Category Archives: Finance

Biggest Corruption Scandals of 2015?

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Corruption Scandals 2015

FIFA     Soccer’s world-governing body is so entangled in a massive web of corruption that it’s hard to pinpoint where it begins or ends, or even just how much money is involved. In May, after a lengthy U.S.-led investigation, the American Justice Department indicted 14 FIFA associates and officials, both current and former, who the FBI believed to be involved in “rampant, systemic, and deep-rooted” corruption. Seven months later, in December, another 16 officials were charged with involvement in bribery and corruption. On top of all that, FIFA president Sepp Blatter and Union of European Football Associations President Michel Platini were both given eight year suspensions from soccer activities this month over $2 million paid to Platini by Blatter in 2011. The U.S. investigation was initially intended to figure out whether FIFA officials took bribes to allow Russia and Qatar to host upcoming World Cups. But as evidence mounted, the inquiries expanded into a much more expansive probe, revealing what prosecutors say are years of corrupt practices, including bribery and game-selling, from officials in Europe, North America, Latin America, and the Caribbean.

Nigeria

When Nigerian President Muhammadu Buhari took over the presidency in May, it didn’t take him long to announce that he estimated some $150 billion had gone missing in Nigeria over the past ten years. The former military leader vowed he would do his best to find out where that money ended up, and in November he claimed to have traced at least a small fraction of it back to his predecessor’s administration. On Nov. 17, he ordered the arrest of Sambo Dasuki, former President Goodluck Jonathan’s national security advisor, for dipping his hands into the defense budget and allegedly stealing some $2 billion from the country’s fund to fight Boko Haram, the extremist group terrorizing Nigeria’s northeast. According to Buhari, Dasuki awarded phantom contracts for military supplies, including helicopters, fighter jets, bombs, and ammunition. But the equipment never arrived, and the new Nigerian administration is convinced Dasuki pocketed the money.

Malaysia

In mid 2015,  $700 million of state funds had ended up in Malaysian Prime Minister Najib Razak’s personal bank account — which was not where they were supposed to go. That tied Razak directly to a probe into the 1Malaysia Development Berhad, a government-owned development company that was supposed to turn Kuala Lumpur into a thriving financial hub. Najib claims the money in his account came from personal donations. But the reports came after the fund had already fallen behind on its payment schedule. Obama claims he raised the question of corruption in a private meeting with Najib, but publicly said only that the government should aim to be “more accountable, more open, more transparent, to root out corruption.”

Honduras and Guatemala

This spring and summer, protests erupted in the Central American countries of Honduras and Guatemala, as angry activists demanded the resignations of the countries’s two presidents. In Guatemala, the outrage was linked to an international probe that discovered how customs duties were lowered for bribes. And in Honduras, the former director of the Honduran Social Security Institute was accused, along with some of his top officials, of awarding $200 million of contracts to phantom companies. Some of that money is allegedly tied to President Juan Hernandez’s political party.

Ghanaian Judges

For two years, investigative journalist and 2015 Foreign Policy Global ThinkerAremeyaw Anas worked on a film based on footage he gathered prowling the halls of Ghanaian courthouses, pretending to be the relative of accused criminals and offering bribes to judges in exchange for shortened prison sentences. Wearing a secret camera, Anas claims to have caught 32 judges accepting offers of money and even livestock. In October, after Anas published his documentary, Ghana suspended seven top judges in what the country’s judicial council labeled a “prima facie case of stated misbehavior against them.” That “misbehavior” was what was documented by Anas, whose journalistic mission is to “name, shame, and jail” corrupt officials. And in this case, he claims he has hundreds of additional hours of footage to further prove the justices’ complicity. In December, 21 of the 32 indicted judges were reportedlyasked to step down.

United Nations General Assembly

According to the prosecutors who filed charges against him in October, John Ashe, former president of the U.N. General Assembly and one-time U.N. ambassador from Antigua and Barbuda, knew how to use diplomacy to make a quick buck. The October complaint claims that Ashe took part in a $1 million bribery scheme with a Chinese businessman who wanted to build a multi-billion dollar U.N. conference center in Macau. But that wasn’t the end of his shady deals with Chinese businessmen:  Ashe allegedly pocketed upwards of $800,000 in bribe money to support Chinese business deals on Antigua, then shared some of it with the Antiguan prime minister. And prosecutors say Ashe got a lot more than just the extra pocket money out of all his wheeling and dealing. According to the complaint, his under the table deals helped him pay $40,000 in BMW bills, build a $30,000 basketball court in his private home, collect $54,000 in Rolex watches, and join a vacation club for $69,000 — among other luxuries.

 

India a Bright Hope in the World Economy

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Nihda Sinha writes:  As 2015 draws to a close, the outlook for global growth looks negative. On Wednesday, International Monetary Fund (IMF) managing director Christine Lagarde raised concerns over the issue.

Global economic growth will be disappointing next year and the outlook for the medium-term has also deteriorated.  Lagarde said the prospect of rising interest rates in the US and an economic slowdown in China were contributing to uncertainty and a higher risk of economic vulnerability worldwide.

Although weak global growth remains a drag, Janet Yellen of the US Fed has said the US was far more dependent on domestic consumption and investment, which, at least so far, has been strong enough to produce growth that was slightly above trend.

Though the Reuters polls point to global growth averaging only 3.4% next year with scant prospect of touching 4%, given the slowdown in China and the gloom surrounding emerging markets, India seems to be on a better footing.

Last week, World Bank chief economist Kaushik Basu said amidst sluggish global growth, the US and India are two engines of growth with India anticipated to be among the fastest growing major economies in the world.

Addressing the 98th annual conference of the Indian Economic Association (IEA), Basu said, “Global growth is sluggish. The world economy is expected to grow barely by 2.5%.”

He noted that Russia is in recession and its GDP is actually shrinking by about 4%. Among the BRICS (Brazil, Russia, India, China and South Africa) nations, only China and India are growing around and below 7%, while Brazil’s GDP is declining by about 3.5% and South Africa is barely growing.

The Indian economy has the potential to be the world’s fastest growing economy over the coming decade, surging ahead of its South Asian economic rival China that will continue to see a slowdown, according to the Harvard University research.

A new economic reality of lower oil and commodity prices, lower growth in Asia and a normalizing US interest-rate environment represent an inflection point for the global economy. These developments will likely result in a volatile global environment.

“The global economy is recovering, but there are some wide regional disparities,” said Gabriel Torres, vice-president and senior credit officer at Moody’s. “Current and prospective growth rates are still generally lower than before the financial crisis.”

A sharp slowdown in China’s GDP growth rate to 2.3% during 2016-2018 “would disrupt global trade and hinder growth, with significant knock-on effects for emerging markets and global corporates. In turn, this would keep short-term interest rates and commodity prices lower for longer”, the report warned.

The UN cut its forecast for global economic growth in 2015 by 0.4 percentage point to 2.4%, largely due to lower commodity prices, increased market volatility and slow growth in emerging market economies, but added that there will be a slight pick-up next year.

“The world economy is projected to grow by 2.9% in 2016 and 3.2% in 2017, supported by generally less restrictive fiscal and still accommodative monetary policy stances worldwide,” the UN said in a statement accompanying its annual World Economic Situation and Prospects report.

In its latest 2015 Global Economic Prospects report, released in June 2015, the World Bank laid out the challenges. Developing countries face a series of tough challenges in 2015, including the looming prospect of higher borrowing costs in a new era of low prices for oil and other key commodities. This will result in a fourth consecutive year of disappointing economic growth this year, said the report. Developing countries are now projected to grow by 4.4% this year, with a likely rise to 5.2% in 2016, and 5.4% in 2017.

Inflation: All Ships Don’t Rise with a Rising Tide

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Philip Pilkington writes:    Real people — and their representatives in government — don’t like inflation much you see. “Irrational nonsense!” says the vulgar Keynesian policy enthusiast, “when the price of everything goes up, your wage should rise as well. Why? Because on average, we are all sellers of something. If you work in a tea shop and the price of tea goes up, your wage can be expected to go up as well, and so forth. Remember, every dollar that one person spends becomes the income of another person!” (Adam  Smith)

That sounds great but things are actually a little more complicated. In fact, the man in the street’s distrust of inflation is probably more grounded than Smith’s abstractions. Why? Because inflation has a distributive element: it does not affect all income groups equally.

Inflation almost certainly hits lower income groups harder than higher income groups. The main reason for this is because food and energy inflation tends to be rather high, while the price of cars and electronic equipment and the like tends to be either steady or falling over time. You can see this with respect to the UK in the graph below:

Inflation1

Food and energy, of course, makes up a greater part of the basket of lower income households than it does higher income households. So what we did was we came up with new weights for the RPI which we thought more accurately reflected the baskets of lower income households. Since we did not have access to survey data we had to basically just make up the weights, but I think they are at least somewhat reasonable. Here is a list of the old weights versus the new weights:

Inflation2

And here are the results we got by comparing the RPI with the new lower income group inflation measure:

Inflation3

What we see is that the lower income group basket is more sensitive to price fluctuations than the standard inflation measure. If we had constructed a high income group basket and compared it, the lower income group basket would be even more sensitive again. This means that in times of high inflation lower income groups tend to see their incomes eroded more rapidly than higher income groups.

Inflation redistributes income from creditors to debtors as the real value of debt is eroded. That is generally good for lower income households. But these households do not generally see this or understand it. They do see, however, that their costs are rising while the wealthy family down the road are not experiencing the same pain and this is likely to irritate them.

Keynesian policy enthusiasts should always remember that we live in a democracy; not a technocracy run by them. If they want their policies to be put in place they require the consensus of elected leaders which ultimately means the consensus of the mass of citizens. For this reason it is probably not such a good idea to go around “celebrating” inflation. Indeed, it often comes across as elitist and lacking in any populist appeal which makes it an easy target for libertarian types who prey on peoples’ fears and misunderstandings to spread ignorance and bad ideas.

Is Apprenticeship the Answer to Job Training?

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The Philadelphia Federal Reserve writes:  Government, foundation, and workforce leaders are displaying keen interest in apprenticeships as a way to give job seekers skills, credentials, and access to careers. This increased interest is also part of the greater attention to workforce development strategies that engage employers.Apprenticeships have a long history with roots in ancient times. The Code of Hammurabi of Babylon, which dates back to the 18th century bce, required artisans to teach their crafts to the next generation. By the 13th century, a type of apprenticeship emerged in Western Europe in the form of craft guilds.[1] In the colonial U.S., now-famous apprentices included George Washington (surveyor), Benjamin Franklin (printer), and Paul Revere (silversmith).

RAs, authorized under 78-year-old federal legislation, are getting more attention in recognition of the critical importance of engaging private-sector employers in addressing the workforce needs of unemployed and underemployed people. RAs, with a combination of structured OTJ training and related training and instruction, hold the promise of industry-recognized credentials and career access. RAs have been used primarily in the skilled trades and construction, but recent DOL grants are intended to catalyze their use by new populations in high-growth industries with new program models.

As private-sector employers weigh the costs and benefits of apprenticeships, intermediaries can assist employers to design programs, recruit participants, and register RA programs. The intermediaries range from state programs such as Apprenticeship Carolina, nonprofits such as Vermont Healthcare and Information Technology Education Center (HITEC), and joint labor – management programs.

The declarations of intent signed this summer between the U.S. Departments of Commerce, Education, and Labor and their counterparts in Germany and Switzerland reflect a growing desire to learn from countries where apprenticeships are successfully embedded in educational and employment systems. The inherent challenge will be to apply and implement successful practices in the U.S. despite differences in educational systems and employment practices.  Apprenticeship

Printer's Apprentice

 

Economics’ Books of the Year

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Noah Smith’s Economics Books of the Year:  Anyone’s list of best books of the year is going to be incomplete and biased. Mine, for example, is weighted toward books about economic theory and the financial industry. That means that 2015 is the perfect year for me to list my recommendations, since this was a particularly epic time for books about the discipline of economics. In no particular order, here is a short list of good ones:

“The Courage to Act: A Memoir of a Crisis and Its Aftermath” by Ben S. Bernanke.  The story of the housing crash, the Lehman shock and the global financial crisis is by now common knowledge. What’s less known is how modern economic theory guided the thinking of the elites charged with halting the crisis. “Courage to Act” tells this story.

Ben Bernanke was the right man in the right place at the right time. He was by training an expert on the Great Depression who just happened to be chairman of the Federal Reserve during the onset of a new and similar crash. He was one of the only mainstream economic theorists who had thought deeply about the connections between finance and the macroeconomy. No person was more suited to the job than Bernanke. Very few would have had the “Courage to Act” as he did.

Bernanke is too modest to say this. It is only by reading his memoir that one gets a clear sense of his thoughtfulness, intellectual humility and powerful intelligence. This stands in strong contrast to the confused, ad-hoc decision-making apparatus of the Treasury Department, regulators, the large financial institutions and Congress. “Courage to Act” is a reminder of why an independent Fed, staffed with our most thoughtful and humble macroeconomists, is an important institution.

“Economics Rules: The Rights and Wrongs of the Dismal Science” by Dani Rodrik.  As mainstream economists go, Dani Rodrik is a reformer. He is one of the only top scholars in the field to have questioned the hallowed pro-free-trade consensus, and to have explored the taboo idea of government industrial policy that targets industries and infrastructure to promote growth. So Rodrik is in a unique position to write a book about the economics  profession and its discontents.

The central tenet of Rodrik’s book is that economic models are basically just fables. For any phenomenon — for example, the housing market — there are many alternative models. Each one represents a different way of thinking about this market — a different simple, imaginary world that hopefully sheds light on one thing that could be affecting housing. Economics, Rodrik asserts, is a craft, not a science — the key to being a good economist isn’t to find the right model, but to wisely pick from among the menu of available alternative models in each situation.

This vision of what economists do is familiar to anyone who has worked in the profession, but will be startling and — I predict — a little off-putting to outsiders who are used to getting more concrete results from science. In my opinion, it underrates the importance of the empirical revolution taking place in economics, which promises to help us choose between economic models not based on plausibility, but on evidence. “Economics Rules” is a must-read for critics and defenders of econ alike.

“Misbehaving: The Making of Behavioral Economics” by Richard Thaler.  Richard Thaler is another rebel economist. In the 1970s and 1980s, the profession began discarding its long-cherished assumptions of perfectly rational consumers and producers, and toying with ideas from psychology. Thaler was one of the people at the forefront of this effort, and in “Misbehaving,” he narrates the history of the behavioral mini-revolution.

This story is engaging because it shows how scientific fields change direction. If you’ve ever read the philosopher of science Thomas Kuhn, you’re familiar with the idea that anomalies accumulate and slowly poke holes in the dominant theory until a crisis is reached. Thaler’s memoir recounts the process of anomalies piling up. It is fundamentally a story about how the economics discipline collectively realized that it was wrong about some things. It isn’t the story of how a new paradigm arose to replace the old one — in fact, that hasn’t happened yet. Eventually, we will get a more complete understanding of how economic agents make decisions, but these things take time.

“Chicagonomics: The Evolution of Chicago Free Market Economics” by Lanny Ebenstein

The so-called Chicago School of economics was the last great political-economic school of thought to emerge in the U.S. It blended libertarian political ideas with simple mathematical modeling, all organized around one central principle — that markets work. Many influential ideas and schools have emerged since the Chicago School, but all of them have been either limited in scope or have avoided mixing political ideology with assessment of the facts. Chicago was grandiose, sweeping and uncompromising. It attracted some of the nation’s brightest minds, and had a huge and lasting impact on our economic policies. In “Chicagonomics,” Lanny Ebenstein, a historian of economics, tells the tale of how this intellectual movement came together and found its destiny.

“Superforecasting: The Art and Science of Prediction” by Philip E. Tetlock and Dan Gardner.  The books in the list so far have been all about theory — about how economists and policy makers hunt around in the dark for something that seems to make sense. But it’s nice to know that sometimes, social scientists can actually predict the future. Phil Tetlock and Dan Gardner have written an excellent book about the times that forecasting has worked. Drawing on lessons gleaned from observing individuals who have been remarkably successful at predicting political and economic events, Tetlock and Gardner offer their scholarly insight into how forecasting should best be done.

Books

 

Landlines Gone Forever?

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Joe Carmichael writes:  Landlines have had a surprising half-life, but it’s starting to feel like their continued existence is an affront to progress, an admission that we’re not all in this thing together. Sure, they’re simple and reliable in case of emergency, but should that be enough? Is it enough? The answer is clearly no. It’s only a matter of time before we cut ourselves free of cords. Here’s why the process is taking so damn long.

Usefulness Isn’t Binary

Landlines are familiar and simple. They’re dumb and there’s some sentimental beauty to that. Landlines are a product of the more innocent time before your phone kept watch on you, shoved “notifications” into your pocket, and profiteered app by app. Still, most people don’t use landlines in a nostalgic way. The sentiment is real, but minor. People fundamentally use old-fashioned phones because they’re useful. The fact that they aren’t very useful is overshadowed by the fact that they have utility. We’re reluctant to be rid of things that work.

Simplicity, epitomized.

But the real reason, the main reason people still have landlines collecting dust in their homes, is that they think it makes them more secure in the face of an emergency. Calls made from landlines to emergency services include addresses in their identification tags, whereas cell phones only initially provide the nearest cell tower. In natural disasters and emergencies, there’s a good chance that your old-fashioned, corded, copper-wired landline will continue to function. (Cordless phones still require power, and therefore will fail.) There’s a chance that your cell phone will not continue to function.

The fact that landlines are dumb is a double-edged sword: Sure, their simplicity is attractive, but their function is narrowly defined. Landlines don’t provide access to anything other than what’s on the other end of the line. This is why they seem comical to younger consumers unused to gadgets with such limited utility. And in that issue we find the economic problem: Landlines aren’t worth it and are getting less worth it daily. Supply and demand affect cost. The chart below illustrates the relative increase in cost of landlines as opposed to the cost of cell phones. More for less is not a great business model.  Almost half of all adults and over half of all children sport cell phones exclusively.

 The trendlines show that in just over five years, the landline will be gone — though the truth is more complicated than that. When demand gets very low, they’ll cease to be an option for mass consumption and become a boutique option. Still, they’ll effectively have a zero percent share of the market. Beyond that it’s a matter of generations until they’re both gone and forgotten.
Image by Claudio Munoz

Image by Claudio Munoz

 

China Overlooks Zimbabwe’s Human Rights Record

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Yuan to be Zimbabwe’s official currency after China cancels debt.  China overlooks a terrible human rights record, and Zimbabwe has a new preferred trade ally.

Zimbabwe has announced that it will make the Chinese yuan legal tender after Beijing confirmed it would cancel $40m in debts.

“They [China] said they are cancelling our debts that are maturing this year and we are in the process of finalising the debt instruments and calculating the debts,” minister Patrick Chinamasa said in a statement.

China also announced that Zimbabwe will officially make the Chinese yuan legal tender as it seeks to increase trade with Beijing.

Zimbabwe abandoned its own dollar in 2009 after hyperinflation, which had peaked at around 500bn%, rendered it unusable.

It then started using a slew of foreign currencies, including the US dollar and the South African rand.

The yuan was later added to the basket of the foreign currencies, but its use had not been approved yet for public transactions in the market dominated by the greenback.

Use of the yuan “will be a function of trade between China and Zimbabwe and acceptability with customers in Zimbabwe,” the minister said.

Zimbabwe’s central bank chief John Mangudya was in negotiations with the People’s Bank of China “to see whether we can enhance its usage here,” said Chinamasa.

China is Zimbabwe’s biggest trading partner following Zimbabwe’s isolation by its former western trading partners over Harare’s human rights record.

In reaction veteran president Robert Mugabe adopted a “look East policy”, forging new alliances with eastern Asian countries and buttressing existing ones.

In early December, Chinese president Xi Jinping stopped over in Zimbabwe in a rare trip by a world leader to the country, and presided over the signing of various agreements, mainly to upgrade and rebuild Zimbabwe’s infrastructure such as power stations.

 

China and the Phillipines Kiss at a Bank and Fight at Sea

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Phillipines joins China-baced bank.

Days after the China-led Asian Infrastructure Investment Bank was formally launched, the government of Philippines said it will sign on to the bank’s articles of agreement. Despite the opposition of Washington, Philippines, a major US ally in the region, has joined the new lender.

“The Republic of the Philippines will be signing the Articles of Agreement (AOA) of the Asia Infrastructure Investment Bank before year-end, joining the newly created multilateral institution aimed at boosting infrastructure development and connectivity,” the Department of Finance (DOF) in Manila said in a statement.

The announcement came two days before the deadline for prospective founding members to sign on the charter of the AIIB. Founding members include the BRICS, half of the European Union and all of the Asian bloc, ASEAN.

The Philippines has a dispute with China over territorial claims in parts of the South China Sea.  It has taken its case to the Permanent Court of Arbitration in the Hague, but China has declined to take part.

Philippine Vice President Jejomar Binay has said he wants the country to be a member of the China-backed bank because it will spur more investment and employment in his country.

The country’s indicative paid-in capital will be $196 million payable in five years, or $39 million per annum, said a government statement on Wednesday.

The Banks’ board of directors and executive council will meet for the first time from Jan. 16 to 18 in Beijing.

The bank, headquartered in Beijing, now has 57 members, that includes Germany, France, Italy, and the UK. It is expected to name its first lending projects in mid-2016.

The China-backed multilateral development institution is tasked with financing infrastructure development across Asia.

With an authorized capital of $100 billion, the AIIB will finance infrastructure projects like the construction of roads, railways, and airports in the Asia-Pacific Region.

The ADB has estimated that in the next decade Asian countries will need $8 trillion in infrastructure investments to maintain the current economic growth rate.

The AIIB will extend China’s financial reach and compete not only with the World Bank, but also with the Asian Development Bank, which is heavily dominated by Japan.

South China Seas