Ishac Diwan writes:  Five years after the Arab Spring uprisings began, Egypt, Jordan, Morocco, and Tunisia have achieved reasonable levels of political stability. Yet economic growth remains tepid.

Market economies are relatively new to the Middle East and North Africa, having arisen only after the 1980s, when the model of state-directed economic growth collapsed under the weight of its inefficiencies (and resulting debt). Unlike Latin America or Eastern Europe, however, Arab countries liberalized their economies without liberalizing their politics.

As a result, even as the reforms of the 1990s rolled back the state’s economic role – in Egypt, state spending fell from 60% of GDP in 1980 to 30% of GDP in the 1990s – politics continued to shape markets. With economic privileges doled out in a way that favored firms were able to acquire virtual monopolies over entire liberalized economic sectors.

In Egypt, for example, the firms of 32 businessmen closely connected with then-President Hosni Mubarak received in 2010 more than 80% of the credit that went to the formal private sector and earned 60% of the sector’s overall profits, while employing only 11% of the country’s labor force. In Tunisia, former President Zine El Abidine Ben Ali’s cronies received 21% of all private-sector profits in 2010, though their firms employed only 1% of Tunisia’s labor force.

Unsurprisingly, this system generated only modest growth.

And it was not only traditional rent-filled sectors, such as real estate or natural resources, that failed to reach their growth potential. In tradable sectors, such as manufacturing and utilities, rents were created through non-tariff protection and subsidies, leading to anemic export growth.

The result was a dearth of jobs in the formal sector. Intensifying social dissatisfaction was met with rising levels of repression.

The governments that emerged from the Arab Spring’s wreckage inherited a broken system of closed deals. Inadequate property-rights protection is impeding investment, but moving to fair and well-enforced rules is not a realistic prospect in the current environment, given the petty corruption of an underpaid bureaucracy and the polarized political environment.

These countries could try to replicate Turkey’s economic success in 2000-2010, when a political alliance between the ruling party and a broad group of dynamic small and medium-size enterprises (SMEs) contributed to a tripling of exports.

Here, Morocco and Jordan have had some success, with their monarchies proving capable of managing elites who offer both political acquiescence and economic sustenance. Tunisia could take a page out of Morocco’s playbook, expanding its export sector by attracting foreign direct investment, while opening up its domestic services sector to local SMEs. For its part, Egypt is relying on public and private firms close to its army, together with finance from the Gulf Cooperation Council, to support its economy.

For Morocco and Tunisia, the convergence of interests between moderate Islamists and liberals offers a ray of hope. But such hope seems to be lacking for the moment in Egypt and elsewhere in the region.

Koichi Hamada writes:  In a bold attempt to reflate the Japanese economy, the Bank of Japan has now pushed interest rates on deposits into negative territory. Though this policy is not new – it is already being pursued by the European Central Bank, the Bank of Sweden, the Swiss National Bank, and others – it is uncharted ground for the BOJ. And, unfortunately, markets have not responded as expected.

In theory, negative rates, by forcing commercial banks essentially to pay the central bank to be able to park their money, should spur increased lending to companies, which would then spend more, including on hiring more employees. This should spur a stock-market rebound, boost household consumption, weaken the yen’s exchange rate, and halt deflation.

One reason for this is widespread pessimism about Japan’s economy, reinforced by volatility in China, monetary tightening in the United States, and the collapse in world oil prices. But, as BOJ Governor Haruhiko Kuroda recently reported to the House of Councillors, Japan’s economic fundamentals are generally sound, and pessimistic predictions are greatly exaggerated.

In fact, Prime Minister Shinzo Abe’s economy strategy – so-called “Abenomics” – has enabled Japan to stay on a reasonably positive path in highly uncertain times.

Japan, like emerging economies with flexible exchange-rate regimes, may actually benefit from America’s monetary tightening, as an appreciating dollar makes Japanese exports more competitive.

There is no reason why the Tokyo stock market should gyrate whenever the Shanghai market shakes. Yet, even though Japan’s economic situation is far from dire, introducing negative interest rates has not been treated as what it is: a maneuver to loosen monetary policy. Instead, the Japanese stock market regarded negative rates as a harbinger of greater financial risk, and speculators have remained bullish on the yen.

From 2003 to 2004, the Japanese treasury purchased a large amount of dollars, thereby easing monetary conditions at a time when the BOJ was reluctant to pursue open market operations. In recent years, however, the yen’s exchange rate has been determined through monetary policy, not manipulated by intervention. In general, I welcome this new approach, and thus do not recommend major interventions to change the direction of the yen exchange rate. I do, however, believe that sporadic interventions may be needed to punish speculators who are taking advantage of temporary market psychology to keep the yen far above its market value.

Martin Feldstein writes:  The US Congressional Budget Office (CBO) has just delivered the bad news that the national debt is now rising faster than GDP and heading toward ratios that we usually associate with Italy or Spain. That confirms my view that the fiscal deficit is the most serious long-term economic problem facing US policymakers.

The high and rising level of the national debt hurts the US economy in many ways. Paying the interest requires higher federal taxes or a larger budget deficit. In 2016, the interest on the national debt is equal to nearly 16% of the revenue from personal income tax. By 2026, the projected interest on the national debt will equal more than 31% of this revenue, even if interest rates rise as slowly as the CBO projects.

Foreign investors now own more than half of net government debt, and that proportion is likely to keep growing.

Increased borrowing by the federal government also means crowding out the private sector. Lower borrowing and capital investment by firms reduces future productivity growth and growth in real incomes.

So it is important to find ways to reduce the budget deficit and minimize the future debt ratio. The good news is that a relatively small reduction in the deficit can put the debt ratio on a path to a much lower level. Cutting the deficit to 2% of GDP, for example, would cause the debt ratio eventually to reach 50%.

Deficit reduction requires cutting government spending, increasing revenue, or both. Neither is politically easy; but neither should be impossible.

Cutting spending is made more difficult by the reductions in relative outlays that have already occurred. The share of GDP devoted to defense has fallen from 7.5% of GDP in 1966 to 3.2% of GDP this year, and the CBO projects it to fall to 2.6% during the next decade. That would be the lowest GDP share since World War II, representing a level of spending that military experts believe is dangerously low.

Other spending is split between the annually appropriated amounts (known as non-defense discretionary spending) and the programs in which spending follows from established rules that are not subject to annual review (known as the “mandatory” spending programs, primarily Social Security retirement benefits and health-care spending).

The non-defense discretionary spending is also heading toward 2.6% of GDP – also the smallest share of GDP since WWII.

Federal taxes now take 18.3% of GDP and are projected to remain at that level for the next decade, unless tax rules or rates are changed. The rate structure for personal taxation has changed over the past 30 years, with the top tax rate rising from 28% in 1986 to more than 40% now. The corporate rate of 35% is already the highest in the industrial world.

Higher marginal tax rates would weaken incentives and distort economic decisions.

The mortgage deduction alone will reduce tax revenue in 2016 by $84 billion, or more than 5% of the personal income tax collected. The exclusion of health insurance premiums from employees’ taxable income will reduce revenue by more than $200 billion, or about 15% of receipts from the personal income tax.

Nothing to start shrinking the deficit will happen before this year’s presidential election. But tackling the spending and revenue components of deficit reduction should be high on the agenda when the new president takes office next year.

Michael Spence writes:  Uncertainty about China’s economic prospects is roiling global markets – not least because so many questions are so difficult to answer. IIn the real economy, the export-driven tradable sector is contracting, owing to weak foreign demand. Faced with slow growth in Europe and Japan, moderate growth in the United States, and serious challenges in developing countries (with the exception of India), the Chinese trade engine has lost much of its steam.

At the same time, however, rising domestic demand has kept China’s growth rate relatively high – a feat that has been achieved without a substantial increase in household indebtedness. As private consumption has expanded, services have proliferated, generating employment for many. This is clear evidence of a healthy economic rebalancing.

The situation in the corporate sector is mixed. On one hand, highly innovative and dynamic private firms are driving growth. On the other hand, the corporate sector remains subject to serious vulnerabilities. The rapid expansion of credit in 2009 led to huge over-investment and excess capacity in commodity sectors, basic industries like steel, and especially real estate.

Despite these challenges, the reality is that China’s transition to a more innovative, consumer-driven economy is well underway. This suggests that the economy is experiencing a bumpy deceleration, not a meltdown.

As it stands, non-performing loans are on the rise, owing largely to the weaknesses in heavy industry and real estate.

China may need to rely on the large state balance sheet for loan consolidation, debt write-offs, and bank recapitalization.

Net private capital outflows remain substantial, and show no signs of slowing. As a result, the reserves held by the People’s Bank of China (PBOC) have declined by roughly $500 billion over the last year, with particularly large declines of some $100 billion in each of the last two months.

President Xi Jinping’s intensive anti-corruption campaign and, more generally, declining official tolerance for heterodox views also impact the economy.  Those who feel directly threatened by the anti-graft campaign might be inclined to take their money out of China.

Given China’s systemic importance in the global economy, uncertainty about its plans and prospects is bound to send tremors through global capital markets. That is why it is so important that the Chinese government increase the transparency of its decision-making, including by communicating its policy decisions more effectively.

The principal unaddressed problem affecting China’s financial system is the pervasiveness of state control and ownership, and the implicit guarantees that pervade asset markets. This leads to misallocation of capital (with small and medium-size private enterprises struggling the most) and the mispricing of risk, while contributing to a lax credit culture. The absence of credit discipline is particularly problematic when combined with highly accommodative monetary policy, because it can artificially keep zombie companies afloat.

To resolve this problem, China’s leaders must segregate the state balance sheet from the credit allocation system.

China’s current bout of economic volatility is likely to persist, though increased transparency could do much to blunt it. Add to that the smart use of state resources, together with sure-footed reforms, and China should be able to achieve moderate yet sustainable long-term growth.

Are women CEOs less talented than men, or do they only get the very touch jobs now.  Two of three CEOs at the top of a list of “must-gos” are women.

IBM (NYSE: IBM)
CEO: Virginia Rometty
Year started: 2012
One year stock price change: -18.9%
Annual compensation: $19.3 million

105-year old IBM is one of the greatest conglomerates in U.S. history. The company created some of the most important tech products of all time, including the mainframe computer and PC. The company has been battered by falling demand for large computers, a poor showing in the enterprise software and consulting business, and a weak move into the cloud computing market. IBM reported $103.6 billion in revenue in 2008. Revenue last year was $92.2 billion, and has continued to decline in 2015. Ginni Rometty has been CEO for four years. Rometty has repeatedly told shareholders the company will soon become dominant in cloud computing, mobile, and social media. Instead, it appears the company is having more trouble dealing with the changing tech landscape than Rometty is willing to admit.

Carl Icahn has finally managed to achieve what many Xerox investors were hoping would happen for a long time. Following pressure from the billionaire shareholder, the company announced it is breaking in two. This breakup is essentially undoing CEO Ursula Burns’ 2010 purchase of Affiliated Computer Systems for $6.4 billion. At the time, the plan was to transform Xerox from a hardware and copier company to an IT consulting company. Xerox’s performance has been downhill since. The company is in such deep trouble that the Icahn plan did not lift the company’s stock price. It trades near its 52-week low, which puts it down 32% for the period. Revenue of the company Burns created hit $22.6 billion in 2011. Last year, revenue was $18.0 billion, and it continues to drop rapidly. Burns may not have a role in either of the two new companies.

ChristineLagarde, Managing Director of the IMF,  says indirect taxation in the form of VAT in low single digits is the most viable option for GCC states: Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman.

Growing anxiety over the UK’s EU referendum has driven sterling down to a new seven year low. The pound fell as low as $1.3879, as cabinet ministers clashed over the legal strength of Britain’s new deal with Europe.

Investors are also scrambling to protect themselves against fresh volatility ahead of the June referendum. The cost of insuring against sterling volatility has hit its highest level since 2011.

IMF chief Christine Lagarde has warned that Britain, and Europe, would bother suffer if the UK quits the EU. She fears that the uncertainty will hurt growth, at a time when the world economy is already fragile.

The Fund also cited June’s referendum as a potential threat to the UK’s recovery.

Several other City bosses have warned against Brexit. Ryanair, the budget airline, has even pledged to campaign actively to keep Britain inside the EU.

HSBC has predicted that the pound would slump by 20% in the event of a Brexit vote. It also warned that growth would fall sharply, with the housing market and the banking sector also vulnerable.

A poll of City economists has also predicted that the pound will tumble further if the Out campaign wins.

The City of Philadelphia is considering a public bank.  Like the State of North Dakota, Philadelphia can create its own bank to hold and invest City funds to fulfill our needs, not the needs of multinational corporations funded by monopoly banks.

City Council will hold hearings on the creation of a Philadelphia Public Bank

Here are just some of the specific things a public bank can do that Wall Street can’t.  a Philadelphia Public Bank that we can’t do when we leave our money with Wall Street.

1.  Invest City dollars in capital-starved small businesses, including those owned and controlled by neighborhood residents through community development corporations, and consumer and worker-owned co-ops

2.  Direct lending at low rates to college students

3.  Finance and refinance mortgage loans at low rates

4.  Partner with community banks now threatened with extinction because they don’t have enough capital to lend

5.  Finance green energy improvements to homes and businesses throughout our City

6.  Issue bonds at low interest rates, save the City and School District millions of dollars, and free up precious resources to serve the needs of our families and residents.

Adam Creighton writes:  Some of the world’s leading economists are hosing down fears that the US – and by extension the west – is about to lose its economic hegemony.

In the coming few years, even a decade, no. — Anat Admati, Professor of finance and economics at the Stanford Graduate School of Business. 

No, the primacy of the US follows from the fact that it offers the greatest scope for innovation by its population relative to any other country. Every American is thinking of a new way to do old things or a way to do new products and technologies, to make a fortune. And the venture capital market obliges by providing the finance to translate the idea of the new innovation into actual innovation. The US is a mecca for people with ideas and skills that blend into this landscape. — Jagdish Bhagwati, professor of economics, law and international relations at Columbia University.

That’s already happened as regards global trade. It is about to happen in the production of goods and services. In the area of finance, the US will remain the top dog for quite a bit longer. — Willem Buiter, Global chief economist at Citigroup, former professor of political economy at LSE. 

In a peaceful world other countries should catch up to the US way of doing things. And in the current trend, the US seems to be going out of its way to pursue inefficiency. Holland is a nice place to live. It was the “powerhouse” of the 17th century. Is it a worse place to live now that other countries have caught up? — John Cochrane, Senior fellow at the Hoover Institution, Stanford. 

No, China is headed rather rapidly toward zero per cent growth. After a long period of adjustment, it will re-emerge with something like a four per cent growth rate. I am a China optimist for the long-term, but not for the next 10 years. — Tyler Cowen, Professor of economics at George Mason University, US.

No, the only potential competitor is China, and it will hit a wall, or explode, unless it figures out how to make its political system much more open. I see no evidence that the Chinese Communist Party will ever let this happen. — Eugene Fama, Professor of finance at the University of Chicago Booth School of Business. He shared the Nobel prize in economic sciences in 2013 with Robert Shiller and Lars Peter Hansen for work on the empirical analysis of asset prices.

In due time, the US will surely cease to have the world’s largest GDP. Even if per capita incomes in China only grow to 40 per cent of US levels, China will become the larger economy. However, over the past few years, the US has looked somewhat stronger and China has looked somewhat weaker. The US system of decentralised capitalism can also create wasteful investment and overbuilding, but we continue to also have an abundant supply of more productive entrepreneurs. Like Australia, America’s open and free culture abets innovators and encourages start-ups. America’s biggest weakness, which will surely cause us even larger problems in the 21st century, is its education system.  Edward Glaeser, Professor of economics at Harvard. With a PhD from the University of Chicago.  

Yes, eventually. For a while the US will have company from China and Europe. —Michael Spence, Professor of economics at New York University’s Stern School of Business. He shared the Nobel Memorial Prize in economic sciences in 2001. 

Not any time soon. Europe could have given the US a run for its money but I think the troubles there will resurface; the single currency is a problem. — Richard Thaler, Professor of behavioural science and economics at the University of Chicago Booth School of Business. 

I doubt it. I would not deny that the economy of the US has structural problems, not least in the areas of education, health and infrastructure. Yet, when we look at China and Europe, potential US rivals, the problems they face seem even bigger. Future prosperity will also depend increasingly on innovation, and there the US still leads by a wide margin. — William White, Chair of the OECD’s economic and development review committee.