Is there a role reversal occurring in the world economy?

Posted: Feb 13, 2012 |Comments: 0 |

Increasingly it appears that emerging market firms are buying a rich world companies. The Halewood car plant near Liverpool was once notorious to strike. In the 1970s its seemingly Bolshevik workforce Frickley clashed with managers. In the peaceful interludes the plan turned out fleets of Ford vehicles, a popular family car. The plant is now part of the Jaguar Land Rover firm, owned by Tatung motors, the car division of an Indian conglomerate. These days is a cheerfully contented place. At one end of the plant workers examine the body parts shaped by one of the 10 giant metal presses. The other end, in the paint shop, a spray address in a protective suit squirts and Mr colour inside the back door of a car shell. For good buddies, owned by DHL, logistics firm with on-site operation, distribute parts from outside suppliers around the factory.

the reason the activity and the good humour is that production has recently started on the new land Rover, a mini sports utility vehicle. Before the car had appeared in the showrooms, the company had taken a 10,000 orders for it and it was already full sale on eBay. Thanks to the contract for the new vehicle, the plan's workforce has doubled to 3000 in the past year. Local suppliers will also benefit.

Two centuries ago the rise of the cotton trade in the mills around Manchester and the Port of Liverpool spell doom to India's textile industry. Today i terms owned large chunks of Britain's old industrial north-west. The standard oil refinery close to the plant just mentioned was bought earlier this year by Indian conglomerate. The chemicals firm started in 1873 just a few miles from the Quarry bank Mill, was bought by Titus chemicals in 2006. Blackburn Rovers, a founding member of England's professional foot ball league in 1888 is now owned by the age group, an Indian poultry.

These Indian outposts are part of a broader shopping spree by emerging market funds. They share of cross-border mergers and acquisitions rose to 17% in the seven years to the 2010, up from this 4% in the previous seven years, according to a recent report by the World Bank. They are the source of more than a third of foreign direct investment in other emerging markets. Typically this sort of foreign direct investment is organic which involves setting up a local fracture a branch office. By contrast, direct investment by emerging market firms in rich countries so-called South and North foreign direct investment tends to be acquisitive, which means one company buys another.

the bulk of the emerging markets mergers and acquisitions activity in rich countries comes from five countries, led by China but also including India. America is a rich world's main recipient, with Britain not far behind, even though its economy is only about one in six of America's sites. Other big target is a commodity rich countries like Canada and Australia.

Firms from America and Europe are falling over themselves to invest in fast-growing emerging markets like China and India to escape sluggish economies at home. But why are emerging market firms rushing in the other direction? The main reason is that, like rich world multinationals, they seek access to new customers. As a company you don't want to be confined to local growth, says one of the authors of the World Bank report mentioned above. You want to have the global economy as your market.

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Business World News Asian stocks fall on Europe crisis pessimism

Posted: Dec 08, 2011 |Comments: 0 |

:
Date December 08 , 2011
Asian stocks fell as hopes faded that a bold solution might be found to a crippling debt crisis.

Asian stocks fell Thursday as hopes faded that a bold solution might be found to a crippling debt crisis that is threatening to drag Europe into a deep recession.

Benchmark oil rose above $100 per barrel while the dollar fell against the euro and the yen.

Japan s Nikkei 225 fell 0.6 percent to 8,670.82, dragged down by weaker-than-expected machinery orders. South Korea s Kospi lost 0.3 percent to 1,913.69 and Hong Kong s Hang Seng shed 0.7 percent to 19,111.64.

Australia s S&P/ASX 200 dropped 0.2 percent to 4,286. Benchmarks in Singapore, Taiwan and India also fell. Mainland China and Malaysia rose.

One point of friction has surfaced over a proposal by French President Nicolas Sarkozy and German chancellor Angela Merkel, leaders of the two economic powerhouses among the 17 nations that use the euro. They are demanding far-reaching changes to the treaty governing the European Union to enforce fiscal discipline among its members.

That proposal is being met with resistance by the European Council, an institution that defines the priorities of the entire 27-nation EU. Its president, Herman Van Rompuy, favors going a simpler route amending existing rules that apply to the 17 euro countries to avoid the trickier step of requiring every country to approve the new treaty.
The disagreement has soured hopes for an immediate solution to the crisis.

"Normally this kind of talk would take place behind closed doors. The fact that it s in the open suggests it already has and normal channels have, at least temporarily, broken down," analysts at DBS Bank Ltd. said in a research note.

Additionally, certain provisions in the Franco-German proposal, such as setting automatic penalties for countries that overspend, are controversial and have the potential to delay an agreement.

Urgency was added to the situation Wednesday when ratings agency Standard & Poor s threatened to downgrade the bonds of all EU countries because their economies were intricately linked with the 17 nations that use the euro.

The intensifying debt crisis and lack of radical solution such as the issuance of eurobonds have roiled global stocks for months. Germany has resisted eurobonds due to fears that pooling debt would drive up its own borrowing costs, expose its taxpayers to the bad debt of weaker countries, and remove incentives for struggling nations to get their finances in order.

"Germany and the rest of Europe are going into two directions. The rest of Europe wants Germany to stand behind the euro but Germany does not want to be the lender of last resort," said Francis Lun, managing director of Lyncean Holdings in Hong Kong. "Because it ... will be the German taxpayer to foot the bill and I don t think that s what Germany wants."

Asian shares faced multiple headwinds. Australia unexpectedly eliminated 6,300 jobs in November. Most economists had predicted total employment would rise by 10,000.

Meanwhile, Japan s core private-sector machinery orders fell a seasonally adjusted 6.9 percent in October, the second consecutive month of decline. Financial markets had expected a 0.5 percent increase, Kyodo News Agency reported. That hurt industrial shares such as Nippon Steel, which lost 1 percent, and industrial supplier Mitsui & Co., down 1.5 percent.

Tokyo Electric Power, operator of the crippled Fukushima nuclear power plant, plunged 7.6 percent after a news report said the government is set to effectively nationalize the utility.

Samsung Electronics rose 2 percent, as Citigroup Global Markets rated its stock "a buy," saying it was expected to be the only profitable major display panel maker in the fourth quarter of 2011.

On Wall Street, the Dow rose 0.4 percent to close at 12,196.37. The Standard & Poor s 500 index rose 0.2 percent at 1,261.01. The Nasdaq composite index fell marginally to 2,649.21.

Benchmark oil for January delivery was up 13 cents to $100.62 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 79 cents to end at $100.49 per barrel on the Nymex on Wednesday.

In currencies, the euro rose to $1.3404 from $1.3394 late Wednesday in New York. The dollar fell slightly to 77.64 yen from 77.66 yen.

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The Least Developed Countries as the Net Exporters of Capital to the Developed World Posted By : Wolassa L. Kumo

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The Least Developed Countries as the Net Exporters of Capital to the Developed WorldBy: Wolassa L. Kumo

    

[ Posted On: 2011-05-22 ]  
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Dr. Wolassa KumoIntroduction

A Report by the United Nations Development Programme released in May 2011 revealed that the world's 48 Least Developed Countries (LDCs) of which 33 are in sub Saharan Africa, 14 in Asia and 1 in Latin America and the Caribbean, illegally transferred a net capital of about US$197 billion mainly to the developed world between 1990-2008. During this period, all the 48 LDCs received about US$118 in remittances and about US$94 billion in new loans, Foreign Direct Investments (FDIs) and other related capital inflows while they paid back US$162 billion in debt services leaving them with net capital inflows of US$50 billion. However, this was sharply offset by a gross massive illicit capital flight estimated to be about US$246 billion for the period stated. This could have wiped out the entire LDC debt of about US$155 billion in 2009 with over US$91 billion being saved for investment in economic development.

These illicit financial flows involve the cross boarder transfer of the proceeds of corruption mainly by local kleptocracies; trade in contraband goods and criminal activities by local households and businesses; and tax evasion mainly by multinational corporations.

The Report identifies three major drivers of illicit capital flows from LDCs. Macroeconomic drivers, structural challenges and overall governance. Macroeconomic factors such as high fiscal deficit, high and volatile inflation rates, overvalued real effective exchange rates, negative real interest rates, low real GDP growth and high indebtedness are believed to positively contribute to higher illicit capital flows. So do structural weaknesses such as growing income inequality, increasing trade openness without adequate regulatory oversight, as well as, poor overall governance including corruption, inimical business climate, prevalence of the shadow economy and political instability.

The Report emphasizes further that the illicit capital flows from the LDCs vary both by region and structural characteristics. The following section describes the regional pattern of such flows.

The Regional Pattern of Illicit Capital Flows

Regionally, about 69% of the total illicit capital flows originates from the 33 LDCs in sub Saharan Africa while about 29% originates from the 14 Asian LDCs. Latin America and the Caribbean contribute the remaining 2%. Among the top ten exporters of illicit capital, 6 countries belong to Africa while 4 belong to Asia. One of the poorest countries in Asia, Bangladesh is the world's top exporter of the illicit capital with the cumulative outflow of US$ 34.8 billion followed closely by Angola, Africa's second largest oil reducer, with a cumulative outflow of US$34 billion during 1990-2008. This accounted for about 11% and 3.4% of Angola's and Bangladesh's GDP during the period respectively.

The Report indicates that trade mispricing accounts for about 65-70% of the illicit capital flows from all LDCs while unrecorded leakages from the balance of payment accounts for the remainder. The Report stresses further that in countries with weak overall governance, i.e. high corruption, and low transparency and accountability, trade mispricing increases with increasing trade volume exacerbating further the illicit capital outflows.

Structural characteristics such as being landlocked or small island nation LDC does not necessary imply higher illicit capital outflows.

Illicit Capital outflows from sub Saharan Africa

The 33 LDCs from the world's least developed continent, Africa, exported a net illicit capital of US$135 billion to the developed world during 1990-2008 alone. And previous estimates suggest that the African continent as a whole had exported roughly about US$1.8 trillion in illicit capital outflows during the past 50 years while it received roughly about US$ 1 trillion in all forms of international capital inflows. Africa therefore was a net exporter of roughly US$ 0.8 trillion during the past half century. This massive loss of capital to the rest of the world explains why the continent remained the poorest and the least developed region in the world. After over 50 years of decolonization Africa's resources continue to fuel development in advanced economies, while the owners of the resources on the continent, the broad masses, continue to languish under perpetual poverty.

The six countries in Africa which are among the top ten exporters of illicit capital include: Angola (US$34 billion), Lesotho (US$16.8 billion), Chad (US$15.4 billion), Uganda (US$8.8 billion), Ethiopia (US$8.4 billion), Zambia (US$6.8 billion) and Sudan (US$6.7 billion). It is saddening to observe that a small, land locked country of Lesotho with a total population of about 2 million lost a staggering amount of capital totaling US$16.8 billion in illicit capital outflows during the past 19 years. Equally astonishing is the size of the illegal capital flight from Ethiopia, the country often regarded as one of the poorest countries in the world in terms of per capita income, although the size of its GDP ranks it as the 86th biggest economy in the word.

Ethiopia cannot afford to export US$8.4 billion illegally aboard while the country is unable to feed close to 5 million of its citizens every year bad weather befalls on it.

Angola, Chad, Zambia and Sudan's size of illicit capital flight is a symptomatic of the natural resource curse and reflect the need for the governments to take urgent actions to improve transparency in their extractive industries.

Other net exporters of illicit capital from sub Saharan Africa include Equatorial Guinea (US$6.5 billion), Liberia (US$5.8 billion), Guinea (US$4.9 billion), Malawi (US$4.2 billion), Djibouti (US$3.9 billion), Mozambique (US$3.8 billion), Madagascar (US$3.7 billion), Congo Democratic Republic (US$3.5 billion), Burkina Faso (US$ 2.9 billion), Tanzania (US$2.3 billion), Sierra Leone (US$2.1 billion), Mali (US$1.7 billion), Gambia (US$1.6 billion), Rwanda (US$1.6 billion), Central African Republic (US$ 1 billion), Niger (US$1 billion), Burundi (US$ 969 million), Guinea Bissau (US$847 million), Togo (US$ 678 million), Mauritania (US$ 428 million), Senegal (US$ 334 million), Benin (US$264 million), Comoros (US$ 154 million), Sao Tome and Principe (US$142 million), and Eritrea (US$118 million).

Equatorial Guinea, one of the largest oil producers in Africa, is in fact not a least developed country in terms of the size of its GDP per capita. With GDP per capita of over US$ 16000, it is the only non-OECD high income country in Africa. However, due to weak overall governance that resulted in illicit capital outflows of over US$6.5 billion over the past 19 years, among other things, nearly 77% of its citizens live under abject poverty. Equatorial Guinea is not even a member of Extractive Industries Transparency Initiative while other countries such as Liberia and Mozambique are making necessary efforts to improve transparency and accountability in the use of revenues from natural resources.

The preceding figures of net illicit capital outflows from the world's least developed countries partly explain why these countries remained poor. The constant rhetoric of aid and FDI to Africa is nothing more than a cheap political propaganda. Poor countries like Ethiopia and Lesotho have been subsidizing economies of the developed nations for the past 50 years at the expense of millions of their own citizens who go to bed every day without a single meal.

It is now abundantly clear that the west not only cannot save Africa, to use the wise words of Professor William Easterly, but in fact is helping the kleptocraceis to kill the continent's people by facilitating the robbery of its meager resources.

Concluding remarks

In spite of continued inflows of aid, foreign direct investments and remittances, the least developed countries of the world continue to be the net exporters of capital to the developed world which denies them crucial resources needed to provide jobs, alleviate poverty and enhance economic development. Cross border illicit outflows of proceeds of corruption by African kleptocracies, contraband trade and criminal economic activities by households and businesses and tax evasion by multinational corporations fueled by structural weaknesses, macroeconomic instability and poor overall governance by the least developed countries led to loss of nearly US$ 200 billion in net capital during the past 19 years. This could have wiped out the entire LDC debt stock of about US$155 billion estimated in 2009 leaving billions of net resources for further investment.

Africa is the hardest hit with nearly 70% of the stated net capital loss originating from the LDCs in sub Saharan Africa.

The UNDP report on illicit capital flows shed new light on challenges of underdevelopment in LDCS and particularly in Africa. The fundamental challenge for the LDCs in Africa and elsewhere is to put effective measures in place to improve overall governance including democratization, fighting corruption and improving transparency and accountability in the generation and use of revenues from natural and other resources, promoting inclusive economic growth, ensuring macroeconomic stability and implementing effective mechanism for trade regulation.

The proliferation of free trade areas with neighbors or the west will not bring sustainable development if the bulk of locally mobilized resources continue to be lost in illicit outflows due to unregulated open trade.

Neither will tax holidays for few FDIs. Continued provisions of tax holidays for multinationals would result in double loss of capital if there is no effective mechanism to control tax evasion by those who have already graduated from the incentives.

The developed world would help the LDCs escape from the vicious circle of poverty not by promising more aid, and technical assistance but by closing down the offshore capital safe havens most notably the Swiss Banks which have continued to gladly receive stolen funds from the Africa's hungry people.

And it is only when Africans stop stealing from their own poor and the west stops aiding and abating the kleptocracies and be part of the process that the least developed countries will ever develop.

References

UNDP: Illicit Financial Flows from the Least Developed Countries: 1990-2008. Discussion paper: May 2011

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About The Author: Dr. Wolassa L. Kumo -- is a development practitioner and researcher. His research interests include risk and uncertainty, productivity and efficiency, finance and investment, currency substitution and development problems of Africa. Currently, he is working as a researcher in a public institution with a primary responsibility in econometric modelling. Previously, he taught Principles of Economics in an academic institution. before and after the --> | View Profile & All Articles By: Wolassa L. Kumo |

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