Saturday, November 19, 2011

Analytical framework of the economic crisis in the US and the EU

Mohamed A. El-Erian explains what happened and what needs to happen in the Western economies:

Each development, and certainly their occurrence in tandem, points to the historic paradigm changes shaping today’s global economy – and to the anxiety that comes with the loss of once-dependable anchors, be they economic and financial or social and political.

Restoring these anchors will take time. There is no game plan as of now, and historic precedents are only partly illuminating. Yet two things seem clear: different countries are opting, either by choice or necessity, for different outcomes; and the global system as a whole faces challenges in reconciling them.

Some changes will be evolutionary, taking many years to manifest themselves; others will be sudden and more disruptive. Yet, as complex as all of this sounds – and, by definition, paradigm changes are complicated affairs that, fortunately, seldom occur – a simple analytical framework may help shed light on what to look for, what to expect and where, and how best to adapt.

The framework relies on an often-used analytical shortcut: identifying a limited set of explanatory variables in what statisticians call “a reduced-form equation.” The objective is not to account for everything, but rather to pinpoint a small number of variables than can explain key factors, albeit neither perfectly nor fully.

Using this approach, it is possible to argue that the future of many Western economies, and that of the global economy, will be shaped by their ability to navigate four inter-related financial, economic, social, and political dynamics.

The first relates to balance sheets. Many Western economies must deal with the nasty legacy of years of excessive borrowing and leveraging; those, like Germany, that do not have this problem are linked to neighbors that do. Faced with this reality, different countries will opt for different de-leveraging options. Indeed, differentiation is already evident.

Some, like Greece, face such a parlous situation that it is difficult to imagine any outcome other than a traumatic default and further economic turmoil; and Greece is unlikely to be the only Western economy forced to restructure its debt. Others, like the United Kingdom, have moved quickly to take firmer control of their destiny, though their austerity drives will inevitably involve considerable sacrifices.

A third group, led by the US, has not yet made an explicit de-leveraging choice. Having more time, they are using the less visible, and much more gradual, path of “financial repression,” under which interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors.

De-leveraging is closely linked to the second variable – namely, economic growth. Simply put, the stronger a country’s ability to generate additional national income, the greater its ability to meet debt obligations while maintaining and enhancing citizens’ standards of living.

Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.

But growth, while necessary, is insufficient by itself, given today’s high unemployment and the extent to which income and wealth inequalities have increased. Hence the third dynamic: the West is being challenged to deliver not just growth, but “inclusive growth,” which, most critically, involves greater “social justice.”

Indeed, there is a deep sense that capitalism in the West has become unfair. Certain players, led by big banks, extracted huge profits during the boom, and avoided the deep losses that they deserved during the bust. Citizens no longer accept the argument that this unfortunate outcome reflects the banks’ special economic role. And why should they, given that record bailouts have not revived growth and employment?

Calls for a fairer system will not go away. If anything, they will spread and grow louder. The West has no choice but to strike a better balance – between capital and labor, between current and future generations, and between the financial sector and the real economy.

This leads to the final variable, the role of politicians and policymakers. It has become fashionable in both America and Europe to point to a debilitating “lack of leadership,” which underscores the extent to which an inherently complex paradigm change is straining traditional mindsets, processes, and governance systems.

Unlike emerging economies, Western countries are not well equipped to deal with structural and secular changes – and understandably so. After all, their histories – and certainly during what was mislabeled as the “Great Moderation” between 1980 and 2008– have been predominantly cyclical. The longer they fail to adjust, the greater the risks.

Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.

Foreign demand for Nepalese coffee outstrips supply

The National Tea and Coffee Development Board (NTCDB) argues that foreign demand for Nepalese coffee is far higher than supply. It maintains that the annual demand for Nepali coffee is more than 4,000 tonnes but production is only 400 tonnes. If this is true, then here is an export potential product that won’t require export potential study! And, the contribution of donors working in the promotion of this product is commendable. Nepal is exporting coffee mainly to Japan, the US, and the EU.

With increasing demand, international agencies and local people have been attracted to investing in the sector. “With aid from INGOs, coffee production is projected to reach 8,000 tonnes within a decade,” said Bhandari. INGOs like Helvetas, Winrock and PACT Nepal have been supporting coffee farming.

There are more than 26,000 people engaged in coffee production. Syangja, Palpa, Lalitpur, Ramechhap, Ilam and Gulmi have been identified among 40 coffee growing districts as the main producers of coffee in the country.

Good prospects have led to expansion of coffee farming. According to the NTCDB, the area under coffee cultivation increased to 1,752 hectares in 2010-11 from 1,630 hectares in 2009-10.

Similarly, increasing domestic production has resulted in a decline in imports. Annual coffee imports plunged to Rs 12.51 million from Rs 84.40 million three years ago.

Executive director of the board Raman Prasad Pathak said that demand for Nepali coffee was on the rise due to its better taste and production system which does not use chemicals.

Despite massive demand, the country exported a mere 279.76 tonnes of coffee worth Rs 93.08 million in the last fiscal year. However, the figure is more than double compared to the previous year when exports amounted to 120 tonnes worth Rs 67.5 million.

Coffee Production
Fiscal year Plantation area (Hectares) Production (M.T.)
1994/95 135.7 12.95
1995/56 220.3 29.2
1996/97 259 37.35
1997/98 272.2 55.9
1998/99 277.1 44.5
1999/00 314.3 72.4
2000/01 424 88.7
2001/02 596 139.2
2002/03 764 187.5
2003/04 952 217.5
2004/05 1078 250
2005/06 1285 391
2006/07 1396 460
2007/08 1145 265
2008/09 1531 334