Is Europe Following India's Footstep?

The term "Flagship" normally denotes a lead ship.  The term has originated from the custom of the commanding officer in Naval who have right to fly a distinguished flag. The term Flagship scheme means the schemes which drive the economy towards faster growth. India is the first country to have flagship schemes. In India, (whoever follows the budget will know that) we have 8 flagship schemes. They are 1. Sarva Shiksha Abhiyan (SSA) 2. Mid-Day Meal (MDM) 3. National Rural Health Mission (NRHM) 4. Integrated Child Development Scheme (ICDS) 5. National Rural Employment Guarantee Scheme (NREGS) 6. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) 7. National Rural Drinking Water programme(NRDWP) 8. Total Sanitation Campaign (TSC).

Now, the Europe has announced an initiative called “Europe 2020 flagship initiative”. They have seven flagship initiatives and they are:

1. Innovation Union: to improve framework conditions and access to finance for research and innovation so as to ensure that innovative ideas can be turned into products and services that create growth and jobs.

2. Youth on the move: to enhance the performance of education systems and to facilitate the entry of young people to the labour market.

3. A digital agenda for Europe: to speed up the roll-out of high-speed internet and reap the benefits of a digital single market for households and firms.

4. Resource efficient Europe: to help decouple economic growth from the use of resources, support the shift towards a low carbon economy, increase the use of renewable energy sources, modernise our transport sector and promote energy efficiency.

5. An industrial policy for the globalisation era: to improve the business environment, notably for SMEs, and to support the development of a strong and sustainable industrial base able to compete globally.

6. An agenda for new skills and jobs: to modernise labour markets and empower people by developing their of skills throughout the lifecycle with a view to increase labour participation and better match labour supply and demand, including through labour mobility.

7. European platform against poverty: to ensure social and territorial cohesion such that the benefits of growth and jobs are widely shared and people experiencing poverty and social exclusion are enabled to live in dignity and take an active part in society. (Source: Europe Commission website)

These seven flagship initiatives will commit both the EU and the Member States. In order to achieve the goals of Seven Flagship Initiatives within the stipulated timeframe i.e. 2020, the Europe Union and Member countries need stronger governance and also need to strengthen the coordination within economic and monetary union. No doubt, Europe is following India’s footstep on flagship schemes/ initiative. But, the success of their Flagship initiative mostly depends on the effectiveness of the governance and coordination within the union.

Should World be Open to do Business with China?

Yesterday, I have read an article from Economist titled "China buys up the world - And the world should stay open for business" Here are few excerpts from it "Chinese buyers—mostly opaque, often run by the Communist Party and sometimes driven by politics as well as profit—have accounted for a tenth of cross-border deals by value this year, bidding for everything from American gas and Brazilian electricity grids to a Swedish car company, Volvo"


The article says that there is opposition for this trend; it states that "The notion that capitalists should allow communists to buy their companies is, some argue, taking economic liberalism to an absurd extreme. But that is just what they should do, for the spread of Chinese capital should bring benefits to its recipients, and the world as a whole."


The article also talks about the rise of mercantalist, it states that "

The rich world has tolerated the rise of mercantilist economies before: think of South Korea’s state-led development or Singapore’s state-controlled firms, which are active acquirers abroad. Yet China is different. It is already the world’s second-biggest economy, and in time is likely to overtake America. Its firms are giants that until now have been inward-looking but are starting to use their vast resources abroad."

It also talks about the investment made by the chinese firms "

Chinese firms own just 6% of global investment in international business. Historically, top dogs have had a far bigger share than that. Both Britain and America peaked with a share of about 50%, in 1914 and 1967 respectively. China’s natural rise could be turbocharged by its vast pool of savings. Today this is largely invested in rich countries’ government bonds; tomorrow it could be used to buy companies and protect China against rich countries’ devaluations and possible defaults. "

The article questions about the domination of china over global capitalism, it further states that "Chinese firms are going global for the usual reasons: to acquire raw materials, get technical know-how and gain access to foreign markets. But they are under the guidance of a state that many countries consider a strategic competitor, not an ally................." 

"The idea that an opaque government might come to dominate global capitalism is unappealing. Resources would be allocated by officials, not the market. Politics, not profit, might drive decisions. Such concerns are being voiced with increasing fervour. Australia and Canada, once open markets for takeovers, are creating hurdles for China’s state-backed firms, particularly in natural resources, and it is easy to see other countries becoming less welcoming too."

The article further states that "That would be a Mistake. China is miles away from posing this kind of threat: most of its firms are only just finding their feet abroad. Even in natural resources, where it has been most active in dealmaking, it is not close to controlling enough supply to rig the market for most commodities."

"Nor is China’s system as monolithic as foreigners often assume. State companies compete at home and their decision-making is consensual rather than dictatorial. When abroad they may have mixed motives, and some sectors—defence and strategic infrastructure, for instance—are too sensitive to allow them in. But such areas are relatively few."


The article takes a stance that "China’s advance may bring benefits beyond the narrowly commercial. As it invests in the global economy, so its interests will become increasingly aligned with the rest of the world’s; and as that happens its enthusiasm for international co-operation may grow. To reject China’s advances would thus be a disservice to future generations, as well as a deeply pessimistic statement about capitalism’s confidence in itself."


I felt this a worth article to read; so I thought of sharing it here.

What is a Currency War?

Recently in many newspaper/ channels we would have come across the term Currency War. What (exactly) is a Currency War? It is a writers term (Currency war),  for economist it is well known as competitive devaluation. It  is a condition in international market's where countries compete against each other in order to achieve a relatively low exchange rate for their home currency, which will help their domestic industry to perish.

Normally at a certain period or given time, any given currency exists in a global markets is determined by supply (how much of a currency exists) and demand (how much investors want to buy goods and assets denominated in that currency).  A country can make its goods and services more "cheaper" (some may say more competitive, because its cheaper) in the global market by devaluing its currency. 


The devaluation of a currency can be made in number of ways, say, from Quantitative Easing (QE) (printing more money - by doing so there will be greater the supply of its own currency, which, would result in the less value it tends to be) to Buying of another Country's Debt (more the demand for another country's currency, the more valuable it tends to be).

QE is a practice, when a central bank tries to mitigate a potential or actual recession by creating money and injecting it into the domestic economy (so that they can avoid inflation once the economy improves). 

QE to devalue a country's currency indirectly in two ways. First, it will encourage the speculators to bet that the currency will decline in value. Secondly, the large increase in the domestic money supply will lower the domestic interest rates, which will become much lower than the prevailing interest rates compared to the countries which are not practicing quantitative easing.

When a country's currency falls in value, its exports usually grow, because its goods and services becomes much cheaper on the global market. Which will benefit the export of the country and boost the domestic as well as the global market and thus achieving economic stability.

(For More info:  click here and for History of Currency War)

(Refernces: Wikipedia and Investopedia)

Quantitative Easing and Developed Countries

        I have read 2 interesting articles today (11th October 2010) in Economist regarding the Quantitative Easing, they are - 1. The magic bullet - How the bulls believe quantitative easing will boost asset prices (Oct 7th 2010) and 2. The Japanese economy - Easy does it - Symbolic moves by the Bank of Japan (Oct 7th 2010) 

      Before going further on these 2 articles let me give definition for quantitative easing. What is quantitative easing? Usually, central banks try to raise the amount of lending and activity in the economy indirectly, by cutting interest rates. Lower interest rates encourage people to spend, not save. But when interest rates cannot be lowered no longer then central bank's only option is to pump money into the economy directly. This is called Quantitative easing (QE).

      The way the central bank does this through buying assets - usually financial assets, say government and corporate bonds. The institutions which sells the assets (either commercial banks or other financial businesses such as insurance companies) will have "new" money in their accounts, which will then boosts the money supply in the economy. Sometimes, the Quantitative Easing literally means printing money, but, nowadays the Bank don't have to literally print the money, because, it is all done electronically. However, few economists would still argue that QE is the same principle as printing money as it is a deliberate expansion of the central bank's in the monetary base. 

        Now coming back to those 2 articles, the First article says that the quantitative easing will boost asset prices. It states that "............ quantitative easing (QE), or creating more money to purchase assets. This is largely presented as a tactic to stimulate the domestic economy by lowering the cost of finance and putting more money into the banking system." 

         The article provides further information that "Over the past two years much of the developed world has attempted some form of QE. (The European Central Bank has done less than its rivals, which may help explain the euro’s relative strength.) Some see this as competitive QE, a game of “I can print more money than you can”. Many investors believe the Federal Reserve will be forced into another round of QE, perhaps as soon as November." It stresses that ".... QE is a kind of magic bullet, helping all asset prices to rise." It concludes that "Although asset prices may be buoyant at the moment, there are other risks ahead. Competitive devaluation is an inherently unstable system. Someone must lose their share of world trade. And a policy of boosting exports can all too easily turn into a policy of blocking imports."

         The Second article talks about Quantitative easing and Japan. It provides the information about how japan is currently facing problem with their monetary policy and how they are trying to adopt quantitative easing in order to get out from the Economic Crunch. The article states that "The effect would be to restart the policy of quantitative easing that Japan used to claw out of its banking crisis between 2001 and 2006. The initial amount under consideration is about ¥5 trillion ($60 billion), ¥3.5 trillion of which is for public-sector debt. That is on top of a sum of ¥30 trillion already budgeted for BoJ loans to banks."
          
         After I have read these 2 articles few thoughts arises in my mind, 1. Is QE is really a solution for the Economic Crisis and failure of Monetary Policy? 2. Whether QE will really boosts the asset's price? 3. If QE is used by an economy, then whether it's impact in the Exchange rate will be higher or lower? I am still looking for the answers for these questions.

BASEL III - An angel or an Evil?

On 12^th September, 2010, the World’s Financial (Authority – so called) watchdogs hammered out the new rules during last week in order to stop banks from causing another financial catastrophe. But few economists, analysts and even some bankers are feeling that the agreement (Basel III) won’t prevent any financial calamity.

Before going further let me give a brief on BASEL Committee. It is a committee which is formed on Banking Supervision - forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding.

 The Committee is best known for its international standards on Capital Adequacy, the core principles for effective Banking Supervision and the Agreement on cross-border Banking Supervision. (History of Basel)

 Now coming back to BASEL-III (yes, already BASEL – I and Basel - II are implemented), on 12 September 2010 meeting, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July 2010. 

Before going further, let me say one thing that the Bank of International Settlements claimed that they had succeeded in the implementation of Basel II norms. But, under the Basel II agreements/ arrangement, all banks were required to maintain particular capital adequacy ratios (CARs). This is to ensure that the banks have sufficient capital and allow them to meet all demands from depositors and also to cover the losses, if a borrower defaulted on their payments. But Basel II, had a misconception, that it would ensure the banking system from collapse or from any financial catastrophe.

The Basel III Committee's package of reforms will increase the minimum common equity requirement from 2% to 4.5%. As per Basel III norms, now banks will be required to hold a capital conservation buffer of 2.5% in order to withstand stress/ calamity in future periods which brings the total common equity requirements to 7%. The higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011. 

The interesting thing is many people started debating about Basel III from now itself, which is too early to say because the rules won’t come into effect until 2019 (9 years from now). And many think that it will be too late and it would provide very little by the time when it gets implemented. 

Bernard Baumohl,chief global economist (The Economic Outlook Group) said to newsweek that "We could very well have one or two more crises before these rules even come into play". Its too early to say whether BASEL III is an angel or evil? we can (ofcourse need to) see how it functions only when it comes in operation.   

Has China Overtook Japan???

Today (17.08.2010) when I was browsing the Economist website found 2 contradict statements. One states that "China's economy overtakes Japan's in real terms" and other States that "Japan overtakes China as the world's third largest economy". The beauty is both the Articles are published on 16th  August 2010. 

Later I went on to do some research regarding this and found that Japan’s nominal Gross Domestic Product for the second quarter was $1.288 trillion which is less than China’s  $1.337 trillion. During the first quarter(first half of 2010) Japan remained bigger than China. Japan’s annual GDP is $5.07 trillion, while China’s is more than $4.9 trillion as per official data. 

It is believed that by some estimates China’s quarterly output actually overtook Japan’s in nominal (US dollar) terms in the fourth quarter of last year. Since the last quarter China has continued to grow rapidly while Japan’s recovery has stalled (due to weak policy framework and outlook?).

In terms of purchasing power parity, China replaced Japan as the world’s second largest economy nearly 10 years back. As per the world bank data 2009, China GDP - PPP is $ 8,887,863 million and Japan's $ 4,138,481. China’s economy also moderated from 11.9 per cent year-on-year growth in the first quarter to 10.3 per cent in the second.

As per Monday’s (16.08.2010) data the deflation remains entrenched in the Japan economy, which prevents people from spending as they expect prices could fall further. The Nominal growth dropped by 3.7 per cent annualised in the second quarter after two quarters of positive growth. In Japan, weak growth in the second quarter has raised questions about the strength of its economic recovery. 

Japan’s slow growth is due to the stalling on consumer spending, falling public investment and slower exports. Net export growth slowed but remained solid and was the main contributor to growth.

But still Japan is relatively richer than China in terms of Per Capita Income. According to world bank ranking Japan is ranked at 39 ($ 33, 280) and China (main China land - excludes Hong Kong SAR, China & Macao SAR, China) is ranked at 120 ($ 6,710)

This arises few questions 

1. How much one can rely on China's Data?  It is believed that the current Data are not strictly comparable because the Japan's data have been seasonally adjusted while China's data have not. 

2.  If China has really overtook Japan's economy in real terms, then how much their overall GDP growth (real GDP) will be this year?

3. How Japan is going to handle crisis (or) crunch in their economy after having positive growth rates in 2 consecutive quarters? 

Can Emerging Countries handle Inflationary Pressure?

Recently I have read an Article titled “Inflation: The Great New Divide - Capital from the low-growth West fuels price increases in Asia” by Peter Coy. In this article he clearly expresses his views on how Emerging countries are facing Inflationary pressure along with pressure of the role of locomotive to the Global Economy. He also clearly states that how India and China is playing a major role of locomotive to pull the Global Economy out of recession.


In this article he states that “For most of the post-World War II era, the U.S. was the locomotive that pulled the global economy out of recessionary valleys. This time it has been emerging-market nations, mostly Brazil, China, and India that have surged, carrying the U.S. along like a big, fat caboose. Exports accounted for a little more than half of the growth the U.S. economy managed to generate in late 2009 and early 2010, according to data compiled by the Commerce Dept. About 40 percent of U.S. exports went to emerging markets”


He fears that the “…. inflation in emerging markets—and near-deflation in developed economies—could slow the growth train”. In context of India and China he states that “Chinese and Indian policymakers are trying to cool things by curbing government spending, raising interest rates, or both. If they accidentally crack down too much, they won't be able to play the role of locomotive. That would be a blow to a U.S. economy that is already threatened with a pause or, at the extreme, a double-dip recession.”


Regarding Japan and Europe economy he expresses that “…. at risk are Japan and Western Europe, which, like the U.S., are wealthy but slow-growing and facing deflationary pressures”. According to Economist Dr. Edward Yardeni (in an interview with Bloomberg Businessweek) "The inflation problem is in exactly the countries you don't want an inflation problem"


Peter coy further states that “The accompanying graphic tells the story of a divided world. On the right are large, light-colored bubbles representing India, China, Turkey, and Brazil. These are countries with relatively low incomes, rapid economic growth, high inflation rates, and increases in inflation over the past year. The other prominent cluster is the wealthy nations in North America and Western Europe, plus Japan and Australia. They have higher incomes, slower growth, lower inflation rates, and smaller increases in inflation. Japan (diamond-shaped) is the only country suffering outright deflation. Russia's big drop in inflation makes it an outlier, befitting its halfway position between the rich and poor nations”. At the end of this article he gives a punch with a statement “The Bottom Line: The world economy is evolving into inflationary and near-deflationary zones. Emerging markets must slow down without crashing”. (For Full Article: http://www.businessweek.com/print/magazine/content/10_32/b4190010426918.htm)


It is true to that Emerging Economies are facing Inflationary Pressure and Developed nations are facing Deflationary problems. Dr. Edward Yardeni Rightly said in his interview to Bloomberg Businessweek that "The inflation problem is in exactly the countries you don't want an inflation problem".


Now, the Major worry is that if these Emerging Economies fail to handle the Inflationary Pressure (in an appropriate manner) then the entire global economy may fall into another Depression (yes, not mere Recession). One can be sure to certain extent that it may not happen in such manner because these Emerging Economies are well known for their policymaking ability. But, we need to watch how they tackle the current problem of Inflation without affecting their growth rates and their role of locomotive for other countries across the globe.