Average wage settlement has far outpaced weak, below-trend economic growth, impairing productivity. South Africa’s unit labor costs had one of the largest increases in the world, a risk the IMF and OECD highlighted in recent reports. In the 2010 Article IV report, the IMF estimated a 16% increase in unit labor costs from 2007-09, driven by a near 11% increase in public sector wages. The increase in wages without a concurrent increase in labor productivity poses major upside risks to inflation, a concern of the South African Reserve Bank. Though wage increases fell slightly to 8.2% in 2010 from 9.3% the previous year, they far outpaced inflation, which eased to a 3.5% y/y pace by Q3 2010. As such, rising wages could counteract the other deflationary and disinflationary forces in the economy.
Zambia’s economic performance is closely tied to the price of and demand for copper, which accounts for 70% of foreign exchange earnings and exports. This lack of export diversity in the economy leaves Zambia extremely vulnerable to global shocks since foreign investment is correlated to the copper price. While higher copper prices boosted the economy (and made Zambian T-bills a temporary wonder) during the 2007-08 commodity boom, the subsequent correction of commodity prices broke the country’s growth momentum, which was further trammeled by the global slowdown. A combination of industrial destocking, weak industrial production and a weak property sector exacerbated the shift in exports from advanced economies to EMs in general—and China in particular. From 2007-09, Zambian exports to the EU fell by 41%, driven by a reduction in metal exports. Notably, exports to Zambia’s largest trading partners within the EU—the UK and the Netherlands—both declined. (The average annual export growth dropped 23% and 6%, respectively.) Switzerland, Zambia’s main export destination, also significantly reduced its metal imports over the period.
Over the last week two frontier markets-Ukraine and Kazakhstan- retracted their ambitions to venture into international debt markets with Eurobond issuances. In both cases, these are countries that are not in need of immediate cash, but they are emblematic of a recent trend in which frontier markets are still having trouble accessing global markets at a price they like.
We hope all our readers are enjoying the World Cup! Given the international diversity of our analysts and strategists, the event has certainly been the preeminent topic of water-cooler conversation this week in our New York and London offices. While we are recognizing the limits of our abilities and refraining from forecasting a winner, we noted in a recent Critical Issue, “Can Economists Predict the World Cup Winner?” that many other research firms are, in fact, making such calls.
The Nuclear Non Proliferation Treaty (NNPT) Review Conference will take place in New York at the U.N. headquarters from May 3-28, 2010. The meeting follows a series of moves to counter nuclear proliferation, which have raised expectations for this year’s review conference. The meeting hopes to strengthen the nonproliferation regime and curb the nuclear ambitions of countries such as Iran and North Korea. The Nuclear Non-Proliferation Treaty, which came into effect in 1970, aims to curb the spread of nuclear weapons making capability. Signatories who do not have nuclear technology pledge to not try and acquire nuclear weapons while the nuclear signatories pledge to work towards gradual disarmament. All members are accorded the right to develop nuclear energy for civilian needs. A review of this treaty is held every five years to evaluate member performance and improve execution of the treaty. This review has the challenge of reviving the NNPT’s role as a viable tool for restricting nuclear proliferation.
Climate change was billed as a major priority and the new members of Obama’s energy team have focused on increasing energy efficiency and the share of alternative fuels. There have in fact been some significant programs, a push for energy efficiency, trying to set a national mileage standard and an increase in funding for clean tech. But the agenda has continued to face significant setbacks particularly surrounding its flagship Cap-and-trade legislation which was approved in the House by a narrow margin in June 2009 but has been stalled in the senate. A revised, stripped-down, version of the house bill, set to be introduced April 26 2010, has been put on hold, increasing the risk that legislation might be delayed till after the midterm elections this fall.
During his recent visit to Sub-Saharan Africa, IMF chief Dominique Strauss-Kahn penned a piece Africa is Back which exudes optimism of an economically brighter sound future for the region, which has been emerging from recession. Kahn stopped by South Africa, Kenya and Zambia where he met members from the business, political and academic communities to evaluate the effects of the global financial crisis on the continent. Kahn stressed that sound economic policies adopted by African nations, including countercyclical monetary and fiscal policies have helped them buffer the effects of the crisis and it is these policies that will ensure stronger growth in the future. Stable domestic governance will underscore the African growth trajectory. He argued that unlike other crises this time Africa’s recovery is not lagging global recovery but is occurring almost at the same pace.
Today, Viktor Yanukovych was sworn in as the new President of Ukraine following a February 7, 2010 runoff vote against Prime Minister Yulia Tymoshenko, which followed an inconclusive first round election in January. His first task will be to form a new coalition in parliament by adding opposition members to his 172 seats to oust rival Yulia Tymoshenko from the post of Prime Minister.
Amid the global financial crisis, several European countries faced serious economic distress and turned to external creditors, including the EU and IMF, for emergency financing. This multilateral support relieved investors and calmed worries of full-fledged balance of payment crises. Nevertheless, these economies are not out of the woods. As first noted in an RGE note in October, political developments could push loan programs off track, reigniting crisis fears. Iceland, Latvia, Romania and Ukraine are cases in point. The derailment of any of one of these IMF programs could lead to a greater focus on political risk in the other program countries.
As global leaders begin meeting in Copenhagen to craft a new climate change deal, we take a look at what sort of deal might emerge, what different countries are bringing to the table and the likely economic costs of such a deal. This piece is excerpted from a longer piece, “The Economics of Copenhagen,” available […]