that microfinance “will benefit from close ties with their local communities, from knowing their borrowers well, from having an ownership structure that includes shareholders with a strong interest in their well-being, from conforming to local financial regulations and from making good use of local savings.” So once again the structure of the micro-credit industry may insulate it from high default rates. But is that shifting?

There are good reasons to believe microfinance will be resilient; however there are also a variety of reasons to be cautious. True, charitable foundations are willing to take risks but many of the endowments charities rely on have shrunk because of sharp decreases in world stock prices. So they may be willing to take risks but may not have the capital to finance such risky loans. Foreign governments have also been large contributors to development projects but will more than likely be forced to cut international aid budgets because their own economies are at risk of collapse. In addition to philanthropic related problems, the micro-lending industry has become increasingly tied to the conventional financial system.

Sarah Bauele of the University of North Carolina, makes three important observations that could affect repayment and micro-lending’s sustainability during the financial crisis: rising food prices means that individuals have less money once basic needs are taken care of; increasing unemployment in rich countries means that money sent as remittances is declining, cutting off a needed source of capital; the commercialization of microfinance means that the industry is affected by the lack of credit in the global financial system.

Echoing the last point made by Bauele, Fitch's Financial Institutions Group, agrees that microfinance will be affected by its ties to the global financial system but believes that a cool down may not necessarily be a bad thing, stating "In a way, it will be a much-needed "taking of stock" after several years of strong growth."

Kate McKee, a senior fellow at the Consultative Group to Assist the Poor wrote an article reinforcing that sentiment, making interesting parallels with the US sub-prime mess and potential problems with micro-finance if it were allowed to get out of control. McKee notes that micro-lenders, like sub-prime lenders, target barrower that may not be the most credit worthy - but in the case of micro-loans that is kind of the point, lending to people that would otherwise not have access to credit. McKee is an advocate for micro-lending so she does not want to see the practice end but emphasizes that lenders should be cautious and make sure borrowers know their rights and obligations before approving loans. This could be key to making sure the for-profit micro-credit industry is sustainable because as large amounts of money get pumped into microfinance - similar to the sub-prime market - lenders could get over ambitious and lend to people they know can not repay and will subsequently defaulted. She also mentions that the microfinance industry could have taken on another characteristic of the sub-prime market due to the small sums of money involved. Traditional lending institutions or investment houses can’t really be bothered with loans for $50-$100 so they could be bundled into more complex securities like the toxic assets that have plagued the banking industry.

In addition to similarities with the sub-prime industry, the changing dynamic of micro-lending and that it is becoming more like the conventional financial system puts its sustainability in jeopardy, Christoph Kneiding notes that “while 9 out of 10 BRAC-only clients repay their loans regularly, repayment drops to 50% for households with membership in three or more MFIs other than BRAC.” There are two observations that can be made about this statement. Similar to US consumer credit cards, repayment was high when credit was not readily available but when multiple lines of credit were offered, borrowers can become overloaded and not able to repay. The changing dynamic of micro-lending can also affect repayment - traditional micro-lending programs used peer pressure as a mechanism for repayment but as microfinance becomes more like a traditional finance - barrowers are removed and don’t feel quite as obligated to repay, especially since there are no formal credit reporting agencies in many countries. So for these few reasons, it may be a good thing for the micro-lending industry to cool down.

This analysis is by no means a comprehensive study of microfinance but hopefully it presented some interesting ideas and possible influences as the industyr tries to weather through the financial crisis. As you can see there are many things to look at to evaluate the future prospects of microfinance; it is caught between two worlds -- business and charity. Depending on what angle or what context, one can make totally different conclusions. My personal opinion is that it will make it through just fine, it may run into some problems but as the saying goes “what doesn’t kill you makes you stronger.”

Is Democracy Important???

Center for Global Development recently sponsored a book on young democracies and how they are finding it difficult to keep democratic institutions alive. But how important is democracy to development, many of the so called “Asian Tigers” like Singapore and Taiwan were able to thrive with an authoritarian regime. Officials were able to push through tough economic programs that voters may not be willing to support. I guess the question is “are these autocratic governments acting in the interest of the people or their own” or I guess a more direct question would be “is there an actual development strategy involved or are decisions being made to line the pocket of those in power??” Q&A on the CGD website indirectly answers some of these questions, if you’re interested follow the link below.

http://www.cgdev.org/content/opinion/detail/1421059/

It's Good to be the Leader...

Zimbabwe, one of the poorest countries in the world will probably stay that way because of genius decision made by its leader Robert Mugabe. With seven million Zimbabweans living on international food aid, Mugabe’s people are planning a birthday bash that will probably come close to that country’s GDP for the day. The list of items include:

• 2,000 bottles of champagne — Moët & Chandon and ’61 Bollinger
• 500 bottles of whisky — Johnny Walker Blue Label, 22-year-old Chivas
• 8,000 lobsters
• 100kg king prawns
• 3,000 ducks
• 4,000 portions of caviar
• 8,000 boxes of Ferrero Rocher
• 16,000 eggs
• 3,000 cakes — chocolate and vanilla
• 4,000 packs of pork sausages

http://www.timesonline.co.uk/tol/news/world/africa/article5697712.ece

Davos Economic Forum

The World Economic Forum holds an annual meeting in Davos Switzerland that usually highlights globalization and the increase in international trade. However this year the discussion was not about increasing trade but by how much trade was going to contract. Current projections are that trade is going to decrease by 2.8% in 2009… a huge number considering trade grew by 4.1% last year in the midst of an economic downturn. The hope is that this will not lead to economic nationalism and the breakdown of trade networks. This would have a disastrous effect on overall economic development as emerging markets rely on exports to fuel their economic growth.

http://www.cfr.org/publication/18429/gloomy_portents_for_global_trade.html?breadcrumb=%2F

International Breakups...

This is a little bit off the topic of development but shows how globalization is affecting the institution of marriage… this article peaked my interest because it takes comparative advantage to a whole new level. The article “Divorce: Money in Misery” looks at what happens when international marriages fall apart and how different jurisdictions affect the distribution of assets… choosing a place to terminate your marriage may be even more important than where you take the vows…

http://www.economist.com/world/international/displaystory.cfm?story_id=13057235

Economic Problems in China

China has been an economic success story, pulling millions of people out of abject poverty over the past decade but their growth has primarily come from increasing thier exports to highly developed economies like the US. The global economic crisis has severely curtailed most peoples spending habits resulting in a sharp decrease in Chinese exports and therefore their GDP. An article in the Economist points to possible political problems because the Chinese Communist Party’s political legitimacy is directly linked with high growth rates and economic development. So the question is, will the global economic crisis result in large scale political change? Will the Communist Party open up or suppress dissenters with physical force?

Strong as an ox? The Economist 01/22/09

Utopia or Disaster...

Recently Bolivian officials signed a new constitution with the aim of creating an egalitarian state but the referendum has a serious possibility of backfiring. Globalization has created an uneven distribution of income, particularly in developing countries like Bolivia, giving rise to populist style governments like that of Evo Morales who championed the new constitution.

One of the more controversial aspects of the new constitution is the land reform policy which limits the size of industrial farms. This seems like a noble gesture, giving land back to people it was stolen from years ago, however these large scale agricultural complexes are very efficient and provide a large portion Bolivia’s demand for food. I cant help but think it sounds like Robert Mugabe’s land reform policy which resulted in a sharp drop in Zimbabwe’s agricultural production. Politically it gave Mugabe a short term boost but created famine and suffering within his country.

In addition to the possibility of food shortages, the new constitution could have further implications for Bolivia’s overall development. Risk Analysts look at leftist governments and see the possibility of another Cuba or Iran where there is a possibility of expropriation or nationalization of private assets. Firms could chose not to locate a plant in Bolivia or pull investment capital out of the economy leading to further economic problems and a continued cycle of poverty.

http://www.economist.com/world/americas/displaystory.cfm?story_id=12974135

Introduction:

Politics and economics are almost inseparable and the interplay between the two can be an interesting phenomenon to observe. Although the two are inseparable, they seem to oppose each other, economics being a rational discipline based on efficiency and the way things ought to run, juxtaposed with international politics which is often influenced by greed and electoral calculations. This blog is going to concentrate on these two opposing forces, commenting on economics, globalization and political factors that drive economic policy decisions.