Archive for the ‘ Globalization ’ Category

USA/China Elections – Shifting Cliffs

It is quite uncommon to have two of the world’s most powerful nations choosing their leaders at the same time. Today, American voters will decide who will become the 45th President of the United States. On Thursday, in the Far East, the National Congress of the Chinese Communist Party will meet to announce who they have chosen to lead the world’s most populous nation for the next decade.

While China selects its leaders behind closed doors, American’s elect theirs after months of public campaigning. Paradoxically, the identity of China’s next leader – Xi Jinping, is public knowledge. The next occupant of the White House, however, remains a matter of speculation for political polls and stock market pundits alike. Both events should be followed closely, as their outcomes would have significant effects on global economic growth and political stability, and perhaps could set the tone for the international political economy.

For the next American President, containing China’s economic rise and influence will remain the focus of his foreign policy. Xi Jinping on the other hand, will be eager to ensure that China’s growing geopolitical influence and economic might do not threaten Sino –US bilateral relations. Interestingly, the next leaders of both countries are immediately confronted with internal challenges, which if not approached with tact and pragmatism, could define the geopolitical landscape over the next decade.

For instance, the next American President’s priority will be to resolve the conundrum popularly referred to as the Fiscal Cliff – a situation where spending cuts and tax increases will be triggered automatically on January 1, 2013. This cliff-hanger presents the possibility of America experiencing a fiscal tightening equivalent to about 5.1% of GDP, effectively tipping the (global) economy back into recession. Balancing the drive for economic growth with the need to reduce its huge budget deficit will also be at the forefront of America’s economic policy.

Xi Jinping will contend with slowing growth and the increasing clamour for economic and political reforms. Official controls will have to give way for the free interplay of market forces and China’s internal economy will need to be opened up in order to make it more productive. However, the more difficult challenge will be restructuring the political system. Failure to do so will leave China on the brink of a ‘revolution cliff’ – an uncertainty which the rest of the world would rather do without.

As we follow the elections in the USA very keenly, it is important to keep an eye on the selection taking place in China; perhaps history will remember this week as representing a baton change in the global economic order.

Mario Draghi’s Silent Bazooka

Photo Credit: Spears Magazine

Last week, the President of the European Central Bank (ECB) – Mario Draghi, literally lifted global financial markets by unveiling a new ‘unlimited’ bond-buying programme designed to purchase European sovereign bonds in the secondary market. This decision is sequel to Draghi’s earlier pledge to do ‘whatever it takes to preserve the Euro’; this time around, the ECBs plans were well received by financial markets.

A direct result of this plan is that European banks holding sovereign bonds now have a safety net even if these European countries default on their debts. The markets were quick to understand this and within 24 hours, the share price of Spain’s Bankinter SA was up 6%; France’s Societe Generale – 8%; Italy’s UniCredit – 8%; Britain’s Barclays – 6% and even Germany’s Deutsche Bank was up by 7%. While stocks rallied, Spanish 10-year bonds fell to a 3month low of about 5.82%, indicating increased confidence in the strength of the country’s economy. The Euro also closed higher in currency pairings.

If today’s stock prices reflect the present value of future earnings and cashflows, then the above figures are good for the Eurozone and the global economy as well. The ECBs actions should place a downward pressure on interest rates thereby encouraging demand for credit by both retail and industrial clients. This will boost economic activity. Should this plan be successful, the ECB would have shortened the recession and recalibrated Europe for growth. After all, how are countries in the Eurozone expected to meet their debt obligations if they cannot produce?

According to the ECB, the buying of bonds will be sterilized; implying that every Euro spent will be offset by mopping up equal amounts of cash elsewhere within the financial system. In theory, there is no additional liquidity created and the fears of inflationary pressure in the short term seem to be have been allayed. However, there are a few areas of concern. Sterilization in this case means creating new bank reserves i.e requiring European banks to maintain a higher cash reserve balance with the ECB and paying these banks an interest for these ‘unloaned’ funds. Invariably, banks will be quick to deposit more cash with the ECB at the expense of lending to the real sector – the real engine of growth.

Secondly, the ECB plans to buy only bonds with a maturity period of less than 10 years. This reveals the ECBs plan as a short term tactic rather than the long term strategy needed to solve the economic problems in the Eurozone. Also, the fact that banks are allowed to use the funds tied down with the ECB as collateral when making other risky bets and investments (which could go awry) is worrisome.

That said, Mario Draghi’s silent Bazooka was loud enough to cause ripples as far away as America, where there has been an increased clamour for Fed Chairman – Ben Bernanke to unleash a third round of quantitative easing. Although, the ECB’s plan is not a remedy to Europe’s widespread economic problems, it might just be the strong painkiller that will help restore competitiveness of economies in Southern Europe.

World Bank Presidency: Who the Cap Fits

This week, the three candidates nominated for the position of President of the World Bank Group (WBG) will be interviewed for the job. Since its establishment 67 years ago, the WBG has been headed by 11 Americans, chosen by the President of the United States (U.S). But for the first time, the ‘selection’ process which was hitherto closed is being challenged.

Going by tradition, Washington has a strong monopoly of appointing the WBG President and is clearly not ready to relinquish its implicit privilege in such matters. However, as developing countries are beginning to play a larger role in the global economy, they are demanding a greater participation at a decision-making level in the WBG. The nominees for the top job are Jim Yong Kim, Jose Antonio Ocampo and Ngozi Okonjo-Iweala.

Jim Yong Kim

Dr. Kim is the man to beat. A South Korean born American, backed by President Barack Obama, Kim seems to have the right balance of qualities. He is the current President of Dartmouth College and a former Director of the HIV/AIDS department at the World Health Organisation (WHO). He co-founded Partners In Health – a non-profit healthcare organization dedicated to providing universal access to primary health care. He has spent a lot of his time engaging the poor directly and was even listed as one of the “100 Most Influential People in the World” by Time Magazine in 2006. He has been described as a very practical man who is at the vanguard of championing social and health justice. Being an outsider who has been willing to critique the WBG in the past, he is likely to infuse some new thinking which perhaps would create a new vision for the future of the Bank.

However, his expertise and experience is narrowly skewed to public health and this has raised prudent concerns in development circles. Also, some of the views expressed in his book – Dying for Growth, appear to be more or less unorthodox. In that book, he criticized corporate led economic growth, arguing that such policies in many cases make the poor in developing countries even poorer. This position has not been well received by Economists as the empirical evidence shows that economic growth has lifted millions of people out of poverty and is in fact strongly correlated with reductions in infant mortality and illiteracy. The WBG certainly doesn’t want a President who is ‘anti-growth’ and this is probably a perspective Kim would have to negotiate with.

Jose Antonio Ocampo

Dr. Ocampo is an even stronger contender. A respected Colombian Economist who has the backing of Brazil, he has served as a United Nations Under-Secretary-General for Economic and Social Affairs and is currently a Professor and member of the Committee on Global Thought at Columbia University. He is best known for reforming the UN Economic Commission for Latin America & the Caribbean as Executive Secretary. Within the Colombian government, Ocampo has held important positions such as Finance Minister, Minister of National Planning, Minister of Agriculture and Rural Development and Chair of the Central Bank board. His policies as finance minister were crucial in helping Colombia to withstand the effects of the Asian and Latin American financial crisis. He is highly respected in academic circles and is a winner of the Leontief Prize for Advancing the Frontiers of Economic Thought.

Ocampo’s experience is incredibly vast and his reputation as a reformer is an enviable one. He has a global perspective and his experience is a perfect blend of economics, government/policy formulation, and finance both in academia and in the real world. The need for reforms in the WBG has been reiterated in development circles and Ocampo is the best candidate for such a tough task.

Ngozi Okonjo-Iweala

Ngozi appears to be the overwhelming favourite. A former Managing Director at the World Bank, she seems to be the ideal candidate who has been groomed for the job. Like Ocampo, Ngozi trained as an economist in top U.S schools, but she went a step further by specialising in regional economic development. She has held multiple positions within the Nigerian government as Minister of Finance, Foreign Affairs Minister and Coordinating Minister for the Economy.

She is best known for negotiating an $18 billion write-off of Nigeria’s debt with the Paris Club of Creditors. As Finance Minister and Head of Nigeria’s Economic Team, she helped instil transparency in the polity and facilitated Nigeria’s receipt of its first ever credit rating. If Ngozi gets the top job, she is expected to broaden the WBG’s development agenda and ‘hit the ground running’ immediately. Moreover, she will command the respect of equally brilliant economists at the WBG.

Ngozi possesses the edge of being well acquainted with the internal workings of the World Bank right from the Young Professionals level to that of Managing Director. Although, being an insider, she might be constrained in carrying out far-reaching reforms within the WBG. She is also viewed as a conventional economist and her tacit support for the removal of fuel subsides in Nigeria without adequate palliative measures is an episode which is still fresh in the minds of her countrymen.

Within the BRICS Nations, she has the backing of South Africa and has even been endorsed by 35 former senior World Bank officials, as well as The Economist and The Financial Times.

The Selection Process Needs Reforms

The voting arithmetic clearly favours Jim Yong Kim if the decision comes to a vote by the WBG’s Board of Governors – thanks to the weighted voting system employed by the Bank. Simply put, voting power is determined by ownership shares and in turn capital contribution. This easily gives the U.S.A a hefty share of 16.45% as a percentage of total votes (see table and link below). Europe, with a collective voting weight of about 30% is likely to support Washington’s candidate in order to maintain the gentlemen’s agreement under which a European gets to run the International Monetary Fund (IMF) while an American heads the World Bank Group. Effectively, both the U.S and Europe wield over 45% of votes. Add Japan (which has 7.89% of the votes and is likely to support the American candidate) to the equation and America has its majority.

World Bank Group: Constituencies, Executive Directors and Voting Status

Country

Vote as % of total vote

United States

16.45

Japan

7.89

Germany

4.51

France

4.32

United Kingdom

4.32

Source: S. Griffith-Jones (2001) 

Evidently, the voting system is flawed and needs as much reforming as the institution itself. The relatively small voting share of low and middle income countries is a sharp contrast to the fact that they represent over 80% of the world’s population and bank membership. This needs to change. Prior to now, there has been a strong rationale for the U.S (being the largest shareholder) to protect its interests by appointing the President of the WBG, but such a monopoly seems trite today, as the global rebalancing of the economic pie is increasingly apparent. The glass ceiling over the leadership of the WBG has to be removed and replaced with a selection process that involves competition, transparency and merit.

Kim’s nomination is actually a smart move by President Obama and suggests a compromise from Washington.  The Obama administration seems to believe that the clamour by developing countries (and largely the East) for greater representation at the top hierarchy of the WBG is manageable, and that it can tack between the demands of the East, the development practitioners and the Republican Party. However, with over $43bn lent out by the WBG in 2011 alone, a critical understanding of the specific problems of development finance is essential for the individual who heads the World Bank. The President of the WBG should command the respect of the major shareholders, be capable of demonstrating leadership which staff support and possess proven credibility on the development front. That person is Ngozi Okonjo-Iweala.

£18,000 later, was my master’s degree worth the investment?

For me, 2010 was the year of living dangerously. I quit my ‘lucrative’ job at a local Nigerian bank to fulfill my goal of joining the group of Nigerians who constitute 11.9%  of students in the United Kingdom (U.K). I believed that obtaining a master’s degree was imperative and timely. My decision was made more prominent in the face of an economic decline, fragile labour market conditions and a home-grown banking crisis partly insulated from the global one. Staff morale was at an all time low and it was apparent that the cheese had moved.

While all this was going on, I considered moving to another bank for the colloquial ‘next level’, but deep within me, I knew that such a career move was a horizontal one. I needed a vertical move, a quantum leap. Rather than take the option of an unpaid student leave, I decided to quit all together; that was my own way of crossing the bridge and burning it. The financial challenge was daunting, but I took solace in my belief that the eventual reward was greater than the immediate risk. In order to achieve my goal, I became a salesman of some sort, selling every asset I could come by: shares, skills, my car, properties etc.

Here I was at the University of Manchester (UoM), after crossing the hurdles of writing personal statements, securing reference letters, attending GMAT lessons and accepting ‘rejection emails’. I had wanted to study at the Judge Business School (Cambridge) or London Business School (LBS), but Cambridge “had carefully considered my application and regrettably decided not to invite me for an interview”. They tried to pacify me by claiming that “the decision was a result of the high degree of competition, not because of any specific weakness in the application”. I laughed. Likewise, LBS claimed that “the admissions committee was impressed with my application…but was sorry to have to disappoint me”. Now that got to me. At the end of the day, I was glad to be in Manchester.

At UoM, the learning curve was short but steep, and the teaching method was a lot different from what I was accustomed to. I was used to being ‘taught’, not lectured; I was more familiar with dictated notes and detailed explanations, not fancy presentations and cursory reviews. Without trying to devalue the experience, I must admit that there were moments when I struggled to remember why I had enrolled on the programme. Naturally, pertinent questions followed: was I getting value for money? Was 4 years of capital accumulation being squandered or being deployed to productive use? Interestingly, some of my colleagues expressed similar concerns about whether their expectations of the programme were being met. While these internal debates raged, I battled with more mundane issues like time management, little daylight hours, a long-distance relationship and what seemed like a mild depression. That is what studying in the U.K does to you. I took solace in the internet and its numerous social networking platforms: Youtube became my television, Facebook was my tabloid magazine and Twitter was more or less my daily newspaper. Skype was like oxygen, I needed it to survive.

These challenges paled into insignificance when exams drew near and essays were due for submission; and then came the dissertation writing period, when food and sleep became a luxury. It was a nerve wrecking experience and the fact that I was undertaking an internship concurrently made it more difficult. I did not enjoy writing my dissertation, but I enjoyed reading what I had written. Looking back, I feel that the curriculum placed too much emphasis on the student’s “capacity to undertake independent study”, but retrospect can make things a little hazy. As a matter of fact, it was while writing my dissertation that I realized I had acquired the planning, writing and research skills as guaranteed by my department when I enrolled on the programme.

Often, I am asked whether a foreign master’s degree is worth the investment. An impulsive answer would be YES, but after careful consideration, my response tends to be contextual. I am always quick to point out an example of two friends of mine who decided not to undertake a master’s degree in the same year that I did. Although we are in different career paths, we belong to the same age group and had roughly equal years of work experience in our respective organisations. About half-way through my programme, they both took up important and lucrative roles in multinationals – one, an oil producing company and the other a global technological giant with a regional office in Nigeria. Nevertheless, they still plan to pursue post-graduate degrees abroad, although for both of them, there has been a shift from a specialist masters to an MBA. My point – I guess it is just a matter of timing, at least for individuals interested in building a career. Perhaps, the relevant question should not be “is it worth it?” but rather – “when should I do it?”

Looking back, is my master’s degree worth more than the paper it was printed on? In terms of content and delivery, I must admit that my expectations were not fully met; however, in terms of prospects, they were exceeded. Overall, I gained immense benefits from my degree. In addition to the promised benefits of cutting-edge knowledge, critical thinking skills and access to global networks, personal benefits abound. I have a more focused sense of my career goals and my degree has certainly enhanced my profile among potential employers. Moreover, I have had a year out to evade the recession, although it still prevails.

£18,000 (incl. associated costs) is a lot of money to spend on an experience that will end up as a bullet point on your CV, so it is not surprising that the average graduate is preoccupied with overcoming the immediate challenge of converting the knowledge gained to income. Before taking the plunge and joining the “11.9%”, it is important to evaluate the total cost of a master’s degree and the prospects of recouping it from a higher salary after graduation; nevertheless, a more pertinent issue is whether the degree helps to meet ones career ambitions. In a rapidly globalized world, a foreign degree comes in handy for individuals who can leverage the international aspect of the degree, particularly the opportunities it presents. That said, if I were to pursue another post-graduate degree, it would likely be a part-time programme, except it is fully sponsored.

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