The BRICs or should that be the SKOCTs?

Over the past few years, the most talked-about trend in the global economy has been the so-called rise of the BRICs: Brazil, Russia, India, and China. The world was witnessing a paradigm shift  in which the major players in the developing world were catching up to or even surpassing  the developed world.  But is this really the case?

These were ‘straight-line’ projections that took the developing world's high growth rates from the middle of the last decade and extended them straight into the future, setting them against sluggish growth in the US and other advanced industrial countries. These projections showed, for example, that China was on the verge of overtaking the United States as the world's largest economy (even though the U.S. economy is still more than twice as large and with a per capita income seven times as high)

However, with the world economy heading for its worst year since 2009, Chinese growth is slowing sharply, from double digits down to seven percent (even less) and the rest of the BRICs are tumbling, too - Since 2008, Brazil's annual growth has dropped from 4.5 percent to two percent; Russia's, from seven percent to 3.5 percent; and India's, from nine percent to six percent.

None of this is really surprising, because it is hard to sustain rapid growth for more than a decade but the circumstances of the last decade made it look easy - coming out of the  crisis-ridden 1990s and supported by an abundant supply of credit, the emerging markets took off and by 2007, when only three countries in the world suffered negative growth, recessions had all but disappeared from the international scene.  But now, there is a lot less foreign money flowing into emerging markets and the global economy is returning to its normal state.

EMERGING MARKETS

The notion of a convergence between the developing and the developed world is a myth - of the roughly 180 countries in the world tracked by the International Monetary Fund, only 35 are developed. The markets of the rest are emerging-and most of them have been emerging for many decades and will continue to do so for many more. As of 2011, the difference in per capita incomes between the rich and the developing nations is the same as it was in the 1950s.

BRICs (or should that be BICS or VIPs)

Other than being the largest economies in their respective regions, the big four emerging markets have little in common. They generate growth in different and often competing ways-Brazil and Russia, for example, are major energy producers that benefit from high energy prices, whereas India, as a major energy consumer, suffers from them. Except in highly unusual circumstances (such as those of the last decade) they are unlikely to grow in unison. They have limited trade ties with one another, and they have few political or foreign policy interests in common.

Russia remains a member of the BRICs only because the term sounds better with an R. In recent years, Russia's economy and stock market have been among the weakest of the emerging markets, dominated by an oil-rich class of billionaires whose assets equal 20 percent of GDP

In fact, the longest period over which one can find clear patterns in the global economic cycle is around a decade. The typical business cycle lasts about five years, from the bottom of one downturn to the bottom of the next, and most practical investors limit their perspectives to one or two business cycles. Beyond that, forecasts are often rendered obsolete by the unanticipated appearance of new competitors, new political environments, or new technologies.

THE NEW ECONOMIC ORDER

In the next ten years, the United States, Europe, and Japan are likely to grow slowly as will China as the economy matures. As growth slows in China and in the advanced industrial world, these countries will buy less from their export-driven counterparts, such as Brazil, Malaysia, Mexico, Russia, and Taiwan.

The economic role models of recent times will give way to new models as growth occurs elsewhere. In the past, Asian states tended to look to Japan as a model, nations from the Balkans looked to the European Union, and nearly all countries to some extent looked to the United States. But the crisis of 2008 has undermined the credibility of all these role models. Tokyo's recent mistakes have made South Korea, which is still rising as a manufacturing powerhouse, a much more appealing Asian model than Japan. Countries that once were eager to enter the eurozone, such as the Czech Republic, Poland, and Turkey, now wonder if they want to join a club with so many members on the verge of bankruptcy. And the US call for poor countries to restrain their spending and liberalize their economies is difficult to accept when  Washington can't agree to cut its own huge deficit.

Among countries with per capita incomes in the $20,000 to $25,000 range, only two have a good chance of matching or exceeding 3% growth over the next decade: the Czech Republic and South Korea. Among the large group with average incomes in the $10,000 to $15,000 range, only one country -- Turkey -- has a good shot at matching or exceeding four to five percent growth and  in the $5,000 to $10,000 income class, Thailand seems to be the only country with a real shot at outperforming significantly.

To the extent that there will be a new crop of emerging-market stars in the coming years, therefore, it is likely to feature countries whose per capita incomes are under $5,000, such as Indonesia, Nigeria, the Philippines, Sri Lanka, and various contenders in East Africa.

Although the world can expect more breakout nations to emerge from the bottom income tier, at the top and the middle, the new global economic order will probably look pretty much like the old one . 

A Level Economics Pass or Fail?

As thousands of teenagers receive their A level grades, I am sure many of them would be able to do a better job of sorting out the economy than our present chancellor, who’s qualifications for the job include a degree not in Economics or Maths - but History..

We hear now that half of the economists who strongly supported the George Osbourne’s deficit-reduction-austerity plans are now asking for a rethink and urging the Treasury to take advantage of low borrowing costs to boost spending on infrastructure projects. 

Unlike George Osborne (and David Cameron) economists can see that the evidence now points to the need for a change of course. They know that without growth we can't get the deficit down – George Osborne is already forecast to borrow £150bn more than planned.

Output is now lower than it was when the coalition was formed two years ago while the Bank of England believes it will take until 2014 for gross domestic product to return to the peak reached in early 2008. The economy is expected to contract by 0.2% this year.

Roger Bootle, managing director of Capital Economics, said: "If I were chancellor at this point, I would alter the plan, I would stop the cuts to public investment and I might even seek to increase it. Supply-side reform might be welcome but what we're talking about here is a shortage of demand. The key thing is to try and get the private sector to spend its money and that may require a bit of government spending to prime the pump."

What he is referring to in simple terms is ‘the multiplier effect’

The Multiplier Effect

Every time there is an injection of new demand into the economy there is likely to be a multiplier effect. This is because an injection of extra income leads to more spending, which creates more income, and so on. The multiplier effect refers to the increase in final income arising from any new injection of spending.

The size of the multiplier depends upon household’s marginal decisions to spend, called the marginal propensity to consume (MPC), or to save, called the marginal propensity to save (MPS).  This in turn is largely dependent upon economic confidence.

When income is spent, this spending becomes someone else’s income, and so on. Marginal propensities show the proportion of extra income allocated to particular activities, such as investment spending by UK firms, saving by households, and spending on imports from abroad. For example, if 80% of all new income in a given period of time is spent on UK products, the marginal propensity to consume would be 80/100, which is 0.8.

The following formula to calculate the multiplier uses marginal propensities, as follows:

1/(1-mpc)

So, if consumers spend 0.8 and save 0.2 of every £1 of extra income, the multiplier will be  

1/(1-0.8)

= 1/0.2

= 5

This means the multiplier is 5, which means that every £1 of new income generates £5 of extra income.

The multiplier concept can be used any situation where there is a new injection into an economy for example when the government funds building of a new motorway or invests in a home building programme, as has been suggested.

Of course, there is also the downward or ‘reverse’ multiplier..

A withdrawal of income from the circular flow (austerity cuts, reductions in public spending etc etc) will lead to a downward multiplier effect which will further lead to a reduction of spending and economic activity...

Or in other words, just what George has been doing for the last year.

New Breathalyzer laws in France

Going to France on holiday?  Taking the car?  Don't forget your breathalyzer?

As of yesterday (01 July), motorists and motorcyclists will face an on-the-spot fine unless they travel with two single-use breathalyser kits in their cars  (along with your compulsory warning triangle, high visibility vest and first aid kit!) as part of a government drive to reduce the number of drink-driving-related deaths 

The new law, which exclude mopeds, will also include foreign drivers from 1 November after a four-month period of grace. Anyone failing to produce a breathalyser after that date will receive an €11 fine.

French police have warned they will be carrying out random checks on drivers crossing into France via ferries and through the Channel tunnel.

The French government hopes the laws will encourage drivers who suspect they may be over the limit to test themselves, and will save around 500 lives a year.

The French government is hoping that the requirement will encourage French motorists to test themselves before driving if they have consumed any alcohol - and that using the kit will become as normal as reaching for a condom before sex, they claim.

Alcohol is responsible for almost a third of fatal car accidents on French roads, compared with one in five British and just one in ten German accidents. 

The French drink-driving limit is 50mg of alcohol in 100ml of blood – less than the UK limit of 80mg. 

Only kits bearing the letters 'NF' for 'French Norm' will be recognised by the police - so pack a couple of these into your car

Banks and Bankers..

I was trying to explain the financial sector to my daughter last night and my explanation went like this...

Suppose you give me a million pounds and say, "Invest this profitably and I'll pay you well."

So I go out onto the street and hand out cash randomly to passers-by. I give everyone I meet ten thousand pounds each. In return, each scribbles out an IOU for £20,000, payable in five years.

I then come back to you and say, "Look at these IOUs. I have generated a 20% annual return on your investment." You, in return, are very pleased and pay me an enormous commission.

So now I have a large pile of IOUs, which I now call my 'assets'.

So I use these "assets" as collateral to borrow even more money. I then lend this out to even more people or sell them to others like myself who do the same. I also buy insurance to cover me in case the borrowers default and I pay for this with the same IOUs (or assets).

And so it goes on, with each new loan becoming somebody's asset on which to borrow yet more money.

So I make a huge bonus as the total face value of all the assets I've created is now fifty times that of the original £1m

But then one day, the first batch of IOUs becomes due.

But the person who scribbled his name on the IOU can't it pay off right now. And in fact, lots of the borrowers can't.

So, I try to hush this up for as long as possible, but soon everyone get suspicious and you want your original million pounds back.

I try to sell the IOUs and their derivatives that I hold, but everyone else is suspicious too and no one buys them. The insurance company tries to cover my losses, but it can only do so by selling the IOUs I gave it.

And so finally, the government steps in and buys up all the IOUs, bails out the insurance company and everyone else holding the IOUs and all the derivatives stacked on them.

Their total value is way more than a million dollars now but I and my fellow entrepreneurs retire with our profits and everyone else pays for it.

Music Tourism worth £1.4bn

Feargal Sharkey (one-time leader of the Undertones) is now CEO of UK Music, an organisation representing the collective interests of the UK’s commercial music industry. Today they published a report showing that music tourism contributes around £1.4bn to the UK economy. This represents a positive contribution of £864m (GVA) to the national economy and equivalent of 19,700 full-time jobs.

Their report shows that large-scale live music across all regions of the UK attracts at least 7.7m attendances by domestic and overseas music tourists and that although foreigners made up just 5% of music tourists in the UK, they were responsible for 18% of the spending.

The UK Music report found that iconic venues, such as the Salford Lads Club in Manchester (seen on the sleeve of The Smiths album The Queen is Dead) were attracting attention.

For some dedicated tourists, going to the Salford Lads Club or wal;king on the Abbey Road pedestrian crossing, is just as important as a visit to Buckingham Palace and Stonehenge!

From these findings UK Music has issued a list of recommendations to Government – including the implementation of a national live music tourism strategy, with the immediate goal of increasing the number of overseas music tourists.

The research, undertaken by Bournemouth University’s International Centre for Hospitality and Tourism Research, follows the Government’s Plan For Growth, published alongside the Budget. This specifically identified the UK’s creative industries and tourism amongst sectors with the greatest potential to drive economic growth.

Research leader, Professor Adam Blake said: “This is the first time that a comprehensive study of music tourism has ever been undertaken in the UK. The data on where music-goers come from confirms that large numbers of them do travel around the country to go to music events, and significant numbers come from overseas. However, it is important to note that our definition of a music tourist is hugely conservative, and that we did not analyse the vast numbers of non-ticketed or smaller capacity events. Subsequently, the true value of music to UK tourism will be much higher.”

A word of caution however, after 10 years of growth, the live music industry stuttered last year, there was a drop of 6.7% in UK live music revenues. The sector's revenues rose by 9.4% in 2009 and 13% in 2008.

Down load the full report here

Tsunami in Japan

Incredible footage of the Tsunami as it hits the coast of Japan.

New Government Tourism Strategy - A rant

The new Government Tourism Strategy proposals were published last week and have been met with mass indifference all round.

The problem is it that it fails both the outbound and inbound sectors at the same time by not addressing the tax issues intrinsic in both. Instead of cutting sky-high taxes such as VAT and air passenger duties, which are putting visitors off coming here, ministers instead chose to tinker with bank holiday dates.

Ok, so they said they would move the Bank Holiday (Hurrah) and that we would see and enjoy the benefit from increased traffic due to the Olympics (Mmm, not sure about that one), but the Government's report, while acknowledging the calls for lower taxes, says that, while it will keep the matter under review, "the financial position we inherited means we must give priority to our fiscal base".

In other words, we'll keep VAT and all the other taxes just as they are!

In a nutshell, VAT, APD and TOMs have become the most pressing concerns for the industry as their high rates are making UK tourism most uncompetitive and travel more expensive.

While many European countries have actually reduced APD to encourage activity, the present Government increases it. The Government consistently fails to see the benefits to the UK economy of a buoyant overseas holiday industry and the lack of it in tourism strategy only reinforces this.

The British Hospitality ­Association report said cutting VAT on hotel rooms to 6.5%, as they have in Germany, would help create 236,000 jobs over the next five years and boost visitor numbers. Clearly, we are missing out on an opportunity to create 236,000 new jobs. Britain has just come bottom out of 133 countries for price competitiveness.

And the policy does not address the biggest problem affecting inbound tourism. If you are a company based here trying to sell the UK abroad, you suffer a huge competitive tax disadvantage.

Most visitors coming to this country from long-haul markets (such as North America or Asia) buy their holidays through tour operators. In this country, they are taxed under the Tour Operators' Margin Scheme (TOMS). TOMS is applied to the margin between the cost of the components and the price charged to the consumer.

This margin is not profit. It contains everything not directly supplied by another company. All in-house supplies and all staffing are taxed under TOMS, as are agents’ commissions, marketing, and sales costs. These expenses are the process of adding value. TOMS is thus a levy on the investment made in order to assemble, sell, and deliver visitors to the UK. For a long-haul operator, it is equivalent to a corporation tax of 800%.

If a company is based outside the EU, TOMS is not collectable and so not paid. Thus nearly all incoming operators that sell to consumers are now based off-shore.

Conversely, as this tax is on “services supplied in the EU,” all non-EU holidays sold in the UK (say, to Turkey or to Florida) are untaxed. Thus TOMS is a tax on exports and grants tax-free status to our tourism imports.

For a UK-based company, it is overwhelmingly more sensible to invest in selling non-European holidays than to try and sell a UK holiday to a visitor.

This problem is not actually to do with the level of VAT, but the way in which it is applied to exports. We desperately need to attract visitors to this country. But the process of doing so is subjected to a punitive level of taxation.

Really there should be no VAT on exports which are used abroad. Tourism is an export but the creation of holidays in the EU for visitors from outside the EU is subject to VAT under TOMS. That is different from every other type of export and it’s clearly disadvantageous to inbound tourism.

If the government is serious about encouraging more people to come here, then the Minister needs to go to Brussels and convince the other member states to reform TOMS because there is a massive disincentive on EU-based companies promoting EU-based holidays.

Government Tourism Policy 2011.pdf

Tourism as Exports

One of the mistakes that economic developers and business experts make is ignoring tourism as a major export industry. In fact tourism is often a renewable export that if used properly can also be a major economic development too.

Tourism is not only big business but also tourism should be seen and protected as perhaps one of the world's premier export products. The fact that tourism is an export industry is noted in a Jamaican study which stated: "An export industry is one that sells a significant share of its goods or services outside of the country, thus bringing new money into the local economy. Tourism appears to meet these two tenets as the Jamaica Tourist Board reports that over 90 per cent of our tourists are international and the Bank of Jamaica reports that the industry contributed some US$1,975,519,000 to foreign exchange earnings in 2008" (Jamaica WI Gleaner, June 21, 2008). If we, then, assume that exports refer to money going from place X to place Y due to the sale of product W, then tourism easily meets this standard.

What especially makes tourism a valuable export product is that, if cared for properly, it is a sustainable and renewable resource. Unlike primary resources, such as petroleum or minerals, tourism is not finite. No matter how many people visit the ocean, the ocean is still the ocean, and no matter how many people view a mountain, the mountain remains in place. In fact, in places that have lost manufacturing jobs, tourism offers an alternative advantage in that unlike manufacturing jobs, visits to a specific locale cannot be shipped offshore. Tourism's sustainability does not mean, however, that a tourism product must not be protected. Tourism, like any commodity, can be overused, exploited poorly or allowed to decline. Tourism also needs the support of the local community. Without this support, tourism often becomes an unsustainable product. In order then to use your tourism industry as an export product Tourism & More suggests the following.

1. Educate your community about the fact that tourism is the world's largest peacetime industry, and of its economic benefits. For those people who like facts and figures, according to the World Tourism Council in 2006 tourism produced over US$6 trillion. It is estimated that the world's tourism industries provided around the world 221 million jobs, with an expectation that by 2015 tourism will be providing some 269 million jobs. Even with the world's economic problems it is hoped that by 2015, tourism's growth rate is expected to average 4.6% per year. The Organization for Economic and Operational Development reports on its web site that: "Tourism…is a key component of the service economy (30% of international trade in services in the OECD area). Tourism, which has expanded dramatically over the past 30 years, looks set to continue growing as societies become more mobile and prosperous." In the USA the US Bureau of Labor Statistics measures changes in the prices of goods bought in the USA by foreign visitors. These goods plus services are a US export.

2.Demonstrate to your community how tourism adds to your local economy in a variety of ways. Included are hotel and restaurant expenditures and taxes, conventions and meetings, taxes paid on transportation, attractions of foreign capital, especially in hotel construction, creation of additional jobs in such areas as public services and infrastructure renewal.

3.Make sure that people understand that tourism not only generates employment but also may be a major renewable export source. The tourism industry is all about the selling of memories. The industry helps to bring foreign money to a particular locale where visitors buy local goods and services. Visitors take home the memory of the good time. Tourism professionals understand that the vacation memory is an abstract export commodity. Furthermore, tourism attractions rarely get depleted or disappear; thousands/millions of people can see the same attraction. Foreign visitors also become a major source of foreign exchange, and helping a nation's balance of payment. It must be noted however that for tourism to be a renewable resource it must be developed in a sustainable/responsible manner. That means that where ecologies are fragile, numbers and activities must be tightly controlled, pollution must be prevented, and local cultures protected.

4.Tourism can be an export product even in rural areas. Tourism is about seeing what is different. Rural areas that may be losing population or industry can become tourism centers and create need job opportunities for their younger people. Visitations by foreign tourists also can result in cross-national networking opportunities.

5.Do not be afraid to use creative marketing to attract new money to your area. For example, according to the Travel Association of America, in the United States the tourism industry produces over $600 billion dollars in revenue and over $100 billion in taxes paid to local, state and federal governments. Much of this money comes from visitors from overseas, who earn their money in their home nation and then bring it to another nation. Tap into this market with creative marketing and do not be afraid to flaunt your region, what may seem common place to you may become an international attraction to others.

6.Market in as many languages as possible. Turning your tourism product into an export market means being open to the world. Develop foreign language brochures, encourage the teaching of foreign languages in your school system, and teach your own culture. Tourism does best when it represents the best of who you are to others. Ironically when you celebrate your own culture you become an export market for visitors from other cultures.

7.Emphasize that tourism is an important economic development tool for emerging and minority communities around the world. Because tourism is based on the appreciation of the other, tourism industries have been especially open to giving disadvantaged groups around the world opportunities that have often been denied to them by other economic sectors. In this respect tourism should not been viewed only at the surface level. Tourism produces not only income from foreign guests but also provides large numbers of entry level jobs, and often means the difference between a smaller community's business success and failure.. In nations where there is a decline in manufacturing, the tourism industry can be an essential method to reinvigorate local economies. The bottom line is that tourism is an export commodity that can also become an economic and educational development tool bringing wealth to the local economy while protecting its cultural ecology.

Our thanks to Peter E. Tarlow of T&M for this article.

Tourism as Export

Tourism is often overlooked by economic developers and business experts when in fact it should be regarded as a major export that, if used properly, can also be a major economic development too.

Tourism is not only big business but also tourism should be seen and protected as perhaps one of the world's premier export products. The fact that tourism is an export industry is noted in a recent study which stated: "An export industry is one that sells a significant share of its goods or services outside of the country, thus bringing new money into the local economy. The Jamaica Tourist Board reports that over 90 per cent of our tourists are international and the Bank of Jamaica reports that the industry contributed some US$1,975,519,000 to foreign exchange earnings in 2008" .

What especially makes tourism a valuable export product is that, if cared for properly, it is a sustainable and renewable resource although of course it must be protected. Tourism, like any commodity, can be overused, exploited poorly or allowed to decline and needs the support of the local community. Without this support, tourism often becomes an unsustainable product. In order then to utilise the tourism industry as an export, the following guidelines should be followed:

1. Educate your community about the fact that tourism is the world's largest peacetime industry, and of its economic benefits. According to the World Tourism Council in 2006 tourism produced over US$6 trillion. It is estimated that the world's tourism industries provided around the world 221 million jobs, with an expectation that by 2015 tourism will be providing some 269 million jobs. Even with the world's economic problems it is hoped that by 2015, tourism's growth rate is expected to average 4.6% per year. The Organization for Economic and Operational Development reports on its web site that: "Tourism…is a key component of the service economy (30% of international trade in services in the OECD area). Tourism, which has expanded dramatically over the past 30 years, looks set to continue growing as societies become more mobile and prosperous."

2. Demonstrate to your community how tourism adds to your local economy in a variety of ways. Included are hotel and restaurant expenditures and taxes, conventions and meetings, taxes paid on transportation, attractions of foreign capital, especially in hotel construction, creation of additional jobs in such areas as public services and infrastructure renewal.

3. Make sure that people understand that tourism not only generates employment but also may be a major renewable export source. The tourism industry is all about the selling of memories. The industry helps to bring foreign money to a place where visitors buy local goods and services. Visitors take home the memory of the good time. Tourism professionals understand that the vacation memory is an abstract export commodity. Furthermore, tourism attractions rarely get depleted or disappear; thousands/millions of people can see the same attraction. Foreign visitors also become a major source of foreign exchange, and helping a nation's balance of payment. It must be noted however that for tourism to be a renewable resource it must be developed in a sustainable/responsible manner. That means that where ecologies are fragile, numbers and activities must be tightly controlled, pollution must be prevented, and local cultures protected.

4. Tourism can be an export product even in rural areas. Tourism is about seeing what is different. Rural areas that may be losing population or industry can become tourism centers and create need job opportunities for their younger people. Visitations by foreign tourists also can result in cross-national networking opportunities.

5. Use creative marketing to attract new money to your area. For example, according to the Travel Association of America, in the United States the tourism industry produces over $600 billion dollars in revenue and over $100 billion in taxes paid to local, state and federal governments. Much of this money comes from visitors from overseas, who earn their money in their home nation and then bring it to another nation. Tap into this market with creative marketing and do not be afraid to flaunt your region, what may seem common place to you may become an international attraction to others.

6. Market in as many languages as possible. Turning your tourism product into an export market means being open to the world. Develop foreign language brochures, encourage the teaching of foreign languages in your school system, and teach your own culture. Tourism does best when it represents the best of who you are to others. Ironically when you celebrate your own culture you become an export market for visitors from other cultures.

7. Emphasize that tourism is an important economic development tool for emerging and minority communities around the world. Because tourism is based on the appreciation of the other, tourism industries have been especially open to giving disadvantaged groups around the world opportunities that have often been denied to them by other economic sectors. In this respect tourism should not been viewed only at the surface level. Tourism produces not only income from foreign guests but also provides large numbers of entry level jobs, and often means the difference between a smaller community's business success and failure.. In nations where there is a decline in manufacturing, the tourism industry can be an essential method to reinvigorate local economies. The bottom line is that tourism is an export commodity that can also become an economic and educational development tool bringing wealth to the local economy while protecting its cultural ecology.

(Our thanks to