Posts tagged IMF

China on Equity vs. Efficiency

Should China slow down and focus more on Equality rather than Efficiency?

The Economist: News Article

As the gap between the rich and the poor increases substantially, China’s prime minister, Wen Jiabao, has ordered the new upcoming president, Xi Jinping, to “satisfy the people” by focusing more on the equality. Wen Jiabao has set a low target of 7.5% growth rate for Xi Jinping in order to slow down the overheated economy, lower the inflation rate, and focus more on dividing the economic pie equally for the people.

This old debate about whether an economy should focus on equality or efficiency is a ever-real problem for China as its economy is growing at double-digit growth rate, however, the gap between the rich and the poor has widen. This gap stirs the conflict between the people and the government as they get upset about the problem. There has been outburst of unrest in many parts of China in relation to the low income and the ever-increasing inflation rate.

Therefore, this political situation has forced the Chinese government to focus more on the equality. Otherwise, the government will soon lose the support from people and authority, which will result in the demise of the communist China.

I think that the Chinese officials are well aware of the trade-off of focusing more on equality. The economy will soon lose the efficiency once it had and the economic pie will shrink, instead of increasing. Surely the officials will be able to slice the pie more equally for the poor, however, this will act as a disincentive for the rich to work hard, which lead to the shrinkage of the economic size. In short term, the poor experience the prosperity from equality. However, in the long run, “The poor will get poorer and the rich will get less rich,” which is a quote by Margaret Thatcher.

This is a video of Magaret Thatcher commenting on socialist policies and how everyone will be hurt by focusing on equality.

China’s GDP per capita is only $8,394 according to the recent data from IMF (2011). Its GDP might be the second biggest in the world, however, there are too many people, which decreases the GDP per capita. UK’s GDP per capita was absolutely higher than China’s around 1990, and they were still arguing about equality verses efficiency. UK led by Margaret Thatcher focused more on efficiency. China will almost certainly decrease its economic pie if Xi Jinping focuses on equality. If I were at the decision-making position, I would certainly have focused more on efficiency. I would focus on equality later when the GDP per capita is high enough.

I understand that China has to satisfy and relieve complaints from their people to sustain political power. I am also aware that the government is focusing on slowing down the economy at an appropriate level. However, if the economy loses its economic momentum from socialist policies, the chance that China will become a developed country will decrease substantially.

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What Greece must do to Survive the Debt Crisis

A frustrated Greek expressing his angry through violent protest

CNN News: Click Here

In action to fight off the increasingly unbearable debt crisis, Greece chose to get financial support from both EU (mainly Germany) and IMF. This might help Greece out of the problem in a short-run, yet they still have to pay back the money they have borrowed from EU and IMF. Now all Greeks must tighten their belt in order to fight off the crisis. There is a list of what Greece must to do recover their economy.

  1. Salary Cuts
  2. Retirement
  3. Increase in Taxation
  4. Reform in Pension System

First of all, all Greeks (at least public workers) will increase a cut in their salaries. Salaries are one of the big factors that take up large percentage of the cost in business and government spending. Though this will arouse some violent protests from the people, there is no other way to fight off the debt crisis without a cut in wages.

With some cuts in wages, many business and governments will want to minimize the number of employees as possible to decrease the money spent. This will result in early retirement of many workers with ages over 60. This will also contribute to the high unemployment rate, however, significantly cut the unnecessary budgets.

Interestingly, the Greek government decided not to have an early retirement for its workers but to increase the retirement. The retirement age was shifted from 61 to 65. It may be that Greece government didn’t want more unemployment and more protests regarding it. I think that the Greece government is tightening the payment of wages so much that they don’t need to cut down its workforce.

Greek people will most definetly exprience the rise in taxation. Greek government said that it was going to raise all VAT’s by 10%. Increasing taxation is one of the key ways that Greece can endure the crisis.

Greeks will also exprience a cut in pension. Unplanned pension system was the main culprits for the cause of Greece’s debt crisis. The government borrowed money, unplanned, in order to fulfil its populistic policy of pension system. The system supported too many people and gave out excess amount of money. So many aged Greeks will exprience this frustrating cut in their pension.

In sum, these were the actions that Greece must implement in order to survive the debt crisis. I think that the government’s determination to get out of the deb crisis is firm, but I think that this determination is not supported by lots of Greeks. Greek people must bear in mind that if they don’t start tighenting their belts, the government’s effort in order to get out of the crisis.

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Analysis of Greek Economy in Debt Crisis

Probability of  Countries Being Unable to Pay Back Debt

BBC News: Article 1

BBC News: Article 2

European Commission has announced that Greek economy would shrink by 3% this year due to its high risk of defaulting.

As illustrated in the graph, Greek’s probability of defaulting has passed 50% and is heading for 60%. At this rate, Greece will most definitely default if there are no strict cut-offs on government spending and European countries to aid Greece.

Other countries in Eurozone fear for Greek’s economic crisis might affect Eurozone severely. As a result of Greece’s high CDS, it is badly affecting Euro.

“The euro hit its lowest level against the dollar in more than a year, at $1.2887, and was also down against the pound, with one pound worth 1.1706 euros.”

EU economic and monetary affairs commissioner Olli Rehn describes Greek economic crisis as a “bush fire” and that “it must be contained” in order to prevent it to become a “forest fire” putting Eurozone at risk also.

Accordingly, EU and IMF has promised immediate aid and bail-out package for Greece’s debt crisis. However, there are many doubts about how the bailout package could help the Greek crisis.

“The problem is no one has a clear idea of how we’re going to get out of this situation,” said Julian Callow, chief Europe economist at Barclays Capital.

What will happen if Greece defaults? Last post, I have explained about the consequences of defaulting. First, the Greek currency and possibly Euro will experience hyperinflation and it will be a no better than a piece of toilet paper. Second, as the currency Euro is affected, this will affect the taxpayers in the Eurozone, forcing them to carry the some parts of Greek burden. If this is sever enough, it could mean the dissembling of the Eurozone.

So, what are the actions Greece is taking to fight this problem? Well, first is that they have asked help from EU and IMF, which helped them pay their short-run bills. Secondly, they have announced to cut their governmental spending from more than 10% to 3% by 2012.

It was a wise choice to ask for a bailout package, however, if Greece fails to recover from this debt crisis, it means that they’ve just added another debt to their already unbearable- debt list.

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Greek Bonds are Useless Junks says Standard & Poor’s

BBC News: Click Here

According to BBC News, global stock markets tumbled after Greece’s debt was downgraded to “junk” by rating agency Standard & Poor’s over concerns that the country may default.

As uncertainty of whether Greece will get financial support from EU and IMF to clear up its looming debt increases, many rating agency such as Standard & Poor’s has rated Greek bonds as junks, rubbish.

What does it mean when a rating agency says that now Greek bonds are ‘junk’? It means that it is now very risky to invest on. It is mainly because of Greek’s apparent lack of ability to pay its bills. So there is a higher chance that an investor will lose money for investing in a country falling into the abyss of ever increasing debt.

Greece’s finance ministry said in a statement that the downgrade “does not correspond with the real data of the Greek economy.” Greek finance ministry denies that the down-rating doesn’t reflect the real Greek economy, however, this incident showed investor’s distrust toward the Greek economy.

If Greece does not take action to reduce debt and get help from the EU and IMF, it may default.

What’s default and what happens if a country defaults?

Lets look into what the definition of default is. Default is simply announcing that you cannot pay the debt in the due date. It doesn’t mean that the government will go bankrupt and the debt wouldn’t go away. The debt will always be there and the investors/lenders will demand you to repay the debt whenever possible.

What are the consequences of a country defaulting? There are several effects to this. First of all, the currency of the country becomes a rubbish or a paper tower (or no better than a paper tower). Foreign investors will have distrust against the currency of the defaulted country and the value of the currency will drop significantly. As the value of the currency goes down, it makes the imported goods insanely expensive, which will lead to inflation and shortage of necessary goods. If a country has high food dependency on importing, many people will starve to death as there are simply shortage of food due to expensive importing.

People will loose confidence and the recession or more like disintegration of economy will be in a vicious circle. So by this stage, there is ultimately nothing a country can do to recover. So Greece should get help from EU and IMF quickly by giving them confidence that they can pay back the borrowed money.

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Analysis on OECD Country Korea

Data source: World Bank, World Development Indicators

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
$3.69b $3.02b $8.90b $21.5b $63.8b $96.6b $264b $517b $533b $845b

I have researched about Korea, one of OECD countries, on its GDP. The graph above is the ‘norminal’ GDP, which doesn’t take account for the inflation/deflation.

As you see, Korea had significant economic growth since 1975. Backed up by government’s economic reforms, Korea experienced an exponential economic growth. The chart above shows the norminal GDP since 1960 to 2005.

Korea has experienced near-bankruptcy in 1997 due to lack of foreign currencies. As you can see in the graph, the GDP plunged down from $517b to $345b. It was because they had virtually no foreign currencies (especially USD). Korean government could not pay off debts that accumulated during trades with foreign countries. They only had $2.0 billion, which was too short to pay the debt of $19.5 billion. It did have money to pay of its debt by Korean currency Won, but the lenders would not accept the weak, invaluable Korean currency at the time.

Nevertheless, the government had succeeded in paying off all the debt at 2001, and the economy recovered. This could be seen from the graph that the GDP had recovered to the previous GDP of 1995.

In 2007, Korea’s GDP hit $1.05 trillion due to increased exports. It was the year that Korea exported so much that it dramatically lifted up its GDP by significant degree. However, as 2008 global economic recession started, the GDP plunged to $929 billion due to decreased exports.

So, this was the short analysis of Korean GDP from 1960’s to 2008. Before 1960’s, the GDP of Korea was not recorded because the country’s economy was devastated by wars. So it GDP before 1960’s does not mean anything significant.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
$13,300 $16,100 $19,400 $19,400 $17,800 $19,200 $22,600 $24,500 $25,000 $25,800

The GDP per capita of Korea has been increasing since 2000. It has almost been doubled compared to 2000 and 2009. This means that Korean people’s wealth have been double in 10 year time. In my opinion, this is rather astonishing. With increased GDP per capita, many companies would be shifting their markets to Korean domestic market because of doubled wealth of each person. The developed domestic market will solve many of Korean companies’ dilemma of too much dependency on foreign markets especially US market, which is the biggest market of the world.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
10% 9% 5.8% 6.2% 3.1% 4.6% 4% 4.8% 5% 2.2%

GDP real growth rate for Korea has been declining. As you see in the graph, its showing the declining trend for Korea’s real growth rate. This low real growth rate is the concern for Korea right now, however, many experts consider this a temporary consequence of global recession.


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Analysis on Japanese Crisis

Japanese Economy is in Deep Coma

Times Online: Click Here

According to Bronwen Maddox on Times Online, Japanese Crisis resulted from extremely inefficient bureaucracy culture, lack of risk-taking, aging population, and bad governmental budget.

The article states that Japanese government (local and central) have debt over 180% of Japan’s GDP. That means, the Japanese government has to pay almost double the country’s GDP to the lenders, who are mostly Japanese citizens. So, the Japanese government is carrying the unexpectable time-bomb of national bankruptcy. Japan is the second highest in debt percentage to GDP in the world, after Zimbabwe’s 200%. However, Zimbabwe’s GDP is so infinitesimal compared to the world’s second biggest Japanese GDP. So Zimbabwe could get support from other countries, but Japan will not be able to survive the misery even if there were some supports from other countries.

The main reason for Japan’s enormous debt is the Japanese government’s bad planning for budget. According to the article, over 45% of the governmental spending was borrowed from Japanese people’s savings. This kind of spending started from 1992, so this debt accumulated for 20 years until the debt almost went up to twice the country’s GDP. United States had deficit governmental spending just like Japan, however, Obama passed the Budget Plan for 2010 to minimize the deficit and ultimately get rid of the debt. Japan is not taking any actions to minimize and get rid of debts they are carrying. Instead, the new government is increasing the deficit almost forced by its populist economic policies. If the new government does not cancel its policies and sketch a new way to get out of this misery, Japan will face more serious problem than ‘lost decades’ : a bankruptcy.

There why are Japanese government spending so much money? My answer to this question was that Japanese people did not want to use money. That is why the Japanese government has to release money to the paralyzed Japanese market. I have heard and read that many Japanese people had lack of confidence in their futures because of the prolonged economic recession in Japan (lost decades). Even if they have one of the highest GDP per capita in the world, they do not use money in fear of another economic recession. This is called leakage in economic term. So Japan is suffering from deflation because of very very low demands in domestic market. Japanese domestic markets do have money to spend, however, people simply chose not to and save it. That is why Japanese companies are having a bad time in the domestic market. To get back to the point, the Japanese government has to release money in order to get the domestic market going, or else, it will collapse.

This lack of confidence or fear about future is devastating to the economy. This once happened to Korea when it was near national bankruptcy in 1998 during the economic crisis in Asia. People feared for the future and they stopped spending but saving. This had rather devastating effect on the Korean economy. So the government had made up the mind to get help from IMF, the international monetary fund, and cold-heartedly let the lazy banks or companies to go bankrupt. The government has forced many companies and economic figures to reform. The economic reform has resulted in tons of people without jobs, however, Korea managed to get out of the trouble until 2000, which only took them 4 years to overcome the trouble.

Japan, in the other hand, did not take such daring measures to overcome the economic crisis, which started from 1992. As a result, Japan has suffered from two lost decade, and ‘is’ suffering from another losing decade. The Japanese government was not determined like the Korean government so that the economic crisis of Japan has lingered around since 1992, almost 20 years from now.

There is another factor that is aggravating the crisis in a long term. It is the low birth rate. Japan has the birth rate of 7.64 out of 1000 population, which ranks 221th in the world. It was estimated that in 20 or 30 years, there will be 45% of Japanese population with old people over 65. This will reduce governmental income from taxation and aggravate the responsibility the young people have to carry out. Thus, it will have unenthusiastic young people and there will lack of labor in the market. Every economically active young person (at 25-30) will have to take care of 2 elders. This will give disincentive to the young people to get a job. Also, it will discourage the young people not to have babies because it’ll be even more burdensome. Thus, the low birth rate gets worst. The Japanese government has to do something to give incentive for the young people to have babies. Or else, the national will fall into the abyss of low birth rate and ultimately ‘extinction’ of Japanese people.

In sum, the Japanese government has to do something. The Japanese government should first pass a new budget plan in effort to minimize the deficit, and they should pass a new law to encourage young people to have babies. Also, they should get rid of the culture of bureaucracy. Or else, Japan will confront the irremediable problem of bankruptcy.

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UK economy ‘faces crisis’ warns former IMF economist

BBC News: Click Here

“The UK should be seen in the same category of countries as Greece and Spain, who are facing severe debt problems, a leading economist has said.”

Like any other countries, UK has borrowed tons of money to protect its economy during the recession. This has resulted in tremendous amounts of debts that UK will eventually have to pay in the future.

It is not bad to borrow money in order to recover economy, but it follows with some consequences if it is not properly planned out how it is going to repay its debt. It is a common sense, however, it is an essential rule.

Even if its economy recovers, tremendous amounts of accumulated debts would be another hindrance to economic prosperity. It could stimulate another global economic crisis.

Sometimes, it is appropriate for countries to borrow money to recover its economy. It could have an economic effect that covers the price of the debt. However, if countries borrow too much money, it could be a critical problem. Therefore, countries should look between the line where they can approximate the effect by borrowing and money and lessening the debt as small as possible. 

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