South Africa and the Perfect Economic Storm


Andrew Stiles

South Africa’s economy is hurting. The former British Colony depends heavily on manufacturing and mining for economic growth – so much that these two industries alone make up roughly 50% of the nation’s GDP. Unfortunately, the volatile global economic climate has reduced demand for manufactured goods, and made commodities unstable. In result, South Africa’s two largest industries are contracting, which is causing problems for the government and the private sector.

Output from manufacturing fell by 2.5% over the course of 2015, and output from mining fell by 4.5% that year. The South African treasury said that they are expecting 0.9% growth in the economy - that is down from their estimate of 1.3% in 2015. These growth numbers are at an all time low since the great recession, and are causing investors to pull their money out of South Africa.

In addition to its problems with industry, South Africa is experiencing a severe drought due to, among many meteorological factors, the El-Nino effect. El Nino is caused from changes in wind patterns over the Pacific Ocean, which affects the direction in which seawater evaporates into the atmosphere and is redistributed via rainfall to other areas of the world. The drought in South Africa is causing mass crop failures, and forcing the country to import supplies from foreign sources. Food prices in the country are rising, and so is the rate of inflation.

The recent troubles across manufacturing, mining, and food production is putting stress on the revenues that South Africa’s government receives from these industries, and is creating budgetary problems for the government. The credit-rating agency Moody’s Investors Service recently announced that it is considering downgrading South Africa’s bond rating from investment grade to junk. If this happens, then South Africa’s already bad situation worsens as more investors flee, and consumers lose confidence.

Last week, South Africa’s Finance Minister Pravin Gordhan visited the UK to ease concerns about the economy. He hoped to prevent Moody’s from downgrading South Africa, and also prevent international investors from withdrawing; however, Moody’s has insisted on sending a team of economists to the country from March 16th until March 18th. They will analyze the economic situation and decide in June whether to downgrade South Africa to junk, or not. This year, South Africa experienced the perfect economic storm - but the storm may have only just begun.

Economic Growth Goals in China


Carlos Fineman

Can China continue its economic growth?  Chinese President Xi Jinping supposedly has the answer. He states that China’s economy is capable of creating 10 million jobs throughout the country this year and more than 50 million before 2020. This increase in employment would allow China to continue to expand its gross domestic product by 6.5% per year in order to accomplish China’s goal of doubling its economy of 2010 by 2020. 

Many economists in China, and around the world, fear that the increase in debt needed to support that level of growth might stimulate China’s economy but at the cost of small businesses.  Government-owned businesses in China have significant advantages over, and are more reliable than, private businesses. However, some public sector jobs at mines and steel mills are in danger of being cut.  Premier Li Keqiang was not definitive about how many individuals the government would lay off, but assures that it will provide as much as $15.3 billion in support funds for these workers.

The central bank of China has outlined several reforms that it must undertake to continue to keep the economy growing. Chinese economists and political observers believe many of these reforms will never be actually implemented; nonetheless, China will begin to institute a tax on banks. One tax in particular is a 6% tax on the interest that a bank collects on loans.

China cannot afford to see a dip in economic growth or a decrease in exports.  If China continues to be forced to cut into its foreign exchange reserves - which have already fallen by as much as a third during the past three months - then production will stagnate and foreign investment will fall.  Many foreign investors are already wary of Chinese monetary policies and the country’s ability to set its own currency value.  Foreign investors will continue to seek other countries in which to invest until they believe that China can produce the same type of growth that it has in the past.

Obama Heads to Cuba

Erich Wohl

Conflicting ideologies define the heated relationship between the distinctly capitalist United States and proudly communist Cuba. President Barack Obama is scheduled to go on a diplomatic visit to Cuba for the formal purpose of examining progress on human rights. The US currently has commercial, economic, and financial embargos on Cuba that forbid any US corporation from doing business with Cuba. Obama’s visit represents a chance that the embargos on Cuba will be lifted.

Following Cuban independence, the United States had tremendous economic influence over Cuba; 45% of Cuban firms were owned by the US. Under the regime of Fidel Castro, relationships between the two countries became progressively more heated resulting in the United States instituting a full trade embargo on Cuba in 1962. Tensions between the two culminated in the infamous Cuban missile crisis when Cuba had Soviet nuclear weapons pointed at the US. The strained relationship between the two countries slowly eased towards civility as communist countries, especially Cuba’s main ally, the Soviet Union, collapsed. With the help of Pope Francis, efforts were made to normalize relationships between the two countries and potentially lift the embargo. Diplomatic relations were recently restored on July 20, 2015 with the implementation of an embassy in each country.

Recently, there has been tremendous progress in relations between the US and Cuba. In slightly less than a year, there have been clear signs of progress; ferry services have resumed transporting US citizens to Cuba; American cell phone companies now provide service in Cuba; and there have been talks about environmental and investor protections. Despite progress between the two countries, the Cuban economy is very restricted and has recently faced a stagnation in growth. Economic restrictions have caused state-owned firms to be uncompetitive and have inequitable payrolls. Cuba additionally has the 2nd oldest population and Cuba’s workforce participation rate is estimated to be one of the lowest in the world.

Obama’s visit is the first by an incumbent US president since Calvin Coolidge in 1908. Assuming diplomatic relationships are successful, pundits predict there is a strong possibility of the trade embargo being lifted. Doing so would liberalize Cuba’s economy by bringing in unprecedented direct foreign investment. Obama’s visit will ultimately be critical in influencing future economic relations with Cuba.

Chinese Foreign Investment

Carlos Fineman

China has prided itself on its economic development over the last decade. China’s ability to generate a huge amount of foreign currency from international trade has allowed it to be prosperous and elevate its international credibility. In 2015, China held $4 trillion in foreign currency from other countries. In the past, China has been able to pump this money into infrastructure and other building projects. This rapid growth encouraged foreign nations to also invest in these projects. However, in recent months China’s reserves have fallen - approximately one third of its reserves have dissipated in the last three months.

Now, however, China’s economy has begun to slow down, and foreign countries have begun to divert their investments in other countries (e.g. Japan). Other developing countries are beginning to become competitive with China’s cheap labor and export advantages. Foreign countries are now looking to other places as China has become more developed but more expensive to invest in.

All of this is contributing to China’s recent struggle to maintain its currency value. Many people believe that the People’s Bank of China will let the Yuan (also called Renminbi) depreciate instead of taking more out of their reserves. This is crucial to China’s ability to stay competitive in the labor market, and so Chinese officials are limiting Chinese banks from lending Yuan in order to maintain control over the amount of currency in circulation. China has also begun tightening its own foreign investment, hoping to maintain control over the outflow of Yuan.

China has always had a tight control over the valuation of its currency. Until now, it has been able to successfully maintain the Yuan’s value, and encourage the large inflow of foreign investment. Now that this has begun to slow, investors are concerned about how long China can dip into its reserves until it will be forced to devalue its currency, which will further drive away foreign investment.

Full Speed Ahead for India

Henry Whipple

As turmoil continues in China’s economic markets, their position in the center of the global economy is fading, and producers in China’s once booming manufacturing industry are seeking other countries in which to operate - namely India due to its surging economic growth.


In fact, much of India’s recent success is due to China’s shortcomings across a variety of sectors. While China’s foreign direct investment has decreased by 1.3% from 2014 through 2015, India’s soared upwards by 46% over that same period. Additionally, wages for blue-collar workers in China have skyrocketed over the past decade, and the government’s military displays of force throughout the fall of 2015 have led to concerns that it is too risky a location for business. In contrast, India currently offers both significantly lower wages (a much more attractive prospect for manufacturing companies) as well as a seemingly stable democracy.

Citing the Reserve Bank of India’s policy rate cut last year, PricewaterhouseCooper (PwC) is already forecasting India’s growth for 2016 at 7.7% for the second consecutive year. Increased household consumption and recovering investment across many South Asian nations has helped spur similar progress, as well as falling levels of inflation due to the drop in gasoline prices. Such forecasts along with the competitiveness of these emerging markets have prompted many analysts to consider the possibility of India becoming the world’s next economic power of the 21st century. 

Despite the optimism surrounding India’s robust economic growth in the manufacturing sector, some components of its economy give cause for hesitation. In late 2014 current Prime Minister Narendra Modi launched his “Make in India” campaign, an initiative that focused on almost exclusively on improving infrastructure and creating attractive opportunities for foreign investors and manufacturers. Yet, since that time, little progress has been made outside of major corporations, leaving many inadequate roads, rail lines, and ports unfixed. The country is also dealing with levels of urban air pollution that surpass even those of China, and they will only increase with the continued increase in manufacturing growth.

There are still positive signs for investors and manufacturers looking to operate in India. With Indian officials’ emphasis on the importance of manufacturing in their country, as of late 2015 there are around ten million young workers joining the labor force each year, and the median worker’s age is nearly ten years below that in the United States or China. Both figures suggest that even if India’s soaring economic growth is unsustainable, the nation’s working population will help to put it in a better position. Ultimately, India’s fate might solely depend upon China’s ability to recover from its economic downward spiral. Analysts don’t expect China to relinquish its market share easily, but without a sooner-than-expected recovery, China will have difficulty putting India’s success on hold.