SIMES APRIL 2011 ISSUE
For Internal Circulation Only 1
CONTENTS Letter from the Editor
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SIMES Discussion Forum Report: ‘Will China Surpass USA as a Global Superpower?’
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Talk by Professor Jomo Kwame Sundaram on ‘Retihinking International Finance for Development’
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Talk by Dr Nattavudh Powdthavee on ‘The Happiness Index’
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Nouriel Roubini on - ‘What’s Next?’
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The Impact of Angela Merkel on the Economic Development of Europe
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Feed Us—An Analysis on Food Prices Crisis
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A Profile on: India
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Letter from the Editor Hello All! My name is Sruti Pegatraju and I now have the privilege of being the new Editor-In-Chief of SIMES Publications. My predecessor, Al, is an inspiration in his own right, and did a remarkable job in guiding our writers to bring out the best in their work. Through my time as Editor, I hope to continue these efforts of enhancing the economic curiosity of our writers and readers alike. Such a broad range of dramatic crises have been making headlines these days, that one finds it hard to keep track of it all at this time of uncertainty in the global economy. A distressed Eurozone attempts to maintain price stability and austerity, while the United States was on the verge of a government shutdown with no progress on their new Budget. Elsewhere, emerging markets face overheating difficulties, aggravated by the volatility in oil prices and a series of natural disasters to fuel greater panic. For our April issue, SIMES writers have zoomed in on the unseen features of this world in chaos, by focusing on nature and decisions of our key leaders such as Angela Merkel, as well as an analysis on an underlying issue that affects our day-to-day lives with the rise in food prices. Furthermore, we are keeping you up to date with the enriching activities and opportunities experienced by our members this quarter. With our ongoing efforts to provide a platform for SIM students to express their economic viewpoint and make sense of the complexities of current affairs, SIMES Newsletter publications are always open for new writers or researchers. If you have an interest in contributing to our upcoming July issue, please email to: sruti.rao@gmail.com with your topic of interest by 15th May 2011.
Happy Reading!
Sruti Pegatraju
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SIMES Discussion Forum: WILL CHINA SURPASS USA AS A GLOBAL SUPERPOWER A Report by Al Marzuki Anuar
On the 18th of January 2011, SIMES organised an economic forum titled ‗Will China Surpass the US as a Global Economic Superpower?‘ The three hour event was moderated by the acting Editor, consisting of five student panelists from different academic backgrounds. Supporting graphical materials were sourced from various media, and hand-outs were provided for participants to refer. The forum‘s objective was to promote appreciation for China‘s rising influence amidst US global leadership. The forum began with a historical reflection of post-WWII US, elaborating on policies such as the Marshall Plan and floating exchange rate policies that catalysed the build-up of US influence in global commerce. The prevalent structure of the US economy, which features highly skilled and productive workforce and transparent judicial system, was highlighted as key contributors to its influence. Particularly, the floor was reminded of the US‘s vested interest in the Asian trade and investment climate. Following the US, there was an overview of China‘s progressive history, beginning from Deng Xiao Ping‘s reform from orthodox communist policies to inherent industrial and trade heavyweights. The increasing significance of China‘s policy decisions on regional stability and global commerce begged comparison with the US. The results of China‘s state-led policies on economic growth and controlled reform were explained using recent data. In light of the latest global financial crisis, problems emerging in the US economy were deliberated upon. Among them were direct effects such as high unemployment, others were indirect effects from policy response such as ballooning public debt. Theories such as the Solow Growth Model were used to enrich cause-effect analysis. Background was also provided for China‘s increasing foothold in emerging economies, relative to the US. After the intermission, the panelists proceeded to point out inherent problems in China‘s quest for economic dominance. Asset price bubbles and rising income inequality were highlighted, even amidst encouraging annual GDP growth. The policy ‗turn-around‘ from excessive state-led investment to tightened lending opened a debate on the sustainability of accelerated growth. The recent concerns for exchange rate ‗imbalances‘ and quantitative easing were brought forward to cement the economic rivalry and dependency between China and the US. The arguments in favour and against China‘s currency rigidity and US‘s persistence on QE were deliberated upon. Recent updates on China‘s financial markets were compared against growing US debt for possible reduction in the USD‘s 4
On a social level, the accessibility and standards of education in China were agreed as drivers for sustained economic progress. However, the strength of entrepreneurship in the US was highlighted as the key feature to rival to enhance human capital. Besides that, the floor brought up comparisons of other demographic features and administrative transparency to debate on China‘s potential to overtake the US. There were participants who were skeptical of the US potential to be superseded by China as the global economic superpower. This was mainly due to the former‘s rich global influence and the latter‘s requirements for more significant domestic consumption. However uncertain future outcomes may be, the closing consensus was that in the current economic climate, the ability to effectively deal with shocks and engineer alternative growth strategies were paramount to maintaining economic leadership. SIMES Advisor and senior lecturer, Dr Seet Min Kok was one of the on-lookers of the forum discussion and appreciated the efforts of our panelists. However, Dr Seet did mention points of improvement on the format of the talk, recommending, for instance, the presentation of an agenda to the participants on key points that will be discussed. He also suggested a greater use of diagrams and application to macroeconomic theories by the panelists to reinforce their points, as well as better enforcement by the moderator to direct the discussion towards the topics planned.
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‘Rethinking International Finance for Development’ A Talk by Professor Jomo Kwame Sundaram Reflections by Megan Leong I had the pleasure of attending a talk at Grand Hyatt on the 25 th of February; it was titled “Rethinking International Finance for Development” and given by Professor Jomo Kwame Sundaram, Assistant Secretary-General for Economic Development in the United Nations Department of Economics and Social Affairs (DESA). Professor Jomo began the talk by identifying crisis management priorities, namely containing crisis and spread across borders, inflating of the economy through monetary and fiscal measures, as well as both national and international regulatory reform. He also pointed out the major challenges we should anticipate to face. A few to mention are lower commodity prices, roller-coaster short-term capital flows, low domestic private investments and consumption demand, less FDI, as well as reduced export demand. Aside from technical challenges, he recognized that there also lay constraints on developing country responses. Monetary policy might end up being less effective, as the situation worsened with independent central banks, and fiscal policies would be space constrained. There might also be institutional pro-cyclicality and lost productive capacities due to earlier liberalization and globalization. In terms of global recovery, the professor comments that trade is recovering but at a moderate pace, while commodity prices were rebounding back to original prices, but still remain highly volatile. In addition, capital inflows are returning to emerging economies, but creating new problems. While some positivity is observed, numerous downside risks still remain, such as persistent high unemployment, surging capital inflows, currency wars, currency appreciation, sovereign debt distress, and the widening of global imbalances. Talk of the post-crisis reform agenda led us back in time to compare the impact of the Bretton Woods System in 1944. Then, we saw a clear emphasis on sustaining growth, job creation, post-war reconstruction, and post-colonial development. Focus was not merely placed on monetary and financial stability. Currently, while we do not have as clear an emphasis as we did in the Bretton Woods period, the post-crisis reform agenda consists of a reserve currency system to manage the unsustainable global imbalances, international financial architecture, financial deregulation, as well as capital account liberalization. Finance reform priorities include prudential risk management, counter-cyclical policies to limit pro-cyclicality, finance growth (and hence growth in output and employment), development finance, and inclusive finance. Besides financial reform and crisis management, we were reminded by Professor Jomo that the G20 has also identified development initiatives in better mobilizing private capital for infrastructure financing and creating a framework for strong, sustainable, and balanced economic growth. Evidently however, they have displayed the need to improve in terms of international macroeconomic coordination in terms of managing fiscal austerity, global imbalances, and exchange rates. They also need to ensure effective and coherent financial regulation through the Basel 3 and FSB. The talk covered a wide variety of topics and identified in depth, the problems and priorities that are required to be troubleshot for global recovery. Not only did it provide a fresh insight and perspective on what I knew about the crisis, I also gained from new information and knowledge. It was definitely a value-adding and interesting experience I am thankful to have had the opportunity to attend.
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The happiness index A Talk by Dr Nattavudh Powdthavee Reported by Jerry Siak A number of SIMES members and I attended a book launch talk held by Dr Nattavudh Powdthavee on 21/2/2011. The book is entitled “the happiness Equation: The surprising economics of our most valuable asset” Dr Nattavudh works in the Economics Division of Nanyang Technological University and the talk was an initiative by The Economics Society of Singapore. The main gist of the talk was encircling a prevailing common perception of happiness being subjective as the things that make people happy vary from individual to individual. All of us believe we know what makes us happy better than any other person on the street. Dr Nattavudh disputed this notion. He argues that we sometimes make decisions based on our past experiences - but how good are we at remembering our past experiences? The problem with drawing experience from past memory is that our brain can only store so much of it and with limited details. We do not remember the exact feelings that make us happy. Dr Nattavudh then suggested that since we often fail to forecast our future happiness accurately, we may as well try to systematically measure people’s happiness and make it more objective. He then proceeded to demonstrate measuring of happiness by the use of a table in which activities which are predicted to be good for us such as socializing after work, dinner and relaxing rank high in happiness index and activities predicted to be bad for us such as working, morning commute and childcare tend to rank low in happiness index based on the average reported feelings across 1,000 people. One very important point he raised is that although studies show that life satisfaction correlates positively with GDP per capita, the “Easterlin Paradox” shows that growth in income is not correlated with growth in happiness. One proof is that work nowadays is getting more and more stressful for people and the proportion of high-strain jobs are getting higher from year to year due to market competitiveness. There is much evidence that all the extra money we have today is not doing a lot of good for us. If growth in a country’s GDP does not sufficiently reflect the well being of its citizens, then Dr Nattavudh suggested that new measures of human well-being may be required and happiness may well be the new GDP. Methods of the economics of happiness and mental well being will slowly enter public life and perhaps the time has come to define economics differently. Conventionally, economics is a social science concerned with the efficient allocation of scarce resources. He offered an alternative definition: “Economics is a social science concerned with the best way to allocate plentiful resources to maximize a society’s well being and mental health.” I found the talk to be very interesting and thought provoking. I personally believe that economics is a social science in essence and those practicing it should commit themselves in thinking of ways to maximize the well being of humans and we should not limit ourselves to its theories and mathematical principals. I am thankful that SIMES had given me the opportunity to attend this educational talk and I encourage fellow students and members to participate actively in SIMES activities in order to learn more from outside the classroom.
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NOURIEL ROUBINI ON:
“WHAT’S NEXT ?” Reflections by Sruti Pegatraju Little did I know that the 15th of March would invoke such a memorable evening of economic inspiration for me. It was the day that the Economic Society of Singapore and Singapore Management University arranged for a talk by renowned global economist Nouriel Roubini, and thankfully requested for SIMES exco members to volunteer. The talk was held at Ngee Ann Kongsi Auditorium of SMU’s School of Accountancy, which proved an apt setting for this engrossed and professional event. In all honesty, I somewhat tarnished the term ‘volunteer’ with m selfish intent of signing up to help along with 2 other SIMES exco members. Despite my vague concern for helping the organizers on the day, my key incentive for attending (I mean volunteering!) the talk was to listen to Dr. Roubini in person . Although to my defence, this is an understandable motive considering his stellar credentials. The economics professor of the NYU Stern School of Business is the co-founder and Chairman of Roubini Global Economics, which is a global research and investment strategy firm that was initiated in 2004. He also has a great deal of policy experience under his belt as a Senior Economist at the White House Council of Economic Advisors for former President Bill Clinton, and as Senior Advisor to the Under Secretary of the US Treasury during the Asian Economic crisis. Dr. Roubini’s policy papers on international macroeconomic issues are frequently cited by the financial press, and ‘the Economist’ magazine ranked him the 4th most important economist for his ideas on the aftermath of the crisis. The essence of Roubini’s talk was on the comparative speed of global recovery in advanced economies and emerging markets. He introduced the topic by highlighting the positive characteristics in the current economic climate and praised the resilient cycles in equity markets that are correcting efficiently to ongoing data. More significantly, there is a rise of what Roubini coined as ‘hybrid corporates’ with the global integration of advanced and emerging economies, as companies are merging the benefits from both ends of the spectrum. Nonetheless, in assessment of these fine positive traits in the global economy Dr. Roubini more significantly points out that there are more grieving factors that may undermine growth potential in the future. He mentioned that consumer behaviour is not growth-friendly as there still exists general caution of saving more and spending less, slowing down recovery prospects. Furthermore, the debt conditions , most worrisome being that of America’s debt of 10% of GDP, will be an issue with no quick 8
solution. While emerging markets have learnt from lessons of the past, developed economies will face some challenges in this regard for time to come. The Harvard doctorate holder then moved on to evaluate the status of different economic regions, namely the Eurozone, United States and emerging market countries. Commenting on the Euro nations first, Roubini deemed the region as one with anaemic economic growth. Private and public debt is evidently a problem in the area, gaining headlines with bailouts of Greece and Ireland, and the recently announced Portugal. Along with the debt-restructuring issue at hand, the long term competitiveness of the region is diminishing and taken over by emerging markets. Dr. Roubini moved on the paint quite a bleak picture of the US economy with unemployment remaining high and almost 40 percent of mortgage holders expecting to go ‘under water’ in the coming years. Public and private debt is most certainly a concern , where certain states such as California contribute to bigger shares of overspending. He criticizes that the country is not practicing austerity enough, and this is enhanced by the political divide between Republicans and Democrats. In effect, economic growth is being crowded out by the budget deficit problems that lack any significant solutions. The emerging markets on the other hand are experiencing tremendous growth especially in Asia but still lurk with the fear of overheating. Roubini explains that the inflationary pressure in Asia is in two-thirds impacted by oil and food. Hence a rise in prices in oil and food will be a reason to worry for emerging market economies, and may determine whether the inflation pressures will have a hard or soft landing. The speaker then tied this issue with the current upheaval in the Middle East, as Libya is a key source of oil for emerging and Western nations. The unrest and subsequent rise in oil price will impact the core inflation of emerging markets but with unmatched rise in wages due to lagging productivity. Secondly, currency markets of emerging markets are dependent on the nature of the US dollar as most of the developing nations shadow China, which shadows the US on its currency manipulations. Hence, a weaker US dollar will impact the competitiveness of the developing economies. On a conclusive note, Dr. Roubini commented on the fiscal and monetary measures being implemented by the mentioned countries and their long term impact. He opines that the fiscal austerity measures, used mainly Eurozone nations will have short term lag on growth, which will lead to volatility in the near future. However, if these markets are willing to sacrifice the short term dip, with the help of monetary tightening with raised interest rates, there will be sustainable growth in the future. While the applause and Q&A session followed, I was left in awe of the speaker and the entire experience. Dr. Roubini’s valuable insight and smooth analysis only reiterated his extensive knowledge in the field. The aura of being seated among distinguished professors from leading universities, financial journalists, and senior executives felt like a privilege and made me realize even more that we are mere mignons in our understanding of economics and the great depth that there is to learn and achieve. I walked out of the auditorium satisfied, thankful and absolutely inspired.
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THE IMPACT OF :
Angela merkel ON THE ECONOMIC DEVELOPMENT OF EUROPE The Eurozone debt crisis was brought about when virtually all countries involved had breached their own self -imposed rules. Under the convergence criteria adopted as part of economic and monetary union, government debt must not exceed 60% of GDP at the end of the fiscal year. However, only two of the 16 Eurozone countries – Luxembourg and Finland – have managed to adhere to this criteria, highlighting the magnitude of the debt level that many countries are tackling with. As the Eurozone countries falter individually in their attempts to revive their flagging economy, they are looking for a singular voice that can unite them in this time of crisis. In terms of economic size, Germany is the powerhouse of Europe, and it is only natural for Germany to assume leadership and at the forefront of economic decision making. That leadership was found in current chancellor of Germany—Angela Merkel. Background Born in Hamburg, Angela Merkel was only a couple of months old when her father, a Lutheran pastor, was given a parish in a small town in East Germany. She grew up in a rural area outside Berlin in the communist east, and showed a great talent for mathematics, science and languages. She earned a doctorate in physics but later worked as a chemist in a scientific academy in East Berlin. She was never involved in politics until the age of 36, when she became involved in the burgeoning democracy movement in 1989 after the iconic fall of the Berlin wall. Merkel started her political career as government spokeswoman following the first democratic elections. She then joined the Christian Democrats (CDU) two months before the reunification of Germany and within three months she was in the Kohl cabinet as minister for women and youth. She established herself in the party, and rose through the ranks until she was chosen to lead it in 2000 and was elected Germany‘s first female chancellor in 2005, a role she holds today.
forms, and agree to more left-leaning measures such as minimum wage in some sectors and a huge fiscal stimulus. Many thought the coalition would break apart, but Merkel managed to hold it together and took credit for Germany‘s emergence from the recent recession. Under her party‘s influence and guidance over the years, Germany has become prosperous and the richest country among the nations of the EU. Its export-driven economy looks set to grow at a healthy 3% this year. Unemployment, high in recent years, has just declined to its lowest level in 20 years.
Germany’s role in European Union The response of European leaders to Eurozone crisis has been hesitant and fractious. But when the European council met in Brussels on October 28th and 29th 2010, the EU appeared to be acting with greater purpose and sense of direction. One reason for this change is that most member states – including France – are now willing to accept German leadership. Chancellor Angela Merkel‘s influence was evident on the three key issues discussed by the summit namely tightening rules on economic governance, setting up a new institution to deal with countries unable to borrow in the markets and revising the EU treaties. The first key issue, about strengthening economic governance in EU, implies stricter and more automatic punishments for countries that borrow excessively – a measure to protect Germany and other credit-worthy nations. The EU should focus not only on governments‘ budget deficits, but also the overall level of debt. There is more urgency in tackling the imbalances of countries with Merkel’s influence on Germany big current account deficits than those in the surplus Over the past four years, Merkel has had to steer countries. The new institution also proposes the monitorGermany through some difficult times while keeping her ing of imbalances and disciplinary procedures for those popularity intact. She is a confident leader and is certainly who fail to act on recommendations to tackle imbalances. praised for her sound decision making in bringing the On the second issue, EU leaders agree to estabstrength and stability that the German economy fastened lish a ‗crisis resolution framework‘ to replace the Eurothrough the economic crisis. pean Financial Stability Facility that they designed to supMerkel is known for her pragmatism and ability to port governments unable to borrow in the markets. EU compromise. After being elected in 2005 she entered into leaders have not yet agreed on how the new body will coalition with her rivals in the social democrats (SPD). work, but it will probably to be a kind of European She had to forsake some of her planned free market re10
Germany is noted to be in a supremely selfconfident mood because of its export surge to emerging markets. But their economic model was marred by a low level of domestic demand, that was aggravating the Eurozone crisis. A suggestion is that Germany would benefit from taking specific steps such as increasing investment and spending on R&D, lengthening shopping hours and getting more women into the workforce. Such steps would in the long term help to rebalance the Eurozone. One of the most current challenges that Merkel faces is that her party lost an election which caused the ceding of a key state of Baden-Wuerttemberg to her competitor The Greens. The CDU have run the state for almost 58 years before this unprecedented defeat. In an increasingly globalised world, Merkel‘s party was adMonetary Fund that both lends money with strict condiversely affected by the nuclear accident in Fukushima, tions attached and facilitates an orderly restructuring of Japan, which sparked Germany‘s biggest anti-nuclear the debt of the countries that cannot repay what they demonstrations, which invariably caused harm to Merkel‘s have borrowed. The Germans say this restructuring political aspirations. It is imperative that Merkel points out should lead to private sector creditors taking a loss, and her strengths in economic leadership for Germans and many governments go along with that. EU nations to pull back supporters. Some leaders who worry about their ability to borIn conclusion, the whole of Europe needs a strong row argued against establishing this kind of restructuring leader and Angela Merkel is the answer to that. In the mechanism at this stage. It could deter investors from time of crisis, a leader of clear vision and harsh but fair lending to Eurozone governments and make it even pragmatism is needed to provide a guiding hand for other harder for them to service their debts. The Germans rewayward countries to follow. To sum it up, this is a quote sponded that tax payers should not bear all the cost of from Merkel that bests describes the person she is and bail-outs, and the markets should fret about potential the leadership she provides, ―We are doing everything to losses in order to discipline borrowers. The Germans will ensure that there will never be a repeat of the crisis we face stiff opposition on the issue of creditors taking have had. I think it is important to create a clear culture of losses, but since they will be responsible for providing the stability in Europe. This is the ultimate for good cohesion biggest share of any rescue package, they are likely to in the EU. Europe makes us strong, but this Europe win the argument. needs rules.‖ On the third issue, namely treaty change, after many months of persuasion, Merkel successfully perReferences: suaded France‘s president, Nicolas Sarkozy, and many Robert Marquand, 2010. How Germany's Merkel conother European leaders to back the establishment of a vinced EU to change rules after the Greek crisis. new institution that reinforces a more grounded consensus on the foundations of he union. Although more signifi- [online] 29 October. Available at: http://www.csmonitor.com/World/Europe/2010/1029/ cantly within this establishment is a plea for a monetary and fiscal union of the eurozone nations to provide better How-Germany-s-Merkel-convinced-EU-to-changestability to the currency. Merkel has generally stood rules-after-the-Greek-crisis against the integration of such economic policies, be3: Germany: Greens celebrate Merkel election defeat. cause of the fear that it would create greater disparity BBC [online] 28 March 2011. Available at among the nations. Nonetheless, with the interests of http://www.csmonitor.com/World/Europe/2010/1029/ currency stability in mind, the German chancellor has argued for the proposition, further highlighting her rational How-Germany-s-Merkel-convinced-EU-to-changeleadership for the region. rules-after-the-Greek-crisis Challenges for the German Chancellor Despite Merkel‘s commendable leadership, Germany‘s state of affairs nonetheless faces its challenges. One is that Germany‘s determination to get its way has bruised several smaller states, as well as the Commission and the European central bank. One example is that for several years, France – and many others – have worried about Germany‘s economic structure, as it focuses more on emerging markets. Another is that its reluctance to discuss imbalances within the Eurozone has prevented the EU from taking serious action to tackle them, though the imbalances contributed to the euro crisis in the view of many countries.
Martin Kettle, 2011. Angela Merkel: uncharismatic leader who dominates German politics. The Guardian. [online] 17 March. Available at: http:// www.guardian.co.uk/world/2011/mar/17/angelamerkel-germany-christian-democrats http://www.globalpost.com/dispatch/germany/101012/ angela-merkel
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FEED US An Analysis of the 2011 Food Crisis By Ruenn Sheng Ng There had been unfortunate natural disasters around the world early this year that have caused a great impact on food prices. Personally, the greatest shock I get from food prices come from an experience in get in a market. 2 packets of beans, sold in a market stall near my home, are usually sold for 30 cents a packet. Then in mid-March, she was asked to pay 40 cents per packet of beans. I am disgusted with the 33% increase of the beans, as much as she does. However, with the increase of prices in foodstuffs in general, I believe other people around the world will feel shocked and uncertain of their current standard of living. In my experience, the food price increases this year is indeed a crisis. In Australia, there had been floods in Queensland and Victoria in January 2011, damaging S$2.6 billion of agricultural produce. In China, Russia and the United States, cold weather, snowstorms and droughts had adversely reduced crop production, and Chinese wheat production was even cut by up to 35%. Thailand also experienced floods on October 2010, as its rice crop was reduced by 20%. All countries mentioned above are major agricultural producers and exporters globally. As a result, the combined effects of these natural disasters mentioned above have caused food prices to rise. Wheat futures in Chicago rose 47% last year, and are poised to rise even further. In United States, the Labor Department also reported that the Producer Price Index rose 1.6 percent on food costs in February 2011. The U.N. Food and Agriculture Organization Food Price Index also rose to 231. This surpasses the previous high of 224, set in 2008, during the previous food crisis caused by the bio-fuel led commodities boom. This shows that the current food crisis is worse than the previous one. Such increases in prices are termed as a ‗supply shock‘. The price of food, as seen in diagram 1, had increased. In the case illustrated in this diagram, the price of food, like rice, increased from US$154 (P1) to US$530 (P2) over the last 10 years. The quantity of wheat produced has actually fallen per
Diagram 1 (Price change, supply shock) capita over the years, as consumption per person fell from 101 kg in 1997 to 67 kg in 2003. With food being a necessity good, its consumption is constant. With rising prices, real incomes will fall. As food becomes relatively more expensive, in periods of rising incomes around the world, there is less expenditure in other goods and services. For example, in the case of the recent Chinese New Year, Malaysian Chinese are reported to spend less on other goods for the festive season. With more money spent on food for reunion dinners due to inflation, with slower growths in income, other areas of spending have to be cut – such as new clothes. Effects of the Food Crisis The increase of food prices have brought to different effects in different types of economies, namely, developed economies and emerging developing economies. For countries with higher incomes, increases in food prices lead to consumers choosing lowercost alternatives. Fast food restaurants are making
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record earnings. KFC even posted a 14% increase in profits. The developed countries, though, have more than enough resources, like food reserves, to help their people to tide over the food crisis. For emerging economies, in South, Southeast and East Asia, governments have different strategies to contain food price inflation. They hold more than half of the World‘s people. The focus of governmental action will be on these emerging countries, with the influence exerted by these countries‘ sheer size in populations. The economic trend to consider in these emerging economies is the growth of the workingand middle-class individuals within these economies. The working-class and middle-class people of India and China are rapidly growing in numbers and wealth. Both countries now have fewer people living under poverty, as compared to 20 years ago. In particular, India has lifted one-fifth of its people from the international poverty line of US$1.25 (purchasing power parity) over the past 30 years. But it is of great governmental concern that the increase of incomes in such countries could be undermined by the increase of food prices. With no suitable alternative to the production of such staple foods such as maize, wheat, rice, which make up 87% of current total food production, cost-push inflation then ensues. As seen on diagram 2 below, aggregate supply (AS) shifts to AS'. It causes an increase in the general price level, while output of goods and services (real output) in the economy shrinks. With cost-push inflation, the rise of price in food leads to ice/a wage spiral. Firms‘ wages chase increasing prices, while prices may in turn chase rising wages, seemingly with no end. Inevitably, wage earners need an increase of wages to protect their purchasing power, by finding a way to negotiate and try to force their salaries increasing faster than the price of goods, especially food, as reflected in the Consumer Price Index (CPI).
Diagram 2 (Cost-push inflation) In the case of business owners, their profit margins will be squeezed, both by the increases of raw materials (in the grains or other raw materials they use), and even more likely, the increase of wages. Hence, firms are forced to raise prices to protect a certain profit margin, from rising costs. This in turn negates the effects of the wage increases, and workers continue to bargain for higher wages, with all factors constant. This can help explain the labour unrest in emerging economies such as Bangladesh and China, in the 1st quarter of 2011. Another economic factor for emerging markets‘ governments to consider is the interest rates of the economy. To control runaway inflation, the economy has to cool off, with reduced aggregate demand. As a result, governments choose to increase their interest rates. It will reduce the demand for lending to firms and households, and increase market rate in saving. Vietnam, for example, is raising main borrowing rates from 9 to 11 percent. The increase of interest rates ultimately leads to households being poorer off, and less able to buy food that still becomes increasingly expensive. Possible Policies to control food prices Governments can choose to impose price controls on their economies. Wages are kept to a maximum, while the prices of goods and services are kept steady, through subsidies. This works when the industries in the economy are working in a monopolistic or oligopolistic market structure. However, the success of price controls is dependent upon the ability of governments to cover such huge costs in subsidising the prices of the goods. The ability is assessed by the country‘s governmental budgets, which is in turn affected by
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their overall net income, in the form of current account balance. Countries with current account surpluses such as China, Thailand and Indonesia, with their current account balance totaling over 10 billion US dollars, are in a better position to tackle the cost of subsidizing food prices. Countries with current account balance deficits, such as India, Turkey and Vietnam, may not be able to subsidize food prices effectively, as they do not have the means to fund food subsidies. Another possible policy, though seemingly unrelated to the current food prices increases, is the deregulation of industries. More free trade should be allowed in countries where there are high tariffs for imported goods. This will help to reduce the cost of imported food in the market, and it will make the market for food more efficient. The European Union, for example, charges up to 146 percent on tropical fruits such as bananas, for trade tariffs. Reducing the tariff costs could possibly make food industries more competitive, with lower entry costs and lower prices, which leads to more food being produced and sold in the market. Thereafter, prices will also be lower. Thus, sustained increases in prices will cease.
every day for our meals. No matter how interlinked our lives are with other people around the world, through the forces of information and communication technologies and globalisation, we have to eat. We have to pay for the food that we eat, before we eat them. The current food crisis, while reflecting a more volatile world that we have, also affects the stability of an economy, or a country. For example, with rising food prices, there had been huge levels of discontent in different governments that toppled in the 1st quarter of 2011, such as Tunisia, Egypt, Syria and now Libya. Eventually solutions, in the form of better production and distribution techniques to reach people, have to be put in place, to feed people across the world.
Reference: http://www.bloomberg.com/news/2011-01-03/wheat-rises-tofive-month-high-as-australia-flood-u-s-cold-threaten-crop.html http://www.webcitation.org/5wVDg6Q9o http://news.xinhuanet.com/english2010/world/2010-10/21/ c_13568950.htm http://news.yahoo.com/s/nm/20110203/wl_nm/us_food_prices http://www.cbsnews.com/stories/2011/03/16/business/ main20043737.shtml The future of food prices http://voices.washingtonpost.com/political-economy/2011/01/ The earthquake in Tohoku, Japan on 11 spike_in_global_food_prices_tr.html March 2011 influences future food prices. Unlike http://www.cathnewsindia.com/2011/02/02/malaysiansother net food exporters on the list, as mentioned tightening-belts-for-new-year/ above, Japan is the largest net food importer in the http://www.ft.com/cms/a955630e-3603-11dc-ad42world. Japan currently imports 60 percent of its 0000779fd2ac.html?ftcamp=traffic/email/regsnl//memmkt/ caloric intake from other countries. The earthquake http://www.indexmundi.com/commodities/? commodity=rice&months=120 has brought about a temporary halt in short-term http://blog.euromonitor.com/2010/03/emerging-focus-risingdemand for food, keeping food prices in the next middle-class-in-emerging-markets.html quarter in check. http://www.3news.co.nz/News/Global-recession-sees-increaseHowever, despite the level of uncertainty in-fast-food-consumption/tabid/209/articleID/93326/ surrounding food prices from the Japan earthDefault.aspx? quake, researchers Thomas Helbling and Shaun ArtiRoache wrote, ―the world may need to get used to cleID=93326&utm_source=feedburner&utm_medium=feed&u higher food prices.‖ tm_campaign=Feed%3A+co%2FHCaY+%283NewsFood prices could be a problem in our future. +Latest+News%29 http://www.bbc.co.uk/news/business-12501339 Given that incomes in emerging economies continue growing for the working and middle classes in http://www.tradeafricablog.com/2010/01/high-duties-keepthe next few years, demand for food is expected to food-imports-from-poor.html http://www.roubini.com/affiliate/google-news/ increase for this period. Increasing food prices f1ab670f197f8fa31caef5e17b029a27eb26add3/criticalcould hurt people living under poverty around the issues/47776.php world, who may not have the means to feed them- http://www.fas.usda.gov/country/Japan/Japan.asp selves. http://www.imf.org/external/pubs/ft/fandd/2011/03/ helbling.htm Conclusion http://www.encyclopedia.com/doc/1O214-eat.html
Food prices affect our everyday lives. As the Roman philosopher Cicero puts it succinctly, ‗one must eat to live, not live to eat‘. Food is really necessary to keep us going. The prices of food affect our quality of life, as we have to spend money
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A Profile on : INDIA We live in a time of transformation. The world is levelling out into an equal playing field and the Asian powers are emerging as a region of economic prowess. India has risen to the stature of the second largest emerging economy in the world with GDP growth at 8.8% and forecast growth that may arguably surpass that of China‘s in the coming years. The country has gained a foothold in key sustainable industries such as IT, engineering, and telecommunications to name a few, providing valuable services that every major corporation wants to get a piece of. Of course, every emerging market will have its challenges, but India has played on their assets to pave a formidable road to success.
In addition to a surge in foreign investment, a valuable effect of ridding the license raj was the outburst of entrepreneurial energy that became the driving force for the country‘s economic potence. Private firms were thrown into the global corporate jungle, providing healthy competition that encouraged them to live up to world-class standards. Today, Indian products and services prove to be competent choices and have developed into reputed multinationals. Arcelor Mittal, now the largest steel firm in the world, is based in Luxembourg while Tata Motors which started off as a local small car manufacturing enterprise now owns luxury brands Jaguar and Land Rover.
The epiphany of Rajiv Gandhi After her independence in 1942, India implemented a cautious approach to running the newborn economy with principles of a planned economy. Protectionism and stringent licensing measures echoed through the country and across Western seas, repelled foreign traders from considering potential investments in the country. The most traumatic of these policies was the ‗license raj‘ scheme – a series of strict regulations imposed on foreigners setting up businesses in India. Foreign business owners had to seek approvals from up to 80 agencies for their licenses to be passed, in an attempt to safe-guard local traders from international competition. In 1991, former Prime Minister Rajiv Gandhi realized this closed mind-set proved inefficient in generating the investment potential the country required and, in a rather dramatic effort, abolished the licensing regulations and eradicated trade barriers for a more welcome free market. This was arguably the pivotal move in Indian economic history as the adoption of free trade gathered a surge in Foreign Direct Investment and introduced India as an economic partner in the global arena.
Entrepreneurship leads the way Globalization has been a boon for the Indian economy as the phenomenon projected India‘s comparative advantage of cheap and skilled labour, to bring external interest in the outsourcing, IT and engineering industries. However the success of these industries should be credited to the strategies of the local entrepreneurs who provided multinational corporate clients effective services of improving the efficiency of their day-to-day business operations. The BPO sector companies specialized in simple back-office operations such as data-entry and data entry, telemarketing, troubleshooting, and virtually every operation that did not require face-to-face decision making. This allows international corporations to get their mundane administrative tasks conducted more efficiently with cheaper labour costs. Mr Bhasin, the managing director of Genpact an outsourcing firm that began as an internal unit of General Electric commented that ―car firms should concentrate on making better cars, all other tasks should be outsourced‖ implying that India‘s outsourcing services offers international clients the chance to focus on their products more effectively, a marketable incentive that outsiders splurged on.
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each with an impressive knack of catering to the local public. It is this perfect understanding of the mentality of target audience that gifts Indian businesses a sustainable revenue base for the longrun.
Additionally, the industry offered a domestic advantage as a significant proportion of rural youth who could easily be trained for the abundant job opportunities available in call centres and processing units. In contrast to the demand for simpleton services on administrative tasks, foreign companies also indulged in investing on the specialized skills in IT and engineering of the skilled Indian workforce. A foothold in these two key knowledgeintensive industries has posed as a tactical benefit, as India firms gain access to the abundant demand for greater efficiency by companies in industrialized nations. Public educational institutes have also mastered training in these subject areas within leading universities such as Indian Institutes of Technology (IIT), have become unbelievably competitive and groomed their students into sought after experts in the field. Despite the renovating impact foreign investment has made in India, in actual fact the significant portion of her economic growth comes from the developments in the domestic markets. New York University professor Nouriel Roubini commented to the Hindustan Times that domestic consumption constitutes almost two-thirds of India‘s GDP. Indian firms concentrate on accommodating to the needs of the consumers at home, who prefer cheap goods that adhere to their household needs rather than branded merchandise. By appreciating this mindset, local businesses adopt the label of ―frugal innovators‖ and produce goods that are cost -effective and efficient. For instance Tata Chemicals recently invented a filter that requires no power and provides a family of five, safe drinking water. A much talked about invention is Tata Motors Nano, a car costing only $2,000 with the aim of providing every lowermiddle class family an air-conditioned automobile at affordable prices. The telecommunications industry, a key contributor to the country‘s GDP has emerged as the world‘s fastest growing cell phone market, with key players such as Bharti Airtel who made it possible for almost every local to afford a mobile phone. The list of innovations is endless,
A rickety road to development India is undoubtedly soaring to phenomenal heights, but if the tiger is to continue roaring its way to power, there are some fundamental challenges that need to be addressed. The IMF recently commented that the Indian economy showed signs of overheating as consistent growth rates through the recession and interest rates already imposed at their highest to contain inflation dangers. Inflation currently rattles around 10%, in effect of which the Reserve Bank of India have imposed further hikes to interest rates to 5.82%. Fears of property bubbles also hover through economic circles with the soaring purchasing power of the Indian elite however the truth behind these rumours is still debated.
Other more long term challenges for the nation include serious income disparity and illiteracy in working-age Indians living in rural areas. With the bustling growth in bigger cities, there is a shortage of skills as out the working population aged 15 to 64, 40% are illiterate and another 40% are dropping out of schools. Competent institutions such as the IITs and IIMs deliver top-notch education, but there are only 16 of them in the entire country. According to the Boston Consulting group, there will be a lack of 200,000 engineers, 400,000 other graduates in the coming years. Meanwhile, a surplus of 62 million surplus workers will exist in the agriculture sector. Nearly 40 percent of the workforce manages a living in agriculture while the essential growth-contributing sectors of IT and engineering are unable to find enough suitable candidates for their projects. Implicatively, the limited supply in booming sectors offers existing employees higher wages, while primary sector workers tackle more competition than they can handle, leading to a wider income disparity.
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Lack of skilled labour also contributes to the stagnated development of infrastructure activities which needs considerable attention. Indian roads are gaped with potholes, inoperative traffic lights which lead to traffic that grounds city road to a standstill for hours. However builders, electricians and plumbers are limited, leading to errors in installations, such as the recent debacles during the Commonwealth Games with bridges collapsing and lifts built upside down. Poor and unreliable electricity also incurs extra maintenance costs for offices as back-up generators and computer servers are necessary for preventing data loss during frequent power-cuts. According to a report by McKinsey the urban population will double from 290m to 590 m by 2030, hence in order to keep pace the government will be required to spend USD 1.2 trillion on urban infrastructure – almost 7 times to their current expenditure. The ruling Congress party is aware of such necessary measures but are not acting as promptly as they should on this, any numerous other issues due to basic systematic hindrances. India celebrates a free democracy, but simultaneously tackles a highly complicated political structure. Formation of coalition parties to dominate parliamentary seats, price-tagged politicians bought over by wealthy businessmen or politicians from opposition parties, and an overall intricate hierarchy brings about a political conundrum that makes any important-decision making a strenuous and elaborate process. For instance, India‘s nuclear pact with US was initiated in 2005, would be a significant improvement for the energy sector and industrial improvement, but is held hostage under the heap of pending parliamentary approvals due to unnecessary questioning over minor clauses. Coalition politics is granting the smaller parties a greater control over the ruling party‘s decision making than should be awarded to them, causing parliamentary officials
the distraction of handling bureaucratic issues rather than concentrate on important developmental projects. Another challenge on the efficiency of India‘s growth is that of corruption. This has been a perpetual problem since the time of Jawarlal Nehru, the country‘s first president, but has caught more attention from the international media since the recent unravelling of the telecom scandal involving former telecommunications minister Mr Andimuthu Raja. He is accused of using his authority to sell telephone licenses at rock-bottom prices, costing the government treasury up to $40 billion dollars. Following his resignation, wary foreign investors started pulling out funds with a net outflow of $158m since mention of the news. India has an abundant supply of corrupt politicians, undeservingly handed top positions merely due to their political backing by small regional coalition parties, who are necessary allies of the Congress party. Mr Raja, for example was a small-town lawyer with no background in telecom or business, but handed the reputable post of managing the fastest growing industry in the country because of support from a tiny 16 member DMK party allied with the Congress. Due to the ruling party‘s dependence on their coalition allies, inexperienced candidates are given top positions in exchange for their party‘s support. The future that lies ahead As India commemorates 63 years since independence this year, she also prides herself of the phenomenal growth taken place to be promoted as a key player in the global economy. Economists concur that the nation will continue to soar to greater heights, with foreign demand for Indian skills will be undisturbed and surging purchasing power within the domestic boundaries. Corruption scandals are perhaps the most precarious of challenges to be tackled by the system, as turning a blind eye to the situation may be detrimental to new foreign interest in market, as well as the nation‘s credibility. Global Financial Integrity, an advocacy group estimated $462 million in illicit money has flown out of India since 1948. The black money market runs parallel to official transactions – which is a ridiculous notion. If the country wants to play a bigger role in global markets in the future, it is imperative that the increasingly tainted image of dirty politicians be rectified.
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Nonetheless, if one were to negate the country‘s moral incompetence, stumps in development are being tackled, slowly but surely. The government is reaching out to private investors to donate the capital for infrastructure projects, which plan to augment in the following decade. Education reforms are being implemented with cheaper private schools replacing inadequate public institutions even in rural areas. The literacy rate of 15-24 year olds is over 80% and conservative parents are in fact realizing the importance of their children staying in school in order to secure a more attractive job in the big cities. The demographic dividend is arguably India‘s secret weapon. As the editor of Financial Times Mr Lionel Barber had commented ―by 2020 the average age in India will be only 28, compared to 37 in China and 38 in the US‖. As the world evolves into a more knowledge-intensive economy, India will gain a greater advantage in the long run. So long as steps are taken to preserve and make use of the zealous youth, India could well become a superpower in the making.
References: ‘How India’s growth will outpace China’s’ - the Economist; Oct 2-8th 2010 ‘Contest of the Century—China vs India’ The Economist; Aug 21-27th 2010 ‘What Ails India’ by Ravi Velloor—Straits Times 05/02/11 ‘Business in India—the Economist, Oct 2nd –8th 2010 http://www.economywatch.com/economic-growth/india.html http://article.wn.com/view/2011/03/15 Corruption_threatens_Indias_economic_growth/ http://www.bbc.co.uk/news/business-12363201 http://www.merinews.com/article/mukesh-ambani-confidentof-indias-economic-growth/15845027.shtml http://www.bloomberg.com/news/2010-12-03/india-seconomic-growth-may-surpass-china-s-in-next-10-yearsroubini-says.html http://www.rbi.org.in/scripts/AnnualPublications.aspx? head=Handbook%20of%20Statistics%20on%20Indian% 20Economy http://www.worldbank.org.in/ http://www.google.com.sg/search? um=1&hl=en&client=firefox-a&rls=org.mozilla:enGB:official&biw=1280&bih=617&q=india&ie=UTF8&sa=N&tab=iw
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