The Next In The Economics of...

Albania. 

Much like Afghanistan, I know very little about the economics of Albania. So fun times and learning ahead.

Because I got struck by a mood and Afghanistan came out a few days back, I am ahead of schedule, Albania should be done on the 12th of February.  

Hold me on that.

Is China a Rogue Nation? Thoughts on a fixed currency system.

Ok, I'll admit, rogue nation isn't precisely accurate. But by staying outside the international community and maintaining a fixed currency China risks being labelled a currency manipulator something which we (the world) all want to avoid.

Currency Since the Second World War.

Currency is a complicated topic, and many nations see the strength of their currency (not in value but in prestige sense) as directly tied with their sovereignty. It is not accident that the preeminent power since the Second World War, the United states, has enjoyed the dollar being the de-facto trading currency of choice. The US was able to use the strength of the dollar to push multilateral free trade agreements and in an age of the Cold War push capitalism successfully across the globe.

Since 1973 with the end of the gold tied Bretton Woods system, most western nations have allowed their currencies to float, that is allowed their currencies to be traded on the foreign exchange markets. This is crucial as freely floating currencies promote market efficiency, money flowing in and out of the economy doesn't need to be accounted for by the central government. Furthermore a freely floating currency reduces the need for government intervention in the financial markets (the price of currency doesn't need to be set) which is always a positive.

Having a freely floating currency also reduces the need to physically back your currency, so long as your currency remains stable there is no need for the central bank to provide surety in the form of gold or other valuables.
Admittedly the system isn't perfect, a floating rate can be highly volatile, causing headaches for financial markets as the going rate for a particular currency fluctuates widely, especially in times of crisis.

This is What has Happened in China

The Renminbi (the official term for China's currency which is still split into Yuan) whilst being tradeable on the foreign exchange markets, and having some level of flexibility attached to it-the value is allow within a few percentage points of a the value of a basket of foreign currencies- the value of the Yuan is carefully controlled by the Chinese government. The Yuan is hence essentially a fixed currency. This is important as it has aided China's growth by encouraging its export sector to flourish. It is no accident that China is the largest exporter in the world.  

Ok? But this doesn't really sound like an issue. 

Many countries rightly see a fixed exchange rate as an attack on free trade, disadvantaging their own manufacturing sectors and causing markets to move to China. Until recently the US was the granddaddy of pushing free trade. Trump in his contract with the American Voter promised to instruct his "Secretary of the Treasury to label China a currency manipulator." This means that America could be pushing for a potential trade war with China. Or diplomatic stoush as the Americans seek to prop up their fading manufacturing sector, and the Chinese seeking to maintain their growth. Furthermore this goes back to what I mentioned about countries seeing their currency being tied to their sovereignty. 

The Future

China is unlikely to give up one of its major engines for economic growth, and whilst it has striven to allow a greater level of flexibilty in the going rate for the Yuan, backdown on this issue may be politically impossible due to the growing strain in Sino-US relations. The United States and China becoming economic enemies could be calamitous not just for the economy, but for the world. 

Tomorrow

Just a quickie,
Tomorrow I'll write either about the TPP, or China's currency manipulation.

Why Trump's Tariff Push is Dumb

WHY TRUMP'S TARIFF PUSH IS DUMB

Although I said i'd write on happier things, I'm drawn to another tale of economics currently developing.

Credit: hafteh7

The Wall. 

Its ominous sounding term, one that brings up thoughts of a stark divide. Whether it should or shouldn't be built isn't the point of this entry. Rather it is how it is intended to be paid for which is going to be examined.

Trumps promise to "make Mexico pay for it" hasn't seemed fruitful thus far, and it appears unlikely that the United States will get a lump sum payment to cover the cost of the wall. Trump knew this, the American voters knew this, Mexico knew this.

Why then does Trump continue to make Mexico pay for the Wall? To put it simply what has been proposed by Trump is a tariff on certain Mexican made goods. The basic economics of this is sound enough, Trump is engaging in protectionism to deny Mexico their largest market, force American citizens to look elsewhere for imports and hence push Mexico into paying for some if not all of the wall through a concerted economic effort.

The Problem.

The problem with protectionism is that it is by far from efficient, everyone loses out in the long term, not just Mexico, but also the United States who lose a source of cheap imported goods. Furthermore introduction of tariffs can lead to retaliatory measures taken by Mexico. A similar situation occurred before the great depression with the introduction of the Smoot-Hawley tariff in 1930- ostensibly to protect American industry and labor from cheaper overseas markets was followed by similar tariffs around the world, choking trade and whilst not being the causal factor for the great depression, it definitely made it worse.

Why It's Dumb.

Trumps combative stance on the economy was clear during his election campaign, promising to keep jobs in America, as well as helping the faltering motor industry, something which no doubt helped him in the rust belt states and played no small role in his election to presidency.

With American recovery from the GFC still slow, it is important for all countries around the globe to work together, trade together and grow prosperous together. This combined with Trumps withdrawal from the TPP, it has me hoping that he will not set off a huge trade conflict that hurts the still sick world economy.

The Economics of… Afghanistan

The Economics of… Afghanistan.

Afghanistan: a place famed both for its stunning vistas, and its history of violence. A landlocked state the primary sector of the economy is the Agricultural one. Afghanistan is part of the golden triangle and is one of the largest producers of opium in the world. A problem which is still being grappled with and has a continuing legacy not just in Afghanistan, but also in the West (the majority of heroin available in the west comes from afghan poppies).

History:

Afghanistan has endured a harsh past, lying on a strategic gateway to India it has long been subject to the ambition of foreign powers, from Alexander the Great to the Soviet Union. The problem with having larger powers seeing your lands as strategic zone, rather than an economic bread bowl is a sluggish economy. This has been reflected thus far in Afghanistan. Afghanistan is by no means the poorest nation in the world, however it is far from prosperous, furthermore a lack of investment caused by its more recent political problems has left Afghanistan with significant economic pitfalls.

Since the pulling out of coalition forces in 2014, Afghanistan has experienced a significant economic downturn. It is an interesting point that as terrible as the war in Afghanistan was, it did cause economic growth and attract foreign investment, something that dried up after western troops left.

Current Fiscal Policies/ the Budget

The problems I mentioned above are still very much prevailing in Afghanistan. The legacy of the downturn from 2014 is a cash crunch which has pushed the fiscal policy of Afghanistan to be very conservative. Policy is still geared towards a medium term goal of “ensuring fiscal recovery from the downturn, and building the Government’s domestic resources” (National Budget 1395 pg. 3)

To this end new sources of revenue are being sought. Taxes on top up credit on mobile phones, the business rate tax and tariffs of some goods crossing the border are being raised. Critically a tax on imported fuel is also being included. Despite protestations by the Afghan government the increase in fuel fees will hurt everyone, and is not a luxury good.  

From National Budget 1395 Afghan Ministry of Finance

Forty percent of expenditure currently goes towards security (2.644 billion USD), five percent lower than previous years. This doesn’t just include armed forces expenditure, it also includes training for twenty one hundred personnel in the ministry of defence and general staff command centres. More interesting for me is the fact that this includes the planned destruction of 40,000 hectares of opium fields. Considering that Afghanistan has had a history of political and religious turmoil over the past thirty years it is understandable that such a large portion of the budget has been dedicated towards security. Whilst not directly contributing to economic growth, or opportunities of economic growth (such as infrastructure expenditure) the creation of a stable functioning security is crucial fighting corruption, maintaining political order and providing lasting peace. These are all key to attracting future investment from foreign markets.

Look at it this way, prior to the coalition’s withdrawal in 2014 if you were an investor you would feel that the security of the region, whilst fraught with difficulties would be stable enough to ensure the safety of your venture. This evaporated with the withdrawal and the subsequent outbreak of violence. Whom wants to invest in an economy where it is likely that your investment either disappears or is too unsafe to operate?

The second largest share of expenditure after security goes towards the infrastructure budget. This includes the ministry of mining. Spending was primarily on maintenance of existing infrastructure but also included the construction of over 100 kilometres of roads, connecting 15 universities to a fibre optic network, feasibility studies of a large dam in Kunar province.

This is crucial as infrastructure expenditure is one of the key engines of economic growth, I’m particularly impressed with the fact that there is some level of innovation tied to this expenditure, notably the fibre optic network.

Monetary Policy

The Afghans have a floating exchange rate under a central bank. This is good as it allows the central bank to intervene with low interest rates to make up fiscal shortfalls and boost economic growth. However this doesn’t appear to be the case, since 2014 when the aforementioned economic crisis started interest rates have ranged from fifteen too almost sixteen percent. 

The Afghan Interest Rate: from Trading Economics & Da Afghanistan Bank

To me this seemed very strange, as this quite high (by western economies standards) and would be lessening the ability of Afghan firms and individuals to invest, as well as contributing to a volatile unstable economy. However a look at the inflation rate somewhat explains this.

The Afghan Inflation Rate: from Trading Economics & Central Statistics Organisation of Aghanistan

The inflation rate fluctuates widely and whilst averaging an understandable four and a half percent, in the past three years the rate has been less than negative four percent (deflationary) and as high as six percent. Deflation is super toxic due to delayed expenditure, and it is understandable why interest rates are relatively high.

The Future:

From an economic perspective I see the potential for a large degree of growth in Afghanistan. I say this because if and only if Afghanistan manages to successfully grapple with its social problems, there is a wealth lying directly underground. Afghanistan has access to copper, gold, lithium and iron. A stable economy combined with a steady political climate will bring foreign direct investment back, and Afghanistan’s proximity to the economic powerhouse of China, and the rapidly expanding economy of India means that there will be continued demand for what comes from Afghan Mines.

Hence government fiscal policy should be pushed towards encouraging investment into the mineral sector, ensuring lasting political peace and continuing support for expanded infrastructure.

The central bank of Afghanistan has to get inflation to be stable, then lower interest rates to increase domestic investment. Failure to do this could consign Afghanistan economic obscurity for quite a while longer.

One more thing I want to add, another new years resolution.

I'm about to go into my last year of an economics degree. So I want to hone and sharpen both my economic writing and my economic thinking process, as well as prove to myself I'm capable of putting together a long term project and delivering on it (hopefully). Plus writing down my intentions of doing something tends to incentivise me to follow through.
To that end I'm going to write a series of essays/articles called something like The Economics of... I'll write about the Economic state and policies of each country alphabetically, starting with Afghanistan.

I'll try to write one every week (I'll put them up on Sundays?). I'm going to aim for about a thousand words or so. Not enough to go all the way into a countries policies, but enough to cover them in reasonable depth. Plus keeping it to a thousand words means I won't give up, as that is a manageable target (I hope).
This is in addition the the more regular daily musings on whatever topic I feel like.
Writing this is a small step, but an important one.

The First Day: My thoughts on the Trump Dilemma

The election of Trump has proven to be more divisive than I thought possible. However how much of the outrage is justified is still debatable. Trump has most certainly shaken things up in his first week at the White House. The policies that Trump has instilled through executive action have been largely what was promised on the Campaign trail,with some notable exceptions). However what has awed me (and the world) -though perhaps awed isn't the right word, shocked is closer- is the language that Trump has been using.

The continued use of his Twitter account has led to very undiplomatic comments.(Trump on Iran)

The reason why I point to his comment on Iran is not just due to its fiery and combative tone, but rather because since the collapse of the Soviet Union, Russia and Iran have been very close. I'm interested to see if Trumps promise to closer tie the fate of Russia and the USA together will be compromised by these undiplomatic stances that he has taken on Iran. 

It should be noted however that I think the calls for Trumps impeachment by the left are vastly premature, if not hysterical. Whilst Trump has been using the language of someone still new to politics, he is delivering on his promises (the freeze on Muslim immigration, pushing for a tariff to build the wall on the Mexican border etc.).This is something to be lauded, no matter what side of the political spectrum you fall on. 

Anyway enough rambling for now, tomorrow ill write someone new, probably on Music or TV. Something lighter anyway. 

Day One.