Effect of rich countries’ subsidies on Uganda

The agricultural sector in Uganda contributes a major fraction of GDP and employment. Food crops are the main fraction of agricultural GDP with bananas followed by cereals, root crops, pulses and oilseeds. Despite the domestic production, wheat and rice are imported to serve the urban population. Exports are dominated by cash crops like coffee, cotton, tea and tobacco. In recent years, Uganda also increased sugar production for export. How does export subsidies of rich countries affect Uganda? First, farmers producing food crops will lose because of lower prices. However, a new initiative Everything but Arms (EBA) of the European Union (EU) allows access to the higher priced EU domestic market quota- and tax-free supporting food crops exporters in Uganda recently. Second, food consumers will gain from lower food prices. Third, food security was reduced and world price fluctuations could lead to insufficient food supply before the advent of the EBA initiative.

Japan’s intervention in the foreign-exchange market

Since years, the yen appreciates against the dollar, which makes Japan’s exports more expensive. Repeatedly, Japan’s government intervened in the foreign exchange market via the Bank of Japan with the most recent intervention in October 2011. An intervention to depreciate the exchange rate is done by purchasing foreign currencies / assets. In the case of Japan, this increases the supply of the Yen and, thus, leads to a decrease in its price. However, the past interventions only had very short-term effects and the exchange rate always bounced back to its original value – similar to the past interventions.

China with a pegged currency successfully maintains an underappreciated currency with all the benefits for its exports. Another example is Switzerland, which suffered from appreciation of CHF making exports more difficult. Recently, SNB announced to maintain by all means a weaker CHF and that it would be prepared to buy unlimited foreign assets to sustain the exchange rate of 1.20 franc per euro. Subsequently, the exchange rate indeed stabilized at the announced rate.

One of the main differences between the case in Japan and Switzerland is the determination of the bank. The Japanese one-time intervention is contrasted by the announcement of a permanent lower limit of the exchange rate in Switzerland. Why did Japanese choose a one-time intervention with the risk to be not effective similar to its previous interventions instead of a full-scale stabilization of the exchange rate?

Greece’s Referendum: An Opportunity.

The Euro crisis continues. After the summit last week, most Germans (>80%) believed that this would have been the end of the crisis. Although the package of the summit for Greece and other EMU countries could have been more comprehensive, it was sufficiently substantial to calm the markets. The positive reaction the next days confirmed this convincingly. Then, Papandreou made the surprising announcement of a referendum in Greece about achieving a fiscal balance in exchange of help from the EFSF. Greeks already felt overwhelmed with the current fiscal measures. It is very unlikely that they will vote for more. Without a positive referendum, it will be difficult to disburse money from the fund to Greece. A drop-out from the Euro zone appears more likely. Although I am convinced that a negative referendum will throw Greece into deep misery and will also harm the other Euro countries, there are opportunities to deal with the referendum given that the decision is made.

Fiscal Austerity

Fiscal austerity contracts the local economy. Without monetary adjustments, the local economy is hit even harder. Therefore, there is an upper bound of feasible austerity measures – but it is hard to assess whether the current demands from the EU already reached the limit. Also, the resulting current account balance of a country caused by fiscal austerity is relative to the deficit / surplus of other countries. Only countries with an unsustainable deficit should reduce fiscal expenditures. Countries like Germany with a surplus should do the opposite – otherwise, they reduce the effect of fiscal measures in their partner countries.

Does the EU need teeth?

EU foreign policy is often based on soft power. Soft power is to convince someone to do something that is in your interest. Hard power is force. In the case of climate change, soft power means to convince (with reasonable arguments) other countries to reduce their CO2 emission. Hard power means not using persuasiveness but economic sanctions or military action as a threat. In Copenhagen, the EU failed tremendously in convincing other countries of their 20-20-20 approach and disappeared as a main player in the internationally coordinated fight against climate change. In the Libya intervention, it became indisputable that the military capacities of the EU are not sufficient to plan, command and execute a military intervention. Should the EU increase its military spending (instead of reducing it) and form a united army in order to be able to achieve its goals on the international stage? Or can we proceed with just ‘soft power’?

China the inevitable super-power?

In the current issue of Forein Affairs, Arvind Subramanian argues that China’s dominance in the near future is inevitable. His reasoning is based on a dominance index, which incorporates GDP, trade (sum of exports and imports) and extent of being net creditor to the rest of the world. Why? GDP is a good proxy for current and more importantly future military potential. Trade shows the importance within international relations while being a net creditor can be directly used to coerce other countries to do things they don’t want to do. An example? Suez Canal 1956: The US forced the withdrawal of UK troops by threatening to withhold loans to the UK and blocking an IMF loan. The UK removed the troops in no time; and the decline of the UK as superpower was finalized. Can the same happen to the US by China?

Saving Imbalances and the Euro Debt Crisis

In an article in the New York Fed, the authors explain how the peripheral countries of the EU run into the sovereignty debt crisis. Upon entry in the Euro zone, peripheral countries like Greece, Portugal, Spain and Ireland obtained very low lending rates comparable to the level of Germany. One of the many reasons is that investors believed that the ECB would continue the anti-inflationary course of the German Central Bank. Reducing the chance of depreciation and devaluation, also makes investment more attractive. The final risk of default though was not considered for Euro countries and the leading rating agencies graded all Euro countries highly. With cheap access to investment, the peripheral Euro countries borrowed high sums.

Development by creating capital!

Since the second world war, the developed countries try to enhance growth in developing (meaning non-developing) countries. The developmentalists approach in the 50-60s believed in a state-centered economy with state-led enterprises and high tariffs to reduce competition of local infant industries. As results were mixed at best, a more liberal agenda aimed at attracting investors and lending money. The accumulated debt in conjunction with the crises in Asia, Mexico and Brazil as well as the demise of the Soviet Union crowded out investors such that developing countries couldn’t repay their debt. For loans under the Structural Adjustment Program from IMF and World Bank, the countries had to further liberalize, deregulate and privatize the economy as well as severe spending cuts in social programs. Again, results were far from promising. Why is development so difficult? Why do developing countries still suffer from low or negative growth?

Are public rating agencies better?

A few days ago, the rating agency S&P downgraded the US credit rating from AAA to AA+ despite political pressure and a two trillion error in the calculation. Wall street and other stock markets reacted with huge losses and turbulences to the first credit downgrading of the US in its history. Investors got scared, speculators bet on falling stock prices and journalists reported about the advent of a world wide recession. As this was triggered by the private company S&P, one might wonder whether one single private company should have such an influence on the world economy.

Evolution of Generosity

Human interactions are often based on co-operation. How did co-operation evolve? If co-operation returns a higher pay-off than defection, the answer is obvious. However, many situations – like the famous prisoner dilemma – have a higher pay-off if one defects while only mutual co-operation has a higher pay-off than mutual defection. In this case, Axelrod (read summary here) showed with computer simulations that only in repeated interactions co-operation is sustainable. Psychological experiments don’t support this finding as even if the experimentator ensures that there won’t be any further interactions, people still co-operate. Is this irrational?