Showing posts with label GDP. Show all posts
Showing posts with label GDP. Show all posts

Saturday, October 06, 2012

Another Lethal Blow for The ‘Celtic Tiger’

The Irish Policymakers Argue that the Country’s Economic Fundamentals are still better than That of Greece, Manish K. Pandey Analyses how Poor are they in Finalising the Rationale Behind Their Arguments

Ireland was the fastest growing OECD economy (averaging GDP per capita growth of 5%) since the mid-1990s until the recession hit its shores in 2007. While other OECD nations have at least managed to leave the strong recession winds behind, Ireland (thanks to its fragile banking system) is still at the midst of a deadly storm. What’s more? Ireland’s real GDP has contracted by more than 15% since the end of 2007 and is expected to shrink further. Even the yield on Irish 10-year government bonds has hit a record high of 8% so far this month, well above the 6.4% average reported in October 2010 and also above the 4% rate clocked just before recession in 2007.

Interestingly, Greek 10-year bonds had also traded around that rate before the recession, and then jumped by 780 basis points in the six months before the bailout in May 2010, after yields surpassed 12%. Though, yields on Irish bonds have risen by 370 basis points so far from their low in April, their continued strong upward movement is a clear sign of concern. It’s quite clear that the Emerald Isle economy was headed the Greece way (the first economy to tumble in Euro zone in May 2010) since quite sometime; and it’s quite unfortunate that the Irish policymakers waited till November 21, 2010 to wake up and apply post haste to EU’s European Financial Stability Facility and IMF for assistance. In two days, the international bodies approved a 90 billion pound package for Ireland, but under grilling austerity measures.

On the other hand, as Irish policymakers argue, the fundamentals of the Irish economy are much stronger than Greece’s at present as unlike Greece, the Irish government has enough cash in hand to fund operations through mid-2011. Moreover, the debt-to-GDP ratio of the Irish economy, which currently is 80%, perhaps seems more sustainable than the 130% ratio in Greece and in some sense, for the untrained eye, does not make a strong case for a bailout. As happened globally, even in Ireland’s case, the butler was to blame. The Irish banking system has almost but collapsed. The Economics Group of the US-based Wells Fargo Securities tells B&E through a communiqué, “The Irish banking system, which is being backstopped by the government, is essentially insolvent.” Ireland’s debt-crippled banks (which have already received a minimum of $61 billion from various government agencies) confirm that they are already in a dire situation. While AIB (Allied Irish Banks) admits that $16.39 billion – about 20% of its entire deposit base – has been withdrawn from the bank since June, 2010, BoI (Bank of Ireland) confesses that it had lost $13.66 billion in corporate deposits during August and September this year. In fact, one can understand the seriousness of the situation by the fact that Irish banks have lost a colossal $24.59 billion in deposits in September 2010 alone. Thus, unlike Greece, Ireland’s woes do not stem from government debt but from the government’s open-ended guarantee to cover the losses of the banking system out of taxpayers’ money, which sadly but inevitably will sink the economy whose fiscal deficit has already reached more than 30% of GDP.


Source : IIPM Editorial, 2012.

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Wednesday, August 22, 2012

Administrative reforms – the need of hour

India’s economic journey from the times of the measly Hindu rate of growth is indeed incredible. Economic reform coupled with administrative reform is the way forward

India was a leading manufacturing country in the world in the early 18th century. It had 22.6% share in the world’s GDP, which came down to around 16% by 1820, closer to its share of world population. It had a developed banking system and vigorous merchant capital, with a network of agents, brokers and middlemen. Given the enormous financial surplus, a skilled artisan class, large exports, plenty of arable land and reasonable productivity, the question is why didn’t a modern industrial economy emerge in India? Instead, why did India become impoverished?

Nationalists claimed that Lancashire’s new textile mills crushed India’s handloom textile industry and threw millions of weavers out of work. India’s textile exports plunged from a leadership position before the start of Britain’s Industrial Revolution to a fraction. In recent years some historians have challenged this nationalist picture. They have argued that Indian industry’s decline in the 19th century was caused by technology. The machines of Britain’s Industrial Revolution wiped out Indian textiles, in the same way that traditional handmade textiles disappeared in Europe and the rest of the world. Indian weavers were, thus, the victims of technological obsolescence. Since India consistently exported more then she imported in the second half of the 19th century and early 20th century, Britain used India’s trade surplus to finance her own trade deficit with the rest of the world, to pay for her exports to India, and for capital repayments in London. This represented a massive drain of India’s wealth.

Consider the following hundred year trend: between 1900 and 1950, the Indian economy grew on the average 0.8% a year; but the population also grew at about the same rate; thus, net growth in income per capita was nil and we rightly called our colonial economy stagnant. After Independence, economic growth picked up to 3.5% between 1950 and 1980, and population grew by 2.2%; hence the net affect on income was 1.3% per capita, and this is what we mournfully referred to as “the Hindu rate of growth.” Nehru’s socialism had shackled the economy with fierce controls on the private sector, pejoratively called ‘Licence Raj’; hence its annual GDP growth was 1.5% points below even the Third World average between 1950 and 1980.

As a benchmark, recall that the West’s industrial revolution took place at a 3% GDP growth and 1.1% per capita income growth after 1820. To appreciate the magnitude of the Indian change after 1980, let me illustrate: If India’s per capita GDP had continued growing at the pre-1980 level, then its income would have reached present American capita income levels only by 2250; but if it continues to grow at the post-1980 rate then it will reach those levels by 2066: a gain of 184 years!


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Wednesday, July 18, 2012

Nordic brings back the old ghosts

Tighter Monetary Policy has not only Weakened Domestic demand in Nordic’s biggest Economies, but has also put a Brake on Region’s overall Growth Momentum. Is Nordic slipping back into recession?

Several investors in western Europe, particularly in the Nordic region (comprising countries like Sweden, Denmark, Norway, Finland, et al), are busy rejigging their portfolios these days. Raison d’être: Ghosts of a double-dip recession, which had disappeared as green shoots of recovery started popping up, have once again started haunting the region.

Tighter monetary policy has not only weakened domestic demand in the region’s two biggest economies, Norway and Sweden, but has also put a brake on Nordic’s overall growth momentum. While Norway’s real GDP contracted by 0.5% during Q1 2010, Finland too remained in a full-blown recession in H1 2010 (Finland’s GDP contracted by 5.4% in Q4 2009 and by 0.6% in Q1 2010) as firms pulled back fixed investment spending on the back of falling export demand. Even Sweden’s economy, which was the first to rebound in 2009, has lost its winning momentum. GDP growth in Sweden is expected to slow down from 4.2% in Q2 2010 to 2.1% in Q3 2010. What’s more? Unemployment has also risen in Denmark (from 3.9% in Q3 2009 to 4.3% in Q1 2010) and Norway (from 3.2% in Q3 2009 to 3.5% in Q1 2010) while staying at record-high levels in Finland (at 8.8%). So, is Nordic slipping back into recession or is it just a halt before the growth finally picks up in the region?

Though Eszter Miltenyi, Senior Press Officer at European Central Bank finds an excuse to get away from bringing in the real picture of the region by saying to B&E, “We do not comment on particular countries’ economies of the euro zone,” there are still many who are bold enough to speak the truth. “The region will tip back into a shallow recession in early 2011. Growth momentum will fade as the recovery stalls in key trading partners. Although Denmark, Finland & Sweden have strong trade links with each other, most of their trade flows outside the region to Germany, US and UK. And as Germany and UK are expected to see mild recessions in the first half of 2011, things would really weigh heavy on the Nordic region’s exports,” Christine Li, the London based economist at Moody’s Economy.com tells B&E.

Further, if Europe’s sovereign debt crisis deepens, the demand from Nordic’s trading partners could suffer longer than expected. Dismal economic news from US and western Europe too implies that the global recovery continues to be fragile and growth remains inconsistent. This means a lot more trouble is on its way for Nordic countries in the near future. No doubt, public finance was strong across the Nordic when it entered the 2008 financial crisis, but the situation has changed today with the region’s major economies like Denmark, Sweden and Finland struggling with massive budget deficits. But then, are policy makers really aware of the financial storm that might hit them anytime soon? If yes, what are they doing to avert the danger?



 
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Friday, July 13, 2012

Grossly Disputed Product

Absoulte GDP and GDP growth rates are often correlated to overall economic prosperity of nations. However, their relevance in this regard is quite limited

George Orwell states in his famous book Nineteen Eighty Four in Chapter 3 that, “…the choice for mankind lay between freedom and happiness, and that, for the great bulk of mankind, happiness was better. That the party was the eternal guardian of the weak, a dedicated sect doing evil that good might come, sacrificing its own happiness to that of others…” This Orwellian concept is still very practically relevant but has been buried under the deceptive and manipulative economic parameters predominantly used for measuring economic prosperity.

Economics can be really deceptive. The deception goes wider and deeper with the increase in the number of economic variables that goes into a calculation. And one of those economic parameters that hide more than what they reveal is the much touted Gross Domestic Product a.k.a. GDP and GDP per capita. Both these economic parameters are taken into account while measuring the economic prosperity of a nation and its population at large, but sadly fail to reflect the real prosperity of a nation.

The economic prosperity of a nation does not automatically imply social prosperity. There is hardly any correlation between economic development and well-being of a nation. Take Luxembourg for instance. The fact that it tops the charts when it comes to GDP per capita (highest in the world, $108,952 per year) and features among the top countries in the Human Development Index fails to ensure human prosperity. In spite of being a top performer in two of the world’s most reputed economic indices, the country does not feature as a good performer in the c – that measures overall well-being of nation. This is evident from the fact that Luxembourg has one of the highest per capita carbon footprints and intentional homicide rates (1.45); well above nations like Egypt, Kuwait & China. Luxembourg has less than 5,000 guns per 100,000 popula tion but murder rates are much higher than nations with relatively higher rates of gun ownership!


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