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- Brazil
An
increasingly
Protectionist
attitude?
- Why
is
there
Inequality?
- The
Ailing
E lephant
The
Fortnight
In
Brief
(31
January
to
13
February
)
US:
Too
good
to
be
true?
January's
macroeconomic
figures
were
better
than
expected,
injecting
a
dose
of
optimism
in
the
economy.
Recent
unemployment
figures
have
repeatedly
surprised
economists
with
the
speed
of
its
descent.
Unemployment
fell
again
to
8.3%,
a
three
year
low,
from
8.5%.
This
improvement
in
the
labour
market
suggests
a
general
improvement
in
the
economy,
though
growth
is
expected
to
remain
sluggish.
The
ISM
non-manufacturing
indexwhich
covers
almost
90%
of
the
economyedged
up
to
56.8
in
January
from
53.0
in
December,
indicating
a
faster
pace
of
growth
in
the
nonmanufacturing
sector.
The
manufacturing
sector
also
continued
to
show
reasonable
gains
in
January.
The
DJIA
and
S&P
500
improved
slightly
upon
news
of
the
positive
reports,
increasing
by
1.3%
and
2%
respectively.
However,
the
US
economy
still
remains
depressed,
with
the
Economic
Policy
Institute
forecasting
that
the
US
economy
would
only
reach
full-employment
in
2019,
given
January's
rate
of
job
creation.
Asia
Pacific
ex-Japan:
Lunar
New
Year
Effect
or
Global
Slowdown?
January
passed
with
an
overall
decline
in
trade
across
the
region,
reportedly
due
to
the
reduced
production
during
the
Lunar
New
Year
month.
Exports
in
Taiwan
contracted
by
16.8%
y/y
while
Chinas
exports
saw
a
decline
of
0.5%
y/y.
Imports
on
the
other
hand,
registered
a
drop
of
15.3%,
resulting
to
the
widening
of
Chinas
trade
surplus
to
US$27.28
billion
in
January
from
US$16.52
billion
in
the
previous
month,
reflecting
the
weakening
of
domestic
demand.
The
fear
of
rekindling
inflation
resulted
to
a
28%
y/y
(January)
drop
in
lending
reported
by
the
Chinese
banks.
EU:
Countdown
to
Greek
default?
After
many
delays,
Greek
political
leaders
have
finally
agreed
on
a
deal
to
make
deep
cuts
in
government
spending
and
jobs.
The
deal
includes
a
22%
cut
in
the
minimum
wage,
as
well
as
15,000
layoffs
in
the
civil
service.
At
stake
is
a
130
billion
lifeline
to
avoid
defaults.
Greece
needs
the
money
if
it
is
to
redeem
more
than
14
billion
of
debt
by
March
20
or
risk
defaulting
and
setting
off
a
financial
meltdown.
Meanwhile,
leaders
in
Europe
are
withholding
the
bailout
funds
until
they
get
written
guarantee
that
Greece
will
implement
those
cuts,
and
find
an
additional
325
million
in
savings
by
next
week.
The
Greek
economic
situation
continues
to
worsen
with
rising
unemployment
and
falling
output.
IN COLLABORATION WITH
PROUDLY SUPPORTED BY
Given this rosy outlook, Brazils apparent shift to a protectionist policy1 seems peculiar. It has recently imposed taxes and other measures which have the effect of discouraging imports and foreign investment particularly Chinese in certain industries. Are these policies a genuine herald of a protectionist era, or are there alternative explanations? Either way, the retention of those policies will spell trouble for Brazil in the long run. SPEX takes a closer look at the situation. Increased import taxes in an industry dominated by Chinese products In December 2011, a 30% tax increase on cars with less than 65% local content took effect. This raises the tax on some imported models to a punitive 55%, and is in addition to import tariffs. This hits foreign carmakers hard; China particularly so, given that demand for Chinese cars rose almost fivefold in 2011. The official reason given was that Brazil was increasingly under siege from imports. Prima facie it certainly seems protectionist: high taxes would discourage importers from importing cars at present levels to Brazil, thereby forcing consumers to rely on locally-manufactured substitutes. 2 Copyright 2012 SMU Economics Intelligence Club
Yet how accurate is this reading of the tax policy? Given that Brazils economy cannot, given present infrastructure, support a carmaking industry (making cars is 60% more expensive in Brazil than in China), the more logical objective is arguably to pressurise carmakers without plants in Brazil to build them. This seems to be working: JAC Motors, a state-owned Chinese car maker, and BMW have announced plans to build factories in Brazil since the import tax was unveiled in September 2011. Thus this seemingly protectionist policy arguably has a long-term objective instead. Dumping In 2008, Brazil applied 22 anti-dumping2 measures on Chinese products. All based their estimates of additional taxes on the grounds that China is not a market economy, resulting in higher levies being applied on imports from China than if it were classified as a market economy. In 2011, Brazil imposed a five-year anti-dumping tariff3 of US$743 per metric ton on steel pipes used in Brazils oil and gas industry, a major area of Chinese investment in Brazil. China also seems to be the target of Brazils anti-dumping investigations: In 2008, China was the investigated country of 34.9% of Brazils anti-dumping investigations, with 47 concerning manufactured goods. Advocates of this theory cite the rapidity of the increase in Chinas exports to Brazil as evidence of a dumping strategy. However, can the rise in exports be fairly construed as dumping? One must also realise that many other factors are at work: the slowed pace of the US economy has forced China to look for alternative markets. Together with Europes fragile state and an already-strong foothold in Africa, looking to South America as an alternative export base is a logical and defensible step for China to take. Changing the rules on foreign investment In 2010, Chinese investment in Brazil reached an impressive US$12.690bn. Yet the government seems to be increasingly rewriting rules to favour locals. Foreign firms are now permitted to pump oil in recently-discovered oilfields only as junior partners of the state- controlled Petrobras. Previously they could do so on equal terms. Farmland is being treated in a similarly protectionist manner. In 2011, in an attempt to pre- empt vast tracts of land from being bought up by foreign sovereign-wealth funds and state- owned firms, the Brazilian government resurrected a 1971 law limiting the amount of rural land foreigners can buy. The legislation in question had, in the 1990s, been deemed incompatible with Brazils new democratic constitution and open economy. Its details are currently being reviewed: restrictions on foreigners may be relaxed slightly, particularly if the government considers the effects of foreign ownership to be sufficiently beneficial to the economy. However, there is no timetable for passing a new law. The uncertainty has caused an estimated US$15bn of planned foreign agriculture investments to be dropped. Clearly, whether motivated by protectionist intentions or not, these new laws and policies nevertheless have a detrimental effect on much-needed foreign investment. 3 Copyright 2012 SMU Economics Intelligence Club
The pitfall of a strong Real A possible explanation lies in the relationship between the reals strength and trade levels. A stronger real generally increases the affordability of imports; and indeed, many authorities partially ascribe the boom period of Brazilian imports of Chinese products to the reals appreciation (Figure 2). Brazilian Reals to 1 Chinese Yuan
This theory thus implies that the changes in amount of imports from China are due more to exchange-rate fluctuations than protectionist policies. It certainly is not without its merits: for instance, the reals depreciation in 2009 by 16% dampened domestic demand, in turn contributing to the 20.6% fall in imports from China for 2009. The real has since recovered. However, as it still remains weaker than the yuan, this could well be a stronger reason than protectionist policies for the fall in domestic demand for imports. Conclusion Arguably the short-term impact of Brazils protectionist policies in the manufacturing sector will not have an immediate dampening effect on Brazils growth. After all, its economy is still heavily reliant on commodities: commodity exports accounted for 45% of 2010s total exports. Yet Brazil cannot avoid an eventual shift to a manufacturing-based economy; after all, commodities are finite. If Brazil does not start to diversify its exports into processed goods, it risks falling victim to Dutch disease4, whereby commodity-driven currency appreciation crushes local manufacturing. Given this, Brazil ought to be laying the groundwork so as to smoothen the transition. Such policies, whether intentionally protectionist or not, should hence be stopped now, while their potential for long-lasting damages is still fairly low. Foreign investment and imports should be further encouraged, as it allows domestic industries to learn from their foreign counterparts. This in turn would not only expand Brazils current scope of economic activity and ensure continued growth, but also facilitate its progression to a manufacturing- and services-based economy. 4 Copyright 2012 SMU Economics Intelligence Club
China
would
be
an
invaluable
partner
for
this:
As
a
major
global
manufacturing
site,
it
would
be
able
to
induct
Brazil
in
the
nuts-and-bolts
of
a
manufacturing-based
economy.
Furthermore,
as
China
inevitably
moves
to
a
knowledge-based
economy,
Brazil
could,
if
sufficiently
prepared,
take
over
as
a
major
global
manufacturing
centre.
Therefore,
it
is
to
Brazils
immediate
and
long-term
interests
to
avoid
sending
out
protectionist
signals.
Not
only
do
they
provide
fodder
for
politicians
to
capitalise
on
them
at
Brazils
expense;
they
would
only
hurt
Brazils
economy
and
reduce
its
presence
in
global
trade.
1
These
generally
refer
to
government
restrictions
or
restraints
on
international
trade
aimed
at
protecting
local
businesses
and
jobs
from
foreign
competition.
Typical
methods
of
protectionism
are
import
tariffs,
quotas,
subsidies
or
tax
cuts
to
local
businesses
and
direct
state
intervention.
2
Anti-dumping
measures
aim
to
rectify
the
trade
distortions
caused
by
one
countrys
dumping
of
goods
in
another
country.
Dumping
occurs
when
products
are
exported
at
prices
significantly
lower
than
what
it
normally
is
in
the
exporting
countrys
domestic
market.
3
A
tax
imposed
on
imported
goods
and
services.
Tariffs
are
used
to
restrict
trade,
as
they
Sources: The Economist, L.A. Times, Financial Times, CESifo, Ipeadata, CEIC database,
increase the price of imported goods and services, making them more expensive to consumers. They are one of several tools available to shape trade policy. 4 A concept in economics that explains the relationship between the increase in the exploitation of natural resources and the decline in the manufacturing sector. The increase in revenue from the sale of natural resources would lead to an appreciation of the local currency, thereby adversely affecting the competitiveness of the manufacturing industries.
OECD
iLibrary.
The world today seems to be suffering from an uncontrollable spasm. Weakened and still in the throes of economic and political upheaval, any wrong step threatens to hurl us at breakneck speed to social unrest and other unpleasant consequences. Amidst the uncertainty of the future, the World Economic Forum has rated severe wage disparity as the global risk with the highest likelihood the direction where our wrong step is most likely to bring us. This is due to two potent and inexorable forces Globalization and Technological Advances. Highly interconnected countries coupled with rapid technological changes have led to an extremely complex and delicate equilibrium for the entire world where the slightest tremor in one part could cause serious repercussions in another. We will explore how these two forces widen inequality. 5 Copyright 2012 SMU Economics Intelligence Club
Source:
World
Economic
Forum
Globalization and International Trade It is no longer possible for any country to willfully isolate and sustain itself. The complexity that globalization has wrought forces the entire world into an endless loop of international trade, whether out of sheer necessity or a desire to simply consume more. While it is true that international trade increases production efficiency and reduces overall costs; the tradeoff is greater exposure to global risks and competition. For a developed economy, the influx of cheap goods and services stifles its producers, forcing them into a dilemma between raising productivity levels and keeping domestic costs and wages low by hiring cheaper foreign labor. Matters get more complicated if a particular segment of the workforce is reliant on the production of such goods as they would then bear most of the burden with depressed wages. In most cases, these would be the unskilled, low-educated, and least privileged laborers. Inequality is worsened as a disproportionate burden is placed on the weakest and most vulnerable segment while almost everyone enjoys the fruits of international trade such as through the growth of GDP. Besides the liberalization of barriers to international trade, the increasing openness of financial institutions is also associated with a rise in income inequality. Foreign Direct Investment (FDI) 1 into an economy tends to favor and stimulate demand for workers with relatively higher education and skills in both developed and developing economies such as high-skill and high-technology industries and non-agricultural employment respectively. Moreover, as the wages of high-income earners are pegged globally due to increased labor mobility, corporations have to offer a competitive wage to avoid brain drain. In effect, this will only increase the wages and opportunities of those already fortunate to be in a higher position. On the other hand, FDI flowing out of developed countries would reduce employment opportunities and wages in low-skilled sectors. The net effect then would be employment opportunities and wages rising at the top tier and diminishing at the bottom tier, hence resulting in rising inequality. 6 Copyright 2012 SMU Economics Intelligence Club
Let us also not neglect the two rising giants in Asia, namely China and India. As their growth and progress skyrocket, they become increasingly embedded in global and regional supply chains. Already, both nations account for a large majority of global labor supply, concentrated at the lower end of the wage scale in developed countries. This not only affects the wages of low-skilled workers in the nations they export to, but also their employment opportunities as companies outsource labor. Over time, as these two juggernauts climb up the rungs of the value-added ladder to reach middle-skill industries such as in Information Technology, they present greater wage competition for a larger proportion of a developed countrys labor force. Technological Advances The current reality of the world is also such that there is a constant state of flux due to rapid technological advances. To have the capability to navigate this complex maze and avoid pitfalls is a growing concern for many corporations, institutions and states alike. Technological advances have been increasingly prevalent in manufacturing and services throughout both the developed and developing world. As these are two of the most important sectors in an economy, it is no surprise then that a substantial proportion of the workforce is affected. When unskilled or semi-skilled labor is substituted by technology and mechanization, it results in depressed wages for this segment of the population, resulting in rising inequality. The impact of technology is also similar to that of financial globalization. As society becomes more technological savvy, a greater premium is placed on skills able to capture the most out of technology. Professionals, managers and those engaged in abstract or analytical work become highly sought after and receive greater benefits or incomes compared to others, thereby exacerbating the inequality in wages. Coupled with the squeeze of middle-skilled labor in white and blue collar occupations by advances in technology, job opportunities are becoming increasingly polarized which results in greater wage disparity. One possible explanation is that while technology easily replaces routine tasks, it is a poor substitute for jobs that require personal interaction and abstract thinking. At the same time, advances in information technology lower the barriers to competition and allow firms to coordinate their operations more efficiently, thus contributing to the creation of winner-take-all markets 2. Just take a look at large multi-national corporations like Wal-Mart who squeeze out their competitors. The consequence is widening inequality as the super-rich enjoy magnificent profits whereas those in the middle and at the bottom receive only mediocre profits. Some segments of society would also be less able in capitalizing on technological advances. For instance, a significant share of the older generation as well as the less-educated generally struggle to take advantage of recent technological advances and boost their productivity.
Comparing Impacts While globalization and technological advances are very significant in causing a rise in wage inequality (measured by changes in the Gini Coefficient 3), they do so in different ways and have different impacts on developed and developing economies. This is attributed in part to the differences in infrastructure and domestic policies such as immigration control between countries.
Conclusion It is perhaps wise to understand the interaction between these two powerful forces, albeit each would be strong enough to stand alone. For instance, globalization and international trade tend to raise the prices of high-tech and high-skilled products, raising incentives for corporations and prompting even greater research and development of highly profitable technologies. Alternatively, improvements in communications and information technology have made it much easier for companies to coordinate their operations globally, thus increasing outsourcing opportunities and allowing them to hire less workers in rich countries to save costs. Ignoring the interaction effect between these two forces might result in an underestimate of their impact on inequality. Are we forced to consign ourselves to this bleak future of inequality? I do not think so. While both forces seem overbearing, inequality as a consequence is not inevitable. To avert such a future, it is essential for the world to muster up its strength to act and find a solution to its problems through a repeated process of trial and error. Teetering on the precipice of uncertainty does not afford us the luxury of refusing to take a step forward.
1 An investment abroad, where the company being invested in is usually controlled by the
foreign corporation 2 Market where only the top performers reap extremely large returns 3 A measurement of the income distribution of a country's residents. This number, which ranges between 0 and 1 and is based on residents' net income, helps define the gap between the rich and the poor, with 0 representing perfect equality and 1 representing perfect inequality. Sources: World Economic Forum; International Monetary Fund
By Adam Tan, Singapore Management University This article seeks to briefly explore Indias membership in the Twin Deficit Club along with the analysis of the implications that ensue. Membership status in clubs and societies these days are highly regarded by many as exclusive and prestigious - but this is certainly not the case for the Twin Deficit Club (TDC). With members in the recent years such as Portugal, Ireland and Greece joining the likes of America and Britain, this club seemed oblivious to the public until several of these members started appearing on the news headlines lately for the wrong reasons. Basic membership requirements of the club include having the nation to be running a both a current account1 and fiscal deficit2, making many wonder where the money they are spending comes from. Sadly to mention, the latest member joining the TDC while chasing high economical growth appears to be the pride of South Asia, India. With current account deficit at 3.5% of Gross Domestic Product and fiscal deficit expected to be around 5.5% in 2011-2012, Indias near- term outlook is looking grim. India, the second most populous nation in the world with growing affluence has always been touted to be the third largest economy in the world by 2030, succeeding Japan. This optimistic forecast had been constantly challenged over the past year with Indias growing deficit during uncertain global economic conditions. Oblivious to many, especially when India is often associated with the term growing emerging market, India has always been a net importer over the past decade, with heavy reliance on crude oil to drive economic growth. With an average of 30% of their imports comprising of black gold3, higher crude oil prices at the forecasted level of U$103 per barrel till 2014 looks to add insult to the injury. Lowering export growth due to lower demand from European trading partners can be seen as a protracted problem with the brewing Eurozone crisis. The growing divergence between imports and exports since 2003 may continue to stay in the coming decade as India struggles to differentiate herself competitively through exporting more variety of goods and services other than the more commonly known textile, leather goods and call centre services.
Another pressing issue that needs to be addressed immediately to prevent worsening of trade balance is the recent depreciation of Indian Rupees (INR) which stemmed from weaker market sentiments brewing from the Eurozone crisis. A weaker currency not only translates to higher cost to importers, it further threatens to derail India from her recent trend of high growth through possible inflationary concerns. However, many finance professionals expect the India Central Bank, Reserve Bank of India (RBI) to act quickly in the near term to stabilise these fluctuation as the RBI has always maintained a conservative policy to keep the Rupees at a stable exchange rate of 45 USD/INR since 2004 through repeated interventions (see chart below) in the currency market. Such currency market interventions are deemed necessary to provide a more conducive business environment to home-grown businesses to spur domestic demand, an area which India is underperforming her BRIC4 counterparts.
On the bright side, stringent restrictions put in place by the RBI on the purchase and sale of Indian Rupees on the onshore currency market help to shelter the Rupees against any speculative attack - preventing any potential Soros5 from breaking the Bank of India. On top of the exogenous economic factors afflicting Indias economy, home-grown politics has been a driving factor behind the fiscal deficit. With the current party in power favouring 10 Copyright 2012 SMU Economics Intelligence Club
policies
geared
towards
encouraging
inflow
of
capital
to
help
spur
growth,
these
policies
can
be
seen
as
a
double-edged
sword
during
times
of
uncertainty
as
seen
in
the
case
of
Greece
where
external
credit
dries
up.
Proceeds
from
the
recent
3G
network
auction
and
surge
in
tax
revenues
has
helped
to
temporarily
to
offset
the
growing
fiscal
deficit
but
leaves
the
root
of
the
problem
unsolved.
This
can
only
be
resolved
if
the
government
can
better
reconcile
the
difference
between
the
objective
of
balancing
growth
and
containing
the
risk
involved.
Prolonged
membership
in
the
Twin
Deficit
Club
with
uncertainty
in
the
global
outlook
will
probably
drive
India
towards
a
crisis
if
the
current
government
at
helm
do
not
act
fast
enough.
Reliance
in
general
is
never
a
good
thing,
and
for
Indias
case,
their
model
to
rely
on
external
capital
to
spur
growth
should
be
reviewed
against
the
possible
risks
they
are
exposed
to.
After
all,
no
one
should
be
following
the
footsteps
of
Portugal,
Ireland
and
Greece.
1
Situation
where
a
nation
is
importing
more
than
exporting,
thus
making
the
nation
a
net
debtor
to
the
rest
of
the
world
2
Situation
where
a
Governments
expenditure
is
more
than
its
revenues
3
Crude
oil
which
is
black
in
colour
and
is
valuable
like
gold
due
to
its
usefulness
4
Acronym
coined
for
the
four
growing
nations
Brazil,
Russia,
India
and
China
5
George
Soros,
notoriously
known
to
have
profited
from
speculating
the
British
Pound
in
1992,
causing
the
central
bank,
Bank
of
England
to
lose
over
a
billion
worth
of
its
reserve
Sources:
Bloomberg,
the
Wall
Street
Journal,
Financial
Times
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large- cap common stocks actively traded in the United States. It has been widely regarded as a gauge for the large cap US equities market The MSCI Asia ex Japan Index is a free float-adjusted market capitalization index consisting of 10 developed and emerging market country indices: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. The STOXX Europe 600 Index is regarded as a benchmark for European equity markets. It represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Correspondents Shane Ai Changxun (Vice President, Publication) Ben Lim (Vice President, Publication) changxun.ai.2010@smu.edu.sg ben.lim.2010@smu.edu.sg Singapore Management University Singapore Management University Singapore Singapore Kwan Yu Wen (Vice President, Operations) Tan Jia Ming (Publications Director) ywkwan.2010@smu.edu.sg jiaming.tan.2010@smu.edu.sg Singapore Management University Singapore Management University Singapore Singapore Herman Cheong (Marketing Director) Vera Soh (Liaison Officer) brendanchua.2009@smu.edu.sg Vera.soh.2011smu.edu.sg Singapore Management University Singapore Management University Singapore Singapore Randy Lai (Editor) Seumas Yeo (Editor) Tw.lai.2010@smu.edu.sg Seumas.yeo.2010@smum.edu.sg Singapore Management University Singapore Management University Singapore Singapore Timothy Ong Adam Tan Tyong.2011@smu.edu.sg adam.tan.2009.smu.edu.sg Singapore Management University Singapore Management University Singapore Singapore Lisa Ho Lisa.ho.2010.smu.edu.sg Singapore Management University Singapore
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