Roll Call: July, Week 1

Egypt: We’ve been here before

Reuters’ David Rohde makes a world of sense in The Atlantic when he argues that not only are elections urgently needed in Egypt, but they absolutely must include the just-deposed Muslim Brotherhood. Why? Yes, because marginalizing them from the mainstream political process will only convince them, at Egypt’s peril, to shun the ballot box for the bullet box (on 5 July, 2 days after Morsi’s ouster, CNN reported that Brotherhood supporters had demonstrated outside the Republican Army Headquarters in Cairo where Morsi’s believed to be detained, chanting “No more elections after this”). But it’s also because there’s a need to forge a civilian government enjoying the support of as many Egyptians as possible across as many constituencies as possible, as soon as possible. Early elections will allow the current momentum to be channeled toward the electoral process, they will persuade dissatisfied Morsi supporters to give the democratic process another chance, and they will prevent the military-supervised interim status quo from concretizing into something more protracted. Early elections stand a higher chance of producing some semblance of a cohesive government that will be able to act as a counterweight to the military’s tremendous influence. Of course, there’s every possibility (though remote at this time) that the Brotherhood could win a second mandate to govern. At the worst, it could turn out to be as ineffective as the Morsi government, in which case the Egyptian public could mobilize once again to oust it. The alternative though, prematurely eliminating the Brotherhood from the process altogether, invites far more uncertainty – including the possibility of open conflict – and should be avoided as much as possible.

Then there’s this equally level-headed, realist piece by Martin Indyk in Foreign Policy. Without discounting the need for a speedy restoration of civilian, representative government in Egypt, Indyk argues that the Egyptian military is a crucial stakeholder in Egyptian political life and that the United States (and pretty much all other countries who care about Egypt) would be daft to marginalize it. At the end of the day, whichever direction Egyptian politics swings towards, the military can be counted on to provide the strategic policy continuity that has shaped Egypt-U.S. relations and ensured relative peace in the region: maintenance of the 1979 Egyptian-Israeli peace treaty, a rejection of avowedly pro-Al Qaeda factions and alignment with the moderate Arab League in place of Nasserist destiny-mongering. Remember Niall Ferguson’s article in (the now dead) Newsweek written just days after Mubarak’s overthrow, in which he fulminated against a disjointed Obama policy of pacifying both the anti- and pro-Mubarak camps – to the disgust of both? Indyk believes, very convincingly, that that Obama should avoid similar equivocation this time and get behind the military, while using that support as leverage to press for the prompt restoration of democracy.

And finally, Caroline Freund, former Middle East Chief Economist at the World Bank, spoke to the Washington Post to talk about the economic origins of the Egypt’s mess – and the economic roads that could lead Egypt out of it. See also this Foreign Affairs article on Egypt’s languishing economy. The FT also have a superb collection of charts and quantitative data.

Meanwhile, news has been breaking like glass on Friday, 5 July:

  • Egypt’s African Union membership was suspended by the organization’s Peace and Security Council. The AU normally suspends member states following coups or extraconstitutional power transfers – it suspended Mali’s membership following the Sanogo Coup in 2012 and suspended Cote d’Ivoire after its controversial 2010 elections.
  • UN High Commissioner for Human Rights Navi Pillay voiced out against the military’s detention of Muslim Brotherhood leaders.
  • Interim President Mansour has dissolved the Shura Council (upper house) of Egypt’s parliament by decree. The People’s Assembly (lower house) had been dissolved by the SCAF in June 2012.
  • The Freedom and Justice Party’s leader and deputy, Saad El-Katatni and Rashad Bayoumi, were released from detention at Cairo’s Tora Prison “pending investigations”.
  • But the Muslim Brotherhood’s supreme guide, Mohamad Badie, and deputy supreme guide, Khairat El-Shater, were both arrested. As was the Brotherhood’s former supreme guide, Mahdi Akef.
  • The Brotherhood’s website issued a list of 4 demands, couched as the demands of “the masses of the Egyptian people in all liberty squares of Egypt”.
  • But not before the same website reportedly called Interim President Mansour a Jew and a failed Christian convert. It apparently rescinded that statement shortly after.



The Brazilian branch of the Ludwig von Mises Institute (which promotes libertarian Austrian economics) has a solid piece on the Brazilian protests. To spare you the effort of getting all that Portuguese translated, here are the main points:

  • There are two sides in the protest movement. The first is a mixed bag of economic interest groups: from libertarians (demanding tax cuts and deregulation) to communists (demanding nationalization of public services) to students (demanding more scholarships and reduced fees) to the general working class (demanding cheaper public transport and higher wages – recall that it was these guys who started the whole thing in Sao Paulo) to the general middle class (demanding better infrastructure and, not surprisingly, higher wages).
  • To this first group, Brasilia has made some concessions –  the Brazilian Senate for instance has approved a constitutional amendment proposal making transportation a “social right”.
  • The second side is pretty much just anarchists who are free-riding the protests in order to cause damage and confusion.The authorities should take the appropriate steps to clamp down on this camp.


World Bank promotes/demotes countries’ income status

On 1 July, as it does every 1 July, the World Bank revised the classifications of a number of national economies based on estimates of gross national income (GNI) per capita for the previous year. There were a number of promotions:

  • Chile: Upper middle  High
  • Iraq: Lower middle  Upper middle
  • Latvia: Upper middle → High
  • Russia: Upper middle → High

And some notable demotions:

  • Hungary: High → Upper middle
  • South Sudan: Lower middle  Low


550 days to MDGs deadline

1 July 2013 marks the 550-day mark to the 1 January 2015 deadline for meeting the 8 Millennium Development Goals (MDGs). Progress continues to be inconsistent. For instance, the World Bank reports mixed progress in meeting the first MDG – eradicating extreme poverty and hunger. The indicator for eradicating extreme poverty (MDG 1.1) is encouraging: 46% of developing countries have met this target, with another 8% having made “sufficient progress”. Only 17% of developing countries are considered to be “seriously off target” in eradicating extreme poverty:

poverty copy

In contrast, one of the two indicators for eradicating hunger, undernourishment (MDG 1.9), yields a different picture: only 24% of developing countries have met this target, while over 50% have not shown adequate progress.

nours copy


European ‘Forward Guidance’ vs American QE (or the downgrading of it)

In a bid to calm European markets over strong hints that the U.S. Fed is headed for what Barclays is calling “Septaper” (boosted by the addition of 195,000 U.S. jobs in June and an addition of 70,000 to May’s figure – bringing U.S. average monthly jobs growth in 2013 to 202,000), both the ECB and the Bank of England have joined up to announce that Eurozone and UK interest rates will remain at rock-bottom “for a very long time” -possibly into 2015-, breaking a long-held rule of not pre-committing to future interest rates. The 4 July announcements by the ECB’s Draghi and the BOE’s Mark Carney had their desired effect: the Euro and pound fell against the USD, while Euro equities rallied (the FTSE rose 3.1% while the Eurofirst 300 picked up by 2.4%).

The Euro announcements are what everyone’s been calling central bank “Forward Guidance”. It’s nothing new – as the FT explains. The BBC also offers some clarification. The Europeans appear to be rolling it out again in 2013 to mitigate market expectations that the U.S. Fed could start tapering down on QE3 by reducing the volume of its $85 billion/month assets purchases, with a view to terminating QE altogether next summer when the U.S. unemployment rate is expected to shrink to 7% (from the current 7.6% and expected 7.25% by the end of this year). More worryingly, there’s speculation that the Fed could also start tightening its monetary policy – by raising interest rates from their current floor level – once unemployment reaches 6.5%. Of course, the Fed doesn’t engage in forward guidance, so it hasn’t indicated when it intends to start raising rates (though everyone’s thinking 2015).

So there we have it – Europe is effectively trying to shout out that cheap and abundant European money is here to stay: a direct response to markets’ interpretations of Fed statements that the Americans are planning to make borrowing more expensive for the first time in years (not so soon, comes the Fed retort: remember the “feral hogs” chastise?). Japan?


China: Sustainable Growth rules OK

Chinese academics and economists have come out to lend intellectual weight to the Chinese government’s recent indications that it intends to move China from rapid growth to slower, more sustainable growth. and we have learnt a lot more about how China conducts

Goldman Sachs’ Yu Song argues that the new Chinese leadership is trying to shift the focus away from a rapid growth model based on exports, manufacturing and high levels of liquidity to slower and more sustainable growth based on structural variables such as environmental protection, labor safety, anti-corruption and effective regulation aimed at controlling systemic risks. Song believes that the government is becoming “more tolerant of slower growth” as it comes to the realization that “fix(ing) the holes in the financial system to make its development more sustainable” may come “possibly at the expense of short-term growth”. Provided the authorities don’t overtighten monetary policy, he believes that China’s economic focus should be on  risks:

He grants

While Western observers may assume it is a universal rule that policymakers should try to guide market expectations by communicating their thinking to market participants, this is still not always the case in China. This could in part be because of the difference in the way policymakers view the issue conceptually and in part because of the practical difficulties in making the reasons for decisions explicit (an implicit reference to China’s recent power transfer, perhaps?) .

The PBOC was forced to publicly comment on June’s credit crunch (see here and here) on 24 June   . And Chinese authorities have censored domestic media coverage of the

Like Song, Fudan University’s Zhang Jun argues that China’s slowdown “could actually be beneficial, spurring the structural reforms that China needs to achieve its longer-term goal of more balanced and stable GDP growth”. He goes on to

The government must now dispel the remaining vestiges of the stimulus-fueled over-investment of 2008-2010, however painful it may be. This means allowing the economy to continue to slow, while maintaining relatively tight macroeconomic policies that force local governments and the business sector to find new sources of growth.

The Chinese Academy of Social Sciences’ Yi Xianrong says that

It is only too natural for the Chinese government to keep a close eye on the speed of economic growth, but it will never take quantitative growth as its top goal. Now that it is ready to tolerate a moderation of economic growth, the Chinese government will not rush to endorse any monetary policy of quantitative easing to stimulate the economy, even when its growth slows down.

So why then is the Chinese government rushing to liberalize China’s capital markets?


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s