The MINT economies: Mexico

The term "MINT" refers to the countries Mexico, Indonesia, Nigeria and Turkey who have been named by economist Jim O'Neill (responsible for creating the BRIC acronym) as the next economic powerhouses. 

The MINTs all share some common features:

• All have growing populations with a large quantity of young workers. This will aid faster economic growth as the shrinking and ageing populations of current developed countries slows growth in most currently developed countries.
• The MINT countries have useful geographical locations, with a close proximity to vast markets. Mexico neighbours the USA, Indonesia is close to China and Turkey is on the edge of the European Union, with connections with both the East and the West. Nigeria holds the potential to become an economic hub of Africa as many African economies grow. 
• It is only Turkey that is not a commodity producer. Mexico, Indonesia and Nigeria, however, have benefited greatly from the increased demand for fuel and raw materials resulting from the growth and industrialisation in Asia. 

Mexico

Mexico has the largest economy of the MINTs of around US$1.2 trillion. It is also the most mature, with an upper middle income bracket and the average income being around US$10,000.

Mexico currently sends 75% of its exports to the USA. As a result, the recovery the of US economy will see great benefits for Mexico, whose manufacturing sector is closer linked to the US supply chain. The growth of Latin America economies is also likely to result in increased export demand in Mexico.

With increasing domestic consumption, the government is also completing reforms with the aim of freeing up product and labour markets to stimulate further growth. Unlike many European countries, gas and electricity prices are being drastically lowered in order to attract investment to take place. Investors are also attracted to Mexico's young population, with the average age being 28 (compared in 40 in the UK). 

The country also has significant oil reserves deep in the Gulf of Mexico.

The main challenge for Mexico as it continues to grow will be improving security, as the country (particularly in the North) continues to face problems with violence, drugs and the exploitation of workers. Reducing this deterrent to investment would see massive gains to an economy that already seems to be on the road to advanced development.  

Why do countries protect trade?

Despite free trade having many benefits (as discussed in my previous post), many countries choose to participate in protectionism, the protection of domestic industries from foreign competition. But as free trade and specialisation argues that the global economy will benefit in terms of increased production, efficiency and welfare, why do countries want to protect their trade?

The most basic answer to this question is that there is no guarantee that these benefits will be equally distributed among the trading countries. Individual countries may feel that it is in their best interest to restrict the freedom of trade. Countries and organisations in favour of free trade may see this as myopia (short shortsightedness). However, a number of arguments for protecting trade exists. 

Reasons for protecting trade:

• To protect infant industries. Infant industries cannot afford to complete with some importing industries that are benefiting from economies of scale, so tarrifs are used to protect these indutries.
• To protect sunset industries. These are industries that are in decline due to a structural change of the economy. Protection of trade is therefore used to prevent unemployment in the short term. 
• To avoid the dangers of over specialisation. Governments may choose to limit over specialisation if it risks leading to the country becoming over dependent on the export sales of a single or few products. An example in Ethiopia, where an over dependence on coffee (which experiences volatile prices) means protection is required to be able to diversify industries. 
• To cushion home employment. Protection may prevent the loss of domestic markets to the free market forces of demand and supply on a global level if they would not be able to compete. 
• To prevent dumping. Dumping occurs when manufacturers export a product to another country at a price either below the price charged in its home market of below its cost of production as a predatory move to gain entry to the market of that country. 
• To avoid unfair competition. Countries that subsidise their exports to make price more competition may be considered to be unfair competition. In retaliation, importing countries put a tariff on the goods to restore fair competition. 
• To raise revenue. A tariff is a tax on imports and the revenue will go to the importing country and can be spent in other sectors of the economy. 

The Benefits Free Trade (AS Level Economics)

Free trade occurs when there are no obstacles between countries to trade.

Advantages

Specialisation: some countries will have a comparative advantage in production, meaning that they can produce certain goods cheaper, using their own resources and will have built up knowledge and expertise on the specific production. Specialisation permits trading nations to achieve higher levels of output, thus higher levels of consumption.

Economies of Scale: production can be made cheaper at a larger scale as the size of the markets in which producers sell their goods and services increases. This can be felt through benefits such as bulk buying, and is especially significant for small nations.

Choice: consumers are presented with a greater variety of goods to choose from.

Innovation: growth is stimulated by accelerating technological change and spurring competition.

Competition: increased level of competition will increase productive and allocative efficiency and lower prices of domestic firms. Free trade also decreases the power of domestic monopolies by exposing them to international competitive forces.

Closer Links: trade between countries will increase their political tie as they become economically dependent on each other. A diffusion and transfer of technology and ideas across borders will become faster.

Best use of scarce resources: as factor endowments differ between countries, specilisation of scarce resources is permitted.

Breaking Bad Means Business

Breaking Bad tells the story of a high school Chemistry teacher, Walter White, who when diagnosed with cancer turns to the production of methamphetamine to fund his treatment and ensure his family is financially secure before he dies. The first series premiered in 2008 in the USA, in a time of national recession. This is reflected in Walt's second job working in a car wash. Walter proposes a business partnership with a former student of his, Jesse Pinkman, who he discovers to be a drug dealer.

I recently read an article in The Economist that highlights Breaking Bad's usefulness as a study of the dynamics of a modern business (Read the article here). When looking at the series in from an economic perspective, a different (and slightly less thrilling, some may argue) story can be seen. 

Whilst producing and selling meth he experiences massive amount of both success and failure. As expansion takes place his business employee numbers grow, the majority being distributors. He eventually moves into production on an industrial scale, where economies of scale could be felt, in technology and bulk buying (/stealing) and producing. However, as production continued to grow, diseconomies of scale could be seen. In a dangerous business, high fees such as that as his "not-so-legal-lawyer" Saul and the purchase of a car wash in order to pay taxes so not to raise suspicions. As the business grew, operations seemed to become increasingly difficult. 

He also had product obsession, and focused on a high quality that was differentiated (blue in colour due to its purity). His product, sold under his street name, Heisenburg’s brand became superior to all of its competitors. Walt also became a hugely ambitious businessman, rarely satisfied with his levels of production and earning. The conquering of the meth industry by his “empire business” is compared to Steve Job’s out-competing of Microsoft in the The Economist article.  It may be argued however, that at some points his greed was the cause of many failures (and deaths) within the industry.  Another comparison made in the article is to Bill Gates, in that both came from other careers to bring fresh perspectives to their industries, which led to revolutionary success.

The article also focuses on the importance of partnerships and allies as portrayed on the show. Initially, he allocates his partner to be in charge of distribution to allow him to focus on production and quality control. It shows how that breakdown of work relationships can act as a force of destruction in business, where regular conflict with his partner and distributors occurs. Other forces of business destruction including the problems that arise from a poor work-life balance can be seen, as the situation deteriorates while he attempts to hide his new profession from his wife and family. Breaking bad also gives examples of the importance of being vertically integrated (at different points on the same production path), through Walts relationship with drug kingpin Gustavo Fring.

Gus Fring is another example of a successful businessman, who invests to increase volume of output and, to some extent, achieve productive efficiency. His distribution was efficient, and used his ownership of chicken restaurants "Los Pollos Hermanos" and public support of the DEA to successful export high quantities of meth without suspicion. 

It seems as well as providing a source of entertainment with global success, Breaking Bad has provided a new reflection of the business world. 

The Human Development Index

The Human Development Index (HDI) is defined as a measure that, recognising limitations of GDP per capita as a measure of development, combines outcomes that might be valued in the development process. It is made up of three components: Life expectancy at birth, the adult literacy rate and GDP per capita in US$ at PPP (Purchasing Power Parity- shows what per capita income will purchase when the cost of living is taken into consideration) as an indicator of the standard of living.

This graph shows the 10 countries with the largest HDI scores in 2011. The 10 countries with the lowest HDI scores were: Eritrea (0.349), Guinea, Central African Republic, Sierra Leone, Burkina Faso, Liberia, Chad, Mozambique, Burundi, Niger and Democratic Republic of the Congo (0.286).

As a measure of development, where development is defined as the ways in which a country seeks to grow economically and to improve the standard of living for its inhabitants, HDI has both advantages and limitations.

Advantages of HDI

• It allows judgement to be made on a country's development over time.
• A poor HDI will bring attention to the nations with the lowest levels of development. This may act as a guide to the allocation of international aid.

Limitations of HDI

• HDI focuses on only three aspects of development and therefore does not provide a complete picture of a nations true level of development.
• It fails to take account of qualitative factors such as cultural identity and political freedoms ( e.g. human security, gender opportunities and human rights).
• The GDP per capita figure (and consequently the HDI figure) takes no account of income distribution. If income is unevenly distributed, then the GDP per capita will actually be an inaccurate measure of the monetary well-being of the people.

What is wrong with our economy?

Many people will have different answers to this question and in a way, there are many answers, but for me there is one answer in particular that screams out the loudest, maximising short-term  profits. 

Since looking at this in our current A2 syllabus I have come to believe that those who are not prudent and forethought may be better off themselves but as Pareto's theory suggests, it is impossible to make any one individual better off without making at least one individual worse off. 

This is what is happening; Multinational corporations (MNC's) are obsessed with maximising their profits that long-term growth is something of the past. It is the employees of these companies that are suffering the most. Employees are people who devote their lives to creating money for customers, shareholders, and colleagues. Therefore, in return, at least in theory, they share in the rewards of the value created by their team. 

However in reality, it is far from this. Employees aren't regarded as people of a team anymore. Businesses nowadays see their employees as "costs" due to the ever increasing obsession towards maximising short term profits.  For the greatest profits costs are to be kept at a minimum. In order to do this, reducing costs as much as possible is something that has to take place (expect the "costs" of salaries to senior management and shareholders). 

The problems with this increasing short-term profit maximising is what it leaves us for the future? If these MNC's -of which some could be referred to as monopolies- are more focused on creating abnormal profits which pays for the luxury lives of those that run them then how are the firms to develop? Abnormal profit is supposed to create money towards R&D (Research and Development), so without this firms cannot progress. In the long-run this is likely to cause competition that would diminish these abnormal profits being earned but this will take time to happen. 

More so, cutting "costs" to create this short-term profit is having a huge affect on the working class population. For those lucky enough to be kept in labour, their wages are still reduced to keep costs at a minimum. This is effectively removing their purchasing power, coincidentally stunting the growth of these same corporations making the choices. 

If consumer expenditure is being reduced then businesses can't grow. Right now, firms aren't concerned about the growth of their companies but more so maximising their short-term profits. In the overall aspect of an economy, aggregate supply is likely to decrease due to the fall in labour force, thus resulting in an overall decrease in economic growth and the development of these companies in the future. 

Rising Energy Prices in the UK

Rising energy bills have been a major political focus in the last few months, as the Labour and Conservative parties look to offer differentiating policies to reduce the increase in energy bills for households as each of the "big six" energy firms (British Gas, SSE, Scottish Power, E.On and EDF) announce significant price increases. 

The domination of the big six firms in this market means that energy can be considered to be an oligopoly market structure. This is a market dominated by a few large firms where the firms are interdependent (the actions by one firm will produce counter-action by others). 

The price rises within the energy market in the UK could potentially be considered a form of collusion. The first announced price rise was by SSE, who on October 10th announced an 8.2% increase in domestic bills from 15th November. The other 5 firms were soon to follow, with E.On being the last of the big 6, announcing on 6th December that a 3.7% price rise was set to take place. This could be considered a tacit collusion, where although there is no formal agreement between the firms, the firms are observing each other's behaviour and refraining competing on price by following price increases. 

It may be arguable as to whether the major energy suppliers' profits are excessive or whether the price rises are justified. Energy companies claim that prices are rising as a result of a rise in the international price of energy. They also claim that their profits are around 5%, which is much lower than that of major supermarkets.

Regardless as to whether price rises can be justified, the proposed response by the government and opposing political parties is likely to be  a major influence on the 2015 election if energy prices continue to rise as households' discretionary incomes fall and consumers demand a solution for falling standards of living. 

The Proposed Solutions

1.Domestic Fuel Cap

Ed Miliband has promised to freeze the price of gas and electricity bills for 20 months if Labour win the 2015 election. He also promised the restructuring of firms by forcing the big companies to split power generation from their retail businesses (which he believes would encourage greater competition) and to replace Ofgem, the existing regulator, with a more powerful body that would force firms to pass savings in the market on to customers.

However, major energy companies, as well as the Conservatives and Liberal Democrats argue that this is unrealistic because of the varying and unpredictable international costs of gas and other fuels. In addition, reduced profits for the big 6 firms would be likely to lead to a lack of investment in technological improvements. Any reduction in profits could also lead to a reduction in investment in firms as a result of shareholders receiving less dividends. This could increase the cost of fuel production in the future. 

2.Reduction of Green Levies

David Cameron has proposed the reform of the Energy Companies Obligation (ECO), which provides subsidised insulation to households in areas of low income. The ECO scheme costs firms £1.3bn a year and adds about £50 to every household bill. A reform in the ECO would involve reducing its key energy efficiency targets by 30% and extending the ECO by an additional 2 years to March 2017. 

Diluting the target, however, means that the government will be doing much less to reduce carbon emissions, a backward step in progression towards a more environmentally sustainable energy supply. Furthermore, building groups argue that this would severely damage the green energy industry and means there will be much less free insulation for fuel poor households.