Tag Archives: foreign direct investment

Five Stories You Might Have Missed

Debates over Wall Street compensation reemerged on the national stage last week, as the government urged companies that received federal assistance under the Troubled Asset Recovery Program (TARP) limit executive compensation. On Thursday, the Federal Reserve issued draft rules governing compensation for companies that have not repaid TARP assistance. Under the new rules, the companies would be required to demonstrate that their compensation packages do not encourage excessive risk-taking. In an interview with the Financial Times, George Soros weighed in on the debate, calling Wall Street’s profits this quarter “hidden gifts” from the U.S. government. He commented that, “Those earning are not from the achievement of risk-takers. These are gifts, hidden gifts, so I don’t think that those monies should be used to pay bonuses. There’s a resentment which I think is justified.”

Meanwhile, concerns over the spread of the H1N1 (swine flu) virus continue to grow. On Saturday, President Barack Obama declared a declaration of “national emergency” to combat the flu. Under the declaration, hospitals eases some restrictions on hospital operations, giving them additional powers to treat the flu. 

In news from outside the United States last week:

1. German Chancellor Angela Merkel formally announced her new coalition agreement on Saturday. There were few surprises, as Merkel’s center right Christian Democrats allied with the liberal Free Democratic Party. The coalition contract included a promise to pass a €24 billion tax cut for poor and middle-income Germans and will reform inheritance laws. Under the new coalition agreement, Guido Westerwelle, the leader of the Free Democrats, will assume the post of foreign minister. The Christian Democrat’s Wolfgang Schäuble, a strong fiscal conservative, will become finance minister.

2. In two separate attacks, two car bombs exploded outside government buildings in Baghdad, Iraq, on Sunday, killed more than 130 people and injuring more than 500. The attacks were the deadliest in more than two months. Iraq had been enjoying a period of relative stability, as Western-backed tribal leaders had pushed al Qaeda militants into the margins. But U.S. officials contend that Iraq may be entering a period of increased violence, as militants attempt to reignite sectarian violence ahead of parliamentary elections scheduled for next year.

3. Negotiations intended to resolve the standoff over the Iranian nuclear program appear to have stalled. The talks, which were reopened early last week, were intended to develop an agreement which reduced Iran’s stockpile of low enriched uranium (LEU), building upon an agreement reached earlier this month under which Iran agreed, in principle, to send some of its estimated 1,200 kg of LEU to Russia and France, which would convert the fuel into medical isotopes before sending it back to Iran. But after Iran failed to meet a Friday deadline, the United States warned that it would be willing to wait for a few more days, but cautioned that its patience was limited. Iran’s current stockpile, if enriched, could provide enough uranium for a single nuclear weapon.

4. Figthing between Somali insurgents and African Union (AU) peacekeepers broke out in Mogadishu on Thursday, killing at least 30 people. According to witnesses, militants attacked using mortars as Somali President Sheikh Sharif Ahmed was leaving the country for a meeting in Uganda. AU forces responded with artillery fire. More than 19,000 civilians have been killed, and an estimated 1.5 million people have been displaced from their homes since 2007 as a result of ongoing fighting in Somalia, which has made the country a center for international piracy and terrorism.

5. The government of Brazil on Tuesday imposed a two percent tax on some capital inflows into the country. The decision, which as intended to slow the increase in the value of the real, Brazil’s currency, which had already increased more than 36 percent against the U.S. dollar this year. The new tax targets portfolio investment and financial speculation, not productive investment in the country. Nevertheless, the announcement was not well received by the market, and stocks fell sharply after the government made its announcement. But analysts offered a more positive pronouncement. In an editorial comment, the Financial Times described the new tax as “wise,” “sensible,” and “honest.”

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Explaining Global Capital Flows

The World Economic Forum  [glossary] released its annual Global Competitiveness Report earlier this week. This year’s report is the first to take account of the impact of the global economic crisis. The report is intended to outline and measure those factors which facilitate economic growth and make national economies more competitive. The index is thus developed from twelve “pillars”: the strength and stability of political institutions, the extensiveness and effectiveness of infrastructure, macroeconomic stability, access to health and education, the efficiency of goods markets, the efficiency of labor markets, the sophistication of financial markets, technological readiness, the overall size of the domestic market, business sophistication, and innovation. A number of variables are then used to weight and rank each of the twelve pillars (readers who are interested in this aspect of the rankings can read more about the process in the appendix to the full report.

This year’s rankings saw some minor shifting in positions but few dramatic changes. Some countries (e.g., New Zealand and Taiwan) improved their rankings, and a number predictably declined. Iceland, for example, saw its overall ranking fall from 20th place to 26th place, largely as a result of the fallout from the banking crisis that undermined financial institutions in the country last year. The top ten performers were:

1. Switzerland (up from 2nd in 2008)
2. The United States (down from 1st)
3. Singapore (up from 5th)
4. Sweden (position unchanged)
5. Denmark (down from 3rd)
6. Finland (position unchanged)
7. Germany (position unchanged)
8. Japan (up from 9th)
9. Canada (up from 10th)
10. The Netherlands (down from 8th)

The bottom ten performers, which also saw few dramatic changes, were:

124. Paraguay (position unchanged from 2008)
125. Nepal (up from 126th)
126. East Timor (up from 129th)
127. Mauritania (up from 131st)
128. Burkina Faso (down from 127th)
129. Mozambique (up from 130th)
130. Mali (down from 117th)
131. Chad (up from 124th)
132. Zimbabwe (up from 133rd)
133. Burundi (down from 132nd)

The differences between the top and bottom performers are probably obvious. But the composition of the top ten performers also tells us something interesting about the nature of global economics. Although the vast majority of foreign direct investment [glossary] occurs between developed countries, the conventional wisdom, particularly among critics of multinational corporations, is that foreign direct investment tends to flow to the countries with the lowest tax rates, lowest wages, weakest environmental regulations, softest labor standards, and so on. But the countries that top the list of “most competitive” according to the World Economic Forum—hardly as bastion of anti-capitalist rhetoric—suggests something very different. Indeed, many of the countries in the top ten (e.g., Sweden, Denmark, Finland, Germany) have incredibly strict labor and environmental standards and among the highest corporate and individual tax rates in the world. Clearly, some other factors are compensating for the higher cost of doing business in these countries.

Five Stories You Might Have Missed

President Barack Obama is in Moscow today, meeting with Russian President Dmitry Medvedev to lay the foundation for a new nuclear arms control agreement to replace the Strategic Arms Reduction Treaty, which expires in December. In an interesting twist to the meeting, Obama appears to be attempting to improve relations with Medvedev, leaving some to speculate that he is signaling the interest of the United States to work with Medvedev rather than Prime Minister Vladimir Putin, who most observers believe holds the real political power in Russia.

In news from outside the Moscow meetings:

1. Rioting by ethnic Uighurs in Xinjiang, China, has left 140 people dead. Protests broke out in the isolated region in western China over the weekend after police broke up an anti-discrimination protest in the capital, Urumqi. Tensions between Han Chinese and Uighurs had been increasing over the past year, as an oil boom in the Muslim-dominated region led to a massive increase in Han immigration. Security was increased in the region in the run up to the Olympic Games in Beijing last summer, but tensions continued to mount, culminating in this weekend’s violence.

2. Two protestors were killed and several were wounded in Honduras over the weekend. The protestors were awaiting the return of deposed President Manuel Zelaya, who was expelled by the country’s military last week. On Sunday, he attempted to return to Honduras from Costa Rica by plane, but his plane was unable to land. As a result of the coup, Honduras has been suspended from the Organization of American States, and the country faces the risk of future formal and informal sanctions, including risking sharp declines in foreign direct investment and reduced access to international credit flows.

3. The Movement for the Emancipation of the Niger Delta (MEND) has stepped up attacks on Nigeria’s oil infrastructure, following an offer of amnesty from the government. Nigeria’s President, Umaru Yar,Adua, had offered a 60-day amnesty to militants in the region, hoping the offer would bring to a close attacks in the oil-rich Niger delta. But militants appear to have rejected the offer, instead launching a new round of attacks. At issue is the distribution of benefits from the oil industry. The Niger River delta region is one of Nigeria’s poorest regions, despite being home to the vast majority of the country’s oil wealth. Groups living in the delta region are seeking a larger share of the oil revenues and greater autonomy from the Lagos-based government. The conflict has a long history, predating Nigerian independence in 1960. But the most recent phase of the conflict dates to 2006, when MEND launched its attacks.

4. The G8 is preparing to launch a new food security initiative this week, pledging more than U.S. $12 billion over the next three years to support the program. The plan marks a dramatic shift in U.S. policy, which historically has emphasized the provision of emergency food aid sourced from American farmers rather than efforts to expand production of foodstuffs in the developing world. However, the recent global food crisis underscored the vulnerability of global food stocks. With an estimated 1 billion hungry people worldwide and the continuing global financial crisis, observers fear that the global food crisis may yet re-emerge.

5. Indian Finance Minister Pranab Mukherjee delivered the country’s new budget on Monday. The budget, which includes sharp increases in infrastructure spending and new protections for Indian farmers, immediately proved unpopular with investors. India has suffered from a slowdown in economic growth resulting from the global economic crisis, and the new budget would expand the country’s fiscal deficit to as much as six percent of gross domestic product. Nevertheless, the new government appears to be committed to is program of “inclusive growth,” moving forward with privatization and liberalization but maintaining protections for the country’s most vulnerable populations.

Five Stories You Might Have Missed

The closing of the Beijing Olympics and Barack Obama’s announcement of his Vice-Presidential candidate have been the two most widely covered stories over the past few days.  Here are a few other important stories from the past week:

1.  Growing instability in Afghanistan: A Taliban attack outside of Kabul, Afghanistan, resulted in the deaths of ten French soldiers.  The attack appeared to be part of a coordinated effort by the Taliban against Nato forces in the country, coinciding with another attack against US forces in the southwestern part of the country.  The attacks highlight the shortage of material and soldiers  in the country.  Attending a memorial service for the soldiers, French President Nicolas Sarkozy asserted that he would continue French involvement in Afghanistan, asserting that it was “essential to the freedom of the world.”  Reflecting growing tensions in the country, the government of Afghanistan on Friday accused Nato of killing 76 civilians, mostly children, during operations against Taliban insurgents.

2. The Crisis in South Ossetia: After negotiating a ceasefire, Russia and the west once again appear unable to resolve their differences over Russian withdrawal.  Russia has rejected Nato’s call for a total withdrawal to pre-crisis positions.  Nato has moved to isolate Russia, and in return Russia has cancelled joint military operations with Nato countries.  The crisis gave new impetus to the United States and Poland to sign a missile defense shield.  Demonstrating the link between international security and global political economy, the crisis also helped to push oil prices higher and marked the beginning of a trend of western investors pulling their money from Russia at a rate not seen since the Russian Ruble crisis of 1998.

3. The Rise of Food Neo-Colonialism: In a report issued on Tuesday, Jacques Dious, director general of the United Nation’s Food and Agriculture Organization, warned that the drive for farmland could result in the development of a neo-colonial system for agriculture.  Driven by record high commodity prices, foreign direct investment in farms and agricultural production has grown dramatically over the last couple of years.

4. The Pakistani Presidential Race: After the departure of embattled Pakistani President Pervez Musharraf last week, the struggle to find a new president has begun.  Mohammad Mian Soomro, chair of Pakistan’s Senate, has been named acting President and is heading the search for a new leader.  Asif Ali Zardari, widower of former Prime Minister Benazir Bhutto, has emerged as the leading candidate from the Pakistan People’s Party, the largest party in the parliament.  

5. Unified European Parliament: After part of the ceiling of the European Parliament in Strasbourg collapsed last week, the Parliament was forced to cancel its monthly trek from Brussels to Strasbourg.  The Parliament traditionally moved to the French city of Strasbourg from Brussels for its monthly meetings, despite the fact that the majority of the Union’s administrative and bureaucratic support—not to mention its most important institutions—are based in Brussels, Belgium.  The move, widely denounced by both the EU’s proponents and opponents—costs an estimated €200 million (($350 million) per year.  It is hoped that the forced relocation of the Parliament may encourage a reconsideration of the monthly move, although French opposition may be hard to overcome.