Macroeconomic Performance: United States of America, Bahrain, and Bulgaria - Research Paper Example

Macroeconomic Performance and Strategic Decisions: United s of America, Bahrain, and Bulgaria Introduction This is a report on three different countries that are evaluated on four criteria: 1. Macroeconomic performance 2. Attractiveness or viability as a market for exports 3. Source of Manufacturing Inputs 4. Location for Foreign Investment The three countries chosen are the United States of America (US), the Kingdom of Bahrain, and the Republic of Bulgaria. The US fits the requirement of a large industrial economy within one of the triad markets. Bahrain is one of the kingdoms in the Gulf Region in the Middle East and is one of the most fast-growing and open economies in the region. Bulgaria is an emerging economy in East Europe that is in transition from communist rule for almost half a century. The paper analyses these countries based on its three-year macroeconomic performance from 2004 to 2006. This is followed by an evaluation of the economy as a target market for exports, for example foods and clothes. The third part looks at the advantages and disadvantages of the country as a source of manufacturing inputs. The last part analyses the strengths and weaknesses of the economy as a location for FDI or foreign direct investments. The Appendix contains the summary of the key indicators for each of the three countries in this analysis. Most of the data used in this paper came from one source, the latest Factbook of the Central Intelligence Agency (CIA, 2007). Macroeconomic Performance United States of America (US) The US is the largest and most technologically powerful economy in the world, with a per capita GDP of $43,500 based on a GDP (at PPP) of $13.1 trillion and a population of 301 million as of July 2007 that is growing at 0.894% per year. For year 2006, services accounted for 78.2% of GDP, followed by industry (20.9%) and agriculture (0.9%) as contributors to the economy. It has a labour force of 151 million, most of which (over 77%) are in managerial, professional, technical, sales and office, and other service professions. Its 2006 unemployment rate was 4.8%. The 2006 inflation rate was estimated at 3.2%. The Federal Reserve Bank, more commonly known as the Fed, keeps a very strict watch over the interest rates with the objective of keeping inflation at a manageable level. So far, the Fed is doing well. The US had a current account deficit of $812 billion in 2006 because it imports more than it exports. The total external debt was estimated at $10 trillion as of June 2006. Its currency is the US dollar, which is the major world currency, but it has been weakening because the economies of other countries are getting stronger. Compared to the British pound, the US dollar has depreciated from $1.831 to $1.846 per pound from 2004 to 2006. The US is at present having problems with sub-prime mortgage loans, most of which were used to fuel the real estate market in the last five years. As a result, its stock market is going through a difficult period of ups and downs, but the stock market index reached 13,300 on November 7, down -4.5% one week but still up by +6.7% for the year (Economist, 2007, p. 122). Bahrain Bahrain is an archipelago off the eastern coast of Saudi Arabia. It was a British Protectorate for many years until its independence in 1971, after which the country has been ruled by the same Al Khalifa family. With a small population of 708,000 growing at 1.392% as of 2007, the kingdom is one of the richest in the world, with a GDP per capita (at PPP) of $25,600 on its GDP (PPP) of $17.9 billion. In 2006, the services sector of the economy accounted for 54.6% of total GDP, with industry (mostly petroleum and manufacturing related) accounting for 45%. Agriculture is also small at 0.3%. Of its labour force of 352,000 people, 44% are non-nationals of Bahrain. Despite having an unemployment rate of 15%, no one is poor in Bahrain because the government pays for everything: education, health care, social security, and even subsidises most household expenditures like power, water, and petrol for transport. The inflation rate of 2.1% is manageable, more so now that Bahrain has a functioning monetary authority that is controlling interest rates. Because of high exports of processed petroleum, the country had a current account surplus of $1.92 billion in 2006. Its external debt of $7.2 billion is very manageable because its GDP is much higher than the amount needed to pay interest on these loans. The Bahraini dinar has been very stable at a rate of 0.376 per US dollar from 2004 to 2006. Bulgaria The Republic of Bulgaria is one of the fastest growing developing countries in Europe. A NATO member since 2004, it joined the European Union in January 2007. The country's transformation from a communist country to a parliamentary democracy in 1990 attracted foreign direct investments to the country, encouraged by political and economic reforms. Bulgaria has a population of 7.3 million (July 2007) that is growing at - 0.837% per year (which means it is declining), GDP (at PPP) of $79.1 billion that grew at 6.1% in 2006, and a GDP per capita (at PPP) of $10,700 which makes it one of the richest countries that used to be a part of the Soviet Union. It has a labour force of 3.4 million (58% services, 34% industry, and 8% agriculture) and an unemployment rate of 9.6%. 14% of the population is below the poverty line. 2006 inflation was 7.3% and it has an external debt of $27 billion. It had a current account deficit of $5.01 billion in 2006. The currency (leva) has been strong and stable against the US dollar, appreciating from 1.5751 in 2004 to 1.5576 in 2006. One of the reasons why the Bulgarian economy and currency are strong was the decision of the Bulgarian government to push through with its macroeconomic stability plan by imposing a fixed exchange rate of the leva against the German Deutschemark and now, since joining the EU, with the Euro. This has resulted in lower inflation rates and a more stable economy compared to other former Soviet Union States. It is also in negotiation with the IMF to avail of loans for infrastructure investments. Despite government corruption and the presence of organised crime, Bulgaria remains one of the most progressive emerging countries in Eastern Europe (CIA, 2007). Evaluation as Export Market US The US imported $1.9 trillion worth of consumer goods (32%) like automobiles, clothes, medicines, furniture, and toys; industrial supplies (33% of which crude oil accounted for 8%); and capital goods (30%) like computers, telecommunications equipment, motor vehicle parts, office machines, and electric power machinery. The remaining 5% were food and agricultural products. A large population with high purchasing power makes the US, which is the world's biggest importer, a very good export market. Its major import partners which account for 55% of its imports are Canada and China, Mexico (mostly US companies with factories across the border), Japan, and Germany. Bahrain Bahrain imported $8.6 billion worth of goods in 2006, mostly food commodities, crude oil, machinery, and chemicals. These last three were due to the processing plants that foreign investors have established in the country. Bahrain does not product much oil, but it accounts for a big share of petroleum processing in the region. With the rise in demand for petroleum products globally, the economy is growing, and the people are getting richer. As an export market, Bahrain has very good potential because of rising incomes, despite its small population, because of its large pool of expatriate workers. Its major import partners are Saudi Arabia, Japan, US and UK, Germany, and the United Arab Emirates (UAE). There is very strong competition to supply goods to Bahrain because it is also a member of the World Trade Organisation (WTO). Bulgaria Total imports of Bulgaria amounted to $22 billion made up of commodities, machinery and equipment, metal and ores, chemicals and plastics, fuels, minerals, and raw materials from Germany, Italy, Turkey, Greece, China, France, and Romania. As can be seen from this list, Bulgaria is an industrialised country that used to be one of the Communist bloc's production centres, a role that it continues to perform to this day (CIA, 2007; Lalev, 2006). As a newly democratising and emerging economy, Bulgaria has high potential as an export market. It is improving its telecommunications sector, opening up the country to Internet commerce, and the income of its people are going up, making them more attractive as a market for luxury and consumer goods such as iPods, laptop computers, and western fashion items. However, Bulgaria is one of the main tobacco processors in the region and is not a good market for cigarette products, but it could be opened up to many other consumer products. Source of Manufacturing Inputs US The country's exports ($1.02 trillion in 2006) are mostly capital goods (49%) like transistors, aircraft, motor vehicle parts, computers, and telecommunications equipment; industrial supplies such as organic chemicals; consumer goods like automobiles and medicines, and agricultural products like soybeans, fruits, and corn. Its major export partners are Canada, Mexico, Japan, China, and the UK. The US is therefore a good source of high technology manufacturing inputs, but it mainly out-sources its manufacturing activities to low-cost producers like China and India. Given the effects of globalisation, the US is focusing on intellectual high-value added work such as product innovation, business management, financial engineering, and marketing and advertising. Bahrain Bahrain is strong in industrial processing of petroleum and petroleum products, aluminium (it has one of the world's largest aluminium plants), and textiles. The country would rather concentrate on these big-ticket items because of the linkages between petroleum processing and these industries. Since petroleum by-products are readily available at a low price, the country would not give priority to other manufacturing activities unless the outputs of these are for local consumption, such as food stuffs. Its main trading partners are Saudi Arabia, the US, and Japan. Bulgaria The country produces clothing, footwear, iron and steel, machinery and equipment, and fuels for its major trading partners such as Turkey, Italy, Germany, Greece, Belgium, and France (CIA, 2007). Under communism, Bulgaria's economy was dominated by the impressive, but to a large extent artificial, development of industry concentrated on sectors - such as steel, heavy chemicals, electronics, information technology (IT) and armaments - that turned out to be ill-suited to competition in a post-communist environment. Since Bulgaria is encouraging modern industrialisation to revive these old industries where it has readily available manpower, there is a potential to make the country a source of manufacturing inputs, such as food and clothing for export to other countries in Europe and Asia. The country enjoys labour advantages: production and labour costs are low, with a highly educated, well trained, and highly qualified labour available. Bulgaria's working-age population is highly educated and skilled; a high percentage completed some form of secondary, technical, or vocational education. Many Bulgarians have strong backgrounds in engineering, medicine, economics and the sciences. Target for Foreign Direct Investment (FDI) US Strengths The US is a market-oriented economy. Business firms in the US enjoy more flexibility than their counterparts in Europe and Japan in decisions to expand, to lay-off surplus workers, and to develop new products. Barriers to entry are very low and can be easily hurdled, provided a potential investor finds a good lawyer. In fact, US companies face higher barriers to enter the home markets of their competitors than those encountered by foreign investors who wish to put in their money in the US. Investments are highly welcome, and the country boasts of an excellent labour force that are properly educated and trained. Its foreign investor rules are simple and attract many companies that want to sell in the huge consumer market. As a target for FDI, the US continues to be attractive because of its large market with high purchasing power. Its strong government is a big help in attracting investors. Weaknesses One of the major problems of the US is in its inadequate investment in economic infrastructure, rapidly rising medical and pension costs of an aging population, sizable trade and budget deficits, and stagnation of family income in the lower economic groups. The merchandise trade deficit reached a record $750 billion in 2006. The gains of the past year would be affected by the turmoil in US markets as investors get in and out, some on a whim whilst others are willing to stay. The cause of the present troubles is the sub-prime mortgage lending scandal, where large amounts were loaned to consumers using bloated real estate prices as the banks' basis for loan approvals. The Fed and other business people are confident that this trouble shall pass too in the near future. Bahrain Strengths Bahrain's government is good at determining financial policies, wages and prices, and in administering to its people. For the last two years, Bahrain is working on attracting financial institutions to make the country a financial hub, because it knows that it would run out of oil soon and its competitive advantage lies in financial services. There is, however, much competition from other Gulf States like Qatar and Dubai. The country has a stock exchange, which makes it easier for foreign investors to develop an exit strategy for their investments. The stock exchange is properly regulated, and the numbers and volumes of trade are growing. Bahrain's banking and finance sector has very few restrictions. It is relatively easy to establish a bank; there are few, if any, restrictions or requirements on new banks; and foreign banks are welcome. The banking system is sound and undergoes examination and supervision by the Bahrain Monetary Agency (BMA), which has a solid international reputation. Efforts are being made to increase the liquidity of the Bahrain Stock Exchange (BSE), which opened in 1989. The government allows Gulf Co-operation Council (GCC) nationals to own 100% stakes in firms listed on the BSE and increased the proportion that could be owned by other foreigners to 49%. The Minister of Commerce has announced that ownership for non-GCC nationals will be increased to 100% by end-2005. Bahrain allows the market to set wages and prices, having a minimum wage law that did not have an adverse impact on prices of goods. Since many years ago, it had liberalised its telecommunications sector, where it had monopoly power, and reduced state power over telecommunications services prices (Ali & Partners, 2004). Weaknesses Bahrain, despite its intentions to open its economy, continues to have some hard barriers, mostly regulations and laws, but also a few soft ones, mainly the small size of its markets and the inexperience and inefficiency of its manpower. A moderate level of trade protectionism characterises the country, giving priority to locals and citizens from the region in land ownership and business deals. The country needs to establish the needed legal and administrative mechanisms that would ensure complete transparency. It needs to eliminate low tariffs on consumer and industrial goods and most agricultural products. It also needs to open its doors to foreign banks and companies. Another problem is a growing tendency of government to intervene in the economy, which is shown by the large share of State revenues coming from government-owned businesses and properties. There are similar problems related to market access, national treatment and reciprocity, and equality of competitive opportunity. There continue to be inefficiencies for investors due to lack of experience and petty corruption that, though rare in Bahrain, add friction to the work of investors in the country. Bulgaria Strengths Bulgaria's investment attractiveness lies in its geographical location between the booming economies of Asia and Europe, its natural resources, the abundance of skilled and educated labour, and the existence of a basic business infrastructure. Its location compensates for low domestic demand due to the small population because producers have immediate access to hundreds of millions of people on both sides. The country has a vibrant private sector adjusting to the competitive demands of a free market, which can be an opportunity for low-cost suppliers and at the same time a medium-term threat for potential competitors. Investors can get in early and take advantage of the situation prior to developing it as a base to access new markets in the developing countries of the EU (Lalev, 2006). Bulgaria has created Duty-free Zones where foreign and local companies can find it attractive to do business. These free trade zones provide benefits to Bulgaria through job creation, improved skills in its labour force, technology transfer, and increased income for its people. The strategic location of these zones, the incentives they offer, and the availability of a skilled and educated workforce are helping Bulgaria bring in more FDI to take advantage of these benefits being offered. Weaknesses The main problems of Bulgaria are common to almost all developing countries: graft and corruption, a regulatory regime that is characterised by having many laws and rules to cover every loophole, but where implementation due to lack of experience in the rule of law is a big problem. As an example, Bulgaria has legislation in place that guarantees protection of property rights, both real (land) and intellectual trademarks. The only problem is implementation of these laws in the area of intellectual property. Changes in existing laws, loose implementation and enforcement, and the lack of credibility of (and lack of respect for) the public sector is also a problem, but it is not something that cannot be solved with time. The problem with organised crime and the peace and order situation is a problem for foreign investors who may get afraid because of the threats to their managers and their assets. The government is doing what it should, but problems remain. The lack of managers familiar with the western way of doing business is a disadvantage for foreign investors, but it presents an opportunity to train a new breed of Bulgarian managers who are familiar with the needs of the local markets and who can be hired and developed at a much lower price (Lalev, 2006). Bibliography Ali and Partners (2004) "The Middle East and the World Trade Organization." Articles, Bahrain: Mideast Law. CEA/U.S. Council of Economic Advisers (2007) Economic indicators: August 2007 (Includes data available as of September 10, 2007). Washington, DC: Government Printing Office. Central Intelligence Agency (CIA) (2007) CIA Factbook. Langley, VA: CIA. Economist, The (2007) Economic and financial indicators. Economist, November 10, 2007, p. 122. Euronews (2006). Rehn warns Bulgaria could miss 2007 EU entry. Euronews. 16 April 2006. Retrieved 30 November 2007, from http://www.euronews.net/create_html.phppage=europa&article=353917&lng=1&PHPSESSID=074a7580587fbc3845d85f79fa1bae13 Lalev, V. (2006). Invest Bulgaria: the preferred partner of investors seeking opportunities in Bulgaria. Retrieved 30 November 2007, from http://www.investbulgaria.com/advantages.htm Oxford Business Group (2005) Banking on Bulgaria. INVbg Website. Retrieved November 2007, from http://www.invbg.com/emerging_bulgaria_oxford_business_group.htm Palmer, D. (2005) "US House, Senate panels approve Bahrain trade deal." 18 November 2005. Reuters. 30 November 2007 Read More