RateWatch #415 – World Poverty, World Bank, IMF
July 10, 2004 by Dick Lepre
One strange thing to note about the technical analysis of Treasury Futures is that the implied volatility is extremely low. This is often a sign of a market which has not had much price movement as of late but is gearing for a spike. It is difficult to predict which direction this move will be because we are in a bullish weekly (short term) cycle but a bearish monthly (long term) cycle. This makes rate forecasting and determining rate lock strategy extremely difficult. We will likely remain in this "resting in place" mode until we have data or news that is a real market mover. This could be CPI, jobs or terrorism. When the next move occurs it will likely be fast and extreme.
We often talk about the topics of jobs in the United States, the world economy, protectionism and such. A couple of news stories in the last week about Sudan and the African Union shelving criticism of Zimbabwe's human-rights conduct got me to thinking.
The point offered here is that the first step out of poverty may be democracy.
There are two striking things about the present state of the economy of the world:
1) considering the resources of the planet and the advanced technical and economic resources
that the world has, there are one hell of a lot of poor people in the world. There are about
6.4 billion people in the world. 2.8 billion of them live on less than $700/year. 1.2 billion people earn less than $1/day.
2) One of the parts of the world with the most abject poverty is Africa yet this is quite possibly the part of the world most rich in natural resources: oil, diamonds, minerals, and enough arable land for its population.
Two of the most successful economies in history are Great Britain and Japan but neither of these countries is rich in resources. South America is richer in resources than the United States but it has never been an economic powerhouse. What is going on here?
Strangely enough, it may be the case that a hint at how some of the world's problems can be solved may be ascertained by looking at Iraq. At present, Iraq is in a perilous state. It is a country with a rich history and culture and a country rich in resources. Depending on one's politics or opinions the blame for Iraq's present state can be placed on Saddam the United States or any number of other components but how it got into this state is largely irrelevant. The issue should be how do they get from where they are to where they should be?
The first thing Iraq needs is true sovereignty. A country has sovereignty when it can protect its own borders. Iraq needs to expel all Jihadists who oppose the creation of a democratic government and then it needs U.S. forces out. Then it will have sovereignty. Iraq needs the rule of law, a government with separation of powers, a government held accountable to the people through the process of free and fair elections, an administration that is accountable to the judiciary, a military for defense purposes, local police forces, a clear definition of the limitations of the control that the government has on individuals (a Bill of Rights) and a rebuilding and expansion of its infrastructure: transportation, utilities, hospitals and schools.
It is clearly obvious to me that this is what is needed for Iraq to move ahead. What I see as most interesting is that it is these very things that can get many of the impoverished nations of the world off welfare. The fact that the countries that have substantial poverty is not a result of lack of resources or an unwillingness of the rich to help the poor. It is not a sinister plot unleashed by the IMF and the World Bank. It is not a result of the folks in these countries being lazy or evil or incompetent. It is not merely the result of colonization. Colonization is a contributory cause the effect of which has been reduced by its demise. The primary burden that most poor countries have is that they have screwed-up governments. They need (to repeat the litany from Iraq) the rule of law, a government with separation of powers, a government held accountable to the people through the process of free and fair elections, an administration that is accountable to the judiciary, a military for defense purposes, local police forces, a clear definition of the limitations of the control that the government has on individuals (a Bill of Rights) and a rebuilding and expansion of its infrastructure: transportation, utilities, hospitals and education.
Without the rule of law, a government with separation of powers, accountability and an
administration accountable to the judiciary NOTHING that the World Bank and the IMF does
is going to help the citizens.
The World Bank
The World Bank is not a bank in the traditional sense. It is an agency of the United Nations.
The web site of the World Bank defines its mission as: "... to fight poverty and improve the
living standards of people in the developing world. It is a development Bank which provides
loans, policy advice, technical assistance and knowledge sharing services to low and middle income countries to reduce poverty. The Bank promotes growth to create jobs and to empower poor people to take advantage of these opportunities."
As we folks in the mortgage business know, the starting point in looking at a loan is credit.
The problem that many of these countries have is unmanageably high debt.
The World Bank has a category of countries called HIPC's - Highly Indebted Poor Countries.
See:http://www.worldbank.org/hipc/. 33 of the 41 countries classified as HIPC's are
in sub-Sahara Africa. The others are Bolivia and Guyana in South America, Nicaragua and Honduras in Central America, Yemen in the middle-East, the Lao PDR (Laos), Myanmar (Burma) and Vietnam in Asia.
In 1996 the World Bank started the HIPC Initiative intended to reduce debt to a sustainable level. The concept is that the creditors are willing to forgive debt as long as the debtor nations take actions to achieve certain benchmarks. To be simplistic, they want debt to be a certain multiple of exports.
The problem, as I see it, is that as long as these countries are so far away from democracy
the system will not work. The economic benefits of the loans of the World Bank have, to some
extent, been sucked off by leaders not accountable to the people and wound up in Swiss bank accounts. To some extent the sheer incompetence of bureaucracy consumed some of the would-be benefits. Citizens need to be able to vote out of office the evil or incompetent and they need a judiciary to go to in order to stop malfeasance between elections. Democratic elections foster accountability.
The point then is that the large-scale problem is beyond economics. It is not the place of the
World Bank to force democracy on HIPC's. For the most part, democracy must be fought for by the citizens of HIPC's. The nations of the rest of the world must help with policies such as sanctions and "not looking the other way" because the sitting government is an ally convenient to the moment.
Like the World Bank the IMF is an agency of the United Nations. It was created by the Bretton Woods agreement at the end of World War II. The intention was to have countries cooperate in a manner so as to prevent a repetition of the ill-conceived economic policies that led to the Great Depression. The 1930's were characterized by poor choices in a time of weakening economies.
Nations adopted protectionist policies (restrictions on imports) to protect domestic business and jobs. The problem was that this became endemic. As more and more nations adopted protectionist policies world trade slowed and with it went GDP and jobs.
The purpose of the IMF is to allow trade to take place between nations. It is supposed to prevent crises by encouraging sane economic policies. It also works in a manner similar to way the Federal Reserve works on a national level. It helps countries with balance of payments and reserves problems. An example of a recent success story is the manner in which it helped South Korea after the Asian currency crisis of 1997-1998.
The IMF has a broad mandate to act as the forum for discussion of things such as the stabilization of exchange rates and the discouragement of protectionist policies such as led to the Great Depression.
The scope of the problem that HIPC's have is gigantic. They are underdeveloped. They need debt forgiveness. They need democracy. They need more loans. To make this situation a bit more impossible, in sub-Saharan Africa, HIPC's along with economically developed countries are beset by the AIDS epidemic. There are 13 countries in Africa with HIV infection rates above
10% (of adults 15-49 years old). There are 2 countries with HIV infection rates above 25%.
The task is gigantic: HIPC's need democracy and then help from the World Bank and the IMF. In parallel the World Health Organization along with the financial and medical resources of the developed nations need to address the problems of AIDS prevention and treatment.
The Role of the U.S.
The United States, as a country blessed with a healthy economy, must insist that its citizens recognize that the problems that these countries have will ultimately find some way to hurt us. We must put aside the Lou Dobbs mentality that our first obligation is to protect jobs here and recognize that we all live on the same darn planet. One thing that is necessary to get these countries productive is low tariffs and little or no restrictions on their ability to export stuff here (or anywhere else).
If that does not work for you - think of these folks are several billion potential customers.
To receive this free RateWatch newsletter each week by e-mail, click here.
To view the archive of RateWatch newsletters, click here.