Inflation

Evan Schrager 11/14/2011 Quantitative Easing Research Paper The term quantitative easing (QE) describes a process in which the Federal Reserve expands its balance sheet through purchasing back government bonds from financial institutions with electronically created funds. The government purchases, by way of account deposits, give banks the excess reserves required for them to create new money by the process of deposit multiplication from increased lending in the fractional reserve banking system. As the supply of medium and long-term government bonds decreases, their prices increase.

This leads to a decrease in their yield; yields are often a determinant of long-term interest rates, mortgages and most business lending. Since it is easier for individuals to borrow money, consumer wealth increases, which leads to investment and consumption increases as well. Risks include the policy being more effective than intended, spurring hyperinflation, or the risk of not being effective enough, if banks opt simply to pocket the additional cash in order to increase their capital reserves in a climate of increasing defaults in their present loan portfolio.

In the quantitative easing process, the Fed goes to a network of dealers, in search of Treasury bonds. The Fed buys the bonds in a competitive bidding process between the approved bond dealers. The Fed takes a bond certificate and gives the dealers freshly printed US dollars. The transactions are done electronically, but it is still referred to as printed money. The US Federal Reserve held between $700 billion and $800 billion of Treasury notes on its balance sheet before the current recession. In late November 2008, the Fed started buying $600 billion in Mortgage-backed securities.

By March 2009, it held $1. 75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2. 1 trillion in June 2010. The primary dealers can offer to sell the Fed bonds held by their clients. The newly printed money moves from the Fed, to the dealer, to the client’s brokerage account. Cash is moving directly into the real economy. The customer can buy another bond, buy stocks, use it at the grocery store, or simply keep the cash. Right now, however, cash is earning next to nothing, so investors are motivated to find alternative stores of value. They are motivated to spend or invest their cash.

With an ongoing battle taking place between inflationary and deflationary forces in the economy and financial markets, it is extremely important for investors to understand how “quantitave easing” programs will impact their investments and their long term purchasing power. Since quantitative easing represents a threat to our wealth based on its potential adverse impact, this topic warrants serious attention above and beyond a boilerplate analysis. Common references to “cash sitting at banks” will give investors a poor read on what quantitative easing is and the possible ramifications for our portfolios and the economy.

In order to put QE in context, I will discuss the Japanese deflationary spiral of the ‘90s. Japan suffered from stagflation throughout the 1990’s, so the Bank of Japan instituted a quantitative easing program of its own, referred to as QEP. The QEP consisted of three key elements: “(1) The BOJ changed its main operating target from the uncollateralized overnight call rate to the outstanding current account balances (CABs) held by financial institutions at the BOJ (i. e. , bank reserves), and ultimately boosted the CAB well in excess of required reserves. 2) The BOJ boosted its purchases of government bonds, including long-term JGBs, and some other assets, in order to help achieve the targeted increases in CABs. (3) The BOJ committed to maintain the QEP until the core CPI (which in Japan is defined to exclude perishables but not energy) stopped declining. ” The effect of the Bank of Japan’s liquidity injections on bank lending was muted by the substitution of central bank liquidity for interbank liquidity. Second, despite the dampening of the stimulus from the liquidity injections due to this substitution, there was a positive and significant effect of liquidity on bank lending.

This implies that quantitative easing can affect the supply of credit, particularly during periods of financial stress. However, the overall effect was fairly small, so that huge amounts of liquidity would have been needed to achieve noticeable effects. Third, weak banks benefited more from QEP than stronger banks. However, “the rapid unwinding of liquidity infusions observed at the conclusion of QEP had little impact on lending growth once bank health and confidence in the banking system had been restored. ” It is possible that QEP exerted ositive effects, but that these were simply overwhelmed by the drag on total spending coming from weakness in the banking sector and balance sheet problems among households and firms. Since there are a number of ways that QEP may have stimulated spending, we can infer that the QE programs in the United States will stimulate some spending as well, but perhaps we will overestimate the effects just like Japan did years ago. When you consider some of the world’s largest sovereign wealth funds may participate in QE, you can understand the potentially broad impact of the Fed’s actions. The largest ones control billions of dollars.

With the currency risk involved when foreigners hold treasury bonds, it is not a stretch to believe that some sovereign wealth funds will be interested in selling some of their treasuries to the Fed in exchange for newly printed US dollars. They may also quickly exchange the cash for gold, silver, copper, oil or stocks to reduce their currency risk. Fears of future inflation can make cash unattractive in the eyes of investors and consumers. A big part of the Fed’s approach is to increase the expectations of future inflation since it can change the investing and buying habits of businesses and consumers. Since there are many unknowns, and many moving parts, listen with skepticism to anyone who claims to know the long term impacts of QE programs on both the financial markets and the economy. ” We need to better understand the QE process, and monitor and assess the market’s reaction to details as they are released by the Fed. We must be willing to make inflationary and deflationary adjustments based on market internals and economic data. Adopting a “QE will work or won’t work” approach in advance would be highly speculative. Flexibility is always important in the markets, but maybe more so when it comes to the possible long term impacts of QE.

This newly printed money will find its way around the globe, impacting currencies, commodities, and foreign stock markets. According to Brian P. Sack of the NYFRB, “The effect of asset purchases on the economy remains a point of ongoing debate, with some uncertainty about the channels through which such purchases operate and the magnitude of those effects… In particular, by purchasing longer term securities, the Federal Reserve removes duration risk form the market, which should help reduce the term premium that investors demand for holding longer term securities. That effect should, in turn, oost other asset prices, as those investors displaced by the Fed’s purchases would likely seek to hold alternative types of securities. ” “Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be. It seems highly unlikely that the economy is completely insensitive to borrowing costs and wealth, or to other changes in broad financial conditions. ” Notice the references to “boosting asset prices,” and “lowering borrowing costs,” and “adding to household wealth by keeping asset prices higher. From Mr. Sack’s perspective, the Fed buys intermediate term treasuries, which drives down the yield for new investors. Mr. Sack hypothesizes that those new investors will decide to purchase other bonds, perhaps with longer maturities as they search for higher yields. As the Fed pushes demand to other areas of the bond market, longer term interest rates would fall. As new investors look at their options, they may decide to purchase other high yielding assets since the Fed’s actions have made yields on more conservative investments unattractive.

Since the Fed promises to remain in the market with QE for an extended period, the risk associated with holding stocks, higher yielding bonds, commodities, precious metals and real estate are reduced. If you think in extremes, if the Fed stated that all treasuries would pay no interest for the next 5 years, investors would move into investments with more risk in search of higher yields. A good way to summarize QE is as follows: QE attempts to lower long term interest rates, keep them low for a pre-defined period of time, while pouring cash into the economy in an effort to boost consumption and investment.

Like gold, US dollars have value only to the extent that they are strictly limited in supply. The government has technology that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or by threatening to do so, the US government can reduce the value of a dollar in terms of goods and services, which is the same as raising the price in dollars of those goods and services. Thus, we can conclude that, under a paper money system, a determined government can always generate higher spending and hence, positive inflation.

The important takeaway is the concept, which is to print money, and devalue the purchasing power of US dollars in your wallet/bank account. Based on the government and Fed’s extreme actions during the financial crisis, it is safe to say that we have a determined government. Investors cannot underestimate how determined our government will be, in terms of “how much money are they willing to print? ” and “what assets are they willing to buy? ” For example, if buying T-bonds doesn’t work, what prevents them from moving to corporate bonds, stocks, residential housing, or commercial real estate?

That sounds extreme, but five or six years ago, having the Fed buy treasury bonds or having the government take over AIG seemed extreme. But that happened right before our eyes. A problem around the globe is weak balance sheets from consumers to corporations to municipalities all the way up to the United States’ assets and liabilities ledger. There are two ways to address weak balance sheets. You can attack the asset side or the liability side. During recessions, bad debt is removed from the system when entities go out of business, defaulting on their debts.

This is a painful part of a recession, but is necessary to allow capital to reform, which eventually leads to new investment and sustainable economic growth. The hard way to address our problems with balance sheets is to let those who deserve to fail go out of business. Unfortunately for the country’s long term outlook, the hard way, or short term pain, does not sit well with those in positions of power—especially politicians, who are always concerned about the next election. This is a huge flaw: we need to think in terms of what is best for the future of our country instead of thinking in the short term.

If we need to reduce our standard of living in order to combat the national deficit, then so be it. Americans need to stop complaining about the recessionary conditions and must make now in order to guarantee future standards of living. In order to understand all of the bailouts, government takeovers, and money printing, you basically need to think about powerful people in business and government who are simply trying to stay in power, regardless of whether or not their actions are in the best long term interest of shareholders, taxpayers, and ordinary hard working citizens.

These comments do not apply to the select few in positions of power who still make decisions based upon sound principles and integrity, but most politicians do not. I’ll stay away from this topic because it is a political issue, but quite relevant so I felt it was worth mentioning. In a healthy credit market, banks lend while consumers and businesses borrow to invest and consume. Demand, based upon available credit, boosts asset prices and profits. As asset prices rise, balance sheets strengthen. With healthy balance sheets, businesses and consumers feel wealthy, and borrow more, invest more, and consume more.

This is known as the wealth effect. As asset prices rise, the collateral backing the loans remains sound, allowing the banks to lend even more, and around and around we go, until credit causes the creation of too much supply. A good example is the recent overbuilding in the housing market. Then asset prices begin to fall. Now the wealth effect becomes the reverse wealth effect, as consumers, businesses, and banks begin to see their net worth deteriorate. When the Fed lowers interest rates, they attempt to spur borrowing and lending.

This, in turn, can get the wealth effect back into gear, as borrowed money creates demand for goods, services, and assets. In the present day, traditional banks are reluctant to lend, and many consumers either don’t want a loan, or cannot get a loan. In this environment, the Fed, via QE, is trying to spark the wealth effect by attempting to re-inflate asset prices. QE II refers to the decision in November 2010 in which the FOMC announced the purchases of 600 billion longer-term treasury debt. A fair question to ask is, “Why did we pursue QEII? There are several reasons the government went through with another round of QE. Firstly, the Japanese experience with mild deflation and a near-zero nominal interest rate has been poor. Second, inflation in the US was close to the implicit FOMC inflation target during the first part of 2010. However, during 2010, a renewed disinflation trend developed and the recovery slowed down in the summer of ’10. These developments leave the US at risk of a Japanese-style outcome. Was QEII effective? The financial markets effects of QEII looked the same as if the FOMC had reduced the policy rate substantially.

Specifically, real interest rates declined, the dollar depreciated, and equity prices rose. These are the classic financial market effects one might observe when the Fed eases monetary policy in ordinary times (in an interest rate targeting environment). The QEII experience shows that monetary policy can be eased aggressively even when the policy rate is near zero. However, it is difficult to observe the overall effects of QE and QEII because of the lags involved. Effects on the real economy would be expected to lag by six to twelve months.

Real effects are difficult to disentangle because other shocks hit the economy in the meantime. This happened, apparently, during the first half of 2011, and is a standard problem in evaluating monetary policy. Overall, QE2 has shown that the Fed can conduct an effective monetary stabilization policy even when policy rates are near zero. Now I will discuss investment strategies for inflationary and deflationary outcomes of quantitative easing. Inflationary and deflationary forces coupled with possible Fed intervention require a flexible approach to financial markets.

Common sense tells us that money printing is probably not the path to long term prosperity, but I do believe QE can impact asset prices in a manner not fully understood by many individual investors as well as many financial advisors. If the Fed is successful for a period of time, I would invest in inflation friendly and weak-dollar assets such as gold, silver, copper, oil, and emerging market stocks. If the Fed fails in the long run, then a deflationary spiral may be the outcome, making cash, gold, dividend payers, conservative bonds, and CDs attractive.

Middle of the road choices include utilities, consumer staples stocks, and other dividend payers. Financial markets tend to anticipate Fed announcements. We always have to be on our toes for information/news relevant to QE. If you read the writings of Ben Bernanke and more recently writings by James Bullard, you know the Federal Reserve is willing to use every tool and in their arsenal in attempt to re-inflate asset prices and restore some semblance of the wealth effect. However, we must understand that the Fed faces high hurdles, in the form of mountains of global debt and fragile asset prices.

So far, the U. S. has been able to get away with massive debts and unsustainable deficits for one simple reason. The U. S. dollar is still the world’s reserve currency, as it has been effectively since World War II and literally since the early 1970? s. Because all governments and banks in the world accept and hold U. S. dollars as the majority of their reserves, the United States is able to simply print more money whenever it cannot afford to pay for things that it needs. Besides this, the country can borrow money in its own currency at incredibly low interest rates that we have seen approach almost zero.

US citizens personally benefit in another critical way every time that they stop to get gas. With the U. S. dollar as the international reserve currency, oil and almost all commodities are all priced in dollars. As a result, you see an enormous amount of inexpensive goods available. Food items and other items that use oil/gas as inputs are extremely cheap. This makes restaurants and other attractions affordable in America. The level of wealth seen in the United States is simply unprecedented, and most of this results from the benefits of the dollar as universal reserve currency.

There will be dramatic consequences difficult to imagine if the dollar finally ceases to be the reserve currency of the world. Should this happen, then the value of the dollar will plummet. The immediate painful effects will be that commodities prices skyrocket. These would no longer be priced in U. S. dollars, and you would see the falling value of the dollar buy fewer and fewer commodities. Gasoline at five to ten dollars a gallon is not only possible, but highly likely. Along with higher gas prices, we could see higher prices for anything that uses oil to ship goods around the world.

This means practically everything that you buy would all cost dramatically more. As prices skyrocket, your lifestyle would sustain a punishing drop overnight. This is a very scary succession of possible events. Unfortunately, this is not the only consequence that you would see of a dollar that is no longer the reserve currency of the world. Interest rates would rise dramatically. They could easily reach ten to fifteen percent. This would wreck the housing market far worse than it is today. It would also cause the stock market to crash by almost half in a number of weeks.

As the costs of supplies and materials go up with the falling currency value, businesses would be forced to cut back on employees because of their falling sales. Unemployment could reach twenty to thirty percent or more as a result of this. As if this is not bad enough, inflation would be sky high along with the rising prices and disappearing jobs. It is important to remember that the only thing that has to occur for all of these terrible things to happen is for other countries to prefer to be paid in anything besides U. S. Dollars.

In the event that non-United States holders of dollar-denominated assets decided to shift holdings to assets denominated in other currencies, there could be serious consequences for the US economy. The possibility of QE3 has some serious implications, although Bernanke has denied that there will be another round easing. The dollar has plunged nearly 20% against the euro over the last year and a half, a period that includes the run-up to and aftermath of the last round of quantitative easing, the Fed’s $600 billion bond-buying program known as QE2. But a QE3 may not pack the same dollar-slamming punch.

If there is a QE3, the dollar’s fall could easily approach 10% on a trade-weighted basis against rival currencies, said David Woo, head of G-10 global rates and currencies research at Bank of America Merrill Lynch in New York. But “the market is now more skeptical of the benefits of QE for the economy,” Mr. Woo said. “It is possible that by extension this means any short-term [dollar] decline on the back of QE3 will be also more limited. ” Instead of QE3, Bernanke and the Fed decided to implement “Operation Twist,” a widely expected stimulus move reviving a policy from the 1960s.

The policy involves selling $400 billion in short-term Treasuries in exchange for the same amount of longer-term bonds, starting in October and ending in June 2012. While the move does not mean the Fed will pump additional money into the economy, it is designed to lower yields on long-term bonds, while keeping short-term rates little changed. The intent is to thereby push down interest rates on everything from mortgages to business loans, giving consumers and companies an additional incentive to borrow and spend money. Some reputable names believe the dollar is going to depreciate in value over the next decade or two.

Bestselling authors Robert Wiedemer of “Aftershock” and David Skarica of “The Great Super Cycle” both forecasted the housing collapse, financial crisis, and stock market collapse years ahead of them happening. They are calling for a collapse of the dollar. This could lead to many unsophisticated investors to “hop on the train”, causing a swing in technical expectations. QE attempts to lower long term interest rates, keep them low for a fairly well-understood period of time, while flooding the economy with cash in an effort to boost consumption and investment.

In my opinion, quantitative easing in the US was a mild success. The markets were in a state of flux and we needed to do something. QE2 was necessary because we needed to increase the scale to which the LSAPs (large scale asset purchases) affected the economy. As for QE3, I don’t believe it is in our country’s best interest, because it would show even greater weakness, leading many foreign investors to flee from the dollar. Somewhere down the line, I predict that the IMF will attempt to overtake the dollar as the world reserve currency, but it certainly won’t happen overnight.

If this happens, Americans will have to downgrade their wealthy standard of living due to increased commodity prices. However, I don’t believe the US Dollar will lose its currency reserve status anytime soon, nor do I believe that QE3 will happen. My recommendation is to continue QE in small amounts, unwinding it under Bernanke’s plan from his September speech in Minneapolis. Bernanke has stated that there will be no more easing, but you never know with the “Bernanke, Obama, Geithner brain trust. ” Thus, our best option is to remain flexible in our policy schemes and monitor and react to relevant news as best as we can.

Ben Bernanke concludes his Minneapolis speech in an attempt to reassure us that our country will be okay. “The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability. ” Let us hope they act with rationality and in the best interest of the long term growth and stability of our economy. If America is ever going to dig itself out of the enormous debts it has taken, we must not devalue the dollar to the point that it is phased out as the world reserve currency.

Perhaps a downgrade in American’s standard of living is necessary to reduce the deficit by a significant enough margin. There is some hope for a return to prosperity and consistent growth, but Americans need to be aware of the implications of QE on their portfolios and their long term purchasing power. Works Cited 1. United States. Richmond Federal Reserve. By Thomas M. Humphrey. The Theory of Multiple Expansion of Deposits: What It Is and Whence It Came. Mar. -Apr. 1987. Web. 14 Nov. 2011. <http://www. richmondfed. org/publications/research/economic_review/1987/pdf/er730201. pdf>. 2. A QE1 Timeline. ” Calculated Risk, 03 Oct. 2010. Web. 13 Nov. 2011. <http://www. calculatedriskblog. com/2010/10/qe1-timeline. html>. 3. Ciovacco, Chris. “Video Series: Quantitative Easing. ” Ciovacco Capital Management. Web. 14 Nov. 2011. <http://ciovaccocapital. com/videos/qe/index. html>. 4. 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“A civilization which leaves so large a number of its participants unsatisfied and drives them into revolt neither has nor deserves the prospect of a lasting existence. ” (Freud, 2011) As the above quote describes the revolt took place when the citizen of the country is left unsatisfied and there are demands and rights ignored by the government or the king/queen or by the monarch for their benefits and luxury it triggered the citizen to come on the roads or even to pick up the arms for their freedom to breath in their country. This is what the world has witnessed from winters of 2010.

When the citizen of the Middle East countries and North Africa mainly Tunisia, Egypt, Libya, Syria, and Yemen came together to throw away the rule of the old tyrants which are ruling them for years and suppressing their lives for the lavishness in their own countries by exercising their power on them. But once the revolt got the spark it turns into the fire and it burnt all the ruler rules and even some rulers also have to lose their lives. The revolt which took place in the Middle East countries and North Africa was named Jasmine revolution and Arab spring.

The revolt was first triggered by the North Africa country Tunisia and from there the demand for democracy travel to Egypt, Libya, Syria, and Yemen. Facebook was one of the major tools for the revolutionary, which united them collected them, and helps them to share ideas for finding a way to achieve the democracy dream. The youth played a major role in the revolt and it was fueled by the seven metrics which include price rise, corruption, income disparity, unemployment, repression, external (NATO) support, and internet and mobile media support. Anderson, 2011) The Jasmine revolution or Arab Spring started from Tunisia on 18 December 2010 where the Tunisia citizen which turn out to be the revolutionary in the end for their right for democracy. Tunisia citizen was very unsatisfied from the rule of their dictator Zine el-Abidine Ben Ali who was ruling the country from 1987. In the 23 years rule zine el-Abidine Ben Ali has never thought of the citizen of the country and only thought of his luxurious life, which resulted in high unemployment, low income, corruption, and food inflation.

The balloon which was filled with the hot air of the problem and concerns for their and their children’s life from 23 years exploded. The Tunisia citizen came on the streets on 18 December evening demanding Zine el-Abidine Ben Ali to leave the throne. The vendor Mohamed Bouaziz who killed himself by setting himself on fire in Sidi Bouzid to demonstrate Zine el-Abidine Ben Ali that it is easier to do suicide by setting himself on fire than to live with his family in Tunisia under the rule of Zine el-Abidine Ben Ali which has only given him problem life food inflation, poverty, no liberty and no right to even ask for his right.

The death Mohamed Bouaziz work as a catalyst in the Tunisia revolution the demonstration and protest started to get more fierce which was shaking the 23 years rule of Zine el-Abidine Ben Ali. Zine el-Abidine Ben Ali tries his best to safeguard his rule by using the power of police and security forces. Police and security forces open fire on the demonstrators. Thousands of demonstrators got injured and hundreds of demonstrators were killed by the forces. After 28 days of Mohamed Bouaziz’s death On 14 January 2011 Zine el-Abidine Ben Ali has to resign from his post and to save his life he has to leave Tunisia and fly to Saudi Arabia.

After the demolition of the rule of Zine el-Abidine Ben Ali, a state emergency was declared. This inspired the other Middle East countries and North Africa countries to fight for the problems, rights, and freedom. ( Chick,2011) As the revolt has not only impacted the Tunisia economy itself but also the European Union, the Arab league and western countries. Tunisia has very good trade relations with the European Union, the United States, China, and many other Asian countries so it also going to affect the economies of these countries.

Tunisia is very close to the European Union economically and commercially, On 1 January 2008 European Union and Tunisia signed an association agreement in which all the trade barriers and custom tariffs were lifted for both the countries on manufactured goods which made free trade for both the European Union countries and Tunisia. Tunisia used mainly deals in manufacturing goods, textiles, footwear, petroleum, and electrical and mechanical goods. Tunisia exports count of $ 16. 416 billion which is mainly clothing, semi-finished goods and textiles, mechanical and electrical goods, and hydrocarbons.

The main importers of the Tunisian goods are European Union countries, European Union import more than 76% of Tunisia goods which are export from Tunisia to other countries. Asia, Africa, and the Americas are the next major importer of the Tunisian goods. So the revolt has a significant effect on the European Union countries market. Tunisia is not only the supplier of goods to the European market but it is also a very good market for the European Union countries as the European countries export more than 71% of total import of the Tunisia which accounts for $ 22. 08 billion, Asia and African next two major exporters for Tunisia. (European Commission Trade,2010) The United States of America has also signed a Trade and Investment Framework Agreement in October 2002. Tunisia has also signed an Agadir Agreement with Saudi Arab, Jordan, and Morocco In 2004. (U. S. Department of State,2011) Egypt was the next country which got inspired by the Tunisia revolution and was ready to do the same which Tunisia citizen has done for their democracy and right because Egypt was also suffering from the same disease from many years name dictatorship.

Egypt’s economy was growing under the rule of Hosni Mubarak but some factors that triggered the Egyptian citizen to fight for the resignation of Hosni Mubarak were corruption, low incomes, high unemployment, food inflation, emergency law, and no right to speak. These were the factors that were the cause of the end of the Hosni Mubarak rule over Egypt. Hosni Mubarak got the power to rule Egypt in 1981 and he ruled Egypt for 30 years by imposing the continuous state of emergency in the country.

On 25 January 2011 young generation of Egypt decided that they are going to fight against the corrupt government of Hosni Mubarak by using social networking sites like Facebook and Twitter. Social media and television media played a very big role in the Egypt revolution. On 28 January 2011 thousands of people came out of their houses on streets for the peaceful demonstration in Cairo. President Hosni Mubarak tried very hard to cling on the power by giving speeches to the nation, by promising he want a stand for election for next time, and by forming a new cabinet.

But on 3 February in Cairo on Tahrir square, the tsunami of protestors has been witnessed by Egypt and then riots broke out in which many people died and got injured. After the 18th day protest on 11 February 2011, Hosni Mubarak steps down from the post of the president and the Egyptian Armed force took over the control of Egypt. (Amar, 2011) Egypt is not an oil-exporting country but it plays a very vital rule in providing the oil to the other through the gift of the Suez canal. Suez Canal is a 102-mile long canal situated in the red sea.

Through Suez Canal and overland pipelines in Egypt, nearly 3. 6 % of total oil production passes to the world which is 3 million barrels of oil every day. 2700 crude oil tanker ships pass through the canal and if the revolt continues and it disrupted the canal then it will directly lead to the price rise of the oil which will be the strong reason for spreading the food inflation in the world. (Dadwal, 2011) After Tunisia and Egypt, it was the turn of Libya which was suffering from the rule of Colonel Muammar Gaddafi.

Libya citizen was facing many problems during the 42 years rule of Colonel Muammar Gaddafi like unemployment, corruption in the government office, no right speech, human right violation, and food Inflation. But after the success of Tunisia citizen, Libya got the new hope that they can fight for their right and they can win the rights. The protest was started on 15 February 2011 and turn into a civil war when security force fire on the crowd. After that rebellion group was formed. On 20 February rebellions captured Tripoli which is the capital of Libya.

In this fight, the rebellion also got the support of the NATO forces which was bombarding on the Gaddafi army. After capturing the Tripoli the one and only aim of the rebellion force was to capture Muammar Gaddafi and kill him. On 20 October Muammar Gaddafi’s rule ended on Libya and his life to he was killed by the rebellion army when he was trying to escape from Libya. On 23 October 2011, the civil war of Libya ended. (BIX, 2011) Economically Libyan Civil war has many major impacts on the global economy as Libya is one of the oil-producing countries in North Africa and it’s oil production counts for 1% or 2% of the total oil production of the world.

But Libya exports more than 85% oil to Europe and 5% oil to the US. Because of the Libyan Civil war, oil prices have rocketed in the global market. Libya produces 1. 7 million barrels a day on the normal day of Libya but after the protest started the oil production has gone down more than 50%. In the revolt time, Libya is just producing half of the oil compared to a normal day which is less than 400000 barrels a day. The production has gone down because the foreign workers which work in oil refinery have to flee to their homes to save their life and because of which in the oil refineries few workers are left.

The energy export of Libya has been completely stopped after the revolt which has given the new jump to the oil in the world market. Italy imported 25% of oil and 15 % of natural gases from Libya. Greenstream pipeline which carriers’ natural gases from Sahara field of Wafa to Mediterranean port which ship to Italy for meeting the energy requirement of Italy. But during the Libyan Civil war, it was under the control of rebel forces because of which Italy has to suffer from an energy shortage.

Because of the Libyan civil war, the oil futures rise to $120 barrel in London and $100 in the US which was the highest since the global slowdown of 2008. ( WATSON,2011) And the oil will have more price rise because the Libya output might vanish for some time from the global market. Saudi Arab has also announced that it will cover oil production from the Arab nation by producing more oil which will cover for the loss of oil production of Libya. And they will ship extra barrels to European countries through the Red sea.

Saudi Arab has also convinced the West African countries to divert the shipment of oil from Asia to Europe. But the high-quality oil of Libya which has low sulphur content and which can easily be refined will create a problem for the European small refineries to refine the heavy sulphur Saudi Oil which will also increase the cost of the European countries and which will be seen on the price of the product of goods in the long run. But it not all about Libya export it also about the Libya Import as the Libya Import accounts for more than $ 22 billion.

The goods which is mainly imported by Libya are machinery, transport equipment, food, manufactured goods, and consumer products and the major countries which export these goods to Libya are Italy, China, Turkey Germany and South Korea etc. These countries will be also being facing problem because the market where they were selling the goods it is completely destroyed by the revolt. (Reddy,2011) Syria is also included in the name of the countries which are fighting for their freedom like Tunisia, Egypt, and Libya.

The causes for the Syrian revolution were quite the same with the other three countries like corruption in government, dictatorship, no human rights, unemployment and inspirational success of the revolt of Tunisia and Egypt. In Syria this war is not for one person this war is against the corrupt government of Syria which is ruled by Ba’ath Party who’s Hafez al Assad ruled this country for 30 years and after his death, his son Bashar-al-Assad succeeded him and capture the throne of Syria. On 15 March the Syrian decided to protest against the Assad family which is ruling them from 1970 by using their terror and power.

Assad family have many examples of brutality on Syria back but on 15 march citizen of Syria called it “Day of Dignity” and thousands of people came out to protest against Bashar-al-Assad demanding his resignation. Bashar –al-Assad is clinging to the power by security forces and police. Security force and police have killed many protestors during the protest to safeguard the crown of the president of Bashar-al-Assad. Bashar–al-Assad has fired his old government but he remains in the power and he formed a new government to manipulate the people of Syria. But the protest is still going on and Bashar–al-Assad is using the army to suppress the revolt. Blanford, 2011) Economically Syrian uprising will also affect the world and first it will affect neighbouring countries mainly Turkey, Jordan, Lebanon and Iran. Turkey and Syria have the trade of $2. 27 billion last year it is definitely going to hurt Turkey badly. Firstly the demands for Turkey goods are decreasing in Syria after starting of the Syrian uprising. The sources have estimated that the demand for imports and Turkish goods which used to be high has decreased very sharply. The percentage decrease in the demand for Turkish imported goods in Syria has fallen between 30% to 40%. nd it is expected that the percentage decrease may also drop more than this. Both Turkey and Syria are not even having the desire to renew their contracts because of the Syrian Uprising. In 2010 Turkey exported goods to Syria which account for $ 630 million while Syria exports goods to Turkey which account for $ 1. 6 billion. Turkey has invested around $ 260 million in the sector such as the lighting industry and construction industry. The second country which is going to get affected by this revolt is Lebanon. Lebanon is going to affected by Syria in two ways.

Firstly the Syria and Lebanon have very good trade relation with each other. In 2010 the trade between both countries is valued around $ 1. 3 billion. Secondly, Lebanon got cheap labour from Syria and because of the Syrian uprising, the movement of labour will become difficult which rise the labour cost in the Lebanese economy. But because of this revolt, Lebanese banks will have benefits, as Syrian merchants and businessmen use Lebanese banks to keep their deposits. And because of the revolt and instability in Syria, the banking activity of Syrian merchants and businessmen will increase in a Lebanese bank.

Iraq is the primary destination of Syrian exports as the Syria export goods to Iraq which account for $ 2. 5 billion which is the 18. 8% of the total Syrian export. (Saif, 2011). Syria is not a major oil-producing nation. Two Asian emerging economies China and India have also invested in the Syria Al-Furat Petroleum company in 2005. India OVL and China CNPC jointly bought a 37% stake in the Syria Al-Furat Petroleum Company, which owns 39 oil and gas fields in the whole of Syria. Share of OVL (India) was 0. 72 million tones in 2009- 2010 in the production of crude oil in Syria.

In 2009 OVL (India) founded oil on an onshore block of North-Eastern Syria which is under the commercial development. So India and China also might get affected if the revolt continues in Syria. Syria uprising will also have an impact on Russia and the European Union countries as they are one of the important trade partners of Syria. ( Balakrishanan,2011) Yemen Upspring 2011 started on 27 January when 16000 demonstrators came on to the streets against the president of Yemen Ali Abdullah Saleh and start demanding the resignation from the post of the president, which he was holding from 1978.

After the Tunisia revolution success, Saleh was aware of the protest is going to happen in Yemen too. So Soon after the Jasmine revolution success, he increased the salaries of military officers and civil servants by 25%. On 3 February 20000 people of Yemen protested against Saleh in the Capital of Yemen Sana’a. On 18 march Saleh force killed 52 and injured hundreds of protestors in Sana’a. But people of Yemen are still fighting for their human rights and against corruption. Ali Abdullah Saleh is evacuated to Saudi Arab Because he got injured in a Bomb blast in the presidential compound mosque.

And he hands over the power to vice president Abd al-Rab Mansur al-Hadi and revolt is going on and on. (Economist, 2011) Economically Yemen’s uprising impact will be seen mostly in Asian Countries China and India. China and India have a very good trade relation with Yemen from many years. Yemen is a one of the largest markets for a Chinese product. Yemen export nearly accounts for $ 7. 5 billion which is mainly petroleum products, liquefied natural gas and refined oil products and the major market for the Yemeni goods are China, India, Thailand, South Africa, South Korea and the United States.

Yemen Import accounts for around $ 9. 2 billion and the major suppliers in China, India, UAE, Saudi Arab and Kuwait. As the revolt goes on these are the countries whose market might suffer in the future. (U. S. Department of State 2011) Before the start of the Arab spring, the Brent crude oil price was $100 per barrel. International Energy Agency has shown an astonishing figure of the growth by 2. 7 billion barrel per dollar and has also predited that the growth will have a pace of 1. 5 million barrel per day for the world. The Arab Spring 2011 has had its major impact on oil prices.

The prices have risen in all parts of the world as there has been an unfavourable condition of more demand than the Arab countries can supply. The risk is greater in the emerging economies of the world than on the developed economies because the developed economies have the money and they hold some power in these Arab economies which the emerging economies cannot enjoy. The main countries which are facing the revolt are Tunisia Libya and Egypt. As Libya is the 13th largest oil-producing country and Egypt also control the supply of oil in foreign countries by Suez canal.

The price of Brent crude oil has increased to $115 per barrel and on 24 February the price of oil got increased to $120 per barrel because it was realized that the world has to manage without or less supply of oil from Libya which accounts for 2% of worlds need. During the period of the oil embargo in 1972, the Iranian revolution and invasion of Iraq in Kuwait the world had witnessed a recessionary period and had also suffered from high oil prices to the low supply of the same. The world economy is very sensitive to oil prices. As the price of Brent Crude oil had jumped 25% in last year which $23 per barrel.

IMF has recognized that 10% increase in the oil price will decrease the GDP of economies by 0. 2% to 0. 3% in a year. An increase in the oil prices may send back the US and UK economy in a double-dip recession in the future. Every dollar increase in the oil price leads to the increase in US gas price by 2. 3 cents per gallon and which leads to the consumer taxes to $ 1. 2 billion per year. Emerging countries like India and China will be hard hit from the rise in oil prices. The higher oil price may increase the inflation rate in the Emerging countries as China was targeting the Inflation rate of 4% but it rose well above the target which is 4. % and India inflation has been more than 9% in this which. The higher oil price may jump the inflation rate in the near future. The increase in the oil prices may also result in higher unemployment as the rise of the oil price will increase the price of manufacturing which will lead to layoffs which will cause stagflation in the economy. (Economist, 2011) As the Arab Spring was for the democracy and for the Human rights of the citizen of MENA countries but the fact can’t be neglected that it had hurt the world economy quite badly and it may also worsen the current situation of the world, which is already suffering from other wounds like recession, Eurozone crisis, Japan crisis due to tsunami and earthquake and occupy wall street and many more events. But “You are a human being. You have rights inherent in that reality. You have dignity and worth that exist prior law” (Neylon,2011)

Reference List

1. Anderson, L (2011), ‘Demystifying the Arab Spring’, Foreign Affairs, 90, 3, pp 2-7.

2. Amar, P (2011), ‘EGYPT AFTER MUBARAK’, Nation, 292, 21, pp. 11-15

3. Blanford, N (2011), ‘Could Syria see an uprising like Egypt’s? Not likely’, Christian Science Monitor.Available at: http://ehis. ebscohost. com/ehost/detail? vid=6=121=f6bf370c-a90d-4f69-a3a9-eecc26d597ec%40sessionmgr115=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=aph=57765811

4. BIX, HP (2011), ‘The North African–Middle East Uprisings from Tunisia to Libya’, Massachusetts Review,

52, 2, pp. 329-347. 5. Balakrishanan ,B (2011) ‘Global Impact of Syria’a crisis’ The Hindu Business Line, Available at: http://www. thehindubusinessline. com/opinion/columns/bhaskar-balakrishnan/article2032363. ece [Accessed on 6/11/2011].

6. Chick, K, (2011). How revolt sparked to life in Tunisia. Christian Science Monitor , Available at:. ttp://ehis. ebscohost. com/ehost/resultsadvanced? sid=f6bf370c-a90d-4f69-a3a9-eecc26d597ec%40sessionmgr115=3=20=(yet+more+cracking+down)=JmRiPWFwaCZ0eXBlPTEmc2l0ZT1laG9zdC1saXZl

7. Dadwal. R. S, (2011) ‘The Crisis in Egypt and its Impact on the Oil Market’ Available at: http://www. eurasiareview. com/05022011-the-crisis-in-egypt-and-its-impact-on-the-oil-market/. [Accessed on 7/11/2011]

8. European Commission Trade (2010), ‘Tunisia’ Available at : http://ec. europa. eu/trade/creating-opportunities/bilateral-relations/countries/tunisia/ [Accessed on 8/11/2011]

9. Freud,S (2011) ‘Sigmund Freud quotes’ Available at: ttp://www. brainyquote. com/quotes/quotes/s/sigmundfre401883. html [Accessed on 8/11/2011]

10. Neylon. L. B (2011) ‘Quotation about human rights’ Quote Garden Available at: http://www. quotegarden. com/h-rights. html [Accessed on 9/11/2011]

11. Reddy,S,B,S (2011) ‘ Libyan crisis to hit domestic inflation’ India Today. in, Available at http://indiatoday. intoday. in/story/libya-unrest-to-hit-domestic-inflation/1/131802. html [Accessed on 6/11/2011 ]

12. Saif, I, (2011). Syria: Crisis may hurt economies of Turkey, Lebanon, Jordan, Iraq. Los Angeles Times, 13 August.

13. ‘The price of fear’ (2011), Economist, 398, 8723, pp. 29-32.

14. U. S. Department of State (2011) ‘Tunisia economy’ Available at: http://www. state. gov/r/pa/ei/bgn/5439. htm [Accessed on 7/11/2011]

15. U. S. Department of State (2011) ‘Yemen Economy’ Available at: http://www. state. gov/r/pa/ei/bgn/35836. htm [Accessed on 7/11/2011]

16. WATSON, T (2011), ‘THE PRICE OF REVOLUTION’, Canadian Business, 84, 5, pp. 12-14. 17. ‘Yet more cracking down’ (2011), Economist, 398, 8725, p. 57. Available at: http://ehis. ebscohost. com/ehost/resultsadvanced? sid=f6bf370c-a90d-4f69-a3a9-eecc26d597ec%40sessionmgr115=3=20=(yet+more+cracking+down)=JmRiPWFwaCZ0eXBlPTEmc2l0ZT1laG9zdC

The New Economic Policy (NEP) was a measure implemented in order to counter the arguably disastrous effects War Communism. The New Economic is controversial. Some historians argue it allowed the Soviet economy to solidify and begin to recover, and also allowed the Bolsheviks to retain control over Russia. Others, like Orlando Figes, state it was ultimately a failure, arguing that under the NEP the peasants grew away from the Bolshevik regime, inviting a future, and brutal, reassertion of central control. This essay will discuss the effectiveness of the NEP economically and politically as well as outlining War Communism and why it failed Michael Lynch argues that ‘By 1921, the grim economic situation had undermined the original justification for war communism. During its operation, industrial and agricultural production had fallen alarmingly. ’ War Communism was first introduced as an extreme economic measure in order to deal with problems created during the Civil War as well as enabling the Army to be fed.

However in accordance with Lynch, the policy did not improve Russia’s productivity or indeed the Bolshevik popularity. The existence of the Cheka and the Red Army enabled Lenin to embark on the policy of centralisation. This resulted in a considerable increase in Bolshevik influence in the factories via the infiltration of the Workers’ committees by political commissars. This development helped prepare the way for issuing the Decree of Nationalisation in June 1918 and within two years it brought practically all major industrial enterprises in Russia under central government control.

Yet nationalism did nothing to increase production due to being imposed at the time of severe industrial disruption caused initially by the strains of World War One but which worsened during the Civil War. Furthermore the military needs were given priority thus denying resources to those industries not considered essential. The situation was made more serious by factories being deprived of man power as a result of conscription into the Red army and flight from urban areas of large numbers of inhabitants who left in search of food or by means of escape from the Civil War.

This led to the population of Petrograd and Moscow to drop by half between 1918 and 1921 causing a dramatic decrease in Russia’s productivity. Problems were deepened further by hyper-inflation. The scarcity of goods and the government’s policy of continuing to print currency notes effectively destroyed the value of money and by the end of 1920 the rouble had fallen to 1% of its worth in 1917. Ultimately War Communism tightened the Bolshevik’s grip on industry but did not lead to economic growth. Agriculture was also largely affected by War Communism. A major purpose of War Communism was to force the peasants to provide more food.

However peasants were resistant to the government’s demands and this was largely blamed on the Kulaks who the Bolsheviks claimed were hoarding the grain. As a result the government become infuriated by the peasant’s refusal to conform and condemned them as counter-revolutionaries and restored to coercion. Cheka requisition units were sent into the countryside to take the grain by force. In 1920 the order was given to hang one hundred kulaks publically in order to terrify the population however this seemed to have the reverse effect of the one intended.

With the knowledge that any surplus would be confiscated, peasants produced the bare minimum to feed themselves and their family. By 1921 a combination of requisitioning, draught and general disruption of war resulted in national famine with grain harvests in 1920 and 1921 being less than half that gathered in 1913. The matters became so desperate that the Bolsheviks admitted famine and accepted foreign assistance however foreign help was too late to prevent mass starvation. Of the 10 million of the Civil War period over half starved to death.

Although War Communism proved catastrophic in terms of industrial and agricultural output the Bolsheviks saw it as true socialism due to the squeezing of the peasants and the ending of private ownership. Even after the Red Army’s victory in the Civil War, the policy of War Communism was maintained. As a short-term measure the policy produced the results Lenin wanted but severity increased Bolshevik unpopularity resulting in a number of minor outbreaks of resistance during the 1920s. But the Kronstadt Rising of 1921 proved to be highly disturbing to Lenin as he described it as the ‘lightening flash that illuminated the true reality of things’.

Lynch claims that ‘As long as unrest was confined to the peasants and the Bolsheviks’ political enemies it was a containable problem’ but Lenin began to worry over the development of War Communism within the party itself. The two prominent Bolsheviks involved Alexander Shlyapnikov, labour commissar, and Alexandra Kollontai, who led a ‘workers’ Opposition’ movement against the excess of war communism. Kollontai accused party leaders of losing touch with the proletariat and from this, groups of workers in Petrograd went on strike in early 1921 justifying their actions in the proclamation than change is needed in the policies of the government.

By February 1921 thousands of Petrograd workers crossed the naval base on Kronstadt claiming that Russia should be better, not worse, than Tsarist times ,as the Bolshevik government claimed Russia to be a workers’ state. In an attempt to pacify strikers Lenin sent a team of political commissars to Kronstadt who were greeted with derision. In early March, the sailors and workers of Kronstadt produced a manifesto. It was not the demands that frightened the Bolsheviks but the people who drafted them as the workers and sailors of Kronstadt had been great and popular supporters of the Bolsheviks in 1917.

Shelia Fitzpatrick describes them as ‘The Kronstadters, heroes of the July Days and supporters of the Bolsheviks in the October Revolution, had become almost legendary figures in Bolshevik mythology. Now they were repudiating the Bolsheviks’ revolution, denouncing ‘the arbitrary rule of the commissar’ and calling for a true society republic of workers and peasants’. The danger for the Bolsheviks was that due to their popularity of the Kronstadters revolted the rest of the people would be due to follow. The rising was finally crushed when Trotsky ordered the Red Army to storm the Kronstadt base with violent results.

Lenin took an important lesson from the Kronstadt uprising which was to avoid scandal and embarrassment of another open challenge to his party and government and so decided it was time to soften his severity of war communism leading to the introduction of the NEP in order to tackle the famine and thus prevent further uprising. The majority of historians agree that the NEP was certainly an economic success compared to the catastrophe of War Communism with both Shelia Fitzpatrick and Orlando Figes agreeing that NEP was introduced as ‘an impoverished response to desperate economic conditions’.

Lenin is a pragmatic character and so seeing that peasants could not be forced to produce more food so instead must be persuaded and thus temporarily abandon the idea of War Communism. The success of the NEP can in reality only be measured by its aims. The NEP was set up primarily to stabilise the economy; this included decreasing inflation, increasing agricultural and industrial production and re-establishing trade outside of the country. The other major aim of the policy was to minimise the gap between the worker and the peasant in order to get peasant co-operation and support.

Due to the fact that the NEP was set up as a result of Kronstadt its other aim is to demolish the possibility of such a rebellion happening again. Many reforms took place in Russia due to the NEP. Under the NEP the Government stopped its policy of requisitioning the peasants entire crop and instead began to take only what was needed to meet the minimum requirements of the army and the urban workers. Fixed tax in kind was introduced and although the peasants were forced to pay the tax, they were now allowed to sell the remainder of their crop for profit.

They could sell either privately or to the state. This gave peasants the initiative to grow more crops as a result the grain harvest went up from 37. 6 million tons in 1921 to 72. 5 million tons in 1925. This was a success of the NEP as it increased agricultural production to Russia’s pre-war levels, which helped to stabilise the economy. Nationalisation was minimised with only the large industries remaining under state control. However, this was still a lot as 85% of the workforce worked for state enterprises, the rest for private enterprises or co-operatives.

Also conscription of the workforce was abandoned. Over the course of five years, the NEP allowed industrial and agricultural output to rise to its pre-war levels. In this sense, the NEP did achieve economic recovery. However, the NEP was bitterly disliked by many leading communists who saw it as a reversal of everything they believed which will be discussed later in the essay. Although industrial production increased at a slower pace than agricultural production, which caused many problems such as the scissors crisis in 1923, it did increase. For example, coal in 1921 did not exceed 8. million tons while in 1925, it was around 18. 1 million tons, and steel production increased nearly 10 times from 183 thousand tons being produced in 1921 to 2135 thousand tons in 1925. However industry did not attain the same levels of recovery as agriculture and did not reach the pre-war level. This shows that the NEP was successful in increasing industrial production. However, the increase in heavy industry was not as great as light industry, consequently it suffered in comparison. Trade with foreign countries was also reintroduced, as earlier it had been prohibited.

The ban against free trade was lifted too so the whole population was permitted to trade with one another. The state only had control over 15% of the trade; the rest was under Nepmen or co-operative control. However, the boom in private trade led to a widening gap between rich and poor. This can clearly be seen by the sudden rise in unemployment in the first two years of the setting up of the NEP. There was a lot of anger focused on the Nepmen, who were seen as the ‘new class’, between rich and poor. The workers also felt resentful towards the Bolsheviks as they felt the NEP was sacrificing their class interests in favour of the peasantry.

Therefore although the NEP allowed free trade and re-established foreign trade, not everyone benefited from it. And in fact this lead to the very thing communism went against class. Nepmen became the new beneficiaries, as they grew rich. Also, the gap between rich peasants and poor ones increased as class, once again became an issue. In addition, a new currency was set up to ease the economic problem. This currency was known as the chervontsy. However, they were in heavy demand and only available in large denominations. The rouble was still legal tender until February 1924.

Inflation can clearly be seen as in January 1921 there was 1,169 milliards of roubles in circulation and by January 1923 there were 1, 9994,464 milliards. This clearly shows that a change in currency was needed. Although this helped the economy as the rate of inflation decreased slightly, it did not do enough to help the people and their financial difficulties. The NEP did minimise the gap between workers and peasants. The policy meant that peasants could make more of a profit as they were allowed to sell their own produce and trade with others. It also encouraged them to work harder.

However, it was the peasants who suffered most due to inflation. Although they made money, it was worth little in industry. In this way the NEP had been partly a success as it had minimised the gap and made things better for the peasants but did not improve everything. As for the NEP’s other aim, that being avoiding another rebellion like Kronstadt, the policy was successful as there was no threat of them ever losing power. Although there were protests against the NEP or some parts of it, overall these were unthreatening to Bolshevik power and were ignored or came to an end after a while.

Aside from economic issues, the NEP also caused dispute amongst the Bolsheviks themselves in political terms. As Fitzpatrick argues ‘From the communist standpoint NEP was a retreat, and a partial admission of failure. Many Communists felt deeply disillusioned: it seemed that the revolution had changed so little. ’ The NEP was a mixture of socialism and capitalism and was referred to as a “step back” for the Bolsheviks as they had just defended socialism in the civil war but was now retreating into capitalism and the “old ways”. A major objection from the

Bolsheviks was the reintroduction of money and private trading had created the Nepmen. It was the profiteering that Victor Serge, a representative of the Left Bolsheviks, had in mind when he described the immediate social effects of NEP: ‘the cities we ruled over assumed a foreign aspect, we felt ourselves sinking into the mire. Money lubricated and befouled the entire machine just as under capitalism’ As the NEP had become such a contentious issue among the Bolsheviks Lenin introduced the banning of factionalism as well as outlawing all other parties except from Bolshevism.

The object of this was to eliminate party disputes and political rivals and to a certain extent this worked. In conclusion, the NEP was successful to a certain extent. Because of the New Economic Policy the Soviet economy revived quickly. There was more food from the farmers; there were goods in the shops and outdoor markets, However many Bolshevik members did not consider the NEP as socialism and thought that it was a betrayal of communist principles. On the whole the NEP was a success. It met most of its aims. The policy helped stabilise the crumbling economy and re-established pre-war levels.

The policy decreased the rate of inflation, it increased agricultural and industrial production, it allowed free trade and re-established foreign trade. However, some of these aims it only met partly. For example although the rate of inflation did decrease it was still very high and the NEP did not stop it completely. Industry production also suffered as a result of the NEP. Although its production increased its prices rose due to the fast increase of agriculture. Trade also caused problems like the re-establishment of classes.

So these aims were only partly successful and created many other problems. The NEP tried to minimise the gap between peasants and workers. Many of the aims in stabilising the economy were for the peasants’ benefits like the end of requisitioning and allowing them to trade. However, the high prices in industry and high inflation left the peasants with money which was not worth as much. However, the policy did try to get peasant support. It was partly successful in bringing workers and peasants together, however many workers felt let down by the party that was supposed to cater to their needs.

The fact no major rebellions threatened the Communists shows that the policy had kept many people happy and those that protested were insignificant or in such small numbers they were unable to mount a decent threat on the party. Thus the NEP was one of the major factors that had enabled the survival of Communism in Russia. The step back from socialism and the reintroduction of capitalism had worked. Peasant uprisings virtually ceased, the economy recovered and the Bolshevik regime was consolidated

 Central banking credit creation

Credit creation is one of the important functions of a commercial bank. It constitutes the major component of money supply in the economy commercial banks differs from other financial institutions in this aspect. Other financial institutions transfer money from the lenders to the borrowers. Commercial banks while performing the same function, they create credit or bank money also. Professor Sayers says, “Banks are not merely purveyors of money, but in an important sense, they are the manufacturers of money”.

The process of credit creation occurs when banks accepts deposits and provide loans and advances. When the customers deposit money with the bank, they are called primary deposits. This money will not be withdrawn immediately by them. Hence banks keeps a certain amount of deposits as reserves which is known as cash reserve ratio and provide the balance amount as loans and advances. Thus, every deposit creates a loan. Commercial banks give loans and advances against some security to the public. But the bank does not give the loan amount directly. It opens an account in the name of the borrower and deposits the amount in that account.

Thus, every loan creates a deposit. The loan amount can be withdrawn by means of checks. They create deposits while lending money also. These deposits created by banks with the help of primary deposits are called derivative deposits. Customers use these loans to make payments. While paying they issue a checks against these deposits. The person who receives the checks, deposit it in another bank. For that bank, this will be the primary deposit. A part of the deposit will be kept as a reserve and the balance will be used for giving loans and advances. This process is repeated by other banks.

When all the banks involve in this process, it is called Multiple Credit Creation. This can be explained with an example. Suppose, if a person deposits Rs. 1,000/- in a bank. Rs. 1000/- is the primary deposit. The minimum cash reserves ratio is 10% to meet the demand of its depositors. Now the bank can lend out Rs. 900/- i. e. Primary deposit – Cash reserve = Derivative deposit. Rs. 1, 000 – Rs. 100 = Rs. 900 (10% of 1000 is Rs. 100) The bank will give the amount to his creditor only in his account which is opened in his name. The borrower can deposit the amount with the bank.

The bank can lend out Rs. 810/- out of Rs. 900/-, which has come back to the bank in the second round as primary deposits. This process will continue and if there is no cash leakage the credit creation would be processed as in the below figure: [pic] This process can be explained with a formula.

Total credit created = Original deposit x Credit multiplier co-efficient. Credit multiplier co-efficient = 1/CRR x 1/10% = 1/10/100 = 10 Total Credit created = 1000 x 10 = 10000 If CRR rises to 20%, the credit created will be 1/20/100 = 100/20 = 5 So 1000 x 5 = Rs. 5000/-

It is clear, that the amount of credit created depends upon the cash reserve ratio. Higher the CRR, lesser will be the credit created and vice versa.

Limitations:

1. Credit creation depends upon the amount of deposits.
2. There exists an inverse relation between credit creation and cash reserve ratio. During inflation the CRR will be high to reduce credit.
3. Banking habits of the people are well developed; it will lead to expansion of credit.
4. Loans are sanctioned by banks against some security. If enough securities are available, then credit creation will be more and vice versa.
5. If all commercial banks, follows a uniform policy regarding CRR, this credit creation would be smooth.
6. If the liquidity preference of the people is high, the credit creation will be less and vice versa.
7. If business conditions are bright then demand for credit will be more.
8. Customers should be willing to borrow from the banks to facilitate credit creation.
9. Credit control policy of the Central Bank, for example during the depression, the RBI encourages the commercial banks to expand credit.

Conclution

To conclude, we can say that credit creation by banks is one of the important & only sources to generate income.

And when the reserve requirement increased by the central bank it would directly affect on the credit creation by bank because then the lendable funds with the bank decreases and vice versa.

Money supply

The total supply of money in circulation in a given country’s economy at a given time. There are several measures for the money supply, such as M1, M2, and M3. The money supply is considered an important instrument for controlling inflation by those economists who say that growth in money supply will only lead to inflation if money demand is stable.

In order to control the money supply, regulators have to decide which particular measure of the money supply to target. The broader the targeted measure, the more difficult it will be to control that particular target. However, targeting an unsuitable narrow money supply measure may lead to a situation where the total money supply in the country is not adequately controlled. In economics, money supply or money stock is the total amount of money available in an economy at a particular point in time.

There are several ways to define “money,” but standard measures usually include currency in circulation and demand deposits. Money supply data are recorded and published, usually by the government or the central bank of the country. Public and private-sector analysts have long monitored changes in money supply because of its possible effects on the price level, inflation and the business cycle. That relation between money and prices is historically associated with the quantity theory of money. There is strong empirical evidence of a direct relation between long-term price inflation and money-supply growth.

These underlie the current reliance on monetary policy as a means of controlling inflation. This causal chain is however contentious, with some heterodox economists arguing that the money supply is endogenous and that the sources of inflation must be found in the distributional structure of the economy. Purpose: Money supply data is recorded and published in order to monitor the growth of the money supply. Public- and private-sector analysts have long monitored this growth because of the effects that it is believed to have on real economic activity and on the price level.

The money supply is considered an important instrument for controlling inflation by economists who say that growth in money supply will only lead to inflation if money demand is stable. Convention: Because (in principle) money is anything that can be used in settlement of a debt, there are varying measures of money supply. Since most modern economic systems are regulated by governments through monetary policy, the supply of money is broken down into types of money based on how much of an effect monetary policy can have on that type of money.

Narrow money is the type of money that is more easily affected by monetary policy whereas broad money is more difficult to affect through monetary policy. Narrow money exists in smaller quantities while broad money exists in much larger quantities. Each type of money can be classified by placing it along a spectrum between narrow (easily affected) and broad (difficult to affect) money. The different types of money are typically classified as M’s. The number of M’s usually range from M0 (most narrow) to M3 (broadest) but which M’s are actually used depends on the system.

The typical layout for each of the M’s is as follows:

1. M0: Physical currency. A measure of the money supply which combines any liquid or cash assets held within a central bank and the amount of physical currency circulating in the economy. M0 (M-zero) is the most liquid measure of the money supply. It only includes cash or assets that could quickly be converted into currency. This measure is known as narrow money because it is the smallest measure of the money supply.
2. M1: M0 + demand deposits, which are checking accounts.This is used as a measurement for economists trying to quantify the amount of money in circulation. The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency.
3. M2: M1 + small time deposits (less than $100,000), savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is key economic indicator used to forecast inflation. M3: M2 + all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. The broadest measure of money; it is used by economists to estimate the entire supply of money within an economy. Fractional-reserve banking: The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. Whenever a bank gives out a loan in a fractional-reserve banking system, a new type of money is created. This new type of money is what makes up the non-M0 components in the M1-M3 statistics.

In short, there are two types of money in a fractional-reserve banking system: central bank money (physical currency) commercial bank money (money created through loans) – sometimes referred to as checkbook money. In the money supply statistics, central bank money is M0 while the commercial bank money is divided up into the M1-M3 components. Generally, the types of commercial bank money that tend to be valued at lower amounts are classified in the narrow category of M1 while the types of commercial bank money that tend to exist in larger amounts are categorized in M2 and M3, with M3 having the largest.

The Reserve Bank of India defines the monetary aggregates as:

1. Reserve Money (M0): Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI’s claims on banks + RBI’s net foreign assets + Government’s currency liabilities to the public – RBI’s net non-monetary liabilities.
2. M1: Currency with the public + Deposit money of the public (Demand deposits with the banking system + ‘Other’ deposits with the RBI). • M2: M1 + Savings deposits with Post office savings banks. M3: M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector (Other than Time Deposits).
3. M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates). [pic] Link with inflation: Monetary exchange equation: Money supply is important because it is linked to inflation by the “monetary exchange equation”:MV = PQ
4. M is the total dollars in the nation’s money supply
5. V is the number of times per year each dollar is spent
6. P is the average price of all the goods and services sold during the year Q is the quantity of goods and services sold during the year where:
7. velocity = the number of times per year that money turns over in transactions for goods and services (if it is a number it is always simply nominal GDP / money supply)
8. nominal GDP = real Gross Domestic Product ? GDP deflator • GDP deflator = measure of inflation.

Money supply may be less than or greater than the demand of money in the economy In other words, if the money supply grows faster than real GDP growth (described as “unproductive debt expansion”), inflation is likely to follow (“inflation is always and everywhere a monetary phenomenon”). This statement must be qualified slightly, due to changes in velocity. While the monetarists presume that velocity is relatively stable, in fact velocity exhibits variability at business-cycle frequencies, so that the velocity equation is not particularly useful as a short run tool.

Moreover, in the US, velocity has grown at an average of slightly more than 1% a year between 1959 and 2005 (which is to be expected due to the increase in population, unless money supply grows very rapidly). Another aspect of money supply growth that has come under discussion since the collapse of the housing bubble in 2007 is the notion of “asset classes. ” Economists have noted that M3 growth may not affect all assets equally. For example, following the stock market run up and then decline in 2001, home prices began an historically unusual climb that then dropped sharply in 2007.

The dilemma for the Federal Reserve in regulating the money supply is that lowering interest rates to slow price declines in one asset class, e. g. real estate, may cause prices in other asset classes to rise, e. g. commodities. Percentage: In terms of percentage changes (to a small approximation, the percentage change in a product, say XY is equal to the sum of the percentage changes %X + %Y). So: %P + %Y = %M + %V That equation rearranged gives the “basic inflation identity”: %P = %M + %V – %Y Inflation (%P) is equal to the rate of money growth (%M), plus the change in velocity (%V), minus the rate of output growth (%Y).

Bank reserves at central bank When a central bank is “easing”, it triggers an increase in money supply by purchasing government securities on the open market thus increasing available funds for private banks to loan through fractional-reserve banking (the issue of new money through loans) and thus grows the money supply. When the central bank is “tightening”, it slows the process of private bank issue by selling securities on the open market and pulling money (that could be loaned) out of the private banking sector.

It reduces or increases the supply of short term government debt, and inversely increases or reduces the supply of lending funds and thereby the ability of private banks to issue new money through debt. Note that while the terms “easing” and “tightening” are commonly used to describe the central bank’s stated interest rate policy, a central bank has the ability to influence the money supply in a much more direct fashion. Conclusion: Assuming that prices do not instantly adjust to equate supply and demand, one f the principal jobs of central banks is to ensure that aggregate (or overall) demand matches the potential supply of an economy. Central banks can do this because overall demand can be controlled by the money supply. By putting more money into circulation, the central bank can stimulate demand. By taking money out of circulation, the central bank can reduce demand. For instance, if there is an overall shortfall of demand relative to supply (that is, a given economy can potentially produce more goods than consumers wish to buy) then some resources in the economy will be unemployed (i. . , there will be a recession). In this case the central bank can stimulate demand by increasing the money supply. In theory the extra demand will then lead to job creation for the unemployed resources (people, machines, land), leading back to full employment (more precisely, back to the natural rate of unemployment, which is basically determined by the amount of government regulation and is different in different countries).

However, central banks have a difficult balancing act because, if they put too much money into circulation, demand will outstrip an economy’s ability to supply so that, even when all resources are employed, demand still cannot be satisfied. In this case, unemployment will fall back to the natural rate and there will then be competition for the last remaining labor, leading to wage rises and inflation. This can then lead to another recession as the central bank takes money out of circulation (raising interest rates in the process) to try to damp down demand.

The other side shows a blooming economy, with an expanding GAP, increased foreign direct investment, thousands of new Jobs and much-needed sector diversification. Both are true. Unsurprisingly, it was the platinum version which President Michael Sat underlined on September 20 during a speech to inaugurate the 1 lath National Assembly third session, rattling off a by now familiar set of economic indicators. Zambia registered GAP growth of 7. 3% in 2012, though it is down to 6% for 2013 thanks to lowered agricultural production. Inflation shrunk to 7% over the summer of 2013. Lending rates have fallen to 16%, own from 20% last year.

Furthermore, by the end of June, the government had surpassed its $3 billion foreign direct investment target for the year by over half a billion dollars. The centerpiece of Seta’s economic record remains the $750 million Rebound issued last September, a move straight out of Zambia author Dampish Mops 2009 book Dead Aid. With that first foray into international capital markets, Zambia Joined a growing cohort of sub-Sahara African countries drifting away from the confessional loans and aid-based development doctrine promoted by the World Bank and International Monetary Fund.

The Rebound money is earmarked for energy generation and transmission, road and rail infrastructure, small and medium enterprise development, and health care. Of course, this comes with voices of caution that remember Samba’s recent history as a Heavily Indebted Poor Country (HIP). The Treasury says that, in 2013, debt will reach 37% of GAP – not perfect, but much better compared to 200% at the peak of its debt crisis twenty years ago – and that fugue is expected to come down when the government rebates GAP next month. Meanwhile, Zambia has received a frenzy of international attention for co-hosting the

United Nations World Tourism Organization’s General Assembly with Zanzibar. It is generally agreed that the conference will contribute to a long-term branding success, although the private sector had mixed feelings about the event, with operators in the host city of Livingston lamenting the absence of immediate economic benefits. Tourism is central in If’s economic diversificationagenda, along with agricultural development, infrastructure construction and manufacturing, all of which factored in the party’s 2011 campaign. Paving the way to school To that end, Sat boasted of a 316,000 multi-sector expansion in Jobs in his speech.

While light on specifics, the government has been open about setting targets, promising 510,000 Jobs in agriculture and 500,000 in tourism alone. A series of road work programmer also features in the government’s Job-creation scheme, with Pave Zambia 2000 pledging 20,000 Jobs, Link Zambia 8000 gearing up for its second phase the nation’s capital. The party’s 2011 manifesto also vowed huge changes in the health and education sectors, which, thanks in large part to Samba’s painful history of debt servicing obligations, have been long neglected.

The document criticized the roomer Movement for Multiparty Democracy (MD) government for funding only of the education sector, forcing it to rely on non-governmental support. Seta’s anniversary speech highlighted an on-going review of education policy with the intention of aligning curricula to national development goals. He said the government would speed up the construction of secondary schools, with 32 of 84 completed to date. University construction is also on-going and the 2013 budget pledged 17. 5% of total expenditure to education.

The administration has also increased health expenditure. Its manifesto disparaged MD allocations of 6% (although the former overspent actually pegged its contributions at 8. 6% in 2011). In 2013, budget allocations were Just over 11%. Health achievements this year have been partly smothered by on-going news of anti-retrovirus shortages – or “rationing”, in official parlance – but Sat boasted a battery of progress indicators, including 137 facility upgrades, two new district hospitals and hundreds of sector-related construction projects.

A sinister side In general, the numbers paint a reliable picture of a developing county. The fact of the Rubdown’s relatively low coupon rate and 15 times oversubscribed alone attest to market confidence in Zambia. But there is a sinister side to the Sat administration, which seems to be intensifying. To start with, rumors of the president’s poor health sparked a leadership rivalry between Defense Minister Geoffrey Mamba and the party’s Secretary General and Justice Minister Winter Kabob.

While each minister has since publicly distanced himself from presidential ambitions, the dispute was intense enough to split the IF into factions, with six members arrested by police after allegedly storming a party function, destroying property and beating attendants. IF-perpetrated violence has been directed outwards as well. The most recent case was against Hacienda Hickman, leader of the country’s third-place opposition United Party for National Development, who says his entourage was attacked last week during a visit to the town of Assam.

While the incident was reported in numerous media outlets, the police issued a statement on Friday refuting Hacienda’s version of events. Violence has also been a feature of Samba’s numerous by-elections, the result of a IF strategy to increase their majority in Parliament. Government baits the opposition parliamentarians with ministerial appointments and other incentives, triggering by-elections whenever members cross he legislature. The tactic has been largely successful, with IF winning eight of 13 ballots so far, with three more soon.

But after the recent vote in Monika, which the MD won by a landslide, newspaper reports alleged IF-orchestrated violence, complete with gruesome photographs depicting bloodied members of the opposition. Victims of political violence come from all parties, however, as shown by the 2012 Refunds local government by-election that ended in the murder of a IF cadre. The trend in the ruling party has been severe enough to merit censure from The Post, the country’s leading independent and pro-government newspaper.

In an editorial earlier this month, the paper called on government to weed out and bloodshed, but his personal record on the issue is dubious. Nicknamed King Cobra, he was linked to machete attacks in a 2001 by-election while serving as minister without portfolio in the late Frederick Chiliad’s MD government. Cultivating a culture of silence Sat has also taken up Africans presidential tradition of wielding the same laws that frustrated him in opposition. He has been accused of silencing critics with criminal and civil defamationproceedings, with members of the opposition-aligned media a favorite target.

IF cadres have also been accused of beating Journalists and a series of institutional media reforms have run aground, due to the government’s powers to make key appointments to relevant committees. Critics also say the government’s use of the colonial Public Order Act has impinged on constitutionally guaranteed rights of assembly. While the law calls only for organizers to inform police of demonstrations, in practice it has been used to shut them down entirely.

This tendency to suppress alternative dialogue also plays out in disputes with Samba’s Nags, many of which re threatening to boycott what they say is an onerous registration process if government does not amend an MD-era law setting out the terms of their operation. The government says groups that do not register will be delimiters. Broken promises Despite the appearance that Sat has delivered on many of the country’s economic indicators, he trails a long string of broken promises.

One of the most significant of these is his government’s on-going failure to introduce a new constitution, which it promised to do within 90 days of taking power. Another of the government’s 90-day ledges vowed to peacefully settle long-standing separatist sentiments in Western Province, but clashes have continued, culminating in over 60 arrests and numerous treason charges last month. Likewise, the Freedom of Information Bill, paralyses since before his administration took office, has yet to come before the National Assembly, despite assurances to the contrary. Not all stakeholders are internal.

Dominated by foreign ownership, the extraction industry anxiously awaits the completion of government’s review of the Mining Act, and, according to a piece in this month’s The Bulletin and Record, it is unsure of what to expect. That makes for an uncertain investment environment in a country that relies on mining for 80% of its export receipts and, despite weaker Chinese demand, expects copper tonnage to reach 1. 5 million tones by 2015. No matter what the review reveals, it is not likely to assuage the industry legion of critics, who say generations of mining development have failed to improve the economic prospects of ordinary Zambia.

The story of the IF in power is convoluted and often ambiguous. The Sat administrationreinstated the Anti-Corruption Act abuse of office clause, but the president appointed his uncle as minister of finance. The government stabilized the cache, but it tore fuel and maize subsidies away from the poor. Zambia has the respect of international markets, but it maintains close ties with North Korea. The first big vote of the new session will be the 2014 budget, a document that will inevitably steer the narrative toward the 2016 election.

The 2011 poll was close. If the government doesn’t live up to its promises, the next one may be too. Think Africa Press welcomes inquiries regarding the republication of its articles. If you would like purposes, please contact:editor@thinkafricapress. Com. For further reading around he subject see: Back in the Red: Can Zambia Manage More Borrowing? Just six years after debt relief, Zambia is approaching international capital markets, with government promising more such borrowing in the future.

ARTICLE | 16 SEPTEMBER 2013 – 3:PM I BY PAUL CRUCIAL Fifty Cache notes, the Zambia currency. Photograph by Lugging Chaise. Lusaka, Zambia: When Geoffrey Seconds father died in 2001, he was Just about to enter high school and Zambia was still struggling through its debt crisis. His school fees and personal development suddenly at risk, Chino’s eyes were opened to a country that had pent a decade crashing through inalienable reforms that required its leaders to privative the economy, halt subsidies and drastically restructure the social sector.

The debt to GAP ratio was 170% that year, with a huge social fallout: rampant unemployment, over 15% of the population suffering from HIVE/AIDS and life expectancy at Just 42 years old. Congo is now Economic, Equity and Development Programmer manager at the Jesuit Centre for Theological Reflection ACTOR), a Lusaka- based think tank. Speaking to Think Africa Press, he says, “The macroeconomic statistics you’ve heard are real. We knew that when the rain season came, we would have cholera. It’s because of poor sanitation and poor health services.

Every year we would have cholera and it would kill hundreds and hundreds of people. ” His uncles and brothers were able to secure employment, however, and ultimately his school fees were paid. Five years later, after a barrage of reforms prescribed by the International Monetary Fund (MIFF) and World Bank, much of Samba’s $7 billion debt was cancelled. Just six years on, Zambia started borrowing again, with the Patriotic Front (IF) government currently preparing to complete its first interest payment on cast Septembers 10-year $750 multimillionaire.

Finance Minister Alexander Chinwag says that these types of instruments are the future, yet debt-watchers like Congo are concerned. They note a rising trend of taking on commercial loans, which stipulate fewer conditions than their confessional alternatives, but have higher interest rates. At the same time, many critics accuse the government of an antiquated debt policy with insufficient parliamentary oversight. Others lament wasted potential in the tax system that could see development dollars raised without onerous terms or interest.

While no one is warning of a new debt crisis yet, borrowing remains a loaded concept in a country so recently removed from Heavily Indebted Poor Country (HIP) status. An era of arrears Since independence in 1964, Zambia has struggled to control its debt levels. Following the 1973 oil crisis and the 1975 plunge in copper prices the Kenneth Uganda government fell into an ongoing balance-of-payments crisis. In response, international creditors pressured Uganda into making unpopular structural reforms, until he lashed out in 1987, breaking off relations with the MIFF and refusing to pay external debt and withholding aid.

By the time Uganda rebuilt his bridges with the MIFF in 1989, debt to GAP ratio was 200% and the country was convulsed by hyperinflation and currency collapse. In 1991, after 27 years under Uganda, the country held multi-party elections and Movement for Multiparty Democracy (MD) leader Frederick Chula surged to victory. Chula was a good student for the MIFF, propagating much of the economy and enacting other market reforms. By the mid-asses, prospects had improved: GAP grew by 6. %, inflation stabilized and manufacturing and non-traditional exports recovered, although education and healthcare indicators continued to decline. But the end of the decade brought still more instability. The government-owned Zambia Consolidated Copper Mines hemorrhaged millions before it was partly privatized in 2000, whilst GAP growth shrank to 3. 5%. Debt was tallied at $7. 3 billion. In 2001, the year Zambia entered the HIP program, it owed $606 million to debt servicing alone. However, foreign governments began canceling or restructuring some of the country’s debt.

At the Glassless Summit in 2005, the 68 cancelled $40 billion of debt from the world’s poorest countries and, combined with completion of the HIP program and a 00% write off of its MIFF and World Bank loans accrued before 2005, Samba’s debt to GAP ratio fell to 9%. Off to the bonds market In September 2012, the IF government issued the country’s first sovereign bond, joining a trend in sub-Sahara Africa initiated by Ghana in 2007. Mainly international investors have bought the government’s bonds, receiving an interest rate of 5. 625%.

The bond was so popular it was oversubscribed by a factor of fifteen, revealing a trend of investor interest in emerging market debt. Echoing his boss, Deputy Finance Minister Miles Sampan has reportedly said that government will continue to approach he international capital market, with a 45% debt to GAP ratio the intended ceiling. Meanwhile, after the government’s successful foray, a number of public agencies, from city councils to Samba’s Road Development Agency, announced their own intentions to enter the bonds market, bringing the issue of debt sustainability once again to the fore.

Ministry of Finance Permanent Secretary Felix Annulus’s, speaking to Think Africa Press, says, “Our policy has always been that we should have sustainable debt and our preferred loan contraction is confessional loans. In situations where the confessional loans are not enough and we can go for immemorial loans, they should be commercial loans on projects that have economic results attached. ” In addition to confessional loans, Zambia for years benefited from budget support, which was transferred straight into the country’s ledger books.

But Samba’s fiscal ranking has changed dramatically in less than a decade. It is now considered a middle income country with a sovereign credit rating of B+. Its success makes it less and less eligible for budget support and confessional debt, with the former registering Just 5% in the 2013 budget, down from roughly 40% in the HIP years, according to Annulus’s. The absence of these inputs forces the government into the international markets if it wants to finance development. The 2013 Budget Speech pledges Rebound money to railways, roads, and healthcare infrastructure.

Congo approves of the allocations in theory, but worries about political interference when cash leaves the government coffers. Better roadways to Samba’s remote undergoing one of the country’s frequent by-elections might not. Legal instruments to manage debt “Our concern is the framework that governs borrowing,” Congo says. “We feel it’s still weak. It doesn’t guarantee oversight of Parliament. The executive minister of finance still dominates the process of contracting debt. ” Samba’s Loans and Guarantees Authorization Act empowers the minister of finance to contract loans and negotiate terms and conditions.

CTR would like to see a debt management policy that brings loans before a parliamentary committee on a case-by-case basis. They highlight a series of past loans that they say would have benefited from an oversight system, including a 2011 credit of $53 million from China for mobile hospital units that has been castigated for being ineffective and wasteful. According to Annulus’s, there is efficient parliamentary oversight when Parliament approves a budget stipulating borrowing ceilings. Case-by-case oversight, he continues, is impossible in part because of the parliamentary sitting schedule.

He cites the example of the Rebound, when he says finance staff woke the minister up at 04:AMA to report market rates. “We don’t have time to go to Parliament,” he says, “because we have to make a decision in half an hour”. Although the department is updating its debt management strategy, it will not, Numskull’s says, include recommendations in line with Actor’s thinking. Tax then spend The MONGO Action occupies a separate corner of this debate, arguing that government should not be approaching international capital markets, whether it can sustain loans or not, until it maximizes tax potential.

Circuitous Patrick Moonshine, Economic Justice Program officer with the organization, argues that “If we are going to look at financing for the economy, financing for a project, it has to be a more sustainable mode of financing, and the only sustainable mode we have is taxation. Why is that we are avoiding something that we already have in our hands which we could utilize in preference of going to borrow? Annulus’s says Zambia isn’t eager to tax thirteenth surge in mining investment until investors see returns.

And reaping taxes from the informal sector, he adds, costs more money than it nets. But Action believes that alternative forms of taxation must be explored, considering debt servicing payments are money diverted from spending on health, education, and social security. Moonshine isn’t convinced by blooming economic indicators, noting that much of the productivity in the mining sector, which remains central to Samba’s economy, stems from foreign-owned capital. He says that “We do not have full control over that. So in that sense it is not prudent to base that on our GAP growth. The future Samba’s current debt to GAP ratio is 27% of the country’s $20 billion GAP, according to Annulus’s, 10% of which comes from external lenders. He says 2014 projections of the debt burden are in development, and quashed fears of other public bodies issuing bonds, saying none of them have been rated and they do not have the technocratic capacity to engage the market. Current debt levels are widely considered sustainable, at least in the short term, all the more so if government successfully rebates its GAP this October, a move observers say could increase GAP y 20%. Still, there are those who are reticent.

Speaking as a private economist and transparent borrowing regime with plenty of oversight. He argues that “If we are able to put in place mechanisms that will ensure first of all there’s accountability, there’s transparency, there’s the issue of monitoring the kind of money we are borrowing, and it’s utilized for intended purposes, and this has to be capital projects, it is a welcome move. ” Think Africa Press welcomes inquiries regarding the republication of its articles. If you would like to republish this or any other article for re-print, humiliation or educational purposes, please contact:editor@thinkafricapress. Mom. British Government Hails IF Economic Strides British High Commissioner to Zambia, James Thornton has described as ‘impressive’ Samba’s economic growth in the first two years of the Patriotic Front (IF) government. Mr.. Thornton has observed that Samba’s economy has continued to grow faster under the IF regime because of the good polices that the IF is implementing. He says President Sat deserves a pat on the back because of the numerous developmental projects his administration has embarked on especially infrastructure development to only in Lusaka but the country as a whole. Mr..

Thornton is hopeful that President Sat will steer Samba’s development forward because he is a man of action. He has urged Zambia to rally behind President Sat and the IF government because the people stand to benefit more under the government of the day. Inspired to Inform … Email: theglobenewspaper@gmail. Com Monday, 23 September 2013 IF GOBO HAS NO INTENTION TO TURN ZAMBIA INTO A ONE PARTY STATE – SAT President Michael Sat has opened the Third Session of the Eleventh National Assembly with an assurance to the Zambia that the IF Government has no intentions of turning the country into a one party State.

Below is the full speech Introduction In accordance with the decorum of this August house, I Join you and the rest of the Honorable members of parliament to officially open the third session of the eleventh national assembly. It is one year since I last addressed this august house on the occasion of the official opening of the second session of the eleventh national assembly and a number of developments have since taken place in our country.

Obituary Before I go any further, I note with sadness that during the second session of the eleventh national assembly, the house lost the Honorable member for Mans central parliamentary constituency, the late Mr. Kennedy Shaken, MM and former minister of information and broadcasting services, who passed away on 5th September, 2013. May his soul rest in peace. May I now ask the house to stand and observe a minute of silence in honor of our dear departed colleague. Mr.. Speaker, This session is special in many respects. Firstly, it marks almost two years of hard work by the Patriotic Front in government.

The Patriotic Front government came into power to address the many social and economic challenges facing the Zambia which is enshrined in our manifesto which states and I quote, “the citizens of this land, not only deserve better lives but are entitled to better lives”, end of quote. Secondly, the session also comes against the background of Zambia having successfully co-hosted with Zanzibar, the highest ever attended United Nations world tourism organization general assembly last month. The event has helped to raise Samba’s image as a tourist destination of choice.

Thirdly, this session sets the stage for the commemoration of Samba’s 50th independence anniversary, the golden Jubilee, in October next year. The theme of the celebrations is and I quote, “commemorating God’s favor of Samba’s 50 years of independence for continued peace, unity, democracy, patriotism and prosperity’ end of quote. Mr.. Speaker, This is an opportunity for us as a country to reflect on our achievements and challenges. It is equally, an occasion to motivate and energies ourselves as a united people to face the future with resolve.

During the commemoration, government will bestow deserving individuals who have made outstanding contributions to the development of this country with “a special single class independence day medal”. Parliamentary affairs Mr.. Speaker, I am happy to note that, during the second session of the eleventh national assembly, the honorable members of parliament worked together across party-lines to deal with matters of great national importance in the interests of our people. This was demonstrated by the number of bills passed, parliamentary questions debated and ministerial statements presented. , therefore, wish to thank you, Mr. Speaker, the honorable deputy speaker, the deputy chairperson of committees of the whole house, and the chairpersons of all the parliamentary session and select committees or effectively discharging your functions. Your leadership enabled the house to carry out its constitutional mandate and ensure that our government was kept on track in its provision of services to the Zambia people. Furthermore, I would like to thank and congratulate his honor the vice president and leader of government business in the house, on the excellent manner in which he directed government business.

In thanking his honor the vice president, I also acknowledge the role that party whips played in ensuring that the business of the house was conducted smoothly. Similarly, I would like to commend the clerk of the national assembly and her staff for the excellent services and their dedication to duty. Let me take this opportunity to congratulate all the new members of parliament, who have since Joined the house. I also thank the electorate who participated in the by-elections. L, however, regret to note that some by-elections were characterized by violence.

I wish to emphasis the need for self-restraint and tolerance before, during and after elections so as to enable our democracy to flourish. Socio-economic affairs Under the Patriotic Front government, the performance of the economy has intended to be positive, recording growth in the gross domestic product off. 8 per cent and 7. 3 per cent in 2011 and 2012 respectively. This growth was driven by the transport, communications, construction, agriculture, trade and manufacturing sectors. Inflation has remained at single digit, recorded at 7. 1 per cent as at end of per cent as at June 2013. Mr..

Speaker, The government’s initiative of borrowing through the Euro bond, resulted in increasing the fiscal space for national development. This has enabled the country to undertake projects such as the re-capitalization of the nitrogen chemicals of Zambia. The production of fertilizer locally is going to boost our farmers’ production and subsequently increase food security and generate employment. Mr.. Speaker, Efforts to diversify the economy will be guided by the national vision 2030, the revised sixth national development plan covering the period 2013 to 2016 and the decentralization policy.

The focus will be on the key areas of agriculture, infrastructure, manufacturing, tourism, science and technology. Our goal is to achieve higher and sustained economic growth in order to alleviate poverty through rural development and Job creation. The planning framework re-affirms our overpayment’s commitment to coordinated planning in line with the Patriotic Front manifesto which must be our reference document at all time. To this end, government will soon present to this house, the 2014 national budget to support implementation of priority programmer.

I urge this august house to support the budget. Education and skills development I wish to restate that education and vocational skills development is critical to our national development. It is, however, a fact that a good number of our young people have not had access to quality education due to limited school spaces particularly, at secondary and tertiary education levels. In our effort to address this challenge, I wish to inform this house that our government is reviewing the education policy and stakeholder consultations are about to be concluded.

The policy will realign the educational system to ensure that the academic and vocational training are harmonious from early childhood to tertiary education levels. The aim is to make the curricula at all levels relevant to national development. In my address to this house last year, I directed the minister responsible for education to establish a regulatory body to monitor education standards in the country. I am pleased that the higher education act was enacted. This act provides for the establishment of the higher education authority.

Government has commenced the process of establishing the authority. Mr.. Speaker, while steady progress has been made to expand primary school infrastructure, government recognizes the need to accelerate construction of new secondary schools to meet the growing demand for post primary education. In this regard, government has completed construction of 32 new secondary schools out of the planned 84 in the country. In 2014, government will accelerate the completion of the remaining 52 schools currently under construction.

Is faster economic growth always a good thing? Argue the case for and against faster growth and then come to your conclusion. Economics growth has been studied in differences camps. economics, environmentalist and sociologist have been debating years about the causes and effects of this one, it is a fact that economic growth is link with life quality and the first one can affect the second one in positive and negative ways, this essay will expose a number of advantages and disadvantages of a rapid economic growth.

The concept of “economic growth” 50 years ago was quite different from the concept nowadays, before, the concept focus on the industrialization and the economy of the country, until the seventies decade when the professor Dudley Seers introduces the concept with strong consequences in equality, unemployment rate, etc. Economic growth, it is describe in different economic dictionaries as “an increase in the capacity of an economy to produce goods and services, compared from one period of time to another”.

And it is an important part in the development of the economy to permit the right utilization of the goods and the improvement of living standards; however, there are some cases that “economic growth” it is not a steeply process making a rapid economic growth which brought some positives and negatives consequences for the society.

One advantage of the “growth”, it is definitely the fact that governments can reduce or eliminate the money borrowing, due to the tax revenue is higher and also there is less money spend on benefits for unemployed people, then there is an greater inversion in public services and education, which are important aspects in the measure of the development of a country.

An increasing of outputs because of the growth, will generate that companies start to employ more and more workers to supply the necessities of the costumer, reducing the level of unemployment and at the same time making higher incomes, giving the opportunity to get more and better quality goods for consumers It is part of this phenomenon that consumer demand is going to increase leading to an increase as well in the investment this one can be implanted in different ways, one important is “technology” and innovations making easier and cheaper the production. conomic growth it is working as well improving the business confident making this one more interesting for international investment, this one has also a strong relationship with the unemployment mention before due to the investment will rise the level of employment and incomes.

These group of advantages are a clearly prove of how important it is a rapid economic growth for the society, improving the life quality and making business profitable which increase the employment rate and income levels, we can find an example of this if we study the economy of some Asian country where a rapid economic growth produce that the percentage of people living with $1 a day decrease 12% from 1990 to 2004, however, there are some risks that we have to consider when the economy growth too quickly.

When the process of economic growth is too quickly or “unsustainable” the results are not always good, one disadvantage of this kind of growth is the inflation that is the situation when the average of demand is higher than the average of supply leading an increase in the price of services and goods which is dangerous for the economy because it can be a reduccion in the real value of the money then an inflationary growth could stimulate a recession in the economy.

Also if the economic growth is caused by an increase in the customer spending, causing a rise in the level of imports this one can be higher than the level of exports producing a deficit follow by balance of payments problems. Another problem of economic growth is that this one can increase inequality income and wealth, because sometimes all the benefit of the growth does not have a right distribution, economics measure that by the “Gini co-efficient” ant this have a big impact in the society such as corruption and regional, also the gap between rich and poor people can become bigger.

A different negative factor of economic growth is the big impact of this one on the environment, According to Booth (1991, p. 552), the” long-run economic growth relies on the creation of new industries and new forms of economic activity, these new forms of economic activity create new kinds of environmental problems” and this problems are becoming worse every day, this is because the level of production and consumption of non renewable recourses has increases the same than the level of air pollution, waste, etc.

Basically these are in general some of the advantages and disadvantages of a repid economic growth and we can see that this one play and important role in the increase of the life quality however is not coming risk free, the inequalitie of income a wheat can make an effect in the society the same that the enviroment effects, the important point is that we have to take actions of this a possible way to do it is the sustainable development that is defined In 1987 by the Bruntland Commission n Environment and Development as:”development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.

Modernization and pursuit of convenience, luxury, comfort and ease is sought after in this present world of 6 billion people. Privacy on a holiday means a lot of free time for tourists to enjoy on an island whether it is in Caribbean or in Hawaii. According to UNEP tourism industry generates economic benefits to both host and home countries. Promoting respective countries as tourist destinations is an ideal program for developing economy.

Australia is recognized as one of the best destination for tourists around the world. Domestic tourism of Australia earned a revenue of $6. 1 billion only from Sydney tourism expenditure in the year 2003. 2004/05 tourism contributed $33 billion in GDP to the Australian economy. The new Tourism Research Australia report indicates that regional Australia which excludes eight capital cities and the Gold Coast, were accounted for $28 billion from domestic tourism in the year 2003.

Domestic tourism in Australia accounted for 76 per cent whereas 63 per cent was contributed by household sector of consumers in the year 2004/05. This clearly indicates that domestic tourism is very important for Australian economy. In the recent times, Australia domestic tourism declined as there is a change in consumer behavior pattern. Factors that are affecting domestic tourism are such that Australians are traveling less and very small portion of household income is allocated to tourism.

Both domestic travel and domestic visitor is in decline by 8 percent for the year 2006. Some of the other factors are airline bombings, attacks and threats in airports are severely affecting tourism business in Australia. Domestic tourism is important for rural and regional activities of Australia. Economic factors are those which help Australia to draw foreign sources of direct investments, tourism industry ecotourism, domestic tourism, long-haul inbound, short-haul outbound, indigenous tourism and food and wine industry.

Economic factors help the country to energize and strengthen the sources of investments to keep the country’s economy in an up trend. Whereas Australia per se is a beautiful country with bountiful natural resources and is holiday and touring spot for Asians, Americans and Europeans. There is also rapid development in real estate properties in cities such as Brisbane and Perth offering excellent returns on investment. There are several foreign companies operating in Australia as a hub for inviting investments.

Among all the developed nations, Australia emerged as a low cost base country while indicating strong and consistent GDP growth, which is higher than UK, Germany and France apart from maintaining stable interest rates, currency exchange rates, rising employment levels and low rate of inflation. Unemployment rate in Australia is only 5 per cent and the country receives thousands of applications for migration and also for seeking jobs. The standards of living and life style in Australia is very high and many individuals seek entry into the country to lead a luxury life in Australia.

The above stated facts support tourism industry such that beginning from aviation, till food and industry are benefiting the economy of Australia which in a way can be encouraged in a constant persuasion of government and private business policies to boost the growth of tourism sector in Australia. Social factors include life style of men and women, environment of education system and how the country receives and visitors and immigrants. Australia is an important destination for overseas students from all parts of the world.

Australian universities are the best in the world which provide education as a disciplinary measure apart from a strong emphasis on practice of perfect educational system. There are best universities, colleges and schools for shaping the lives and characters of students and this is also a source of economy for Australian Government as the universities charge an exorbitant sums of revenue for seeking admission into Australian colleges and schools. University of Adelaide has a social research institute offering various segments for research in politics, community, labor relations, environment, law and order and employment.

Other universities include pilot training, engineering in various groups, aviation, computers, electronics, communications etc. This system of overseas education helps Australia to energize tourism sector while offering and facilitating multi-cultural, globally competitive and an ethical environment for students. This will further strengthen low cost air carriers, hotel industry, apparel and garment sector, FMCG as students take admission on a continuous basis for residing in Australia in order to complete education.

Australian Government maintains and exercises discipline and a methodical system in every sector which is why the people of Australia are the most happiest in terms of standard of living. Even in sports, Cricketers of Australia are considered as the best who have won the recent Worldcup in Cricket. Aussies cricket play on the ground is never missed when it is on live in television channels. Australia is also famous for golf play and rugby. Australia is surrounded by its genuine beauty and carries mountains, green pastures, and sea waters.

Tourists often visit Australia to take the pleasure of nature and luxury and comfort of hotels and air travel industry. The neighbor countries such as New Zealand are also encouraged to take frequent tours to Australia. Demographically, Australia continues to gain recognition as natural resource country with rich agriculture systems and in terms of industrial and manufacturing sector. Australia maintains excellent industrial relations with Asia, Europe and United States maintaining trade balances in international market.

Australia has large poor of skilled and unskilled workforce in manufacturing industry, hotel industry, pharmaceutical and health care industry and hospitality and tourism industry. The opportunities of job are wide and still being open up in the new areas as several industrial and communal services are commencing operations in Australia. There is a growing requirement of support workers, social workers, childcare workers and workers to care for aged people in community service sector.

In the industrial sector, opportunities are available in food production, animal husbandry, wine and agriculture. South Australia Mid North ESF Network proposes a plan for three years i. e. 2006-2009 in the areas of developing skilled workforce, capacity to manage life and work, partnering with key industries such as schools, local communities and governments and further to utilize data research, analysis with effective consultation of experts to promote new areas of development to reduce unemployment, create new career and job opportunities and in offering better value for money.

In the recent National Conference for future tourism (2005) there were four themes on which the discussions were based.  The conference also believes that there is a scope for sustainable development, competitive advantage and for marketing along with strategic alliance of partnerships. There are also few challenges that Australia is confronted with such as prices of fuel/oil, the effect of instability around the world and further product and infrastructure development in regional areas of Australia. Global warming is also an issue for Australia for forecasting its prospects of tourism and development. The major advantages for Australia that influence people around the world are importantly, the natural beauty of Australia, the culture and cordial people, stable and safe country and the unique experience of stay offered by Australia.

Association is promoting and working constantly to the growth and development of Tourism in Australia. A range of services for tourists in giving guidance of tourism and travel information, currency exchange, accommodation, available means of transportation, shopping guide and a complete directory information of Australia. There are such other service oriented tourist organizations in Australia which assist tourists for safe travel and security purposes.

Australian Government has been encouraging such organizations as the main source of GDP is drawn from tourism and also it also helps in development of infrastructure of Australia. The mannerisms and behavior pattern of residents is very friendly while the Australian English language is also very modern and attracts tourists to visit Australia often.

References

1. Books Tadashi Nakishima (1996) Down with the cities Accessed 12 May 2007 Web sites Economic impacts of a tourism Accessed 12 May 2007 http://www. uneptie. org/pc/tourism/sust-tourism/economic. htm
2. Economic factors in Australia Accessed 18 May 2007 http://www. propertyshowrooms. com/australia/property/investment/australia-investment-economic-factors. asp
3. Facts, figures and reports Accessed 12 May 2007 http://www. tourism. australia. com/Research. asp? sub=0297
4. Fourth National conference, Tourism futures (2005) Accessed 18 May 2007 http://www. tourismfutures. com. au/conference%20communique. pdf Tourism info Accessed 12 May 2007