Another Year just Another Cycle?

To those with a sharp memory, the summer of 2014 so far has had some all too familiar headlines. From the Israeli – Palestinian conflict in the Middle East, the death of over 290 innocent commercial airline passengers, disease outbreak in West Africa and now the re-defaulting Argentinians.

                The common cliché would remind us that history repeats itself. However, the saying is often used in a greater sense with reoccurrence decades maybe even hundreds of years later.

                This summer we have seen Anderson Cooper report on Gaza and the Israeli – Palestinian conflict for now the fourth time after seeing this issue arise again and again in 2006, 2009, and 2012. We have seen Malaysian airline flight MH17 get shot down over a warzone in eastern Ukraine resulting in the tragic death of over 290 innocent lives. However, even this, is not something new. In 1983, some may remember Korean Air flight HL7442, shot down by a Soviet Su-15 fighter jet resulting in the loss of 269 innocent lives or in 1988, 5 years later, when Iranian Air flight EP-IBU was shot down by a US Navy guided missile resulting in the loss of all 290 people on board as well. Most recently, the media has caught up on a growing Ebola outbreak in West Africa that has been surviving and brewing since 1976 that has claimed the lives of thousands. This all sounds disturbingly familiar.

Lastly, what has been flying under the radar for most are the Argentinian debt talks….again. July 29th was the first time in many years the country has agreed and not denied face-to-face talks with bondholders in Manhattan, New York. After hours of negotiation yesterday, both parties still have not reached any resolution, a day before Argentina faces an almost inevitable default. After being shunned from global credit markets since its default in 2002 on $100 billion, Argentina still has not learned from its mistakes. In a country that is already in a recession many suspect that it will not hurt any markets other than its own. Yesterday’s meeting was the first of in more than three weeks that Economic Minister Axel Kicillof decided to show up to negotiate which obviously questions Argentina’s commitment to even reach an agreement. Besides continuously declining invitations to negotiate, Argentinian economic officials have criticized US bondholders and investors as “vultures” tearing at the scraps of its distressed debt and possible default. Amongst the negotiating now lies a myriad of legal clauses such as RUFO, rights upon future offers, that US court judge Griesa has been asked to stay, which would’ve incentivized the terms for bondholders already offered the debt restructure. Speculators say that not extending Argentinian debt would have a greater impact than many foresee, especially for many of its South American neighbors. However in the coming 48 hours it will be interesting to see what is decided and how everything is resolved. It seems to many that beyond this reoccurring Argentinian default, is not only a mismanagement of capital and poor leadership but also an ego that has brought Argentina into these situations in its financial history over and over again. Possibly due to a fear of foreign influence and dependency, the South Americas have always regarded foreign entities as bullies or in this case “vultures.” Nonetheless it will be interesting to see how things pan out for both sides.

How much longer will some of these issues continue to cycle? Will some type of bulletproof agreement or resolution ever finally bring peace Gaza even though many ask if anything ever will? Will Boeing and other commercial airline manufacturers finally decide to designed precautionary anti-ballistic measures to avoid airlines from being shot down? You would think that by now like many others, a disease that’s been actively around since 1976 whose source and cause is known would have been eradicated. How much longer will Argentina continue to default instead of being able to responsibly manage their financing?

2014 so far, for many people has been more of the same, but with many of these issues still in the air as of today, one can only hope that many of these issues finally can be resolved or prevented.

 

Watch the Youtube video in the middle

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Being outside the Bubble

Firstly, Happy Monday.

Over the past week I’ve been reading and hearing a lot of material on this Quantitative Easing by Bernanke etc. How his talk was interpreted was a mess so the Fed’s president spoke to clarify things on how QE would be approached, blah blah blah. And more about how Bernanke was trying to take some of the juice out of the Equity market so it wouldn’t take off without the economy.

Now, 2-3 weeks later, many see exactly what many feared. With the Fed acting the way it is with it’s policies, analysts have found a trend in the last few bubbles. The attached picture explains it perfectly. Whenever the Fed has kept its rates lower than the Nominal GDP, there’s been a bubble. And yes, that is exactly the position we are in now. Image

Many now fear that this bubble whether seen or unseen will either happen now because it has been noticed, thus putting investor confidence in the toilet or will be triggered in a more financial fashion, rather than the Red Scare. However, it’s very interesting. Would now be a great time to buy gold? Markets have been somewhat bullish, the fear of a bubble is setting in unless the Fed changes something, and gold is at record lows.So? Buy gold? I mean, if I could, I would, at least a sufficient amount to maybe collateralize what I have invested in equities? Or go all in and become a millionaire if things go my way. But then again isnt that the whole game?

 

Who knows, just some food for thought. Enjoy your July 4th’s.

 

Cheers.

The Fed. Stocks & Bonds

Buon Pomeriggio.

I recently read this article on bonds and stocks by Michael A. Gayed on MarketWatch.com and found it pretty damn interesting.
Link : http://www.marketwatch.com/story/the-biggest-risk-to-stocks-2013-05-29

A lot of what I’m about to say is going to be reiterating his thoughts, but I though I’d share them with you/ summarize to make it a little bit easier in lay man’s terms.

 

So this smart guy knows that when bond yields go up, stocks start hurtin’. His point is that after last week, after Bernanke’s talk about the Fed’s position and the volatility in Japan this recent confidence and stability is only an illusion. I like the way he’s looking at what the Fed is doing. Gayed stresses that the Fed is simple “confusing and conquering.” By this he means, say something that can be interpreted 100 different ways, say something confident but not too confident, but nonetheless whatever you do don’t get excited.

Now why would he and the Fed do this? The Fed is worried that stocks are gonna start taking off and forgetting about the still struggling economy. By sending mixed messages, the Fed is taking some of the umph out of the somewhat rising stocks. Gayed puts it perfectly saying “they may be able to stop the advance in U.S. averages from getting too far ahead of itself.”

Additionally Gayed also adds that the Fed should really cut down on talks about tapering if they don’t want to deflate the momentum the housing market has recently experienced over the last few quarters.

The position Gayed takes on this is a position I like. Why else would the Fed come out like this? I mean, I’d like to think they aren’t just a bunch of confusing fools and actually have a reasoning for their ways. Additionally, this stock and bond relationship is highlighted perfectly in reference to whats going on now. Preferably, I’d obviously like to see a nice balance, in tandem with the economy. But I think it’s smart that the Fed is doing what their doing so that the market doesn’t trip on its shoelaces once people realize the economy isn’t so great.

 

Enjoy the rest of your day!

 

Arrivaderci.

Globalization Theory

Buon Giorno.

Recently got out of the daily 9AM trade floor meeting. I was so tempted to bring up this little theory that I’ve developed over the past couple months; patents pending. However, in a room full of geniuses, I didn’t say anything in-case someone found it utterly stupid for “the intern” to put his two cents in, especially if my little idea was already known.

 

However, during the last couple weeks of school, on April 29th. I went to a talk at Brown University that involved a couple former Latin American Presidents. One was Ernesto Zedillo Ponce de León, a Mexican economist and former president of Mexico from December 1, 1994 to November 30, 2000.

Approximately a month before, I had given a presentation on the reality of Brazil as an emerging market among the BRICs and if it was actually leading the BRICs, aka fulfilling the economic prophecies. My findings led me to an article that helped me formulate my presentation. It, among other sources, pointed out that Brazil was underperforming and it’s as simple as that. It was not leading the BRICs and had under-preformed during the last few quarters.

So the question is, why? Well, my theory or as I call it, phenomenon, is that of globalization’s impact on emerging markets. The world is no longer flat. We know in a matter of seconds what is going on with the Nikkei over in Asia and milliseconds whats going on with the FTSE in London. Between the critics, the analysts, the media and speed that information travels today every move is speculated and known instantly. The connectivity is truly unbelievable between markets. With this integration of markets, an emerging economy is killed by it’s own hype. The analysts, speculators and media kill the potential of these emerging economies. Former President Zedillo coined the concept perfectly during his talk, labeling this mentality as a form of complacency. He related it to Mexico’s potential and arguing that outlets and economists (WSJ, Bloomberg, FinancialTimes, etc) tell the world that Mexico and the BRICs are going to be growing economies and have endless potential, so the country grows a little and figures because everyone in the financial world is saying they’re going to be good, that there’s nothing to do but sit back and let it happen. This is the complacency factor and phenomenon that globalization has caused and that the world economies have never seen. Never in our history have markets been so connected and information been so readily available; therefore causing this hype. I mean, I think it’s rather simple.

Now to relate this back to the meeting this morning, the fact that emerging markets currencies all haven’t been returning as much as people have hoped for other than the MXN Peso was brought up and questioned. Other, all very plausible factors were also thrown into discussion but I was surprised nobody had addressed anything close to my idea and it left me wondering if it would be relevant or worthy of consideration. Even if so, I don’t think there would be a way to quantify it’s (globalization/complacency theory) impact, which poses a problem were it to be taken into account.

 

Nonetheless, I would be very interested to see if anyone talks about this or if this becomes a big deal as markets integrate more and more.

 

Thoughts?

 

Arrivaderci.

 

Let us Share – Banco Compartamos

Banco Compartamos was formed in 1990 as a private organization to aid the poor in rural areas of Chiapas and Oaxaca, Mexico, by providing microloans to the low income population of the region. In 2001, Carlos Danel and Carlos Labarthe, known as “the two Charlies,” took the organization private, and then in 2007 took Compartamos public in an IPO valued at $1.56 billion. Compartamos executives received $150 million of the $450 million in proceeds. Banco Compartamos became one of Mexico’s most successful banks, with an average return on equity of at least 40 percent.

However, after the IPO many criticized that Compartamos no longer benefitted the people but more so worked for its shareholders, a disservice to the world of microfinance. Many in this field saw such a successful and model microfinancing bank completely sell out to the world of big banks. There was also a worry in Compartamos’ social mission being lost.  With the 27.1 price to earnings ratio Compartamos had after the IPO, it was harder to reduce rates if need be in the future, and this indicated high profit expectations which meant tending to the needs of the shareholders was going to be high on the priority list. This new dimension to the company is exactly what made others believe Compartamos had lost their way and was taking the wrong path. This IPO also meant rapid growth in the front office, which meant spending more money to catch up the back office with management info systems, a huge fear in the world of microfinancing.

In weighing their options, the two Charlies considered a private sale of the company, but saw that a private sale had biggest threat to company because it would threaten the current mission and strategy if it were to be under new management. Another option was to continue looking for private investors, which is not only time consuming but demands higher returns and raises less capital than a public offering. Therefore a public offering seemed to be the only viable option under a couple conditions. Some of the conditions ran along the lines of no more than 30% of shares could be sold and no single investor could own more than 10%, to avoid one investor becoming too powerful. With enough leverage, the two Charlies could still run the company their way with their mission.

The IPO proved to be very successful, bringing in $1.56 billion in capital, selling at around $40 per share. Such a figure could have never been raised by non-commercial investors. However, this money had now made an almost impossible goal of 1 million clients, attainable now. A goal that they had set back “in the NGO days,” was a reason they saw themselves still on the right path. The capital now allowed them to expand to more clients and allowed them to offer different products other than their GDI. Among these two were many other opportunities of expansion. The cost of setting up a bank prior to the IPO was around $50,000, to build a new branch now that complied with banking standards cost around $200,000. So even though the new capital allowed expansion, it was almost relatively the same. The two Charlies also mention advice that made them consider what they had done from Luis Velazco saying, “Strategy drives finance and not the other way around.” Velazco’s words resonated in them as they wondered if their method of financing was really a medium to carry out their mission and strategy or not.

As the CEO of Compartamos I would have been against the IPO. I would have been against it because I believe it has distracted the company. It has brought another dimension that needs attention and thus removing administrative attention from their mission and purpose. The company had clearly been successful up until that point, with ridiculous returns on investment; I don’t see how hard it actually would have been to find more investors. The IPO simply juiced up all their operations but when their goal is to reach 1 million clients and the cost of a new branch is amplified four fold then they’re relatively in the same place. In addition to all the regulations, standards, quarterly reports and critizing by the financial world of Wall Street they must deal with now. If anything I believe if the company’s purpose is to provide low income financing, it should do that and grow at its own pace, especially if it has been so successful thus far. If the two Charlies had other ambitions, they should have made a separate company or entity to run alongside their private bank. Running the same programs but for profit and then going public would have been the more rational thing, as long as they kept one of the entities fully dedicated to its purpose of microfinancing.

The Achilles Heel

During the hectic month of December 2001, Argentina defaulted. Over that month, the economy was reduced to barter, mobs looted bank buildings, and the country went through five presidents in eleven days. After President Néstor Kirchner took office in 2003, Argentina began renegotiating it’s the debt in Dubai. The Argentines put a unique offer on the table with the conditions that the creditors would forgive past-due interest, and the old bonds would be swapped for new ones worth 35 cents on the dollar.  In exchange, the new bonds would include a GDP “kicker,” pronounced “keek-ker” by the Argentinians. This “kicker” promised the creditors additional payments equal to 1/20th of the dollar value of all GDP growth above an initial threshold of 4.2% per year.

The creditors rejected the offer, preferring a “haircut” of 40% on the face value of the debt, no interest-forgiveness, and none of this “kicker” business.  In response, Kirchner told them, the IMF, and the U.S. Treasury that the bondholders could take his “haircut” or nothing. On March 1st, 2005, the president finally repudiated their bonds. In 1998, Argentina’s debt burden came to 38% of GDP, interest payments on the foreign portion totaled 29% of exports, and the deficit came to 1.2% of GDP.  Yet investors pounded the poor country, taking out their money and rolling over the debt at higher interest rates, in addition to rising interest expenses, leading to bigger deficits and even higher interest expenses.

By pulling the plug on Argentina and rejecting the “haircut,” creditors fanned the flames of anti-market, anti-U.S. sentiment across Latin America, which brought Hugo Chavez to power in Venezuela and led to the failure of the Washington-backed Free Trade Area of the Americas. These long term results, a possible warning to Germany and the EU. However, Greece and Argentina are two different economies. Argentina is a food producer and, therefore, has an inflow of dollars to the country given the state of world affairs. That is not the case for Greece, at this point, which is primarily an import dependent economy.

Despite the differences, Argentina has some lessons for Greek policymakers. Unfortunately, none of them are easy and if Greece decides to exit the Eurozone, it could face some unpopular choices to prevent the collapse of the banking system. With the crisis picking up steam in Argentina, between March 2001 and July 2002, unpopular capital controls that only allowed withdrawals of $1200 to $1500 per month were imposed to keep the financial system solvent. The government went further. Wary of massive personal and corporate bankruptcies, it decided to devalue bank deposits at a rate of ARS 1.4 per dollar while keeping bank debt at 1 to 1 with the US dollar. This transition left banks in a fragile state and forced the government to step in and compensate them with some $8 billion in sovereign bonds.

In the end, long-term confidence in the financial system was lost. If Greece chose the same road, the move would obviously lead to social unrest similar to what was seen in Argentina. The economy would also take a dive, possibly contracting by 7% – 8% in the first few years. Greece is also more exposed to the negative effects of a rapid devaluation than Argentina was before the crisis. “The country is a net importer with more than 30% of its GDP worth of imports compared to only 12% in Argentina in 2001” (Financial Times). The move to devalue could outweigh the benefits of any domestic oriented growth in stark contrast to Argentina that managed to export its way out of its mess.

In addition to a heavy-handed policy to force foreign-owned “strategic” industries into local hands over the last 10 years, the contentious debt restructuring has negatively affected foreign direct investment. “FDI inflows to Argentina dropped to just USD 12bn from 2002 – 2010 from USD 76bn in 1992 – 2001”, according to the World Bank. If Greece decides to re-denominate claims into devalued drachmas, Greece may be able to avoid Argentina’s holdout drama. Most of the country’s debt has been issued under the Greek law. “In Argentina’s case, the bonds were mostly issued under New York, not Argentine, law – a move designed to give comfort to investors and reduce the interest rates demanded – which allowed creditors to sue in the US,” said former Secretary of Finance Marx. Additionally, like Argentina, Greece’s bonds do not have a collective action clause forcing creditors to participate in a restructuring if it is supported by a majority of creditors. However with most of its debt under local law, Athens could change the law forcing any untendered bonds to adhere to a deal supported by a majority.

One area where Greece trumps Argentina is the spillover impact of a crisis on its neighbors. When Argentina went through its crisis, the only countries affected were major trading partner Brazil and Uruguay. Rather than being chaotic for Greece alone, a default would affect the Eurozone, challenging the solvency of the regions banks. “Banks are not only exposed directly to the peripheral Eurozone countries such as Greece, but also indirectly via their lending to banks that hold significant peripheral claims,” said Richard McGuire, a senior fixed income strategist at Rabobank.

The quality of the crisis and supports the notion that for all the logical arguments in favor of a Greek exit, the repercussions of such a development will be felt throughout the system in ways likely to be as painful as they are hard to determine. Lastly, one can only hope Greece has leaders who look beyond short-term political costs and decide what is truly best for society.

 

 

 

 

Work Cited

Agustoni, Clara, and Christopher De Vrieze. “Latin Lessons: What Greece Can Learn from             Argentina.” Financial Times. Debtwire, 8 Dec. 2011. Web. 25 Mar. 2013.

Brazil: Leading the BRICs?

The longtime football powerhouse may soon be known for more than just its football. Brazil’s triumph in World Trade Organization has put it at the forefront of powerful developing economies. Between their victories using the World Trade Organization compulsory licensing to break patents, fighting agricultural subsidies in more developed countries, and its diplomatic negations with Iran, Brazil has proven itself to no longer be a country to be slept on. However the underlying question remains as to whether these developments will prove to be beneficial in their long term economy. Some of these developments however, have antagonized the United States and European Union along with potentially scaring away future businesses. That being said, although the success has put them on many countries radars, being on the bad side of the US and European Union can make things very difficult. In addition, using the WTO compulsory licensing due to a trivial price difference will have deterred companies from wanting to invest in Brazil with the fear that they may end up like Merck Pharmaceuticals.

Financially and from a business perspective, Merck was making a financially sound decision in asking a higher price from a country that was more financially capable. In addition, Brazil’s tariffs were much higher thus forcing Merck to offer a higher price. However, Merck was selling to other developing countries for less such as Thailand for 65 cents and to Brazil for $1.10, double. In 2007, Brazil offered that a single annual purchase as a compromise to save some of the company’s marketing expenses but Merck refused to retain higher profit margins. Therefore not only was Merck Pharmaceuticals offering deceptive pricing but also bringing a question of ethics to the table. This enraged Brazilian President Lula to the point where he announced that “From an ethical point of view the price difference is grotesque, and from a political point of view, it represents a lack of respect, as though a sick Brazilian is inferior.” This strong statement perfectly represented the Brazilian government’s point of view. It also showed that Brazil was not going to be pushed around by some foreign pharmaceutical company and that it held its people to a higher priority even though Merck had a large amount invested in Brazil. Therefore even though it may have hurt its reputation among potentially interested investors, many companies will overlook the quarrel with Merck because of what Brazil’s economy has to offer. Additionally, Brazil’s actions will be seen lesser because it was compulsory and an extreme case. Although the financial aspect and numbers being argued were in the bigger scheme, trivial, Brazil’s actions were more motivated more by principle and nationalism rather than simply breaking a patent for a drug they could afford. I believe Brazil made the right decision in the greater picture as Merck’s pricing was to a certain extent discriminatory towards Brazilians.

Brazil’s capitalism is a very controlled capitalism. The government holds a key role not only by owning many of the larger firms but serves as the primary source of capital, thus making it extremely influential in its economy’s direction. A key component of Brazil’s success has been its political and macroeconomic stability. Sizeable improvements in their public debt, reduction of poverty, rising standard of living, and industrial policies have brought it the success it holds today. These advancements have made Brazil an agricultural powerhouse and have been supplying commodities to China since 2003. Brazil’s weaknesses only lie in its infrastructure, as high interest rates bar entrepreneurial Brazilians from economic opportunity. Additionally Brazil has been labeled as on of the harder countries between the BRICs to work in due to all the red tape foreign and domestic companies need to cross to bring business to Brazil. These issues are issues found in any developing country and can be fixed with the right leadership.

With the World Cup coming in 2014 and the Olympics in 2016 Brazil’s future has only been looking brighter. With victories not only on the international economic podium but also politically, Brazil has put itself at the forefront of the BRICs. With the right leadership, and the right direction, Brazil has the opportunity to have the brightest future among the four biggest developing economies.

 

 

 

Work Cited

Daemmrich, Arthur A., and Aldo Musacchio. Brazil: Leading the BRICs? Boston: Harvard

Business School, 2011. Print.

 

 

The Southern Common Market

Mercosur also known as Mercosul, or in English, “southern common market” like the European Union and other commercial pacts or agreements, has had an immensely positive influence on the South American economies. From domestic increases in trade within South America to increasing overall employment between member nations and educational integration, Mercosur undoubtedly impacted South American economies for the better. Politically, it has also proved to be an asset for all South American nations as a medium of exerting political pressure.

Economically, Mercosur has been an enormous helper in spurring internal trade between South American countries. Merchandise trade in Mercosur member countries grew from $10 billion at the cusp of the bloc’s beginning in 1991 to $88 billion in 2010 (Eurostat, PDF). In 2010, Eurostat also reported that Mercosur accounted for 16% of the member’s trade. Exports from the bloc are very diverse, and include a variety from agricultural and industrial to energy. The trade agreements allow access to goods that may be rich in another countries but lacking in theirs. As an example, Venezuela’s introduction to the bloc allowed to buy cheaper foods in exchange for its oil. Another method by which the trade bloc has benefitted its members is by its lending and debt management. During Paraguay’s crisis, Brazil and Argentina offered to relieve its debt by renegotiating its terms. It would be undermining to say that the trade bloc is irrelevant due to its incentives to trade locally in South America. However, although it is irrefutable that the agreement has increased internal economic fluidity, South American exports continue to be the money maker among all South American countries. Nonetheless this claim does not disapprove the fact that intra-Mercosur trade accounted for approximately 16% of its member countries trade.

Where there is economic power, there is political power as well. As a unified economic zone, the South American member countries can dictate as a whole who they offer incentives to. In its recent history Mercosur has denied the United States free trade incentives. Whereas, during the same time engaged in economic talks with China for incentives and tariff breaks. This is a powerful bargaining chip especially when Mercosur includes some of the world’s largest emerging markets. Mercosur also led to the failure of the U.S. led Free Trade Agreement of the Americas which would have united the entire region under one economic agreement and granting the U.S. special deals with South American resources. In this respect, Mercosur is again undoubtedly relevant as an economic agreement. Amongst its economic power it has also been a vessel for other dimensions of politics. In 2007, the Mercosur members pledged to increase focus on human rights and democracy during a summit. American political scientist Riordan Roett, professor and Director of the Western Hemisphere Program at Johns Hopkins University was quoted saying that since Venezuela signed the Protocol of Adhesion in 2006. “Mercosur is no longer about trade” (Mercosur: South America’s Fractious Trade Bloc, Klonsky).

An agreement that spurs economic growth, power and overall advancement is in no way irrelevant. It’s only potential soft spot is that it does not account for as much of South America’s economic activity in the same manner that South Americas exports do. Nonetheless, it does account for 16% which is a considerable amount. In an area with so much potential, not having such an agreement would be illogical. It would hinder the growth of not only the more powerful economies but also the lesser.

 

 

 

 

 

 

Works Cited

EU BILATERAL TRADE AND TRADE WITH THE WORLD. N.p.: EUROSTAT, 29 Nov. 2012.             PDF.

Klonsky, Joanna. “Mercosur: South America’s Fractious Trade Bloc.” Council on Foreign Relations. Ed. Stephanie Hanson and Brianna Lee. Council on Foreign Relations, 31 July      2012. Web. 04 Mar.2013.

 

Latin America & Cotton Subsidies

The 2002 World Trade Organization cotton dispute case initiated by Brazil targeted six commitments made by the United States in the Agreement on Subsidies and Countervailing Measures. Brazil argued that the US and European Union were exploiting loopholes and bookkeeping methods to remain competitive and hurt developing markets. Through these loopholes they claimed the US was providing illegal subsidies and distorting trade.

In Brazil’s defense lays many agreements, provisions, measures set in place and agreed upon by the United States and other countries. More specifically, the laws applied were those from the SCM Agreement of the Agreement on Subsidies and Countervailing Measures which the World Trade Organization then used in its decision in the dispute.

According to the Congressional Research Service (CRS), over the past ten years the United States has given about 24 billion dollars’ worth of cotton subsidies despite the fact that the World Trade Organization (WTO) ruled that United States cotton subsidies are illegal.” (Illinois College of Law)

The distorting effects that American subsidies to cotton farmers have on the global market, are what triggered the WTO to formally step in after Brazil’s claims. By encouraging the production of cotton through subsidizing, American cotton farmers were flooding the markets with cotton and therefore bringing the price down. This offset the equilibrium and caused the US to dump its surplus cotton into foreign markets and thus making it almost impossible for unsubsidized farmers to compete. The dumping and American subsidies to cotton farmers were deemed illegal by the WTO. Brazil was given the go ahead to cross-retaliate if the US did not cooperate. This cross-retaliation allows Brazil to seek damages in other methods aside from import, export tariffs. Cross-retaliation allows Brazil to break any media or pharmaceutical patents which could add up to approximately 829 million dollars’ worth of indirect compensation for their losses in cotton exports.

  • However, in response to Brazil’s complaints the US brought to attention both legal and technical rebuttals. For one the United States highlighted the fact that the agreement granted countries involved until 2004 to phase out the forbidden subsidies and export incentives.
  • In addition, the US also showed that many of the claimed illegal programs had expired by the time the WTO formally initiated the process. Therefore excluding many of the claims put forth by the Brazilian foreign affair ministry.
  •  The US government also argued that a select number of subsidies were also permissible under the Agreement of Agriculture. Seeing the WTO case, American cotton farmers also expressed their concern with the stability of the cotton market without subsidies and its impact on prices and consumers. An interesting comment from Charles Stenholm, a Texas cotton farmer also claimed that despite Brazil’s high standing among global economies it still claims itself as a developing economy.
  •  In addition, these subsidies are simply keeping the US competitive and cotton prices down; simply because Brazil cannot do the same does not mean it is wrong. Some US officials have said Brazil’s litigation instead of negotiation has led people to think it is out to eradicate competition instead of competing naturally. However, in reality this seems to be the other way around.
  •  If the subsidies were to be stripped, the US cotton industry would fall flat on its face and thousands of jobs would be lost. It would be nearly impossible to replace those jobs in any timely fashion, and it is hard enough as it is to keep jobs in the US with all the outsourcing that goes on today. As the world’s third leading cotton producer, we are also the world’s number one exporter of cotton, as annual exports exceed $3 billion.
  •  78% of the US subsidies for cotton went to only 10% of the cotton farmers ‘about 2000 farmers.
  •  Before NAFTA there were 40,000 cotton farms, today, there are only 20,000 left.
  •  Only 36% of the US farmers receive all of the crop subsidies. 64% of US farmers receive none. Only 3.6% of the US farmers received 71% of all the government payments. The next 3.6% got 15%, which means that 7.2% of the farms received 86% of all the US subsidy payments.

United States cotton subsidies are not fair and have been distorting the market. Why has the US not taken the proper steps in finding an alternative or solution and have stalled it for so long is a question worth asking. However, in the greater scheme of the global economy, American subsidizing has been hurting foreign cotton farmers by undercutting them and not allowing them to make the profits they should be making.

 

Work Cited

Daemmrich, Arthur A., and Aldo Musacchio. Brazil: Leading the BRICs? Boston: Harvard

Business School, 2011. Print.

Sunshine, Benjamin. “United States’ Last Chance to Save Cotton Subsidies?” College of Law.      Illinois Business Law Journal, 02 Feb. 2012. Web. 04 Fe

The Cartel

There is no doubt that the Mexican drug cartels are hurting the Mexican economy. Cartel violence and notoriety have hindered tourism, foreign direct investment and global reputation of Mexico.

With its manufacturing might and numbers, a GDP of 4% in 2011, low inflation (3%) and developing middle class Mexico seems to resemble the US in the 1950s. However, with so much potential, the drug problem has severely cast a shadow over Mexico’s economy. Mexico’s fourth biggest source of revenue and approximately 8% of its GDP, is tourism. The problem is, popular destinations for tourists such as Acapulco have been huge sources of cartel violence. Although not the most violent area, Acapulco has been the home of some very horrific violence. One instance was in August of 2011 where officials found two decapitated corpses, dismembered into 20 pieces in a parking lot of a Sam’s Club wholesale store. The two body’s scalps and facial skin were later found in a patron’s purse. Violent stories vary from mass kidnappings, shootouts with Mexican federal agents and extortion. This violence does not discriminate either. From the U.S. alone, 100 U.S. touring citizens were murdered in Mexico in 2010. (IBTimes) In April of 2011 the U.S. State Department actually issued a long-term travel warning to U.S. Citizens in regards to travels in Mexico. Similar warnings in the past by the U.S. State Department have put Mexico on a list with dangerous destinations such as North Korea, Yemen, The Democratic Republic of Congo and Afghanistan.

Factors like this severely influence tourism in Mexico and are detrimental to its progress as a developing economy. After having to deploy thousands of additional military police to patrol cartel hotbeds in the wake of heightened violence, Mexican Finance Minister Agustin Carstens said in a recent press release that, “The issue of security has effected economic growth in Mexico,” and later added that “If we could resolve this issue it could give the economy an extra shine of at least 1 percent.” Local businesses are also directly being financially burdened by the cartels because in addition to the loss in business they are forced to pay protection money to the gangs. To many small business owners, among the everyday fear of violence, paying the gangs is like paying taxes twice. Reuters estimated that at least “4,500 businesses closed down in Mexico’s Chihuahua state last year as a result of drug cartel extortions pushing them into bankruptcy” (Reuters) The businesses ranged from law firms to pharmaceutical chains. Aside from this, foreign investors are being almost literally scared away. Investors now fear the countries instability after anti criminal forces had to be reinforced by military personnel. To many investors, between the red tape, average infrastructure and normal risks in entering a new country, the fear of violence and gangs is just a risk they do not see worth taking. In cities closer to the U.S. – Mexico border, the tourism has been harshly impacted as hotel occupancies are below 50 percent (Reuters).

Are Mexican drug cartels hurting the Mexican economy? Absolutely; violence, extortion and high-risk, are all words that are used to explain what is going between Mexico and its drug problem. None of these words are words investors or tourists want to hear. Will that completely stop gambling investors or well-versed tourists? No, there are always exceptions but has it potentially hurt and hindered Mexico’s potential thus far as an emerging economy, there is no doubt.

 

 

 

 

Works Cited

Emmott, Robin. “Drug War Hits Mexican Economy in Crisis.” Reuters. Thomson Reuters, 03        Apr. 2009. Web. 11 Feb. 2013.

<http://www.reuters.com/article/2009/04/03/us-mexico-drugs-economy-analysis-idUSTRE5325PG20090403&gt;.

 

Forbes, Miguel. “For Mexican Economy, Drugs Not The Whole Story.” Forbes. Forbes     Magazine, 04 Oct. 2012. Web. 11 Feb. 2013.

<http://www.forbes.com/sites/miguelforbes/2012/10/04/for-mexican-economy-drugs-not-the-whole-story/&gt;.

 

Tovrov, Daniel. “Is Mexico’s Drug War Hurting Tourism?” International Business Times. The        International Business Times Inc., 20 Jan. 2012. Web. 11 Feb. 2013.

<http://www.ibtimes.com/mexicos-drug-war-hurting