Latin America: The Region Raging with Potential

Latin America, a region endowed with vast resources and a large population has the makings to be a successful world economy. However, that is far from reality. In the early 1960s, Latin America’s per capita income was more than double that of East Asia. Nowadays, however, the region lags behind with none of its countries being named developed yet. So why hasn’t the region been named “developed” yet?

The nation has long grappled with manic inflation rates, grave corruption, and torpid socioeconomic growth. In order to explain this reality, a look into the region’s history is required. 

LatAm’s extreme reliance on commodities exports has diluted the region’s resistance against shocks in the economy. Currently, 14 out of 33 countries in the LatAm region are commodity-dependent, wherein more than 60% of their total merchandise export revenue is accredited to exports. Thus, the fluctuations in commodity prices heavily affect the growth rates of LatAm nations; making it an unsustainable revenue source, especially during times affected by unprecedented shocks such as COVID. Contrastingly, LatAm is a net energy importer. With increased inflationary pressures on gas prices, it has become more costly for the region to source energy to run nations. 

On the other hand, LatAm’s rising inflation rates cannot be overlooked when assessing the region’s stunted economic growth. Though many Latin American nations have newly independent central banks wherein price stability is being prioritised, inflation rates are still staggeringly high as compared to most emerging markets. Known as the “curse of emerging market central banks,” nations are being forced to tighten their monetary policy despite their weak economic stature because they can’t forgo the damning consequences of heightened inflation. During a recessionary time like COVID where most nations have adopted low interest rates in hopes to ameliorate economic growth, most LatAm nations are being forced to increase interest rates; hoping to stabilise prices. 

The region’s sudden jump in poverty has forced governments to adopt large social spending packages to improve socio-economic welfare. The prospects of larger budget deficits have been threatening for investors as they have become more sceptical when assessing currency expectations and inflation outlooks. As local businesses are now hedging against the expected high inflation, due to historical evidence, local businesses are increasing prices and workers, demanding greater wages; both of which are somewhat undesirable traits. 

To combat the tumultuous macroeconomic history Latin America has faced over the past few decades, central banks and financial institutions alike must strengthen their policy plans with a utilitarian perspective in mind. Currently, the nation is operating with the richests’ best interests in mind, diluting the welfare of the overall nation; as seen by the awfully high corruption rates observed in the region. Once incumbents are punished and new parties voted in, the promise of reduced inequalities and controlled inflation should be on the horizon. Moreover, when the region develops its ability to diversify exports and remove its heavy reliance on commodities, will Latin America be able to withstand extreme economic shocks. 

This article was written by Shrishti Khetan, currently a student at the London School of Economics and Political Science, pursuing BSc Economics.

Does China need to deregulate its economy?

For years, economists and political scientists studied the relationship between government institutions and economic growth – mainly the association between democratic institutions and economic development within a state. The general consensus was that although democracy does not directly lead to economic development, higher human capital accumulation, lower inflation, lower political instability, and higher economic freedom usually were prerequisites for development. Furthermore, economic sources of growth, like education levels and lifespan, through improvement of academic institutions as well as healthcare were all present in democracies. However, in recent years, China has challenged these conventional political norms greatly. Ever since Deng Xiaoping’s policies of economic growth, entrepreneurship, and subtle suppression of dissent, China’s GDP levels have risen tenfold. The increase in total factor productivity (TFP) was the most significant, with productivity accounting for 40.1% of the GDP increase, compared with a decline of 13.2% for the period 1957 to 1978—at the height of Maoist policies. 

According to the International Monetary Fund (IMF), China has the world’s fastest-growing major economy, with growth rates averaging 10% over 30 years. Furthermore, it has four of the world’s top ten most competitive financial centers (Shanghai, Hong Kong, Beijing, and Shenzhen), and three of the world’s ten largest stock exchanges (Shanghai, Hong Kong and Shenzhen), both by market capitalization and by trade volume. However, over the past few months, China’s economy only grew 4.9%, the slowest pace in a year and worse than analysts had predicted. This severe slowdown in economic growth is due to many factors: the property sector facing increasing pressure to rein in its debt and financial liabilities causing companies to find themselves on the brink of default. However, the most significant development in Chinese economic policy has been companies facing policy curbs aimed at social transformation.  In my opinion, this is the most significant hindrance to contemporary economic growth.

From big tech to gaming services, a number of Chinese companies have been facing increased regulation crackdown by the government. In 2021, at the National People’s Congress, the government revealed outlining tighter regulation of much of its economy. New rules, such as tightened regulation of monopolistic firms, were aimed to increase gross national industrial and agricultural output by 38% within five years, or by an average annual rate of 6.7%, gross agricultural output by 4% a year, and gross industrial output by 7.5%. However, instead of helping companies, these new policies have hindered potential for the companies to grow. In November of 2020, ahead of Alibaba subsidiary company Ant Group’s biggest IPO, Ma addressed an assembly of high-profile figures with a controversial speech that criticized the Chinese financial system. He was not seen in public again until late January. In the interim, there were rumors that he might have been placed under house arrest or otherwise detained. Once the Chinese government found out that he had accused Chinese banks of operating with a “pawn-shop mentality”, and that authorities were trying to “use the way to manage a railway station to manage an airport”, they disrupted his business interests. Him and his close colleagues were summoned for a meeting with the regulators, and Ant Group’s flotation was halted in its tracks. This not only hurt Ant Group’s IPO, but Alibaba’s share price fell significantly. Regulators slapped a $2.8 bn fine after a probe determined that it had abused its market position for years, and the company was fined an amount equal to  4% of the company’s domestic revenues. 

Jack Ma’s disappearance, and the fall in China’s e-commerce sector calls for questions on whether the Chinese government should transition away from a regulated approach, and instead allow businesses to thrive under a free market. 

This article was written by: Dhruv Mathur, currently a student at the London School of Economics, pursuing BSc Economic History.

China, Real-Estate & Evergrande. Operation Damage Limitation.

Situation

At the time of writing, whispers grow that Evergrande, the Chinese real-estate developer, will default on $82.5 million in interest payments. Al-Jazeera notes how the failure to make the payments on a public bond would “trigger cross-defaults on all the company’s about $19 billion of bonds on the international capital markets” earning Evergrande a place in the history books as China’s largest ever defaulter to date, obviously sending ripple effects across the economy. Understanding those ripple effects, and their channels and mechanisms is the purpose of the article, and unravelling why the Chinese real-estate market poses a stern challenge to local, national and monetary officials.

Threat to the wider Chinese economy

It comes not as a surprise that the Chinese economy is heavily intertwined with the Real Estate Market. The Role of the real estate sector is distortionary in many ways, but the counterargument is that given the increase in the steady income growth, and the otherwise limited investment opportunities and the huge demand of over a billion citizens, there is no Chinese equivalent to the Japanese property bubbles and concerns about oversupply, stemming from the early 1990s. At that time, the land surrounding the Imperial Palace in Tokyo was worth more than California. However, the balancing forces keeping the effect of a clear property rise of prices in China have become muted, which raises the sceptre of a potentially painful readjustment period.

Why would the readjustment period be painful? This is because real estate has become an extraordinarily powerful driver of the economy – contributing 5% of GDP in 1997 to over 13% in 2019 (Rogoff, Yang, 2021). More importantly, all Chinese citizens will likely be affected. Over 70% of annual real estate development is now for housing, and fuels 23% of household consumption (Ibid). Thus, it becomes apparent that the housing market is intertwined closely with the rest of the Chinese Economy. But in what ways? In terms of output, the numbers are historical – in 2016, the combined value of the Real Estate and the construction business amounted to 29% of GDP (Ibid), on par only with pre crisis Spain and Ireland.  Meanwhile, in terms of employment, the numbers are equally significant – over 20% of non-urban private sector workers are employed in the combined real-estate and construction industry. Large regional and national firms have significant influence over the tax revenues for local governments – land sales compose 40% of local revenues. Evergrande may be the biggest indebted real estate developer, but it is ultimately a piece in a larger puzzle.

Additionally, the real-estate market which has boomed over the past 20 years in particular, is also significantly distortionary. Given how the vast majority of loans for real-estate development is taken from state-banks, the portfolio of these banks is such that they are increasingly holding land holdings and real estate as the collateral, implying that they are preferring real-estate developers as creditworthy, crowding out others in due process. Additionally, rising property prices above the real value of the asset class is distortionary since it leads to an apparent arbitrage opportunity, ultimately causing the transfer of resources and other investments from other sources detached from the land business – including the technology sector. The threat to the wider Chinese economy also arises due to the social dimension, which is understandably harder to unravel. Nevertheless, it is clear that young men are increasingly encouraged to buy property as a social-status symbol, especially for marriage. Given the historic performance of real-estate, and the belief that the prices will continue to rise (hence causing a self-perpetuating increase in the prices as a result of remaining in the trade despite valuations being above the real value), this together means that Chinese private consumption will be affected in an outsized manner by declines in the housing market (Rogoff, Yang, 2021).

Source: Rogoff, Kenneth, and Yuanchen Yang. 2021. “Has China’s Housing Production Peaked?” China and the World Economy 21 (1): 1-31.

How is Chinese Monetary Policy set to cope with this?

On December 6th 2021, the People’s Bank of China (Henceforth PBC) announced the decision to inject liquidity into the financial system by cutting the required reserve ratio by 5 percentage points, effective December 15th, reducing the weighted required reserve ratio to 8.4%.

Onlookers have drawn the relationship between the implementation of a slightly more dovish approach and the perilous state of Evergrande. It is reported that given the already perilous state of the State banks, this provides room for manaeovuring which ensures that lending to state developers who will likely take over the Evergrande empire, will be able to access credit. This is significant – since Evergrande’s total debts sum to $343 million. For now, the strategy appears to slowly wind down the Grey Rhino of Evergrande, such that its major projects are taken over by the already-burdened State real-estate developers, all the while ensuring that Evergrande will remain a shell of what it used to be – the world’s largest property developer in the world.

Eswar Prasad states that the strategy of Chinese monetary policy is to “support growth but without a broad expansion of credit that could fuel a resurgence of financial market imbalances”. In that sense Messrs Prasad appears correct – the same press release from the PBC also noted that its measures will set the stage for a “favourable monetary and financial environment for the high-qualilty development”.

Mathematical Modelling and Predictions

Rogoff and Yang use the following input-output modelling, whose purpose is to estimate the impacts of positive or negative economic shocks and analyse the ripple effects across the economy.

As noted, there are direct and amplifying effects as a result of the fluctuations in the Chinese property market.

Direct:

  1. A Massive reduction in house prices is likely to put real-estate developers out of cash, and thus force them to default on payments and eventually go bankrupt.
  2. A surge in insolvencies will cause people to lose their jobs, or at least part of their income, which once again puts a downward pressure on housing demand (Ibid).
  3. The financial accelerator means that house price movement determines credit growth and financial stability.

Meanwhile the amplifying effects include on ancillary industries affected by a change in the house prices.

What they noted, alongside researchers at the Kansas City Fed, was that the magnitude of real-estate activity was 22% of total GDP. In addition, a 10% reduction in investment in real-estate would have a -2.9% amplified effect on GDP.

Conclusion

In summation, it is evident how big the real-estate market is to the Chinese economy, and how sensitive total output is to fluctuations in investment and house price. The strategy for Evergrande is to try and mitigate the fallout of the indebted developer, through tweaking the central bank reserve requirements for banks and additionally putting in place Party officials to try and inspire public trust. Evergrande appears to be gone – the Communist government could yet save the empire and its shareholders, but it appears keen to bring the housing market, and all its speculations and distortions, to heel.

This article was written by: Ishan Kalia, currently a student at the London School of Economics, pursuing BSc Economics.

The Irreversible Macroeconomic Impacts of COVID-19 on India

Over the past decade, India’s stance in the global economy has become irrefutable; making it a powerhouse that fuels and guides multiple sectors. Moreover, the Indian economy was just beginning to gain traction amongst other prominent world powers. Nonetheless, with the onset of the COVID-19 pandemic, India was faced with unforeseen challenges that the economy wasn’t equipped to battle. On the other hand, however, the COVID-19 pandemic proved to be an opportunistic time period that helped further develop and evolve the Indian economy.

COVID-19’s threats to the Indian economy

COVID-19 had multiple impacts on the Indian economy as with most other global markets. Some significant impacts were the illumination of the grave socioeconomic inequalities that still exist within India along with staggering economic contractions. India has grappled with numerous inequalities for years on end; whether they’re economic or social issues. During the pandemic, the poorer did indeed get poorer and a large proportion of the rich benefitted. According to the Consumer Pyramids Household Survey (CPHS) in India, between December 2019 and December 2020, rural poverty increased by 9.3 percentage points and urban poverty by 11.7 percentage points. Nonetheless, experts such as Swati Dhingra (LSE) have identified that such CPHS calculations are often underestimated and aren’t an accurate figure of India’s poverty standing. Hence, poverty has undeniably increased – a step back for a progressive Indian economy. Furthermore, housing and medical inequalities have multiplied with the onset of COVID-19. Social distancing is considered a privilege to which only a fraction of Indian citizens are entitled to. Those residing in traditional slums, for instance, were not able to maintain a necessary level of hygiene and cleanliness, as areas such as bathrooms and congregational rooms were shared amongst communities, allowing for the unhindered spread of the virus; weakening the labour force in large quantities. Moreover, with a lack of privacy comes the inability to reach out for help when it is most required. Women, especially, are left in a vulnerable situation where they are unable to seek help against gender-based violence (GBV) while trapped within four walls. Globally, GBV cases have been exacerbated as women have been isolated, often with their abusers. With the underrepresentation of GBV cases yet extreme increase in GBV cases, GBV has skyrocketed while women have been more unable to voice their abuse due to the pandemic, exacerbating gender-based issues. This has weakened the Indian labour force and confined women to the boundaries of their households. India’s GDP also decreased immensely, especially when the pandemic first hit. Between April and June 2020, India’s GDP fell by 24.4%, highlighting the necessity for the nation to explore differing industries to self sustain their economy.

Rising opportunities from COVID-19 in India

India asserted its stance at the forefront in the medical industry during the pandemic. Their prompt reaction to the shortage of vaccines was apparent very quickly. Arguably, India’s biggest competitor – China, was weakened due to the devastating impacts that COVID-19 had on the nation. Hence, India was able to strengthen its medical sector and efficiently develop a vaccine of their own – Covaxin. This allowed India’s economy to adapt to an everchanging environment where most other sectors, except the medical industry, were in the midst of economic turmoil. Such rapid adjustments to the current situation are a testament to India’s diverse and efficient reactions to current happenings and illuminated that the country can bounce back from economic shocks in a timely manner. Thus, India’s medical industry is proving to be a sector that cannot be ignored and could be India’s future.

What’s in store for India?

All in all, COVID-19 has had myriad effects on India’s ever-growing economy. It has posed several threats yet opportunities for the socio-economic fabric of the nation and questioned the economy’s integrity as well. It is imperative that India maintains its malleable tendencies wherein it’s able to adapt to changing times – as seen through its medical industry while questioning the undeniably unequal society that India has only seen exacerbate. Moreover, with its drastic reduction in GDP, it’s essential that India explores other ways to maintain its otherwise admirable GDP growth rates through self-sustaining techniques and the implementation of economically liberal policies.

This article was written by Shrishti Khetan, currently a student at the London School of Economics and Political Science, pursuing BSc Economics.

The Sustainable Development Conundrum

In this article we examine two factors: (1) Gender Equality and (2) Environmental, Social and Governance (ESG). We explore how gender equality may affect post pandemic recovery in developing markets, the impact of the pandemic on developing markets’ commitment to ESG and the risks ESG poses to developing markets in the future. We also touch upon sovereign credit ratings and see how these may be influenced by the aforementioned factors.

Gender equality is the state of equal ease of access to resources and opportunities regardless of gender. One important way this could be achieved is more women in the workforce – resulting in a higher number of economically active people, increasing output, ceteris paribus. This leads to higher inflows of earnings which, when pumped back into the economy, support consumption, increase the tax base and overall social welfare.

A 2020 study by UN Women shows that the pandemic has largely troubled sectors in which there is an overrepresentation of women, such as accommodation, retail trade and tourism. Worrying that this, if unaddressed, is likely to aggravate gender gaps in the near future. A 2018 report by the World Bank estimated a $160 trillion loss in wealth due to earnings gaps between women and men.

Governments have responded to this issue by targeting policies at sectors where women form a larger part of the workforce. For example, India launched a support scheme targeting SMEs and the healthcare sector. Bank of Russia facilitated $6.3B to help fund SMEs. A Moody’s report from March expects states to continue such schemes, mainly cash transfers, training, and credit lines for women to ensure income disparities don’t worsen in the post-pandemic era. It also argues that more than recovery policies, there are social policies regarding women’s training which are likely to make a larger, long-lasting impact and explores examples of Latin American countries running programs for women.

For the ethical investor, check out gender bonds.

Coming to ESG

Most of the severely affected people due to the pandemic reside in developing countries – around 6.8B, close to 85 percent of the world’s population. These countries are the ones at greatest risk from ESG factors, be it climate change, civil disorder and/or impotent governments.

Companies in developing markets seek to work towards UN SDGs and there are others which are managed in a way to solve societal and environmental problems. They contribute to society, employ sustainable practices, and generate financial returns. Covid-19 has pinned down the need of investing in these markets as there is increasing awareness of ESG issues. This puts forward a convincing case for impact investing in these markets in the times to come. There’s no hiding from the fact that emerging markets and their volatility pose a greater risk to investors, but as the old saying goes; high risk – high reward.

Featuring: China’s Belt and Road Initiative (BRI)

China’s global infrastructure development and investment strategy, BRI, is now active in around 140 countries, most of which are classified developing. This is not only achieving China’s geopolitical objectives of increasing economic influence but also helping these markets reduce infrastructure gaps over the past seven years. The pandemic has heightened external vulnerabilities across emerging markets, but this poses minimal risk to Chinese investors, argues Lillian Li from Moody’s Investor Service, Shanghai. Across the nations under the BRI, GDP is expected to contract by 3.8 per cent in 2021. Credit stress remains pronounced as these markets confront liquidity constraints, revenue shortfalls and in some cases increased default risks. This is due to the fact that most of these countries are small and lack diversification, i.e., are usually concentrated in one commodity or one sect of industry such as tourism and rely somewhat heavily on remittances from workers overseas.

The pandemic has seen a reduction in new investment flows, but this is no sign of the BRI pulling back. This is because of three main reasons. First, Chinese institutions have invested a huge amount of financial and political capital. Second, objectives of expanding influence in emerging markets are more prominent now as China’s relations with some advanced economies have soured. Lastly, trade regionalization which was partly ramped up by the pandemic will continue to support the initiative as China continues to stand out as one of the major export destinations for raw materials and other products.

Interesting to note that the BRI is ‘greening’. In the first half of this year, renewables accounted for 58% of BRI projects, a threefold increase from 18% in 2014 during the early stages of the initiative. One explanation is that Covid-19 led to a rise in demand for ESG infrastructure and digital connectivity, providing new opportunities for Chinese investors.

For the future impact investor, check out green bonds.

Sovereign credit ratings

A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign institution. It can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.

It is worthwhile to explore the effect ESG factors have on these ratings. A Moody’s report from January tells us that ESG factors usually bring down the sovereign credit ratings. Each component would further explain why: Environmental risk exposure is relatively lesser in advanced economies when compared to emerging markets, possibly due to climate risk and carbon transitions, hence affecting the latter’s ratings negatively. Social risks come into play when we consider factors such as inequality, safety, education and many more. Clearly, developing markets which lack behind in all these aspects have their ratings negatively affected. Lastly, governance – which reflects policy effectiveness and quality of institutions, is where the two types really diverge. For advanced economies, this factor strengthens their ratings whereas the polar opposite occurs for emerging markets.

A final word: Awareness on the importance of sustainability has been around for a long time and continues to grow rapidly, but real change occurs when economic agents consider these when making decisions.

This article was written by Krishna Karthik Kosoor, currently a student at the London School of Economics and Political Science, pursuing BSc Finance.

Bangladesh: A Lethal Religious Divide

The most recent attack on the Hindu community in Bangladesh is part of a broader problem of systematic oppression against religious minorities in the country. A Muslim-majority country, Hindus account for only 9% of Bangladesh’s population. Since gaining independence from Pakistan in the 1970s, the percentage of Hindus in Bangladesh has been constantly shrinking as more Hindus gradually migrate to India. Hindu community leaders have estimated the Hindu population in Bangladesh to have declined from 30% in 1947 to less than 9% now. Consequently, Bangladesh is scarcely a religiously diverse country. 

On 13 October, the spread of rumours that the Quran had been insulted at an annual Hindu religious festival sparked off attacks by hundreds of Muslim fundamentalists on religious pavilions in Cumilla, a city in Bangladesh southeast of the capital, Dhaka. Houses and businesses belonging to the Hindu minority, along with temples, were destroyed. Seven were killed, with many others being injured. In an effort to contain the mob, police had to open fire and use tear gas. Mobile internet access was also shut down for the majority of the day in Dhaka. 

The violence and rioting spread beyond Cumilla, resulting in the deployment of paramilitary forces to more than 35 districts. In response to the attacks, Bengali Hindus even protested outside the House of Commons in the UK, calling for the British government to put pressure on Bangladesh’s immediate and proper handling of the situation. 

The UN has urged the government to take control of the situation. In response, Sheik Hasina, the Prime Minister of Bangladesh and a member of its ruling party, Awami League, has vowed to serve ‘justice and (take) swift action’ in response to the attacks. Her party’s campaign has long been premised upon a pledge to uphold secularity in the country. Nevertheless, Hindu activists say that little has been done to serve justice to victims of religious oppression.

The complicated historical landscape of this communal intolerance renders it a tricky situation for the government to resolve. Nevertheless, it is interesting to note that beyond this long-standing cross-border religious conflict, the increasing intolerance towards minorities in Bangladesh has been fuelled partly due to the spread of misinformation on social media. Similar to the misinformation regarding the insulting of the Quran that triggered the riots in Cumilla, a fake Facebook post alleging an insult to Islam by a Hindu sparked another wave of violence in 2016, where many homes belonging to Hindus were burned down in Nasirnagar. 

While long-standing and deeply-seeded conflict within religious groups might seem difficult for the government to quickly tackle, a solution must be found as soon as possible to avoid the loss of many more lives. A crucial first step is to curtail the spread of harmful misinformation aimed at stirring interreligious conflict. 

This article was written by: Darrellyn Yong Zheng Ying, currently a student at the London School of Economics, pursuing BSc Economics.

‘Dance of the Trillions’: David Lubin

During the late 1950s, Argentinian academician and statesmen, Raúl Prebisch, introduced the Dependency Theory in response to concerns that the gap between rich and poor countries was becoming far too wide. Additionally, policy makers were troubled by the fact that rapid economic growth in industrialised parts of the world did not necessarily lead to growth in poorer countries through the domino effect. In essence, the Dependency Theory broke up countries into three different types of states: core, periphery, and semi-periphery. The core states were rapidly developed and growing, the semi-periphery were moderately developed, and the periphery were some of the poorest countries in the world. According to Prebisch, periphery states would always stay underdeveloped due to declining terms of trade when trading with core countries. Overtime, the value of the raw materials that periphery states export declines relative to the finished products they import. This explains why in many countries, development had still not occurred by the late 20th century. For decades, economists and social historians used the Dependency Theory to explain why many parts of the world continued to stay underdeveloped while economic growth occurred in already prosperous nations. 

Managing director and head of emerging markets at CitiBank, David Lubin, published Dance of the Trillions: Developing Countries and Global Finance in 2018 that discussed topics regarding modern capital flows between high and low-income countries. Unlike the Dependency Theory, Mr. Lubin takes a more positive outlook by taking readers through a modern historical tour of economic development within emerging economies. He traces how the traditional approach of Washington DC-led liberalization is slowly being replaced by a Beijing-led approach of state-imposed restrictions. 

In 1989, American economist and LSE alumni, John Williamson, coined the term “Washington Consensus” in reference to a set of market oriented policies prescribed by Washington-based policy institutions for developing countries. Although it was originally created for Latin American countries, it slowly spread to many other developing regions around the world, such as countries within sub-Saharan Africa. In essence, the “Washington Consensus” consisted of ten economic policy prescriptions that was considered to be the reform package for crisis-wracked developing economies. The ten policies consisted of fiscal expenditure discipline, public expenditure priorities, tax reform within the state, financial liberalisation, opening of exchange rate policies, trade liberalisation, foreign direct investment, privatisation of most industries, deregulation by government agencies, and securing property rights. The early 1980s debt crisis prompted fiscal policy makers to implement specific laws that tackled the negative role of fiscal deficits on economic development. 

Therefore, the “Washington Consensus” stated that developing countries should have a small budget deficit without the necessary resources to tax inflation. Secondly, policy makers wanted to redirect expenditure from politically sensitive areas to fields with the potential to greatly improve income distribution within the nation, such as healthcare, primary and secondary education, and infrastructural projects. Many components of public spending – food and fuel consumption, subsidies to state-owned firms – favoured urban richer populations and led to great economic distortion. Although reducing subsidies of politically connected sectors can inflict costs on some segments of the population, it frees up expenditure for the government to spend on social and public projects. Broadening up tax reform was one of the most important aspects of the “Washington Consensus” for many of its proponents. They believed that exceptions should be removed for politically connected taxpayers and organisations so that tax collection methods will be improved and there will be less overall tax evasion. Additionally, financial and trade liberalisation meant that the free market would determine interest rates and quantitative trade restrictions would be replaced by tariffs on goods and services. Lastly, another essential part of the program was the privatisation and deregulation of a wide variety of industries. State-owned firms are often surviving on government subsidies that widen countries’ fiscal deficits and are extremely inefficient. Therefore, it was essential for these businesses to be taken out of the hands of the government and be sold off to experienced investors. Furthermore, restricting or banning foreign direct investment often gives domestic firms a monopoly and reduces competition within the market. Thus, it is important foreign investors come in and allow the country to create jobs, gain capital, and build skills, while exposing domestic firms to a high-level of competition. All of these different economic ideologies lead to what David Luben in his book coins as Capital Account Fundalism, which essentially states that a developing country’s relationship with international finance should be completely unregulated. 

The “Washington Consensus” is considered to be a relatively new ideology, and was founded in response to the 1973 world economic oil crisis. Huge current account surpluses were created due to an increase in the price of oil. As a result, the surplus of oil exporters needed to be exported to other parts of the world. When the idea was first proposed, Mr. Luben talks about a lot of the backlash at the time, especially from America’s transatlantic friend. Dennis Heeley, the Chancellor of the Exchequer at the time, opposed this by saying that the government should always be at the center of this process: “The Americans were bitterly opposed because it would have meant interfering in the freedom of financial markets and freedom of American commercial banks to make enormous profits from leading to the third world.” In other words, the US spread the “Washington Consensus” by creating an intellectual ideology from an economic one. 

As mentioned in the book, the common economic theme was that capital flows were extremely volatile as they depended slowly on the US market. When monetary conditions were loose, capital was pushed, and when the Central Bank tightened monetary policy, capital seemed to come back. The Federal Fund Rates (FFR) level and long-end yield curve solely determined the prosperity of developing nations. Therefore, by the end of the 1990s, emerging economies wanted the international financial system to be safer for them. However, due to the destabilising and volatile US economy, developing economies created a sense of self-assurance by making themselves safe for the financial system. In the book Mr. Luben calls this “wrapping up warmly” – in the winters, one cannot change the weather, and therefore has to prepare themselves for the cold. In order to “wrap up warmly”, developing countries accumulate foreign exchange reserves throughout the world. If there’s capital outflow from the economy, there always needs to be dollar reserves that the country has in place. Additionally, two things exponse a country to a large financial crisis: (1) having a fixed exchange crisis and (2) the absence of a stock of foreign exchange reserves. 

Although Turkey and Argentina failed in the process of “dressing up warmly”, China fundamentally succeeded in this process. Between 2001-2011, China single handedly was responsible for the biggest commodity boom in 200 years. This level of international liquidity helped the country finance its deficit, and now they are acting as a supplier of funding to emerging market economies. Through the Belt and Road Initiative, China is set to become a global superpower within this generation. However, the fascinating part is that China used a modified version of the “Washington Consensus”. They never opened their capital accounts, but were very selective with their foreign direct investment. China has successfully used the government to allocate capital within the economy. Furthermore, contrary to many liberalization ideas, the country has greatly benefited from state involvement in the private sector. 

As the next episode of globalisation begins, Mr. Luben wonders in the book what the world would look like moving from a “Washington Consensus” model to a “Beijing-led Consensus.” As China’s impact across developing countries increases, will developing markets never fully liberalize their capital accounts? 

This article was written by: Dhruv Mathur, currently a student at the London School of Economics, pursuing BSc Economic History.

Misinformation within the Indian COVID-19 pandemic: April to June 2021

COVID-19 has hit India hard. In fact, official deaths attributable to the infectious disease is 452,485 – a figure universally recognised as vastly underestimating total number of deaths. On top of such depressing figures are the 34 million recorded cases. The deadly second wave, lasting much of April and June 2021 was further complicated by the hard to untangle problems of misinformation and vaccine hesitancy.

This report aims to shed some light on the incidence of the misinformation, and how its incidence was greatest within states which suffered disproportionately from the total number of recorded deaths. In doing so, the report takes data from the Google Trends, a freely available resource.

On 6th October 2020, whilst vaccine developers were awaiting official regulatory approval, the Indian Health Ministry had begun to recommend traditional remedies to tackle COVID, with health minister Harsh Vardhan releasing recommendations based on Ayurveda, India’s millennia old system of herbal medicine. The rebuke was sharp and fierce; the Indian Medical Association, a body of over 250,000 medicine practitioners, writing that Vardhan was “inflicting a fraud on the nation and gullible patients by calling placebos as drugs”. Given the scale of COVID, and a certain feeling of inevitability regarding its spread prior to the second wave, misinformation appeared ripe to spread in a nation where institutions were ill-equipped to inspire direct trust within the diverse nation (although not completely unheard of nor impossible, given the successful historical rollouts of the polio vaccine during the 20th century). However, the government certainly exacerbated, instigated and catalysed the trend, whether out of desperation, necessity or a belief that nationalism could be deployed to promote belief within indigenously developed medicines.

The adage, of someone who “shot himself in the foot” appears apt.

The following key search words were included for this analysis.

  1.  “ayush” (an Ayurvedic medicine produced by the Indian government)
  2. “Coronil (a controversial concoction promoted by popular yoga guru Baba Ramdev and produced by the big consumer group Patanjali)
  3. “Ayurvedic” – a catch-all phrase for such herbal medicines which were never backed by large scale efficacy trials.

When measuring the incidence of misinformation, I decided not to use covid-cases per 10,000 as a reference point given the chronic underreporting of covid cases, especially within regions with urban areas, for instance the Administrative district of Delhi would thus be over-represented compared to the Region of Uttar Pradesh, which has a population greater than America, simply because its Serum positive prevalence was estimated at over 40%  a shocking statistic implying that nearly half of all households in New Delhi had contracted the COVID-19 virus – but nonetheless misleading when used to compare the total number of cases.

Thus, as a baseline, I use the key word “hospital beds” which acts as a proxy for serious COVID-19 infection rates within certain regions. This was indexed against certain regions, with one state/region always having an index of 100*. The plots are shown as follows:

The charts make for interesting reasoning, of which a single article will not be able to do full justice. Nonetheless, the slope of the regression line between “Ayurvedic” and Hospital Beds appears significant, and warrants further tests on its significance. However, one conclusion is that the incidence of specific fake remedies, including “Ayush” and “Coronil” was not a national phenomenon. There might be several reasons for this, including the level of trust within the general population towards the health ministry.

Nonetheless, whilst the high degree of correlation between “Ayurvedic” and “Hospital Beds” suggests that misinformation was a national movement, specific versions of herbal medicines didn’t affect all regions with the same severity.

Conclusion? Misinformation is heterogenous.

* Technical note: Due to lack of search information across all regions, especially smaller regions, the 100 index may not always be available.

This article was written by: Ishan Kalia, currently a student at the London School of Economics, pursuing BSc Economics.

Is Extremism the remedy Afghanistan’s ailing economy needs?

Afghanistan is one of the world’s poorest countries with a GDP per capita (PPP) of around only $2,100, with its dire economic situation only exacerbated by the pandemic. Fighting in recent years and uncertainty about the future have only made investors jittery. And this year, financial stress and a drought have added to Afghanistan’s woes. The country has endured fighting for over 40 years – so long that most Afghans can’t remember a time of peace. On August 15th, the Taliban swept victory in the nation following their rapid advance across the country, and capture of Kabul. The move came following the withdrawal of foreign forces from Afghanistan following a deal between the US and the Taliban – two decades after US forces removed the militants from power in 2001. The conflict has killed tens of thousands of people and displaced millions. While the Taliban have pledged they will prevent Afghanistan from becoming a breeding ground for terrorism against the West, questions are already being asked about how the group looks to govern the country, particularly how the ailing economy will fare under extremist rule.

Even preceding the ascent of the Taliban, the Afghan economy was already in a fragile state, heavily dependent on foreign aid and development assistance. A nation is considered aid-dependent when 10% or more of its GDP comes from foreign aid; in Afghanistan’s case, around 42% of its GDP is comprised of international aid and funded 75% of public expenditure (BBC, The Guardian and World Bank). With both economic and political instability at the forefront of Afghanistan’s growing worries, this aid has been shrinking over recent years, with fewer private companies, fuelled by uncertainty, willing to invest in a country so unstable. With the Taliban in power, such uncertainty has only augmented, with the US, UK, International Monetary Fund, World Bank, EU and Germany, among several donors, having already suspended the development funds they planned to give the nation. While they may continue to provide humanitarian aid, this will likely be channelled via charities rather than the Taliban government. For Afghanistan, the consequences will be dire, with a likely sizeable contraction in government financing, resulting in the lay-off of civil servants and NGO staff and the collapse of essential services such as health and education.

Another unfortunate aspect of Afghanistan’s crippling economy is the depreciating value of its currency, the Afghani – one dollar is now 88.2 afghanis, versus around 80 before the fall of the previous government. How the Taliban deal with this will be a likely struggle, given the US Federal Reserve have ‘frozen’ all of Afghanistan’s foreign exchange reserves in its hands, amounting to some $7 billion. While intended to block misuse of funds by the extremist government, Afghanistan’s central bank has subsequently lost the ability to manage the exchange rate by trading its dollar and other reserves for the local currency, presaging a further collapse in the afghani, a plunging exchange rate and hyperinflation.

Compounding to Afghanistan’s enlarging economic stress is how it will feed and provide for the population sustainably, given the cost of goods that ordinary people rely on to survive, such as flour, oil and rice, has been rising each day – according to the UN, the cost of wheat, rice, sugar and cooking oil has increased by more than 50% compared with pre-COVID-19 prices. This poses a very tangible threat to the livelihood of millions of Afghan children that could be pushed into severe hunger, only exacerbated by the drought that has severely dented crop yields, foreshadowing significant food shortages the nation will face this winter.

Queues run for hundreds of metres outside banks which – fearing a run on accounts as people desperately seek to secure their assets – have limited withdrawals, sparking a cash crisis that is freezing economic activity in large cities. With 4% of Afghanistan’s GDP made up of remittances (World Bank), the country is one of the most dependent on remittances in the world, where citizens would typically rely upon family members living outside the country sending money home from abroad. However, in response to the Taliban takeover, catalysed by western nations halting foreign aid shipments, international transfer companies, Western Union and MoneyGram, have suspended their services in Afghanistan – effectively eliminating the influx of family cash from abroad, leaving many Afghans in a distressing state.

Nevertheless, while Afghanistan faces the spectre of multiple crises happening at once, the Taliban understand that governing effectively will necessitate delivering on people’s basic needs and providing credible hope for its citizens who have witnessed conflict for far too long. The Taliban already appear benevolent in their approach, calling for renowned relations with many of the countries from which they wrested back control of Afghanistan, including the US. This illustrates a positive signal that the extremist government looks to integrate with the global economy as they seek to try and gain access to much-needed foreign aid and development funds. The Taliban are fully aware that without access to international aid, the Afghan economy will most likely disintegrate – a catalyst for further social disorder in the country that may become uncontrollable. It is crucial to note that this approach by the Taliban is far from conventional, given 20 years ago they would never have sought out foreign assistance. However, now, the UN managed to airlift supplies via Qatar using the Pakistani national airlines – indicative of openness to assistance by the Taliban. The vested economic interests in Afghanistan by the West may give them some leverage to influence the incoming Taliban administration, either by unfreezing Afghanistan’s foreign exchange reserves and access to development funds to progress on human rights, or denial of space to jihadist groups. While this presents some hope for the nation’s economy, ultimately, Afghan citizens will be the ones to suffer in the meantime.

This article was written by: Prerak Goel, currently a student at the London School of Economics, pursuing BSc Economics.

NORTH KOREA: THE HERMIT NATION

North Korea is one of the world’s most isolated countries. It has been dominated by the Kim dynasty since the 1950’s and has developed a ‘command’ economy that is heavily controlled by the central government. With the ravages of the coronavirus pandemic having been devastating even in the developed superpower countries of the world, the negative effect of the pandemic in North Korea must have been unfathomable. Testament to this guesswork was provided by North Korea’s own Kim Jong Un, who admitted his 5 year economic plan for North Korea failed to meet the goal in “almost every sector.”

Source: The New York Times

The origin of North Korea’s isolationist economy can be traced back, in modern times, to the Korean war that took place in the early 1950’s. The repercussion of the war against South Korea and its strongest ally, the USA, was horrifying. There was just one building left standing in the capital Pyonyang, as an aftermath of American bombing raids. Charles K. Armstrong writes “North Korea is a society with a permanent siege mentality. It has lived under a constant threat of war since the 1950s.” North Korea’s continuing reluctance to engage with the rest of world comes from a theory of self-reliance developed by Kim Il Sung. This theory of self-reliance called ‘Juche’ has led to the development of North Korea’s isolationist economic policies.

Source: Model Diplomacy- Council on Foreign Relations

North Korea is ironically, notorious for its secretive tendencies. It has not provided any statistics regarding its macroeconomic condition since 1965. However, there are roughly 24 million people who live in North Korea, more than 40% of whom are undernourished. According to the World Bank, more than 50% of the population lacked access to electricity in 2017. North Korea’s gross domestic product was estimated to be $40 billion in 2015 and per capita income was estimated at $1,700. In the 1990’s, average economic growth per year was at the rate of -4%. This contraction in economic growth can possibly be explained by the country’s hesitation to maximise the opportunities offered by globalisation and it’s limited national target market. Until the recent decline in trade with China, which plummeted trade by about 80%, China was North Korea’s main trading partner. In 2017, 86% of its exports was to China and more than 90% of its imports was from China. Heavy reliance on just one trade partner is another indicator of isolationism. North Korea’s economic isolation embodies a misplaced sense of pride, which is more a cause for concern now. 

Another cause for deep concern, that is also intertwined with its sense of national pride is North Korea’s obsession with military investment. North Korea spent an estimated $4 billion, which is 24% of its GDP on defence in 2016. While defence is an essential area of investment for all countries, over-spending on the military can come at a cost to other key economic and social spheres of civilian consumption such as infrastructure, food production and living standards. This overzealous military spending is manifested in the creation of nuclear programs with the aim of developing ballistic missiles, which has further alienated North Korea from the rest of the world, especially the USA. This political isolation, along with a limited FDI of $28.5 million and restrictions on private entrepreneurship have brought North Korea’s economic freedom score to a total of 5.2. North Korea’s chronic structural problems have stunted its growth and prevented reconciliation with the global economy. Andrei Lankov, a North Korea expert, even goes to the extent of saying it is most likely that the regime will eventually collapse and the North will be absorbed into the South.

Source: The National Committee on North Korea

The rule of the leadership in North Korea is contingent on controlling the flow of information in and out of the country. An Amnesty International report called ‘Connection Denied’ has documented the array of restrictions on phone usage and access to information, such as the imposition of an intranet system to prevent exposure to the outside world. It is likely that it is because of these restrictions that the communication- starved people of North Korea have started to engage in the illicit trade of imported mobile phones and sims. These illegal economic activities produce about $50 million per year. Surprisingly, North Korea also has in operation two economies at the same time: one with lower wages for domestic workers and the other with much higher wages for Chinese-affiliated workers. It is inequalities such as these that prompt unlawful attempts at mass-emigration by the over-worked and underpaid citizens of North Korea.

There appears to be some light at the end of the tunnel because since the early 2000’s, North Korea has implemented some tactics to recover its economy. It has allowed semi-private markets to function, tried to decentralise national planning, increased prices and wages and considered social security reform. These reforms resulted in an increase of economic growth to 2.2% from 2000 to 2005. However, the good news is not what has already improved but rather what could come. North Korea has a store of natural resources, gauged to be valued in the trillions which already has caught the attention of Russia and China, with hopefully more countries to follow.

North Korea has the potential to grow if it can, in true hermit fashion, isolate isolationism from its economic policies and abandon nuclear politics.

This article was written by: Shravani Gowda, currently a student at the London School of Economics, pursuing LLB Bachelor of Laws

BIBLIOGRAPHY

Bajpai, Prableen. “How the North Korean Economy Works.” Investopedia, March 22, 2021. https://www.investopedia.com/articles/investing/013015/how-north-korea-economy-works.asp

Bajpai, Prableen. “North Korean vs. South Korean Economies: What’s the Difference?” Investopedia, March 22, 2021. https://www.investopedia.com/articles/forex/040515/north-korean-vs-south-korean-economies.asp

“Kim Jong Un says North Korea’s economic plan falied.” BBC News, March 22, 2021. https://www.bbc.com/news/world-asia-55563598

“2021 Index of Economic Freedom.” The Heritage Foundation, March 22, 2021. https://www.heritage.org/index/country/northkorea

“North Korea- Economic Indicators.” Moody’s Analytics, March 22, 2021. https://www.economy.com/north-korea/indicators