Daily News Roundup 2012: Tuesday 17 April

Good morning

The headlines:

1. The next Spanish Debt auction is happening today, where the Spanish Government will sell 12 month and 18 month treasury bills. Yesterday, yields of Spanish 10-year bonds rose to 6.16%. The concern is that 7% was the barrier at which Greece, Ireland and Portugal all sought bailouts. But that's on long-term debt. What will be interesting is the yields achieved on the short-term debt - which will give an indication of the market's opinion as to how likely a Spanish default would be in the next 12 to 18 months. The higher the yield, the greater the risk associated with the debt. And we'll just infer that the risk assessment is the risk of default. The other test will be the cost of buying default protection on these treasury bills. That said, the Eurozone took a really long time to let Greece default. On the face of it, a Spanish default in the short-term has too many powerful negatives for it to be a real likelihood. We shall see. Link: Euro weakens ahead of Spanish Debt Auction.
2. The US Senate has blocked the Buffett Tax rule. The bill would have imposed a minimum tax rate on households earning adjusted gross income of more than $2 million a year. Obama scolded the Republicans for rejecting this "common sense" measure. But I do wonder how much of it is common sense, and how much of it is something to do with the 6 out of 10 voters being a fan. Common sense would imply that there is a substantial contribution to be found here. The figure floating around is $47 billion over the next decade (purely from the tax rule - the figure is higher if you include the increase from not extending the tax breaks that expire at the end of 2012). So $4.7 billion a year. Mitt Romney is throwing around accusations that this will fund "11 hours of government". So I went to www.usgovernmentspending.com, which estimates that Federal fiscal spending for 2011 at $3.6 trillion (I believe that State and Local spending are funded at a State and Local level). Assuming a 52 week year, working five days a week, for eight hours a day: I make that a funding of about 3 hours of government. Mr Romney must have been including the "not-extending the tax" breaks part. Because yes, that's an increase of $162 billion; which makes it about 10 hours. Link: Senate sees Cents.
3. Apple's stock is declining. Up to now, analysts have been debating whether it would break the $1,000 mark (it's floating around $580 at the moment). The decrease is being ascribed to waning demand for the iPad 3, and removal of subsidies on iPhones. With all due respect to the iPad 3, I'm just not convinced that I should be upgrading. I'm used to being awed - higher resolution and faster processors, whilst awesome, are not for amateurs. We like the cool stuff. Stop with the 3G and 4G - you're changing the wrong thing - we want 3D. And iPad Siri! Come now. As for the subsidies - telecom providers are making noise about charging for upgrades (makes sense to me - if consumers will pay for the phone, why not take advantage?). On the other hand, maybe everyone is starting to wonder if the Apple share price is just inflated by over-enthusiasm. Link: Apple Falls for Fifth Day.
4. Jim Yong Kim will be the next president of the World Bank. See: And the Oscar Goes To...
5. Zimbabwe's Ministry of Mining has ordered 469 local and foreign miners to resubmit applications for their exploration rights. The news has taken everyone by surprise, particularly the foreign miners (AngloAmerican, Impala Platinum, etc). I'm not entirely sure why though - I mean yes, it's generally surprising. But not really unpredictable. Zimbabwe is not exactly famous for its respect of property rights. And here is a government that has lost its primary source of income (printing money), sitting on a mineral wealth that includes some of the largest platinum reserves in the world. The logical step is a short one. Particularly when Impala Platinum waltzes around trying to avoid empowerment laws; which is the political equivalent of poking a very-much-awake dragon in its sore eye with a burning brand. Lest anyone forget, the 2000 farm invasions began three days after the government lost a referendum on a new Constitution, following a campaign against it spear-headed by white commercial farmers. That same government? Still in power. Watch this space. Link: Zimbabwe Orders Miners to Resubmit Exploration Rights Applications.
6. And the African Business News in brief. Link: ABN Briefs. The highlight:
• SABMiller plans to invest $2.5 billion in Africa over the next five year. The money will be spent on building and revamping breweries. Hurrah for beer.

That's all for now.

Have a good day.

World Bank President: The Oscar goes to...

And the nominees are:

• Jim Yong Kim - a US National and President of Dartmouth College, New Hampshire
• José Antonio Ocampo - a Colombian National and Professor at Columbia University, New York
• Ngozi Okonjo-Iweala - a Nigerian National and Coordinating Minister of the Economy and Minister of Finance, Nigeria.

It certainly sounds a bit worldly, does it not? Very politically correct: African. Asian-American. Colombian Columbia Professor (the Universe and her humour). Black. Asian. Hispanic. Two men. One woman. Almost an entirely representative set of landmasses, other than Europe and Australia. But in all fairness, Europe has Christine Lagarde; and Australia has mostly European convictions.

On a political point, the emerging and developing economies were desperate to have a head of the World Bank that isn't American. Indeed, to that end, Ocampo withdrew his candidacy and threw his hat in favour of the Good Lady from Nigeria. Although, that said, if you read his translated-into-English statement, the issue seems to be more of this game is political; I don't have political support; Dominican Republic thanks for trying; damn you Colombia for not; this process is not merit-based; if it were <heavy unspoken implication>; Ngozi, rather you than my Dartmouth rival.

And then there were only two candidates in the running. I find myself asking the following question:

• What difference does it make?

Which leads me to an even more pertinent question:

• What exactly does the World Bank do anyway?

The World Bank


So the World Bank started back at Bretton Woods in 1944, where the Americans and the Brits had a fantastic sound-off as to how the World would run after the War (ever the planners, they started planning before the War was over - clearly, self-doubt was not an issue). Interestingly, the two key players in this debate were Harry Dexter White (the US-side economist) and John Maynard Keynes (the UK-side economist). And for the most part, Harry Dexter White won - a great many of Keynes' ideas were never implemented and/or were side-lined. For example, Keynes was all for the establishment of a world currency unit (the "bancor") that would function as an independent currency of reserve. White was in favour of the US dollar functioning as the world's reserve currency.

White 1: Keynes 0.

But that aside, the IMF and the World Bank (or just the International Bank for Reconstruction and Development, as it was then) were set up to be the bankers to nations in the years post 1944. Which made a lot of sense – most countries had just experienced the ravages of two World Wars. Defence had been expensive; the large part of the working force was either dead or returning from years of war in need of education and reintegration; many industries had been subverted into war-driven products and were lacking the infrastructure of the years of peace; cities had been bombed and were in need of repairs; world trade had been heavily stifled by war politics; most governments were new and lacking the strength to drive through recovery policies; and reparation payments needed to be negotiated and wrung out of soon-to-be-freshly-defeated nations that had little hope of meeting their obligations.

Solution (in part): the World Bank. “You come to us for loans to rebuild, we’ll give them to you; and in about 50 years time, an artist called Bono with an extraordinarily large collection of sunglasses will run around asking us to forgive the debts of those that haven’t managed to pay them back”.

Solution (another part): the IMF. “You come to us for short-term loans when you can’t maintain your exchange rate/balance of payments; and we’ll tell you how to do it better. Agree to do it like we said, and we’ll give you the money”.

So in effect, the IMF was all about short-term financing; and the World Bank was all about long-term financing. Approximately.

And to clear up something (before I get a host of comments), the "World Bank" is now a collective term referring to the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IDA was formally established in 1960 to offer loans to the really poor countries on the most favourable terms possible. Whilst the two are run in the same way, and share the same headquarters and leadership, the funds that finance the two entities are kept separate. And unsurprisingly, the IDA's fund needs to be replenished more often.

The Criticism

So why do so many people protest against the World Bank? The trouble is that the capitalist reforms that the World Bank insists upon in return for their loans for structural adjustment (ie. for investment in industry, infrastructure, etc) are not always best for their borrowers. For a number of reasons:

1. Countries are not always ready for free market forces immediately. For example, if a country is forced to de-nationalise a parastatal like a Water Authority, the entity in its original form is probably quite inefficient, and unlikely to be self-reliant. Forcing self-reliance could cause the industry to collapse long before the free market forces have enough time to step in and fill the gap. And then there would be a water crisis.
2. Structural adjustment requires a natural order of events. Before factories can be put in place to process agricultural products, the farms have to be put in order. In order for the farms to be put in order, there need to be improvements to the transport system (to carry the product) and to the water system (to irrigate the newly planted crops). Then there is the need for sufficient power supply to govern all of that. The point that I'm trying to make is that the process requires some forethought, and probably some experience in rebuilding economies - structural investment without forethought is, at best, unhelpful. 
3. At the same time, structural adjustment in weak economies can create unhealthy free market structures (such as monopolies), which do more damage than good. 
4. And, for that matter, structural adjustment in weak economies can draw attention to a key incentive imbalance. If a leader that has previously been repressed suddenly attains power, how likely is it that they would be able to resist abusing it? Particularly if that person were unsure of how long they could maintain their position. I think that the human reaction would involve being a lot more interested in self-preservation and/or self-enrichment than in the improvement/enrichment of the economy. Add to this a sudden influx of foreign funds? Hmmm.

I'm all for the eradication of poverty. But the action to be taken, and the implementation thereof, requires a strong and experienced hand. This leads to the main criticism of the World Bank - that its voting system and governance is heavily biased in favour of the donors (ie. the US and the economically powerful). And the point is a fair one - how can a World Bank, controlled by the economically-successful, advise on the development of the economically-awkward? Does their success make them the best decision-makers?

I reckon that's the logic that's been applied until now - it's their money and they should make the decisions. But I really wonder if it continues to apply. Success breeds sophistication - can first-world born-and-bred politicians, with their subtleties of social acceptability, technology, sophisticated finance and medical aid really understand developing countries? Countries where paying your taxes is a lot less certain than death, and choosing a brand, flavour and fat content of yogurt is as foreign a concept as teleportation? These are different worlds. This is no longer 1944. Not everyone is still developing.

And the developing world has pointed this out. If you want to aid development, give the money to the person with the best chance of actioning that original goal. Enter a World Bank Presidency bid with more than one legitimate candidate. So which candidate should get it? We're down to two: 

Nominee Number 1: Jim Yong Kim

The US candidate without the economic background. He is a man of medicine; and his CV includes a long list of successful health programs that have been implemented in a great many developing countries. 

What I like:

• His lack of official economic background. And by this, what I mean is that he's probably going to be quite practical. Here is a man that has set up health programs in developing countries. I mean - I'm not sure how involved he was. But if he was as involved as everyone assumes, that means that he got his hands dirty. He dealt with issues and dealt with people and made things happen. In my mind - economics is just the study of human behaviour on both an individual and a collective level. Do we really think that a physician is going to be any less understanding of human behaviour than a formally-trained economist? Frankly, if the recently-late former-President of Malawi, Mr Mutharika (who used to be World Bank economist) is anything to go by - thanks, but I'll take the good doctor.
• His attitude toward economic growth (he was accused of being anti-growth). Read a little closer, and you'll see that the book generating the criticism was actually against economic growth purely for the sake of economic growth. The argument is that economic growth needs to be sustainable, and it needs to have purpose. Not all growth is like that. For example, economic growth that leads to every person owning two cars because they can afford to have one - is that really useful? Does that make the growth in the car manufacturing industry sustainable? I agree with the book - too much growth is potentially cancerous. I would hope that is Kim's view too.

What I dislike:

• He's not Ngozi. It's an African bias - I freely confess it. But other than that - I tend to like most of the things that his critics dislike. 

Nominee Number 2: Ngozi Okonjo-Iweala

The Nigerian Minister of Finance with the extensive academic background and the extensive economic experience.

What I like:

• Her economic background. She is well-established in the field, and has achieved significant economic reform in Nigeria.
• Her principles. From what I can tell, when she disagreed with Nigerian President Obasanjo in 2006, and he removed her from an economic team that she was heading up, she resigned immediately and joined the World Bank as a managing director. She also voted to abolish the fuel subsidies in Nigeria (the fuel subsidy cost is a significant drain on Nigeria's finances). I like those positions. The second, in particular, was not populist: and she was not popular when she made that call.
• Her continent of origin. Africa is, in many ways, the least developed continent. Ngozi has firsthand successful experience in swimming those waters, and must be aware of the corruption at play. If she can navigate it successfully - that's a quality that Kim will be unable to replicate. 

What I dislike:

• Her continent of origin. Has she been touched by the corruption at play? There are definitely some scandals floating around her name. 

And the winner is:

Jim Yong Kim. Because they announced it 10 minutes ago.

Should he have won?

The question is irrelevant - he was always going to. 

But I do not believe that all is lost. 

The doctor is in the house.