Why did China and Japan follow such divergent paths in the early decades of the twentieth century?

Introduction

Japan and China seem to have lots of similarities to a foreigner. The reason for the similarities include the logogram character in both Chinese and Japanese languages, Eastern religious and traditional practices. However, there are many differences in their lifestyles and traditions that always make the two countries follow divergent paths. (Introductory paragraph should no be long).

Over the past few years, the geographical area of East Asia remains influenced by the Sino- Japanese relationships.  In the past, the both countries might have had friendly relations with each other. However, since the beginning of the 20th century, China and Japan’ relation strained. Japan and China are geographically very close to each other. Both the regions also have many mutual cultures, traditions and ethics (this is repeated from above paragraph, you can consider removing it). Yet, whereas Japan began to conform to the (this is not necessary) modernization to prepare for conquering the world, China was going through an upheaval as the Qing dynasty suddenly collapsed and the country took time to recover from it. The political, economic and social differences between the neighbours unavoidably drew them into hostility between each other.

Moreover, Japan endeavoured to force its Twenty- One Demands over China which they downrightly refused and a war began between the two. Japan also forcibly controlled its former German territory which was part of China during the World War I. This essay would argue that despite having similar customs, there are many political and social differences among China and Japan, and the approach of both the countries to these variations became strikingly different since the beginning of the 20th century especially because of the dominant attitude of Japan and rigidness of China towards modernization.

Analysis

Japan and China reacted differently to modernization in the beginning of 19th century. Historians believe that the traditions of Japanese have their roots in the Chinese culture or rather the traditions of Japan stemmed from the Republic of China (please check the exact name of the Chinese state at that time) (Platt, 2003, p. 12). “Japan’s written language and much of its religious, artistic, and moral civilization derive from Chinese culture” while Japan seemed to have both positive and negative influence on the Chinese youngsters (Johnsons, 1972, p. 1). Both China and Japan remained in isolation from the rest of the world as they mainly communicated between each other. However, by the end of the 19th century, such isolation approach to international relations was not possible in a world which was on its way towards modernization. Both China and Japan had to bear extreme pressure from the Western world to open channels of international relationship which created opportunities for trades. As a result, both China and Japan were “’latecomers’ compared with those ‘first-comers such as England, France and the United States” (Yu, 2006, p. 2).

During the Industrial Revolution, both China and Japan chose to continue with their primitive ways of life. They did not update their technology, so their technology and military lacked advancement to combat the threats from Western countries when they pressured China and Japan to accept modernization in their regimes as well (Valentini, 2015, p. 1). Both the countries were forced by the western countries to sign treaties in which they had to open ports and cities for foreign trades and exchanges.

In the era preceding modernization in these regions, China and Japan had allowed only a limited access to foreigners to trade in their ports. Before the West had pressured the two countries to open their trade channels, they remained in isolation, but China was still the first country to welcome trades between other countries. However, this action was not conducted without constraints. The western merchants were allowed to trade in China, but only in the region of Canton. Additionally, the foreign merchants had no special privileges, so they were reluctant to trade in China (Valentini, 2015, p. 3). In Canton, they were only allowed to have trade dealings with a single group called the Co- hong. Similarly, Japan remained prudent about foreign trades, thus also only allowing commerce with the Dutch company who could trade in just one port of Japan called Dejima. (This sentence is similar to the previous one, but you wrote as if the two sentences have opposite implications).

There is no doubt about the fact that both the countries had similar traditions and customers, yet their approaches to the changes of the era were quite different and has often perturbed historians of the time. The processes of modernization occured in the two countries differ in many ways. Many historians argue that Japan readily accepted the changing times. On the other hand, China was slower to react, probably (you shouldn’t use this word in academic writing) because of the end of the Qing dynasty which completely shook the empire. Even before that, the people of Japan had a more open- minded and flexible approach to life, while the Chinese were orthodox even in the beginning of the 20th century. The Japanese readily accepted the change while Chinese seemed less flexible to do so.

The Chinese rulers were conventional in their approach and they showed resistence against any new change in their society (This sentence is well-written but more like repeating the preceding sentence, you can consider removing it). They didn’t allow the flow of (no need this phrase) modern education and forced the people to follow the orthodox texts of the Ming dynasty. The texts depicted an extremely outdated worldview which didn’t conform to the modern period. In China, the West could only approach Canton for trade purpose as the country didn’t allow a more open access to trade. As a consequence, the emperors and masses of China couldn’t have exchanged much information with the West. Moreover, they could not even find out what was going on in that world. Hence, in the beginning of the 20th century, the Chinese didn’t face the barbarians of the older world, but well- equipped soldiers having military powers (Valentini, 2015. P. 5). China was caught by surprise when the westerns approached them suddenly and forced them to initiate international relationships.

In contrast to China, Japan was more interested in the education and adopted knowledge of the outside world. Their trade was limited, and Western books were banned in 17th century because of the reign of Orthodox churches. However, the strict laws were relaxed and by the end of the 19th century, many students all over the land of Japan received advanced education from the Western system. Different associations were also created in Japan that translated books from the Western side and the scholars were allowed to enlighten the students with Western knowledge.

The Meiji revolution in Japan was also very pivotal for the country’s progress as it ended the Feudal system of the shogunates. In the Meiji Revolution, the new leaders organized the government and its policies in such a way that they opened channels for the Industrial Revolution that was already spread in the rest of the world. Foreign technicians and scholars were welcomed to Japan who helped the country update its technology, infrastructure, banking system, railway system and so on. (you shouldn’t use this phrase in academic writing).

China also attempted similar reforms in the country after the Taiping rebellion was defeated in the end of the 19th century. However, this happened on a small scale and in many limited areas of the country. The country overall remained primitive and outdated (Valentini, 2015, p. 6). The Chinese rulers didn’t understand that the development of the West for prosperity requires the country to change their lifestyles and worldview.

The differences (conflict seems too much in this case) between China and Japan in the beginning of the 20th century also compelled the two countries to adopt divergent paths. As discussed above, people of Japan were more educated, equipped and modern as compared to the Chinese counterparts. It was only in the year 1896 that China began to give a thought to modernization and education. In this year, group of thirteen Chinese students were sent to Japan so that they could learn and bring awareness to their country as well.

China was lagging so much in its approach that when the thirteen students arrived in Japan in their traditional clothes, they were perplexed to see the uniformed students and suited men, while the Japanese couldn’t help but ridicule the students to such extent that four of the students gave up and ran back to China (Harrel, 1992, p. 2). However, the number of Chinese students started to increase and by the year 1906, as many as 9000 Chinese students were studying in Japan. This shows that Japan was the teacher and China was the student (Harrel, 1992, p. 2). (This sentence does not have a strong link with the preceding sentence; it also needs more clarity. Or you can use this sentence: Japan was way ahead of China that it was qualified to play the role of a teacher while China is appropriately a student to Japan). However, the teacher country soon began to show its dominance over the student country and China became displeased over this.

The famous twenty-one Demand of Japan over China in the year 1915 to the Yuan government caused great rift among the two countries. China was already suffering because of “faction fighting” (civil war) and tried to make it dependent upon Japan by weakening it through the twenty one demands. The demands were made in such a way that it put China in a vulnerable situation to Japan and made it obligatory to it. “The 21 Demands underwrote special interests in Shantung, Kwantung, South Manchuria, Inner Mongolia, Fukien, and called for inserting Japanese advisers in key positions in Chinese government agencies” (Harrel, 1992, p. 219).

Japanese also demanded that their officials should be placed in different departments such as police and the army. It also demanded that China allow Japan to run the first- generation steel mill of China called Han Ye Ping Company.  Moreover, it was demanded that Chinese government have to extend all due rights to Japan in Shantung which were previously allowed to Germany as well. The Chinese government was also asked to openly acknowledge the different interventions and services of Japan made to China. It was also demanded that the Chinese government should not lease any region, port, island and the like to any other country except Japan (Harrel, 1992, p. 219).

Japan was trying to limit the communication of China with other countries (Chaurasia, 2003, p. 128). The demands were first rejected, but later accepted by Yuan Shikai. It is believed that he accepted the demands only for his own benefits as he desired to become the emperor. However, there is also a view that Yuan Shikai was forced by the Chinese government to sign the treaty with the threat that if it didn’t accept, Japan would wage war on China. As the latter was technologically weaker than Japan, it was compelled to accept the humiliating demands (SK, 2012, p. 54). Japan had emerged as a very powerful state after the First Great War and its technology was a huge risk for the relatively primitive civilization of China at that time (Chaurasia, 2003, p. 160).

The May Forth Movement was another important incident which led to the divergent paths of Japan and China. The movement can be considered two- edged for the development of China. It criticised the Japanese involvement in China and secondarily, it also criticised the imperialist form of government in China. The revolution was mainly initiated by the students against the weak response of the Chinese government to the Treaty of Versailles which allowed Japan to access former German territories in Shandong. The Treaty of Versailles was developed after the World War which had caused a lot disarray in the world politics. Japan saw this as an opportunity and forced Germany to hand over the region of Kiaochow to it.

This infuriated the Chinese because this region had been taken on lease by China in 1898 for ninety-nine years when they had occupied the region by force. The region of Kiachow was of importance to the Chinese because their two important scholars Confucius and Mencius were born there. Japan promised that it would return Kiaochow to China in the next year, but it was clear that its intention was to violate the promise and it “used her commitment on the side of the Allies as a lever in a bid to displace Germany in the foreign looting of China” (Teodoro, 1975, p. 4).

This led to a nationalistic sentiment in China who banned Japanese products in China. The ban was initiated in Shanghai, but it spread to other parts of China as well. The injustice done by Japan angered the Chinese youth and they began to rebel in small groups. Students were most active in this revolution and they began “national humiliation memorial” meetings (Chen, 1971, p. 83). It later became a nationalist revolution. The movement increased the conflicts between the two countries. However, it also allowed China a divergent approach from Japan. This was a watershed moment for the development of China.

Conclusion

China and Japan seem to be brother countries as they share many traditions, religious norms and culture, but the conflicts of the two regions are clearly visible. The relations of these countries play a vital role in shaping the politics of Asia. Japan is said to have originated from China, but now both countries often stand against each other at daggers drawn to each other. The culture and traditions of both the regions differ to a great extent. Japan seems to be more adaptive by nature, while the people of China rigid in nature. Japan was flexible enough to adopt the values and the changes of the west as well. The Chinese had a certain sense of superiority and they considered people of other cultures as savages, while the Japanese didn’t have such racial approach. Multiculturalism was a speciality of the people of Japan. However, the progress of Japan seemed to make it dominant. Chinese sought help from Japan for education, but Japanese began to show their undue dominance over China. The unjust policies of Treaty of Versailles and the 21 demands are important in this regard where Japan sought its benefits by exploiting Chinese. This had infuriated the masses of China and they began to rebel against Japan. However, China also began to adopt the path of modernization which led to its prosperity. Both the countries went on divergent paths in the early 20th century and this deviation seems to continue even now. Both the countries are prospering but Japan took the lead and China caught up quite later in the 20th century.

 

 

References

Johnson, C. (1972). How China and Japan see each other. Foreign Affairs50(4), 711-721.

Yu, L. (2006). A Comparative Analysis of the Differences between Chinese and Japanese Modernization in the Mid-Late Ninetheenth Century, with Particular Regard to the Idea of’Rich Nation, Strong Army.’ University of Canterbury.

Platt, B. (2003). Why did Japan Succeed and China Fail and isn’t Modernization the Same thing as Westernization? Education about Asia, Vol. 8, no. 3. 12- 19.

Valentini, G. (2014). China and Japan’s Responses to the West in the 19th Century. E- International Relations Students. http://www.e-ir.info/2013/11/04/chinese-and-japanese-responses-to-the-west-during-the-19th-century/.

Lim, S. K. (2012). Modern Chinese History 1840-1949. Asiapac Books Pte Ltd.

Chaurasia, R. S. (2003). History of Japan. Atlantic Publishers & Dist.

Harrell, P. (1992). Sowing the seeds of change: Chinese students, Japanese teachers, 1895-1905. Stanford University Press.

Chen, J. T. (1971). The May Fourth Movement in Shanghai: The Making of a Social Movement in Modern China (Vol. 9). Brill.

Teodoro, L. V. (1975). The May Fourth Movement and the Origins of Chinese Marxism. Asian Studies. Vol. 13, No. 1. 1- 16.

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Bank Financial Management Commercial Banking Company of Australia Limited

Executive summary

The interest rate risk in the banking sector refers to a bank’s exposure to extreme changes and movements in interest rates. Whether current of prospective, the interest rates affect the bank’s capital and assets while also affecting its earnings. The bank therefore has to develop strategies to manage this risk.

This risk is important to the banking industry and therefore if successfully managed it can have an important impact on the institutions profits and on the shareholder value. Excessive interest rate risk can pose a huge threat to a bank’s current capital base and on the future earnings if not managed properly.

The report below shows a detailed analysis of the institution’s current interest rate risk profile currently and also the predicted rates which gives a description of the current position that the institution is in.

The report also analyses and recommends the different strategies that the institution should adopt in order to ensure that it manages the interest rates risks effectively so as to continue making profits and increasing its asset base.

 

 

Table of Contents

Interest Risk. 4

Cash Flow Ladder for the Interest Rates. 4

Variance-covariance method. 7

Question 2. 8

Strategies to manage interest rates and their impact to the banks risk profile. 8

Swaps. 8

The use of interest rate futures to hedge income gap position. 9

The use of option contract 10

  1. d) Why I recommended the strategies. 11

References. 12

 

 

 

Interest Risk

Cash Flow Ladder for the Interest Rates

The tables below show the calculations and the obtained interest rate sensitive assets and liabilities using the indicated time buckets which then are used to represent the cash flow ladder.

Today   DATE YOU WANT  
28-Feb-18 01-Sep-17 28-Feb-18 28-Feb-22
      1.500000                   1.884302                 12.000000
Days -180 0 1461
 6 months      
Today    
28-Feb-18 01-Sep-17 01-Aug-18 28-Feb-22
      1.500000                   2.290346                 12.000000
Days -180 154 1461
1Year

28-Feb-18

01-Sep-17 28-Feb-19 28-Feb-22
      1.500000                   2.992407                 12.000000
Days -180 365 1461

18 Months

28-Feb-18 01-Sep-17 01-Aug-19 28-Feb-22
      1.500000                   3.637234                 12.000000
Days -180 519 1461

24 Months

28-Feb-18 01-Sep-17 28-Feb-20 28-Feb-22
      1.500000                   4.752156                 12.000000
Days -180 730 1461

30Months

28-Feb-18 01-Sep-17 01-Aug-20 28-Feb-22
      1.500000                   5.783513                 12.000000
Days -180 885 1461

3years

28-Feb-18 01-Sep-17 28-Feb-21 28-Feb-22
      1.500000                   7.556334                 12.000000
Days -180 1096 1461

42Months

28-Feb-18 01-Sep-17 01-Aug-21 28-Feb-22
      1.500000                   9.184633                 12.000000
Days -180 1250 1461

4 Years

28-Feb-18 01-Sep-17 28-Feb-22 28-Feb-22
      1.500000                 12.000000                 12.000000
Days -180 1461 1461

 

 

  1. b) I

DEAR means Daily Earnings at Risk represents the estimated potential loss of an institutions value over a particular period of time mainly one day which is mainly a result of the extreme changes in market conditions such as the interest rates.

 II

The Value at Risk also known as VaR analyses usually provide a measure of the risk that a company faces at a particular time. This VaR approach gives an indication of the maximum loss which a company could face if and when the market interest rates change adversely all of a sudden. Thus, VaR means the maximum loss that a company is likely to face within a given time period for a specific probability mainly with 95% probability.

III

I used the below method in my calculation

Variance-covariance method

This is a method that assumes a normal probability distribution of asset price volatility; it then calculates the maximum loss which is usually within the required probability. It also assumes the probability distribution of instruments’ value volatility. Variance-covariance is more often than not regarded as too simplistic for more complex, exotic instruments.

Assumptions

In the above calculations, the relationship assumes that the yield changes are independent which means that those losses which are incurred today are not related at all to those losses that were incurred yesterday or to those that will be incurred tomorrow.

  1. c) Meaning to the institution

The VaR or value at risk model and calculations measures the amount of financial risk that is associated with the total value of a firm. This is not just the interest rate risk associated with its cash flow. The value at risk also shows the amount of maximum potential loss that is within a specified period and with a degree of confidence. This contrary to earnings at risk, value at risk indicates the degree of confidence that a company’s losses will not exceed a certain amount of dollars over a specified period

Question 2

Strategies to manage interest rates and their impact to the banks risk profile

The descriptions below show the strategies that we have developed and come up with that will be used by the institution so as to manage the risks in the changes in the value of the portfolio as a result of the potential future interest rate changes that have been identified in the previous sections of the report.

Whenever the interest rates increase, firms are faced with a more difficult, challenging and potentially critical scenario. They therefore have to be smart and come up with strategies that shall ensure that they are well cushioned from the very likely effects that would occur which can include: high attrition, a reputation being at risk, increased portfolio at risk and reduced market share.

Swaps

Interest rate swaps mainly involve the trading of a variable rate loan structure for which one has a fixed rate or the opposite of it. Interest rate swaps and other hedging strategies are strategies which have for a long time provided a way for companies to help manage the potential impact on their loan portfolios of changes that take place on a daily basis on the rates of interests. An interest rate swap represents is a contract between two involved parties so as to exchange a stream of cash flows according to terms decided prior to that. The transaction involves trading costs which are related to two different types of loans; this mainly involves swapping the terms of a floating rate loan for those of a fixed rate loan or the opposite.

Impact of swaps on the Banks risk profile

They lock in a fixed interest rate, taking advantage of a favorable environment and removing interest rate risk as a consideration. This method also reduces current interest expense by swapping for a floating rate that is lower than the fixed rate currently being paid without having to refinance a loan and pay the associated costs. The bank is also able To effectively match interest rate sensitive assets and liabilities. The institution will also be able to diversify financial risks in a loan portfolio by converting a loan portfolio from all fixed or all variable to a very good mix of the two cases. The institution will also be able to change the interest rate composition of a current loan without facing the expense associated with refunding or issuing new debt.

The use of interest rate futures to hedge income gap position

Generally, there usually is a very close relationship that exists between the interest rates and the net interest margin in a way such that any slight fluctuation or change in the market the interest rate will be affected immediately to the margin. The increasing interest rate will lead to a very high net interest rate while the opposite is also true. It therefore becomes a necessity for the bank to buy one or more treasury bills which will be for future delivery.  In the event of a falling interest rate, the following decrease that occurs in net interest margin will definitely be taken care of by the gain that has occurred in the long hedge in a future market scenario in the negative income gap. Together with the long hedge, there is also use of short hedge in order to reduce the interest Rate risk in the negative dollar gap. As the interest rate rises, there is a likelihood that the unhedged bank will suffer significantly the net decline in its net interest margin. A combination of both the short and long hedge, the bank will benefit from future hedge that can be used in order to compensate for the loss in the net interest margin.

The use of option contract

This is a very common strategy that has been applied and tested in many institutions in the institutions ways of managing the risks associated with interest rate risks and can be applicable in the situation of CBC.

In the positive income gap, the investors and other parties involved or interested can buy call option so as to protect themselves from interest rate risks. From buying that option, the buyers can therefore have that ability to obtain the necessary instruments which is at a specific price. While that takes place, the sellers have to have the willingness to sell these instruments at the same price. If therefore the interest rates fall, the bank can lose a lot of cash. However, the gain from its open option position can help in a huge way to partially if not completely offset that loss that has been incurred before. If there is a rise in the interest rates, the gain in the net income will be only partially compensated by the other option.

Coming back to the negative impact income gap case, the investors can buy interest rate put option in order to deal with that risk. This put option will give those buyers the freedom to sell a certain specific underlying security which will be at the price that has been set prior in the contract and makes the seller to be obliged to buy the underlying security. This will automatically make the buyers to earn some profit from that put option and can use it tom compensate for the interest income loss from the negative dollar gap.

The above strategies if adopted will be of great importance to the bank in its future plans since it will have set ways of managing the risks associated with adverse changes in interest rates.

d) Why I recommended the strategies

I came up with the strategies that I have listed below since they have been used and experimented previously by other banks and found to be successful. They have successfully been used to manage the risk in the change in the value of the portfolio as a result of the potential future interest rate changes that have been identified in the previous sections of the report.

 

 

 

 


 

References

https://privatewealth.usbank.com/insights/managing-interest-rate-risk

Dowd, K., Blake, D. and Cairns, “Long-Term Value at Risk,” The Journal of Risk Finance, Vol. 5, No. 2, 52–57, 2004.

Basel Committee on Banking Supervision, “Interest Rate Risk on the Banking Book,” Basel, June 2015.

Harris, M., “Back testing Your Interest Rate Risk Model,” CFO & Finance Digest, Issue #1, August 2010. Available at http://www.wib.org/publications__resources/cfo__finance_digest/2010–12/augl0/harris.html.

 

 

Interest Risk

Cash Flow Ladder for the Interest Rates

The tables below show the calculations and the obtained interest rate sensitive assets and liabilities using the indicated time buckets which then are used to represent the cash flow ladder.

Today   DATE YOU WANT  
28-Feb-18 01-Sep-17 28-Feb-18 28-Feb-22
      1.500000                   1.884302                 12.000000
Days -180 0 1461
 6 months      
Today    
28-Feb-18 01-Sep-17 01-Aug-18 28-Feb-22
      1.500000                   2.290346                 12.000000
Days -180 154 1461
1Year

28-Feb-18

01-Sep-17 28-Feb-19 28-Feb-22
      1.500000                   2.992407                 12.000000
Days -180 365 1461

18 Months

28-Feb-18 01-Sep-17 01-Aug-19 28-Feb-22
      1.500000                   3.637234                 12.000000
Days -180 519 1461

24 Months

28-Feb-18 01-Sep-17 28-Feb-20 28-Feb-22
      1.500000                   4.752156                 12.000000
Days -180 730 1461

30Months

28-Feb-18 01-Sep-17 01-Aug-20 28-Feb-22
      1.500000                   5.783513                 12.000000
Days -180 885 1461

3years

28-Feb-18 01-Sep-17 28-Feb-21 28-Feb-22
      1.500000                   7.556334                 12.000000
Days -180 1096 1461

42Months

28-Feb-18 01-Sep-17 01-Aug-21 28-Feb-22
      1.500000                   9.184633                 12.000000
Days -180 1250 1461

4 Years

28-Feb-18 01-Sep-17 28-Feb-22 28-Feb-22
      1.500000                 12.000000                 12.000000
Days -180 1461 1461

 

 

  1. b) I

DEAR means Daily Earnings at Risk represents the estimated potential loss of an institutions value over a particular period of time mainly one day which is mainly a result of the extreme changes in market conditions such as the interest rates.

 II

The Value at Risk also known as VaR analyses usually provide a measure of the risk that a company faces at a particular time. This VaR approach gives an indication of the maximum loss which a company could face if and when the market interest rates change adversely all of a sudden. Thus, VaR means the maximum loss that a company is likely to face within a given time period for a specific probability mainly with 95% probability.

III

I used the below method in my calculation

Variance-covariance method

This is a method that assumes a normal probability distribution of asset price volatility; it then calculates the maximum loss which is usually within the required probability. It also assumes the probability distribution of instruments’ value volatility. Variance-covariance is more often than not regarded as too simplistic for more complex, exotic instruments.

Assumptions

In the above calculations, the relationship assumes that the yield changes are independent which means that those losses which are incurred today are not related at all to those losses that were incurred yesterday or to those that will be incurred tomorrow.

  1. c) Meaning to the institution

The VaR or value at risk model and calculations measures the amount of financial risk that is associated with the total value of a firm. This is not just the interest rate risk associated with its cash flow. The value at risk also shows the amount of maximum potential loss that is within a specified period and with a degree of confidence. This contrary to earnings at risk, value at risk indicates the degree of confidence that a company’s losses will not exceed a certain amount of dollars over a specified period

Question 2

Strategies to manage interest rates and their impact to the banks risk profile

The descriptions below show the strategies that we have developed and come up with that will be used by the institution so as to manage the risks in the changes in the value of the portfolio as a result of the potential future interest rate changes that have been identified in the previous sections of the report.

Whenever the interest rates increase, firms are faced with a more difficult, challenging and potentially critical scenario. They, therefore, have to be smart and come up with strategies that shall ensure that they are well cushioned from the very likely effects that would occur which can include: high attrition, a reputation being at risk, increased portfolio at risk and reduced market share.

Swaps

Interest rate swaps mainly involve the trading of a variable rate loan structure for which one has a fixed rate or the opposite of it. Interest rate swaps and other hedging strategies are strategies which have for a long time provided a way for companies to help manage the potential impact on their loan portfolios of changes that take place on a daily basis on the rates of interests. An interest rate swap represents is a contract between two involved parties so as to exchange a stream of cash flows according to terms decided prior to that. The transaction involves trading costs which are related to two different types of loans; this mainly involves swapping the terms of a floating rate loan for those of a fixed rate loan or the opposite.

Impact of swaps on the Banks risk profile

They lock in a fixed interest rate, taking advantage of a favorable environment and removing interest rate risk as a consideration. This method also reduces current interest expense by swapping for a floating rate that is lower than the fixed rate currently being paid without having to refinance a loan and pay the associated costs. The bank is also able To effectively match interest rate sensitive assets and liabilities. The institution will also be able to diversify financial risks in a loan portfolio by converting a loan portfolio from all fixed or all variable to a very good mix of the two cases. The institution will also be able to change the interest rate composition of a current loan without facing the expense associated with refunding or issuing new debt.

The use of interest rate futures to hedge income gap position

Generally, there usually is a very close relationship that exists between the interest rates and the net interest margin in a way such that any slight fluctuation or change in the market the interest rate will be affected immediately to the margin. The increasing interest rate will lead to a very high net interest rate while the opposite is also true. It therefore becomes a necessity for the bank to buy one or more treasury bills which will be for future delivery.  In the event of a falling interest rate, the following decrease that occurs in net interest margin will definitely be taken care of by the gain that has occurred in the long hedge in a future market scenario in the negative income gap. Together with the long hedge, there is also use of short hedge in order to reduce the interest Rate risk in the negative dollar gap. As the interest rate rises, there is a likelihood that the unhedged bank will suffer significantly the net decline in its net interest margin. A combination of both the short and long hedge, the bank will benefit from future hedge that can be used in order to compensate for the loss in the net interest margin.

The use of option contract

This is a very common strategy that has been applied and tested in many institutions in the institutions ways of managing the risks associated with interest rate risks and can be applicable in the situation of CBC.

In the positive income gap, the investors and other parties involved or interested can buy call option so as to protect themselves from interest rate risks. From buying that option, the buyers can therefore have that ability to obtain the necessary instruments which is at a specific price. While that takes place, the sellers have to have the willingness to sell these instruments at the same price. If therefore the interest rates fall, the bank can lose a lot of cash. However, the gain from its open option position can help in a huge way to partially if not completely offset that loss that has been incurred before. If there is a rise in the interest rates, the gain in the net income will be only partially compensated by the other option.

Coming back to the negative impact income gap case, the investors can buy interest rate put option in order to deal with that risk. This put option will give those buyers the freedom to sell a certain specific underlying security which will be at the price that has been set prior in the contract and makes the seller to be obliged to buy the underlying security. This will automatically make the buyers to earn some profit from that put option and can use it tom compensate for the interest income loss from the negative dollar gap.

The above strategies if adopted will be of great importance to the bank in its future plans since it will have set ways of managing the risks associated with adverse changes in interest rates.

d) Why I recommended the strategies

I came up with the strategies that I have listed below since they have been used and experimented previously by other banks and found to be successful. They have successfully been used to manage the risk in the change in the value of the portfolio as a result of the potential future interest rate changes that have been identified in the previous sections of the report.

 

References

https://privatewealth.usbank.com/insights/managing-interest-rate-risk

Dowd, K., Blake, D. and Cairns, “Long-Term Value at Risk,” The Journal of Risk Finance, Vol. 5, No. 2, 52–57, 2004.

Basel Committee on Banking Supervision, “Interest Rate Risk on the Banking Book,” Basel, June 2015.

Harris, M., “Back testing Your Interest Rate Risk Model,” CFO & Finance Digest, Issue #1, August 2010. Available at http://www.wib.org/publications__resources/cfo__finance_digest/2010–12/augl0/harris.html.

 

 

HOW IRAQ INVASION CONTRIBUTE TO INTERNATIONAL LAW

Introduction

In 2002, during his speech to the United Nations, the then United States head of state, President George W. Bush stated that the possible utilization of force against Iraq was necessary to enforce the proposed Security Council resolutions. To him, the use of force would also help eliminate potential danger threat to the existing international peace as well as security (Walzer 2017). The Security Council responded to the request by adopting Resolution 1441 which found Iraq to be in material breach of the past resolutions by the Council. In effect, the Council threatened severe consequences to Iraq for its further intransigence (Williamson 2016).

However, when Iraq refused to comply with states resolutions as was required, the United States was forced to lead what Glahn and Taulbee (2017) call an ad hoc coalition of the willing that invaded Iraq on March 19, 2003. The Iraq armed forces were defeated in the attack bringing to the end Saddam Hussein’s regime as well as the Ba’ath party. Subsequently, in March 2003, President Bush announced to the world the end of a major combat operation in Iraq and the United States has just assumed an occupying power in the country to help in rebuilding it as was recommended in 1483 by the Security Council. While the attack on Iraq could be viewed either as legal as a war preventive measure as was authorized by the Security Council or illegal from a humanitarian perspective, none of them justifies nations going to war. In effect, the event places the debate about the war in various contexts some of which include the dilemmas that emerge in regards to international order such as the problem of law in managing foreign affairs, the claims of equality and even the presence of hyperpowers.  The present paper, therefore, discusses the various ways in which the 2003 invasion of Iraq could be seen as contributing to the international law.

Background Information Leading up to Iraq Invasion

A thoughtful examination of the facts and legal settings that led the Iraq war demonstrates that there was sufficient legal authority for the 2003 invasion. Previously, On August 2, 1990, the country of Iraq invaded Kuwait. The attack was quickly preceded with Security Council adoption of Resolution 660 which was the first resolution attempt that aimed are condemning Iraq’s actions and demanded the immediate withdrawal of the troops from Kuwait (Lowe et al. 2010). However, when the diplomacy approach failed to quell the situation, the Security Council adopted another resolution, dabbed Resolution 678 which authorized the member states to use all necessary measures to implement and uphold the recommendation of Resolutions 660 as well as other relevant resolutions primarily to restore the international peace and security. Regardless of the international intervention, Iraq still refused to withdraw from Kuwait before the stipulated deadline which she was given. This obstinate behavior by Iraq triggered Operation Desert Storm which was initiated to expel Iraq from Kuwait by February 27, 1991.

After two months of the operations, on April 3, 1991, the Security Council established Resolution 687 which aimed at creating conditions form a formal cease-fire to suspend hostilities that were being experienced in the Persian Gulf (Williamson 2016). According to Hehir (2013), the 687 resolution demanded that Iraq destroys its chemical as well as biological weapons and missiles besides agreeing for an onsite inspection. Secondly, it required the Iraq government to stop the development, construction henceforth and acquiring any WMD and their delivery systems. Thirdly, the resolution required the state stop developing and obtaining a nuclear weapon, their components, and related materials. Finally, the resolution demanded Iraq to accept immediate on-site inspection to ascertain her actual compliance with the international regulations as stated by the Security Council. The review was to be done by United Nations Special Commission (UNSCOM), a special commission established specifically for this assignment and was required to take possession all the target country’s nuclear weaponry. Interestingly, Iraq cooperated with the demand and a formal cease-fire went immediately into effect in between Kuwait and its invading force, Iraq. The international community worked together with Kuwait to help rebuild it.

It is worth mentioning that Iraq had previously resisted UNSCOM interventions as were mandated by the Security Council. The effort to continue resisting even after the adoption of Resolution 687, Security Council condemned the country’s continued violations of its obligations. The Security Council observed the behavior by Iraq constituted a severe breach of its relevant provisions especially Resolution 687 which established cease-fire methods as well as conditions for attaining international peace and security (Hehir 2013). The refusal to comply with the Security Council demands by Iraq continued for many years even necessitating the introduction of Resolution 1137 which warned that continued misconduct by the target country would constitute severe consequences for failing to comply with the international obligations.

However, despite the many warnings against Iraq, the country was obstinate to comply, and UNSCOM reported failure to complete its mandate due to target country’s obstructionism. Subsequently, the United States and Britain launched a seventy-hour campaign of missiles and aircraft bombing in over hundred targets in Iraq with the aim to force the country to comply with the regulations (Grant 2003). The focus on the Iraq problem was further heightened when terrorists attacked the United States on September 11, 2001. Towards the end of 2002, President Bush challenged the Security Council through the United Nations to face threats posed by Iraq owing to its continued defiance of the international resolutions. In response, Resolution 1441 was established to address the repeated non-compliance of Iraq and its proliferation of dangerous weaponry of mass destruction as well as failure to renounce international terrorism (Lowe et al. 2010). Although Iraq responded to the resolution to allow inspection, it failed to submit to the entire demands as were requested of her. It later filed an incomplete declaration on December 7, 2002, which fell short of the obligations as stated by the Security Council on behalf of the international community.

While the historical background information may appear monotonous given the repetitive nature in which events occurred, it, however, provide a comprehensive understanding of the inescapable triggers of the 2003 invasion of Iraq (Fenton 2017). From the background data, it is evident that Iraq was in material breach of several resolutions, namely Resolution 687 and Resolution 1141. While it is considerably clear the reason behind the attack on Iraq including being a brewing ground for international terrorism, the ex-post developments do not necessarily provide sufficient justification for the utilization of force ex-ante (Grant 2003). Nonetheless, the events leading up the attack on Iraq contributed significantly to shaping the present international law and relations that Security Council, as well as United Nations, has with its member states.

The law states that as long as the regulation or the agreement itself does not allow for the variation, individuals involved in a contract can be altered by word of mouth or written consent. The law further states that for the variation to be valuable, certain conditions must be met

A suitable harmony between the parties and therefore, a meager notice by a particular group to the other does not validate the change. The consideration comes in different forms which include; shared desertion of accessible privileges, fresh payback being approved by each section to the other party and the corporations assuming added obligations in case the pact is breached (Grant 2003)

Dispensation established by one party to the other for that group’s expediency, and at its appeal, will not, therefore, comprise a variation. Whenever such considerations do not exist, a variation is likely to be influenced by deed.

There is a possibility that a contract can be varied by a spoken understanding or by the conduct of the involved parties even where the contract does not provide for oral agreements in the clause. The position as it appears is confirmed and clarified by the Court of Appeal while ruling on the legal disagreement involving RW Lucas Varity Electric Steering Limited v Globe Motors. The same take was also jointed in a case heard in 2016 between Rock Advertising v MWB Business Exchange Centers.

One party may willingly concur with the request made by the other not to persist with the outlined performance in the contract. Considering the prevailing situation, it may be said that party has waived its right to insist on performance in that particular way. It is worth noting that where the terms of the contract include a provision which is solely for the benefit of one party, that party may relinquish conformity with the stipulation and implement the contract in a manner that appears to have been ignored. It is probably inapplicable where the provision is intended to benefit both parties involved.

The general rule excludes a contract which is expected by law to be performed or accounted for in writing, for instance, consumer hire agreements and consumer credit can only be varied in writing.

With reference to work done by Grant (2003), a thin line is drawn between amendments and variations provision for the work contracted by employees. Amendments are made through well and precisely articulated concurrence between the parties and the expected future changes to the contractual necessities excluding the extent of the work to be accomplished.

Dissimilarities on the performance of the task are made following the variation process crafted into the contract requisites. This is because contractual projects are occasionally extensive and last for longer periods to be completed, therefore,  it is managerially less of a saddle to the parties to resolve a variation procedure in advance, as such an amendment to the contract is not necessary every time the extent of the work changes.

Considering the deviation is made with reference to the correct procedure, changing terms of the contract is not necessary. Consequently, there is no need to establish that the consideration is part and parcel of the amendments. With no appearance of state requirements to the divergent, there is usually an indirect expression in a contract that the contractor does not accomplish the work in a way which disobeys relevant performance regulations or applicable laws.  Factors considered states that; the work for which the contract sum is payable is defined in elaborate terms enough to include work which is unspecified in the contract, but necessary to comply with contract guidelines. Where the contract work is not clear in such extensive terms, whether the contractor acquired the employer’s instructions before carrying out the unanticipated work essential to fulfill the performance regulations or whether the contractor can show a promise to pay (Grant 2003).

Where the indenture is for a lump sum, the courts are tasked to infer a promise on the contractor’s part to provide everything necessary to complete the entire work including everything compulsory to conform to regulations and other relevant laws.

The facts can be borrowed from the report compiled by Sharpe Pritchad Adjudications dated 4th of October 2016, during the ruling of a case involving RW Lucas Varity Electric Steering Limited vs. Globe Motors Inc in 2016. In this case, the Court of Appeal determined that addition of a clause projected to prevent variation of the contract not shown in writing would not stop future variation of a treaty verbally or by demeanor.  The case was concerned with the long-term contract involving the supply of certain products to an automotive company.  TRW consented to purchase buy from Globe, under a supply accord which allowed for variations to be applied to the products supplied (Grant 2003).  It also included a clause which stated that “amendment can only be done to a written document which one, purposely refers to the provision of the conformity to be amended and secondly, is approved by both groups.” From the onset, the judge resolute that TRW violated the agreement for purchasing enhanced motors from another company which Globe was in a position to supply suppose changes in engineering model had been made.

During the appeal case, the court asserted that the description of the word product did not consider the improved motors, and TRW did not violate the agreement in any by sourcing the products from another manufacturer (Grant 2003). The court confirmed that the harmony was prepared so that TRW had an option of accepting new supplies or reconsider suggesting engineering changes to available products, but was not indebted to do so. As much as the court was not gratified to deal with the anti-oral variation provision, Judge Beatson made obiter remarks designed to clarify the situation surrounding existing inconsistent resolution on the point (Fenton 2017). The judge noted that the concerned parties had autonomy to agree on terms they preferred to accept, and could do so in writing, by conduct and by word of mouth. The effect with reference to the context applied in law the fact that the companies’ contract contains a clause in common law does not prevent the two parties from entering into a new contract, varying the contract verbally or by deed. Judge LJ recognized that intricacy of proof might arise whenever it is argued that indenture has been made orally or by the conduct of the companies and the particulars have to be shown by the judge in charge from the evidence given by the parties and their witnesses. In view of the case, a variation can only be found where the proof on the equilibrium of prospect reputable such change is certainly fulfilled (Fenton 2017).  The remarks reiterate the belief in liberty to bond, besides highlighting efforts to limit the style in which the parties can change the contract deficiently to supersede the code of party independence.  For that reason, suppose the companies intend to vary the contract, changes should be properly documented to avoid the likelihood of disputes.

Another case fact involves Rock Advertising and MWB Business Exchange Centers. Rock Advertising is licensed managed office space owned by MWB. Rock company becomes indebted with monthly payments. MWB circulates a note to stop the contract. Rock disputes that a verbal agreement had been entered into the director of Rostock and MWB’s credit controller to postpone the monthly license fees to enable Rock paid at a reduced rate for a number of months and promised to pay at an advanced charge for the remainder of the license (Fenton 2017). The agreement reached at regard the acquisition of license had a regular article which affirmed that“all variations to the license agreed upon, is accounted for in writing and signature appended on behalf of both companies before implementation.” Issues surrounding the case were focused on whether the verbal variations clause in the license implies that the oral variation to reschedule the monthly license fees was of no effect or if an oral variation can still be effectual unless sustained by enough deliberation presented by Rock.

The decisions reached were, firstly, the article applied in the license does not avert verbal changes. This was in line with the autonomy companies have of contracting each other to agree whatever stipulations they desire and the freedom of those parties to vary those terms as they may prefer. Secondly, although, Rock’s assurance to pay is fundamentally a guarantee to pay whatever the due, there are sensible paybacks in Rock’s undertakings that can constitute new consideration.

The war between North and South Korean is traced back to the mid-1950s when it broke and had since prolonged until the present times. Although the real cause of the war is never apparent, many historians have come to associate the fight to the different forms of governance that were adopted by the colonial masters of each region (Grant 2003). The South Korean was under the rule of the United States of America was subjected to capitalism whereas the Northern part which was under Soviet Union (USSR) was pro-communism. Given the prolonged nature of the rivalry between the two nations, it has become a significant attraction academic discussion and debates. Thus, the present paper explores the background of the border conflict between the two countries. It explores the historical roots of the war as well as a hint on the impact it has on the stability of the nations.

Historically, before the two nations were politically divided, they all belonged to one geographical country, the Korean Peninsula, which was governed as a dynasty regarded as Grant (2003). For many years, the rulers of the country accommodated each other with manageable conflicts. However, towards the end of World War II, the Soviet Union (USSR) attacked Japanese setting the state to the path of division.  At the end of the war, Korean Peninsula was divided into two regions at the famous 38th parallel (Grant 2003). The division initiated a conflict of interest between proponents of communism on the Northern part and followers of anti-communism governance, capitalism, on the Southern region of Korean Peninsula.

The conflict was mainly instigated by the attempt to unify the two regions under one system of government. America officials did not consider the invasion of the North on the South Korean as a mere border dispute between two dictatorships. Instead many people felt it as the first steps of the communist campaign to over the countries in the world (Lavelle). In response, National Security Council report recommended that the United States adopt the use of military force to prevent the communist expansionism. The report indicated stopping the communism from spreading in spite of the economic impact or the intrinsic strategic of the regions in questions.

According to Glahn and Taulbee (2017), the use of force on the basis of anticipatory self-defense as has been exemplified in the international law may be used by other nations against those they suspect to breed armed groups with WMD as well as other rogue nations. However, the use of force in anticipatory defense would be dependent on three fundamental factors. One, the country must determine whether its target nation has WMD and has shown any inclination to use them. For the case of Iraq, its leader, Saddam Hussein confessed to having WMD and had all the intentions of using them against the countries enemies such as Iran and even the country’s citizens. Thus, using the same tangent as the one adopted for the war in Iraq, the international legal systems must decide whether to approve the use of force preemptively after carefully considering the possible possession and evidence of hostility. It means, therefore, such decisions will rely heavily on proper intelligence about the rogue country, its possession of WMD, its ability to develop and acquire related components as well as technical expertise to develop other dangerous weapons.

With over sixty years since it broke out, the war between the two nations is still raging on, at least technically. The border popularly referred to as 38th parallel is up to date is regarded as a demilitarized zone (DMZ) and is a constant patrol of heavily armed military personnel (Arend and Beck 2014). Given the polarized nature of the borders between the nations, any slight provocation is enough to instigate a prolonged warfare. A good example was the recent provocation by the South Korean military when they used loudspeaker broadcasts against their North Korean counterparts (Arend and Beck 2014). The loudspeakers were considered a tactical psychological weapon that was commonly used to havoc to both military and civilians living around DMZ.

Although the Korean War was relatively short, it was exceptionally bloody and costly both to the two nations. It is said that approximately 5 million people from both sides died during the war.  With no peace treaties signed, the two countries continuously find themselves always at war leading to the establishment of demilitarized zone which contributes to slight stability in the regions. The disparate systems of governments that were predominate in each side of the former Korean Peninsula were mainly to blame for the war since liberal societies such as America could not allow the full spread of communist ideology.

Conclusion

It could be stated that the International law allowed the utilization of force against Iraq on two independent fronts. Firstly, military actions were permitted as secondary measures when Iraq had failed to comply with the primary negotiation mechanisms. The adoption of military action was aimed at facilitating the implementation of the resolution of the cease-fire to suspend the hostilities that were being experienced in the 1991 Gulf war (Arend and Beck 2014). Owing to Iraq’s repeated breaches of the established principles of international law on a cease-fire, the United States was granted permission by the treaty as well as armistice law to suspend its diplomacy terms and use force against Iraq to force it to comply (Grant 2015). Secondly, according to Williamson (2016), the international law also allowed the use of force against the target country principally as anticipatory-self-defense. Given the threat that Iraq continued to pose to the international community with its harbor of weapons for mass destructions and its cooperation with associated terrorist organizations, it was worth to stop them on their track.  To a more significant extent, the adopted approach to resolve into the use of military force against Iraq to force it to comply has a significant implication on the general outlook of the international law and its application.

Williamson (2016) observes that in all its fairness, the case of Iraq may seem unique given the numerous invitations to peace compliance with the international obligations and the United States together with its allies had sufficient legal authority to act as they did. It is uniquely so because, since the invasion of Iraq, no other situation has promoted such massive support from the Security Council in regards to the threat that a country poses to the international peace and security. However, Iraq set the stage for what Owen and Wheeler (2016) regards as a representation of the future challenges posed by rogue states with mass destruction weaponry that may compromise the extant international peace and tranquility. In reference to the security situation established by the events proceeding to the war in Iraq, the United States together with its allies may opt to use their right to anticipatory self-defense to lead attacks on other nations. In the effort to address the emergence of this new threat, the international legal system will be forced to adapt to consider the likelihood of an attack, the scale of possible harm on civilians, as well as the window of opportunity within which necessary proportionate military force, may be adopted (Glahn and Taulbee 2017).

According to Glahn and Taulbee (2017), the use of force on the basis of anticipatory self-defense as has been exemplified in the international law may be used by other nations against those they suspect to breed armed groups with WMD as well as other rogue nations. However, the use of force in anticipatory defense would be dependent on three fundamental factors. One, the country must determine whether its target nation has WMD and has shown any inclination to use them. For the case of Iraq, its leader, Saddam Hussein confessed to having WMD and had all the intentions of using them against the countries enemies such as Iran and even the country’s citizens. Thus, using the same tangent as the one adopted for the war in Iraq, the international legal systems must decide whether to approve the use of force preemptively after carefully considering the possible possession and evidence of hostility. It means, therefore, such decisions will rely heavily on proper intelligence about the rogue country, its possession of WMD, its ability to develop and acquire related components as well as technical expertise to develop other dangerous weapons.

The second factors entail proper consideration of the available window of opportunity. State governments have the responsibility to protect its citizens and therefore, it must act whenever it has a window of opportunity to prevent any possible attacks. According to Von Glahn and Taulbee (2017), the government has a mandate always to use its resources of intelligence to ascertain any potential harm that may occur its citizens and then act before the targeted civilians are put in the arms-way. While the recent modifications in the terror community notably the adoption of suicide bombers who hide in the plain site may pose considerable challenges to the state agents, the government must be prompt in reacting on any whims or suspicion. By and large, preventing a terrorist attack against civilians through the use of WMD require governments across the globe take advantage of any window of opportunity that opens to stop the terrorist attacks on its citizens. It might be challenging for any state, regardless of its military stature and level of preparedness to minimize casualties if it waits until rogue nations have developed or acquired WMD (Glahn and Taulbee 2017). This is because of the sporadic nature that such attacks are often carried out and the tactical style that these extremist organizations use to infiltrate the civilian population.

The third and final factor entails the consideration of the possible harm that may result from an attack. The states must consider the degree of injury that WMD attack may have on the country that it has been used. Arguably, the combination of the possible vast destructive capacity that WMD attack, as well as the modest means that are often needed to, move them makes the threat from these weapons considerably dangerous (Glahn and Taulbee (2017). Most of the biological and chemical weapons are usually very easy to hide, and this complicates the efforts of security agents to detect them. As a result, given the possible degree of harm that these weapons pose to the civilian population and their low level of detection makes it necessary for state agencies to sensitize the general public to be cautious and report any criminal intentions.

References

Arend, A.C. and Beck, R.J., 2014. International law and the use of force: beyond the UN Charter paradigm. Routledge.

Fenton, N., 2017. Understanding the UN Security Council: coercion or consent?. Routledge.

Gibbings, S.L., 2011. No angry women at the United Nations: political dreams and the cultural politics of United Nations Security Council Resolution 1325. International Feminist Journal of Politics, 13(4), pp.522-538.

Grant, T., 2015. Aggression against Ukraine: territory, responsibility, and international law. Springer.

Grant, T.D., 2003. The Security Council and Iraq: An Incremental Practice. American Journal of International Law, 97(4), pp.823-842.

Gray, C., 2018. International law and the use of force. Oxford University Press.

Hehir, A., 2013. The permanence of inconsistency: Libya, the Security Council, and the Responsibility to Protect. International Security, 38(1), pp.137-159.

Jervis, R., 2017. Perception and misperception in international politics. Princeton University Press.

Joyner, C.C., 2018. Sanctions and International Law. In Economic Sanctions (pp. 73-87). Routledge.

Lowe, V., Roberts, A., Welsh, J. and Zaum, D. eds., 2010. The United Nations Security Council and war: the evolution of thought and practice since 1945. OUP Oxford.

Owen, R.J. and Wheeler, N.J., 2016. Liberal Interventionism versus International Law: Blair’s Wars Against Kosovo and Iraq. In The Ethics of Foreign Policy (pp. 99-114). Routledge.

Von Glahn, G. and Taulbee, J.L., 2017. Law among nations: an introduction to public international law. Routledge.

Walzer, M., 2017. The triumph of just war theory (and the dangers of success). In Empowering Our Military Conscience (pp. 27-44). Routledge.

Williamson, M., 2016. Terrorism, war and international law: the legality of the use of force against Afghanistan in 2001. Routledge.

Non-Profit Management Context: Middle East & Northern Africa

 

 

 

Non-Profit Management Context Middle East and Northern Africa

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April 14, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Profit Management Context Middle East and Northern Africa (Research Paper)

Introduction (300 words)

  • Nonprofit organization (NPO) is an institution created with no business or profit intentions but seeks to develop and sustain and social issue through crafting collaborative efforts to alleviate challenges and problems
  • Majority nonprofits in the world focus on poverty eradication, provision of education facilities in the less developed countries, provision of better health, creating an inclusive society, advocating for human rights for the oppressed in dictatorial society, and creating a place for women and disadvantaged social groups
  • The increase in specific social and health problems such as untreatable diseases, poverty, hunger, floods, political oppression, and poor economic levels has led to growth of specific nonbusiness entity that focus of such particular issues
  • Majority of NPOs rely on contributions from volunteers and donors to meet their objectives. However, large international nonprofits operate under parent organizations that may be business entities. The huge donors in these NPOs include global multinationals such as Walmart, Toyota, Apple, Facebook, and Google that allocate some of their profits to charities and humanitarian aid
  • Africa still remains the region with the highest number of nonprofits organizations followed by the Latin America and middle east. Most of the prominent NPOs in the world are based in America and Europe
  • By the end of 2017, the NPO activities in Middle East and Northern Africa focused on education, poverty, health, and housing.
  • These efforts have been complimented by the entry of Asian nonprofit institution that are focused on provision of solar power to support learning and environment conservation

Historical development of nonprofits in the Middle East and North Africa (800 words)

  • The influx of nonprofits in Middle east and North Africa dates back to the period after independence. The social, political, and economical systems in most countries were unstable and requiring external aid that developed countries provided. However, the population that lived in rural and remote areas lacked essential services and commodities such water, food, sanitation, education, and health facilities. The plight of women and children facilitate the entry of NPOs in these regions to offer supportive services through collaboration with governments and local social institutions
  • Middle East attracted more nonprofits that focused on the human rights for women and the girl child. The strict religions and fundamentalist believes as well as civil wars in the regions denied women and children access to basic services such as education and health care. These institutions sought to engage the governments and political administration to expand the facilities and provide more avenues for women and children to participate in the economic and political lives
  • While the operations of these NPOs are still challenged due to the civil and political unrest, they have continued to influence the position of women in in the society. Importantly, regional organizations have provided support in education and healthcare services leading to improvement of education levels in the middle east countries
  • On the other hand, northern Africa has posted similar challenge over the years with Libya, Egypt, and Tunisia involved in significant political unrests that have results in wars and other conflicts. The religious systems in these countries have also oppressed the women and children denying them basic rights that are available to men
  • Additionally, the increased levels of poverty in marginalized areas as well as lack of education, waters, and health care facilities in such areas created an imbalance in social and economic development. Therefore, on profits that focused initial efforts in northern Africa sought to fight poverty, illiteracy levels, and provide better healthcare services to the poor and marginalized
  • Middle East and North Africa represent the leading region sin the world with the highest presence of international nonprofit organizations
  • Examples of nonprofit organizations in Middle east
    • America-Mideast educational and training services, Inc. (AMIDEAST) – creates and strengthens cordial relations between America and Middle East & North Africa through educational training and skill exchange programs
    • Anna Lindh Foundation – promotes integration, relations, and coexistence between cultures promoting respect dialogue and diversity
    • Middle East Youth Initiative – offers economic empowerment and inclusion of young people in the Middle East region through building partnerships and strategic alliances among policy makers, investors, youth leaders, governments, civil society, academics, and the private sector
    • Said Foundation – targets the children towards assuring a better future for them by investing in children education, development, and understanding of important cultures
    • Save the Children Sweden – The Middle East Chapter provides programs to uplift and sustain better living conditions for children in difficult situations. The program has been expanded in North Africa to promote the abilities of parents and guardians in achieving better lives for the children
  • Examples of nonprofit organizations in North Africa
    • Action for Africa – nonprofit organization Africa that supports productive and healthier young lives through supporting early child development, education especially for girls and orphans who have higher risk of illnesses, social violence and neglect
    • Fistula Foundation – Focus on restoring health for African women suffering from obstetric fistula. The nonprofit organization is a response to the increased number of women who deliver without medical help due to available of facilities or resources
    • World Conservation Network (WCN) – involved in identification and preservation of endangered specifies of wild animals and their habitants such as lions, elephants, cheetahs, rhinos. Promotes coexistence between local population and wildlife through sensitization and awareness programs
    • Search for common ground(SFCG) – a north Africa and middle east nonprofit organization that seeks to improve women participation in the social, economic, and political processes. Focuses on rights of women through inclusive dialogues with leaders in various sectors

Discuss philanthropic (humanitarian) traditions – (1000 words)

  • Nonprofit organizations and nongovernmental institutions operate on similar principles and traditions that aim to correct social evils and achieve balance in provision of services. Majority of nonprofit organization in Middle East and Northern Africa seek to understand the plight of neglected members of the society then provide aid to uplift and improve their social and economic conditions through educational opportunities, health, housing, and integration in the modern society
  • Relief tradition – philanthropy as relief relates to the charitable act to eliminate human suffering among targeted population. Common propagated by organizations affiliated to churches and other religious institutions to the bible teaching on compassion and sharing, “love your neighbor as you love yourself. Nonprofit organizations that further this tradition include world vision, red cross, world relief, direct relief, care international, save the children, among other NPOs, among other NPOs
  • Improvement principle – this tradition is more used by the modern organizations and includes providing adequate tools for the neglected, poor, and marginalized individuals to aid them develop a better future live. The provision of educational opportunities, lighting services, health care facilities, scholarships, trainings, awareness programs,
  • Social reform tradition – this tradition recognizes poverty, illiteracy, religious discrimination, and racial differences as the huge challenges facing developing and underdeveloped countries. Social reform includes initiating and supporting social change due to the impact that the society has on other aspects of growth, development and inclusion. Establishing accurate and proper social values and rules is significant in the functioning of social, political, and economic systems
  • Response Principle – tis tradition includes investing to change the perceptions and opinions of individuals, societies, and institutions towards adopting a common agenda in then achievement of mutual goals. NPOs involved in sensitizing the public on their rights, need for their participation in the various national aspects, and encouraging children to pursue education are some of responsive strategies that the organizations have used to create a unified society that is able to establish and achieve mutual goals.

Key features of the regulatory and tax environment – (1000 words)[1]

  • The regulation of NPO various from region to region due to the diversity in political, policy, regulatory, and income laws. The universal goal for majority of nonprofit organizations has led to unification of taxation and regulation mechanisms that seek to create a global environment where the organizations can work without excessive control and monitoring
  • The vital element of these regulation processes is the exemption from income and other forms of taxes by the government and other entities. The objective of these NPOs has informed the decision by international society to exempt them from levies on their incomes that come from projects, sponsors or donors. While some countries and regions have indirectly dictated the utilization of the funds collected by these organizations, nonprofits select the appropriate project to invest in economic, social, education, infrastructure, religious, and research settings
  • However, the exemption from tax system is subject to application by the NPO and subsequent review and approval by the government. In the United States, The Internal Revenue Service (IRS) is responsible for received tax exemption application from NPOs then vetting such organizations to determine their operations, sources of revenue, expenditure, and other financial processes before issuing them with tax exemption certificates
  • Similarly, nonprofit organizations working in the Middle East have faced the same procedures in complying with the regulations and tax systems. In these regions, the tax authorities or services work with the NGO or NPO organizations to provide exemptions on the payment an filing tax returns
  • However, organizations that do not deliver their mandate in uplifting the lives of the population may be forced out of these regions through imposition of taxes rendering the operation futile. The exemption from taxes is method by government to enough the nonprofit organizations to expand their activities in the humanitarian, development, and relief efforts. Additionally, the sources of finances for the institutions has also been considered in exempting them from income levies due to the understanding that majority of donors and volunteers are subjected to normal incomes taxes such as Pay as you Earn
  • On the other hand, the regulation on nonprofit organization sin northern Africa and Middle East is carried out by specific government authorities that oversee the operation of these institutions. The authorities ensure that the NPOs meet their objectives in the charters agreed with the governments. Importantly, the organizations are not allowed to interfere with the national political, social, and economic landscape. The mandate of most NPOs includes providing relief, response to calamities, and supporting social processes such as education and healthcare. The governments have strict rules to bar the organizations from interfering with the major sectors in the politics and economy.
  • NPOs that participate in the political processes such as campaigns and election have often found them deregistered and blocked from operating in these regions. This also applies to such institutions that go beyond the agreed charters and scope of work. The struggles between government sin developing countries and NPOs has resulted from the increased activities by these entities such that the population will view the NPOs as more important in uplifting their lives leading to conflicts and eventual registration of such institutions
  • Other regulations include solicitation of funds within the regions covered or outside such areas. The NPO must understand and adhere to such policies to avoid creating tensions between countries. For instance, the civil wars prevalent in the Middle East determine which countries the NPOs should engage in seeking financial or material support.
  • The self-regulation among these organizations is recommended by experts and analysts of charitable process due to the closed nature of their operations. While the government have laws and rules that guide the operations of NPOs, such regulations only apply to general processes with control and management of internal activities left to the organizations to manage. The NPOs operating in Middles East and Africa have shown high self-regulation levels leading to their success in meeting their goals and objectives.

Core policy postures (positions) – and how they affect nonprofit management styles, organizational structure and capacities – (1000 words)[2]

  • The social, economic, and political environments in Middle East and Northern Africa have influenced the management and structuring of the nonprofit institutions that have presence in the regions. Middle East Countries have strong religious background and views as well as the extensive oil resources but weak political systems that culminate to offer unstable environment for positive operations of foreign NPOs. Countries such as Qatar, Saudi Arabia, and United Arab Emirates are extremely wealthy in oil deposits and other resources despite their poor administration. The economic policies and political regulation have impacted the introduction of humanitarian and relief programs because proper administration of the available resources is able to sustain the whole population through better lifestyle without outside help.
  • Similarly, northern African countries such as Egypt, Libya, Algeria, Tunisia, Sudan, and Morocco have comparable environments that determine the success of NPO operations. The widespread social challenges such as corruption impact the introduction of essential operation in these countries. The styles and types of governments have also impacted the management and functions of the NPOs in North Africa
  • The various core economic, political, and social policy postures and positions impact the managements, organization and capabilities of the nonprofit organizations
  • The management and regulation policy frameworks have increased micromanagement of many nonprofit organizations and NGOs in Africa and Middle East. Countries with volatile political systems such as Iran and Iraq have influenced the operations of these institutions though direct interference with their management styles and planning of operations. The fact that majority of NPO working in these regions originate from the west create the need by these nations to direct all the operations due to ill relations between middle east and western powers.
  • Fundraising policies – on the other hand, the procedures and rules on raising resources for the various humanitarian projects has also impacted the capabilities of the NPOS. Most organizations are used to an environment where they are free to solicit funds from various sources that may not be authorized by the governments such as churches, communities, and schools. However, most developing countries will limit the number of sources that the organizations can use to collate their funds thus impacting ton the organizations of projects as well as the capacities to meet the targeted populations and regions. The NPOs cite the restriction on collection of funds as the major challenge facing their operations in the Middle East and African countries. The poor relationships among countries in these regions also reduce the number of donor and volunteers.
  • Fiscal policies – the financial policy in any country also impacts the operations of nonprofit organizations because the revenues collected and expended by such institutions is not considered in annual government collection and expenditure. The regulation by many government in the middles east and African countries to determine the cumulate revenues and expenses for the country require the NPOs to provide their financial statements and reports which may pose adverse effects to their future capabilities. Through exposing their financial reports, the institutions will reveal the allocation for resources to various regions and social challenges thus creating perceptions by the government and the public of their operations. NPOs prefer using their internal management styles and structures to decide on the use of their finances without any oversight or control from government or other external entities
  • Selection of projects and regions to service
  • Dictation on the expenditure
  • Operational and financial reviews

Comparison with standard Western nonprofit management model – Naturally, the paper will have to be more illustrative than comprehensive in their treatments, and should focus on any trends and characteristics in which the given region may require an adaptation of, or a different approach to, the standard Western nonprofit management model. (400 words)

  • The standard Western nonprofit management model includes a Board that is charged with strategic running of the institution in the various regions selected as candidates for the humanitarian aid. The boards are usually composed of founders and major financiers of the institutions.
  • The composition of the board determines the success of the operations though the development of various committees that are charged with separate responsibilities that cultivate to the mission, vision, and core values of the NPO
  • The management model has been considered effective in the United States, Europe, and other countries have implemented all the aspects of the system
  • The finance, program, planning, fundraising, personnel, and executive committees are some of the critical elements this management model
  • However, the entry of the western NPOs in foreign regions such as Africa and Middle east include influences on the implementation of these management styles leading to adoption of local models that have adverse impact on the eventual outcomes of the programs. It’s imperative that these nonprofits stick to their management and operational styles considering that the goals of the projects are based on these styles. However, some of these style shave proved unviable in some countries such as Libya, Iraq, and Iran where the levels of common languages, social aspects, political ideologies, and other processes impact the implementation of programs
  • Notably, cultivating public confidence is important in achieving the set objective with the minimal modification of standard management models. The accountability levels in NPOs is very important in informing the donors, volunteers, and other stakeholders on the utilizations of their resources and the actual health, education, or social impacts that they have contributed to the population
  • Importantly, the management and control of these organizations should not be entirely left to volunteers and local personnel in these regions. Many NPOs have reported change of their program objectives due to the individuals charged with running projects in the remote areas. Reporting is very vital in management of projects that are spread across many communities to ensure that the injection of the resources is yielding the expected outcomes
  • While the NPOs are not business entities, their management and operations should meet the requirements of profit organizations because they work with finances, personnel, infrastructure and other resources thus required to be responsible in terms of professionalism and financial control.

 

Conclusion (200 words)

 

 

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[1] Wang, Jiane-Ye. What Drives China’s Growing Role in Africa? (Washington: International Monetary Fund, 2007), 23.

[2] Wang, Jiane-Ye, 89.

Non-Profit Management Context: Middle East & Northern Africa

 

 

 

NON-PROFIT MANAGEMENT CONTEXT: MIDDLE EAST AND NORTHERN AFRICA

 

 

 

 

 

 

 

 

Student Name

Course Title

April 30, 2018

 

 

 

 

 

 

Introduction

The Middle East and North Africa (MENA) region continue to experience social and economic challenges related to poverty, illiteracy, and inaccessibility to basic social services. These problems have facilitated the growth of humanitarian efforts spearheaded by the government, private institutions, and individuals to provide aid and other support services to needy populations[1]. The entry of international nonprofit organizations (NPOs) has been facilitated by the need to develop and sustain social capabilities through crafting collaborative efforts to alleviate the socioeconomic problems facing families and individuals in remote and neglected regions.[2]

The development of philanthropic activities in the MENA region is tied to the provision of corporate social responsibility (CSR) activities. The creation of the Global Compact Unit by the United Nations and its subsequent operations in the Middle East lead to the signing of many public and private institutions to participate in the humanitarian and charity work for the community. The transformation from CSR to philanthropy has been facilitated by the increased efforts towards addressing social issues such as disability, food, clothing for the poor, and housing and education the underprivileged in the society. The recent statistics show that NPOs working in the MENA region are focused on the provision of relief food, housing, and clothing to the poor accounting for over 30% of all humanitarian activities in the region. Social services extended to orphans and other unfortunate members of the society represent over 15% with the provision of education and other learning opportunities attributed to over 10% of NPO activities.

The philanthropy and humanitarian activities in the MENA religion are motivated by the religion and a rich culture of generosity. Over 70% of individuals involved in charity and humanitarian activities are motivated by their religion. The concept of “Ummah” referring to the Muslim and Islam community has led to more donations towards charity activities. While the western professionalism has infiltrated the management of the Muslim NPOs, the conventional motivation for their activities is still retained. The philanthropic elements facilitated by the Islam faith include the Zakat, Sadaqah, and Waqf that compel individuals to contribute a certain amount of their wealth towards helping individuals in need. The MENA region receives an annual average of 500 billion US dollars inform of donations from individuals and corporates to advance the philanthropic activities.

The donations are mainly channeled in projects that seek to eradicate poverty, provide education facilities in the less developed areas, offer better health, create an inclusive society through an understanding of individual rights and building an environment for the disadvantaged social groups[3]. The increase in particular social and health problems such as untreatable diseases, poverty, hunger, floods, political oppression, and poor economic levels in the MENA region has led to the growth of NPOs that initiate and implement programs to improve income, health, and education levels. The increase in international nonprofit institutions has also facilitated governments to create avenues for growth of internal and regional relief and humanitarian programs.

Humanitarian organizations in the MENA region rely on contributions from volunteers and donors to meet their objectives. The domestic and foreign NPOs working in the region have collaborated with the governments and religious institutions to tap more resources through regulations that require individuals and companies to contribute a percentage of wealth towards helping the disadvantaged in the society. Countries with stable political administrations and strict religious beliefs report more contributions to the humanitarian activities. In the MENA regions, Africa accounts for the highest number of NPOs with the majority of these institutions focusing on improving education services, alleviating poverty, and reforming the health services.

Historical Development of Nonprofits in the Middle East and Northern Africa

The philanthropy activities in the Arab countries have been facilitated by the persistence of many social and economic problems. Ibrahim and Sherrif explored the extent of these activities in countries in the MENA regions such as Egypt, Lebanon, Jordan, Saudi Arabia, Kuwait, Qatar, UAE, and Palestine[4]. The oil deposits and other resources have created unprecedented wealth in these countries. While the resources have fueled a positive economic growth, the political environment in some of the states has led to increased levels of poverty, unemployment, poor health services, wars, environment pollution among other critical social economic challenges.

Families, individuals, and private companies have amassed wealth from the oil trade thus sought methods to utilize their resources to improve the livelihood of their fellow local citizens as well as the needy societies across the border. The increase in philanthropic activities in the MENA region has been necessitated by the availability of these resources in the hands of the private individuals and institutions and the willingness of such entities to participate in the public welfare. According to Ibrahim and Sherrif, the main humanitarian activities in the region have included voluntary contributions to the various causes and programs initiated to serve the public good. In the contemporary society, the religious frameworks continue to influence the trends in charitable activities with a notable shift towards strategic philanthropy where contributors are concentrating of establishing the cause of social challenges and finding methods to resolve them.

On the other hand, the philanthropic activities in the MENA regions have seen the transformation of many individual contributions into institutional programs. Humanitarian activities provided through institutions are considered more effective and impactful compared to individual efforts. Individuals seeking to leave a legacy have institutionalized their activities to attract more donors and contributors and also reach wider populations[5]. However, the influence of religion in both individual and organizational philanthropy is huge with both Islam and Christian teachings requiring sharing to benefit those in need. The charitable and humanitarian activities in the regions are rooted in these religious traditions, the social solidarity or takaful for Islam and issuing tenth of individual income to the less fortunate for the Christians[6].

Shaw[7] notes that the increased levels of poverty in marginalized areas and the lack of education, water, and healthcare facilities in such areas, created an imbalance in social and economic development. Therefore, nonprofits that focused initial efforts in Africa sought to fight poverty, illiteracy levels, and provide better healthcare services to the poor and marginalized. Such perennial social, political, and economic challenges have placed the Middle East and North Africa as the leading regions in the world with the highest presence of international nonprofit organizations. MENA region is served by institutions that operate collaboratively due to the similarity of social and economic challenges facing the population[8].

However, the spread of NPOs in the MENA region depends on the definite needs and objectives of the humanitarian institutions. The America-Mideast Educational and Training Services, Inc. (AMIDEAST) is one of the top NPO in the Middle East that creates and strengthens cordial relations between America and the Middle East & North Africa through educational training and skill exchange programs. Anna Lindh Foundation is another organization that promotes integration, relations, and coexistence between cultures through respectful dialogue and diversity[9].

The Middle East Youth Initiative offers economic empowerment and inclusion of young people in the region through building partnerships and strategic alliances among policymakers, investors, youth leaders, governments, civil society, academics, and the private sector while the Said Foundation targets the children towards assuring a better future for them by investing in their education, development, and understanding of important cultures. Save the Children offers programs to uplift and sustain better living conditions for children in difficult social and economic conditions. The program has been expanded in North Africa to promote the abilities of parents and guardians in achieving better lives for the children.

Northern Africa is served by similar organizations that have comparable objectives and goals. The Action for Africa is a nonprofit organization that supports productive and healthier young lives through supporting early child development, education especially for girls and orphans who have a higher risk of illnesses, social violence, and neglect. The Fistula Foundation focusses on restoring health for African women suffering from obstetric fistula[10]. The nonprofit organization is a response to the increased number of women who deliver without medical help due to unavailability of facilities or resources.

World Conservation Network (WCN) has programs in Northern Africa that include the identification and preservation of endangered specifies of wild animals and their habitats such as lions, elephants, cheetahs, and rhinos. The NPO promotes coexistence between local population and wildlife through sensitization and awareness programs. The Search for Common Ground (SFCG) is another Northern Africa and Middle East nonprofit organization that seeks to improve women participation in the social, economic, and political processes. The institutions focus on rights of women through inclusive dialogues with leaders in various sectors[11]. Therefore, the historical development of nonprofits in the Middle East and Northern Africa has been facilitated by the recurrent social and economic issues facilitated by poor governance and improper use of available resources[12].

Philanthropic Traditions

The operations of global nonprofit organizations have been lauded for excellent management, control, and coordination. Denhardt, Denhard, and Aristigueta[13]assert that top-performing NPOs across the world are better organized with strict regulations, traditions, and principles that lead to effectiveness in operations and excellence in services. The traditional philanthropic activities in the MENA region have included the works of civil society organizations (CSOs) that respond to societal issues such as famine, floods, refugee crisis, and water shortages[14]. The CSO activities have been more prominent in Palestine due to the lack of a functioning political administration. The organizations have provided basic social services such as food, shelter, education, and sanitation. In other Arab countries with sustainable economic development, the affluence in these societies has stimulated positive contribution from the public towards humanitarian activities.

Ibrahim and Shneif explore the transformations in the Arab world concerning the impact of politics, employment, wealth creation, education, relationships and other social impacts on the advancement of philanthropic activities[15]. The countries have a culture of sharing that is founded on the legacies of families and social institutions. Parents have traditions of guiding their children through values of sharing financial resources and principles to enable improvement of social welfare and economic changes[16]. Therefore, the philanthropic activities in the Middle East and North Africa have been positively impacted by the strong values that are attached to sharing and promoting public welfare.

According to Bonner, Ener, & Singer, the humanitarian activities in the MENA region have focused on the eradication of poverty through the provision of relief to the poor[17]. The rise of Islam and the increase in the number of institutions and individuals involved in philanthropic activities has helped the region to collaborate in the fight against poverty while creating an environment for international charitable organizations. The private and public relief operations in the region are expected to eliminate the profound social and economic problem through sharing of material resources, ideas, and values[18].

The resemblance of the Middle East and Northern Africa in terms of political frameworks, economic patterns, social environment, and religious systems helps the NPOs to interrelate in the provision of the selected services[19]. The common types of philanthropic and humanitarian traditions that have been used by NPOs operating in the Middle East and Africa include relief principle, improvement tradition, social reform, and response principles. These traditions help in the selection of needy population and regions, setting of targets and objectives, as well as sourcing for finances and other resources[20].

The collaboration among the humanitarian institutions and the government to improve the quality of healthcare, education, literacy, sanitation, and provision of water resources fits into the objectives and tradition of most NPOs. Empowering the population reduces the overreliance on external help in the future through the creation of a self-sustainable society[21]. Other NPOs recognizes poverty, illiteracy, religious discrimination, and racial differences as the huge challenges facing developing and underdeveloped countries[22]. Establishing accurate and proper social values and rules is significant in the functioning of social, political, and economic systems. The focus of social changes stems from the rapid global transforms that are expected to create a unified society bound by similar social aspects. The nonprofit institutions that propagate the social reform tradition tend to focus on human rights and elimination of discrimination in the society[23].

Key Features of the Regulatory and Tax

The success of nonprofit organizations is guaranteed by the availability of a friendly and legal regulatory system that enables such organizations to operate and adhere to the internal, national, and international regulations. The function of NPOs has led to the development of specific regulations to guide their activities in the targeted regions. While the Middle East and the Northern Africa regions have received many nonprofit institutions, the increased presence is not facilitated by the laxity of laws, regulations, or the protocols needed to allow and manage the operations of these relief entities[24].

The regulation of NPOs varies from region to region due to the diversity in political, policy, regulatory, and income laws. The universal goal of the majority of nonprofit organizations has led to the unification of taxation and regulation mechanisms that seek to create a global environment where the organizations can work without excessive control and monitoring.[25] The high number of conflicts between the nonprofits and governments in the Middle East and Africa stem from the differences in regulation and taxation[26]. Some governments have mandated all organizations in their territory to pay and file tax returns to support the government activities.

However, the vital element of these regulatory processes is the exemption from income and other forms of taxes by the government and other entities. The objective of these NPOs has informed the decision by international society to exempt them from levies on their incomes that come from projects, sponsors or donors. While some countries and regions have indirectly dictated the utilization of the funds collected by these organizations, nonprofits select the appropriate projects to invest in economic, social, education, infrastructure, religious, and research settings.

Nevertheless, the exemption from tax system is subject to application by the NPO and subsequent review and approval by the government. In the United States, the Internal Revenue Service (IRS) is responsible for receiving tax exemption application from NPOs then vetting such organizations to determine their operations, sources of revenue, expenditure, and other financial processes before issuing them with tax exemption certificates[27]. The governments have a regulatory role of examining and reviewing the operations of these institutions to ensure that they abide by the mission, objectives, and strategies[28]. There are various cases where business frauds have registered NPOs with a mission of executing illegal business in foreign countries as well as evasion of taxes.

Notably, nonprofit organizations working in the MENA region have faced the same procedures in complying with the regulations and tax systems. In this region, the tax authorities or services work with the NPO organizations to provide exemptions on the payment and filing tax returns. The lifting of tax levies for the international relief organizations in these regions has been attributed to a high number of humanitarian activities in the Middle East and Africa. More institutions are preferring countries that have fewer restrictions on financial control and other regulations that may limit the implementation of social and economic projects[29].

However, organizations that do not deliver their mandate in uplifting the lives of the population may be forced out of these regions through the imposition of taxes rendering the operation futile[30]. The exemption from taxes is a method by governments to enable the nonprofit organizations to expand their activities in the humanitarian, development, and relief efforts. Additionally, the sources of finances for the institutions have also been considered in exempting them from income levies due to the understanding that majority of donors and volunteers are subjected to normal incomes taxes such as Pay as you Earn or income withholding taxes.

On the other hand, the regulation of nonprofit organizations in Northern Africa and the Middle East is carried out by specific government authorities that oversee the operation of these institutions. The authorities ensure that the NPOs meet their objectives in the charters agreed with the governments. Importantly, the organizations are not allowed to interfere with the national political, social, and economic landscape[31]. The mandate of most NPOs includes providing relief, response to calamities, and supporting social processes such as education and healthcare. The governments have strict rules to bar the organizations from interfering with the major sectors in the politics and economy[32].

Nonprofit organizations that participate in the political processes such as campaigns and election have often found them deregistered and blocked from operating in these regions. This also applies to such institutions that go beyond the agreed charters and scope of work. The struggles between governments in developing countries and NPOs have resulted from the increased activities by these entities such that the population will view the NPOs as more important in uplifting their lives leading to conflicts and eventual registration of such institutions. Potluka, Spacek, and Schnurbein[33] point out that the position of the nonprofit organizations should be assistive, not major roles in changing the population perception or impact the direction of development policies and strategies.

The institutions must understand and adhere to such policies to avoid creating tensions between countries. For instance, the civil wars prevalent in the Middle East determine which countries the NPOs should engage in seeking financial or material support[34]. The self-regulation among these organizations is also recommended by experts and analysts due to the closed nature of their operations. While the governments have laws and rules that guide the operations of NPOs, such regulations only apply to general processes with control and management of internal activities left to the organizations to manage. The NPOs operating in the Middle East and Nothern Africa have shown high self-regulation levels leading to their success in meeting their goals and objectives.

The NPOs in the MENA regions fit in the third sector in a typical economy which includes institutions providing support in social, health medical, human rights, sports, and other activities. The self-governing nature of these institutions continues to raise regulation and administration debates. The separation of the NPOs from the government laws and regulations has created conflicts with some countries in the Middle East such as Saudi Arabia banning most of the internal and global private organizations. The western countries have viewed the countries in the MENA regions to have unstable political administration system thus unable to successfully regulate the works of NPOs in the regions.

However, the recent political and governance reforms in these countries have created an environment where philanthropic activities can thrive through extensive laws and regulations that guide the registration and implementation of relief activities. However, the execution of these laws, practices, and regulations differ among countries. For instance, Egypt has over 20,000 registered NPOs working on various social projects while UAE and Saudi Arabia have relatively few organizations due to the political administration and the economic stability.

Core Policy Postures

The social, economic, and political environments in the Middle East and Northern Africa have influenced the management and structuring of the nonprofit institutions that have a presence in the region[35]. The strong religious backgrounds in some countries in MENA region such as Lebanon, Egypt, and Iraq have adversely affected the works and management of humanitarian organizations in the regions. Gulf Cooperation Council (GCC) countries have extensive oil resources that have led to an increase in donations through the responsible government ministries and religious institutions.

The economic and political policies have adversely affected the philanthropic activities in the MENA region[36]. The existing economic strategies have been blamed for the widening gap between the rich and the poor in most countries in the region. The political administration policies that have limited foreign relations has also affected the entry of international NPOs. The involvement of humanitarian organizations in the GCC countries has been dictated by the political, social, and economic ties between the two countries[37]. Northern African countries such as Egypt, Libya, Algeria, Tunisia, Sudan, and Morocco use the economic, political and social to register or deregister charitable institutions[38].

The regulation policy frameworks have increased micromanagement of many nonprofit organizations and NGOs in the MENA region. Countries with unstable political systems have influenced the operations of these institutions through direct interference with their strategies and operations[39]. Fundraising policies relating to the procedures and rules on raising resources for the various humanitarian projects have also impacted the capabilities of the NPOs. Most organizations are used to an environment where they solicit funds from various sources such as religious institutions, communities, and schools without dictation from the governments[40]. The NPOs consider the restriction on collection of funds as the major challenge facing their operations in the Middle East and North African countries. The poor relationships among countries in these regions also reduce the number of donor and volunteers.

On the other hand, fiscal policies in any country also impact the operations of nonprofit organizations because the revenues collected and expended by such institutions is not considered in annual government collection and expenditure. The regulation by many governments in the Middle East and African countries determine the cumulative revenues and expenses for the country, therefore, requiring the NPOs to provide their financial statements and reports which may pose adverse effects to their future capabilities[41].

Comparison with Standard Western Nonprofit Management Model

According to Irwin[42], the standard Western nonprofit management model includes a board that is charged with the strategic running of the institution in the various regions selected as candidates for the humanitarian aid. The boards are usually composed of founders and major financiers. The structure of the board determines the success of the operations through the development of various committees that are charged with separate responsibilities that develop the mission, vision, and core values of the NPO. The effectiveness of this management model is founded on the composition of the critical committees that handle finance, program, planning, fundraising, and personnel activities. The implementation of this standard management model in the MENA region is affected by the local regulations and rules that govern both home-based and foreign NPOs[43].

While the NPOs are not business entities, their management and operations should meet the requirements of profit organizations because they work with finances, personnel, infrastructure and other resources thus required to be responsible in terms of professionalism and financial control. The personnel and other human resources should include experts in employee relations, project management, accounting, management, coordination, risk management, and auditing to ensure that the operations of the institutions meet the required standards and can be comparable to business entities.

The administration of the NPOs in the MENA region is different from the standard western nonprofit management model. While the charity organizations in the western countries are largely institutionalized, the NPOs in the Middle East and North Africa are guided by the altruistic principles. The other difference between the Western and MENA nonprofit management model is the perception of CSR activities. Nonprofit organizations in the western nations view corporate social responsibility as a strategy to reinforce core social and economic issues such as environment, health, and education while the organizations in MENA consider CSR as a channel to provide support to charity towards managing social problems. However, the institutionalization of philanthropy is a new but acceptable concept in MENA humanitarian activities. The countries with expanded wealth through oil and other resources have allied with NPOs to help them provide contributions and monitor their utilization.

Conclusion

The management of nonprofit organizations in Northern Africa and the Middle East has been subject to various internal and external issues that have impacted the execution of various projects and programs. The nature of the political environment, religious systems, and the cultural background has affected the entry and presence of these NPOs.  The political unrests in some countries in the Middle East and some parts of North Africa have also resulted in limited relief and humanitarian programs implemented in these regions. However, the study has identified the key philanthropic aspects that have guided the success in improving the people lives and guarantying their human rights.

Relief, improvement, social reform, and response principles are some of the humanitarian features that are considered in management and operations of the nonprofit organizations in the selected regions. Importantly, the regulatory framework by the home and host governments has also affected the organization and management of nonprofit institutions operating in North Africa and Middle East regions. These countries have facilitated a cordial environment for the institutions through a framework of policies and regulations that prevent maltreatment while affording them access to the government infrastructure and resources required in reaching most remote areas.

The exemption from any form of taxes and levies both at the institutional and employee level encourages initiation of more programs that result in economic and social benefits for the host population. The paper has also highlighted how the various economic and political policies impact the management and functioning of the NPOs. The financial, regulation, economic, and fundraising procedures determine the levels of investment. Governments that are extremely strict on the work of external stakeholders create challenges for these institutions to achieve their goals.

The diversity of policies in the Northern Africa and parts of Middle East regions are considered the major influencer of humanitarian and relief organizations. The level of poverty that does not correspond to the value of available resources is used to shield more NPOs from accessing such countries. The mismanagement and misappropriation of natural resources due to poor political administration and instability create an economy with few wealthy individuals and many middle and low-income earners. The analysis of the standard Western nonprofit management model compared the changes that the NPOs have made to ensure full assimilation in the targeted regions through understanding the local political, social, and economic systems.

However, the relevance of the board as the steering organization of all operations for nonprofit organizations is still critical to guide proper selection, financing and implementation of valuable and needed programs. Therefore, the success of managing nonprofit organizations in the Northern Africa and the Middle East region is pegged on the relation that the entities create with the governments as well as the adherence to the conventional management models and regulation that have helped the institutions succeed in other regions.

 

 

Bibliography

Anderson, Ronald. World Suffering and Quality of Life. New York: Springer, 2015

Anheier, Helmut. Nonprofit Organizations: Theory, Management, Policy. New York: Routledge, 2014.

Aoki, Masahiko, Kuran, Timur, Roland, Gerard. Institutions and Comparative Economic Development. Basingstoke: Palgrave Macmillan, 2012

Arvidson, Malin, Lyon, Fergus. “Social Impact Measurement and Non-profit Organizations: Compliance, Resistance, and Promotion.” International Journal of Voluntary and Nonprofit Organizations, 25, no. 4, (2014): 869-886

Berman, Margo. Productivity in Public and Nonprofit Organizations. New York: Routledge, 2014.

Bonner, Michael., Ener, Mine. & Singer, Amy. Poverty and Charity in Middle Eastern Contexts. New York: SUNY Press, 2012.

Budrys, Grace. How Nonprofits Work: Case Studies in Nonprofit Organizations. Lanham: Rowman & Littlefield, 2013

Ceptureanu, Sebastian, Ceptureanu, Eduard, Bogdan, Liviu, Radulescu, Violeta. “Sustainability Perceptions in Romanian Non-Profit Organizations: An Exploratory Study Using Success Factor Analysis.” Sustainability, 10, no. 2, (2018): 294

Denhardt, Robert, Denhard, Jane, Aristigueta, Maria. Managing Human Behavior in Public and Nonprofit Organizations. Thousand Oaks: SAGE, 2012

Driver, Carolyn. Guidelines for Writing Successful Grant Proposals for Nonprofit Organizations. Bloomington: AuthorHouse, 2010

Epstein, Marc, Yuthas, Kristi. Measuring and Improving Social Impacts: A Guide for Nonprofits, Companies, and Impact Investors. Oakland: Berrett-Koehler Publishers, 2014

Eweje, Gabriel. Corporate Social Responsibility and Sustainability: Emerging Trends in Developing Economies. Auckland: Emerald Group Publishing, 2014

Fishman, James, Schwarz, Stephen, and Mayor, Lloyd. Nonprofit Organizations: Cases and Materials. New York: Foundation Press, 2015

Flynn, Patrice, Hodgkinson, Virginia. Measuring the Impact of the Nonprofit Sector. Washington: Springer Science & Business Media, 2013

Gould, Julie. “Non-profit organizations: Scientists on a mission” Nature, 527, no. 7577, (2015): 265-266.

Halpem, Mafred. Politics of Social Change: In the Middle East and North Africa. New Jersey: Princeton University Press, 2015

Hoque, Zahirul, Parker, Lee. Performance Management in Nonprofit Organizations: Global Perspectives. New York: Routledge, 2014.

Ibrahim, Barbara. & Sherrif, Dina. From Charity to Social Change: Trends in Arab Philanthropy. New York: American University in Cairo Press, 2008.

Ibrahim, Barbara. & Shnief, Heba. Family Legacies: Wealth and Philanthropy in the Arab World. New York: American University in Cairo Press, 2017.

Irwin, Julia. Making the World Safe: The American Red Cross and a Nation’s Humanitarian Awakening. New York: OUP USA, 2013

Kinzey, Ruth. Promoting Nonprofit Organizations: A Reputation Management Approach. New York: Routledge, 2013

Kovacs, Gyongyi, Spens, Karen. Relief Supply Chain Management for Disasters: Humanitarian Aid and Emergency Logistics. Hershey: Information Science Reference, 2012.

Kumar, Anuradha. Human Rights Development of Under Privileged. New Delhi: Sarup & Sons, 2006

Maier, Florentine, Meyer, Michael, Steinbereithner, Martin. “Nonprofit Organizations Becoming Business-Like a Systematic Review.” Nonprofit and Voluntary Sector Quarterly, 45, no. 1, (2016): 64-86

Meier, Patrick. Digital Humanitarians: How Big Data Is Changing the Face of Humanitarian Response. Boca Raton: CRC Press, 2015

Osula, Bwamwell, Ng, Eddie. “Toward a Collaborative, Transformative Model of Non-Profit Leadership: Some Conceptual Building Blocks.” Leadership in Non-Profit Organizations, 4, no. 2 (2014): 87-104

Potluka, Oto, Spacek, Martin, Schnurbein, Georg. “Impact of the EU Structural Funds on Financial Capacities of Non-profit Organizations.” International Journal of Voluntary and Nonprofit Organizations, 28, no. 5, (2017): 2200-2223

Shaw, John. The World’s Largest Humanitarian Agency: The Transformation of the UN World Food Programme and of Food Aid. Basingstoke: Palgrave Macmillan, 2011

Sheehan, Robert. Mission Impact: Breakthrough Strategies for Non-profits. New York: John Wiley & Sons, 2010

Singh, Ardhendu. “Conducting Case Study Research in Non-Profit Organizations”, Qualitative Market Research: An International Journal, 17 no. 1, (2014): 77-84.

Slim, Yugo. Humanitarian Ethics: A Guide to the Morality of Aid in War and Disaster. New York: Oxford University Press, 2015

Svara, James. The Ethics Primer for Public Administrators in Government and Nonprofit Organizations. Burlington: Jones & Bartlett Publishers, 2014

Tanielian, Melaine. The Charity of War: Famine, Humanitarian Aid, and World War I in the Middle East. Palo Alto: Stanford University Press, 2017

Turton, Tine, Torres, Nicholas. Social Innovation and Impact in Nonprofit Leadership. New York: Springer Publishing Company, 2014

Walker, Peter, Maxwell, Daniel. Shaping the Humanitarian World. New York: Routledge, 2014

Wang, Jiane-Ye. What Drives China’s Growing Role in Africa? Washington: International Monetary Fund, 2007.

Wang, XiaoHu. Performance Analysis for Public and Nonprofit Organizations. Sudbury: Jones & Bartlett Learning, 2010

Weikart, Lynne and Chen, Greg. Budgeting and Financial Management for Nonprofit Organizations. Thousand Oaks: SAGE, 2012

Wolf, Thomas. Managing a Nonprofit Organization: Updated Twenty-First-Century Edition. New York: Simon and Schuster, 2012.

 

 

[1] Kinzey, Ruth. Promoting Nonprofit Organizations: A Reputation Management Approach. (New York: Routledge, 2013), 17.

[2] Kinzey, Ruth. Promoting Nonprofit Organizations: A Reputation Management Approach. (New York: Routledge, 2013), 17.

[3] Fishman, James, Schwarz, Stephen, and Mayor, Lloyd. Nonprofit Organizations: Cases and Materials. (New York: Foundation Press, 2015), 42.

[4] Ibrahim, Barbara & Sherrif, Dina. From Charity to Social Change: Trends in Arab Philanthropy. (New York: American University in Cairo Press, 2008), 1.

 

[5] Ibrahim, Barbara & Sherrif, Dina, 2.

[6] Wang, Jiane-Ye, 56.

[7] Shaw, John. The World’s Largest Humanitarian Agency: The Transformation of the UN World Food Programme and of Food Aid. (Basingstoke: Palgrave Macmillan, 2011), 102.

[8] Hoque, Zahirul, Parker, Lee. Performance Management in Nonprofit Organizations: Global Perspectives. (New York: Routledge, 2014), 78.

[9] Tanielian, Melaine. The Charity of War: Famine, Humanitarian Aid, and World War I in the Middle East. (Palo Alto: Stanford University Press, 2017), 17.

[10] Anderson, Ronald. World Suffering and Quality of Life. (New York: Springer, 2015), 38.

[11] Halpem, Mafred. Politics of Social Change: In the Middle East and North Africa. (New Jersey: Princeton University Press, 2015), 112.

[12] Driver, Carolyn. Guidelines for Writing Successful Grant Proposals for Nonprofit Organizations. (Bloomington: AuthorHouse, 2010), 121.

[13] Denhardt, Robert, Denhard, Jane, Aristigueta, Maria. Managing Human Behavior in Public and Nonprofit Organizations. (Thaousand Oaks: SAGE, 2012), 26.

[14] Ibrahim, Barbara & Sherrif, Dina,72.

[15] Ibrahim, Barbara. & Shnief, Heba. Family Legacies: Wealth and Philanthropy in the Arab World. (New York: American University in Cairo Press, 2017), 12.

[16] Budrys, Grace. How Nonprofits Work: Case Studies in Nonprofit Organizations. (Lanham: Rowman & Littlefield, 2013), 18.

[17] Bonner, Michael., Ener, Mine. & Singer, Amy. Poverty and Charity in Middle Eastern Contexts. (New York: SUNY Press, 2012.), 4.

[18] Wolf, Thomas. Managing a Nonprofit Organization: Updated Twenty-First-Century Edition. (New York: Simon and Schuster, 2012), 57.

[19] Kumar, Anuradha. Human Rights Development of Under Privileged. (New Delhi: Sarup & Sons, 2006), 31-32.

[20] Weikart, Lynne and Chen, Greg. Budgeting and Financial Management for Nonprofit Organizations. (Thousand Oaks: SAGE, 2012), 84.

[21] Svara, James. The Ethics Primer for Public Administrators in Government and Nonprofit Organizations. (Burlington: Jones & Bartlett Publishers, 2014), 66.

[22] Hoque, Zahirul, Parker, Lee. Performance Management in Nonprofit Organizations: Global Perspectives. (New York: Routledge, 2014), 14.

[23] Halpem, Mafred. Politics of Social Change: In the Middle East and North Africa. (New Jersey: Princeton University Press, 2015), 46.

[24] Svara, James. The Ethics Primer for Public Administrators in Government and Nonprofit Organizations. (Burlington: Jones & Bartlett Publishers, 2014), 37.

[25] Anheier, Helmut. Nonprofit Organizations: Theory, Management, Policy.(New York: Routledge, 2014), 132.

[26] Osula, Bwamwell, Ng, Eddie. “Toward a Collaborative, Transformative Model of Non-Profit Leadership: Some Conceptual Building Blocks.” Leadership in Non-Profit Organizations, 4, no. 2 (2014): 91

[27] Meier, Patrick. Digital Humanitarians: How Big Data Is Changing the Face of Humanitarian Response. (Boca Raton: CRC Press, 2015), 86.

[28] Singh, Ardhendu. “Conducting Case Study Research in Non-Profit Organizations”, Qualitative Market Research: An International Journal, 17 no. 1, (2014): 79

[29] Arvidson, Malin, Lyon, Fergus. “Social Impact Measurement and Non-profit Organizations: Compliance, Resistance, and Promotion.” International Journal of Voluntary and Nonprofit Organizations, 25, no. 4, (2014): 881

[30] Berman, Margo. Productivity in Public and Nonprofit Organizations. (New York: Routledge, 2014), 92.

[31] Maier, Florentine, Meyer, Michael, Steinbereithner, Martin. “Nonprofit Organizations Becoming Business-Like A Systematic Review.” Nonprofit and Voluntary Sector Quarterly, 45, no. 1, (2016): 71

[32] Walker, Peter, Maxwell, Daniel. Shaping the Humanitarian World. (New York: Routledge, 2014), 29.

[33] Potluka, Oto, Spacek, martin, Schnurbein, Georg. “Impact of the EU Structural Funds on Financial Capacities of Non-profit Organizations.” International Journal of Voluntary and Nonprofit Organizations, 28, no. 5, (2017): 2233

[34] Kovacs, Gyongyi, Spens, Karen. Relief Supply Chain Management for Disasters: Humanitarian Aid and Emergency Logistics. (Hershey: Information Science Reference, 2012), 22.

[35] Gould, Julie. “Non-profit organizations: Scientists on a mission” Nature, 527, no. 7577, (2015): 265

[36] Ceptureanu, Sebastian, Ceptureanu, Eduard, Bogdan, Liviu, Radulescu, Violeta. “Sustainability Perceptions in Romanian Non-Profit Organizations: An Exploratory Study Using Success Factor Analysis.” Sustainability, 10, no. 2, (2018): 294

[37] Aoki, Masahiko, Kuran, Timur,Roland, Gerard. Institutions and Comparative Economic Development. (Basingstoke: Palgrave Macmillan, 2012), 76.

[38] Sheehan, Robert. Mission Impact: Breakthrough Strategies for Non-profits. (New York: John Wiley & Sons, 2010), 77

[39] Epstein, Marc, Yuthas, Kristi. Measuring and Improving Social Impacts: A Guide for Nonprofits, Companies, and Impact Investors. (Orkland: Berrett-Koehler Publishers, 2014), 61.

[40] Flynn, Patrice, Hodgkinson, Virginia. Measuring the Impact of the Non-profit Sector. (Washington: Springer Science & Business Media, 2013), 45.

[41] Turton, Tine, Torres, Nicholas. Social Innovation and Impact in Non-profit Leadership. (New York: Springer Publishing Company, 2014), 19.

[42] Irwin, Julia. Making the World Safe: The American Red Cross and a Nation’s Humanitarian Awakening. (New York: OUP USA, 2013), 57.

[43] Slim, Yugo. Humanitarian Ethics: A Guide to the Morality of Aid in War and Disaster. (New York: Oxford University Press, 2015), 89.

Causes of Business Cycle

Causes of Business Cycles

Economic recession refers to the loss of consumer and business confidence. The loss of confidence is directly proportional to demand, implying a decrease in consumer confidence also leads to a decrease in demand. In a business cycle, the decrease in demand due to consumer’s decrease in confidence marks the tipping point. It is at the point where the peak together with irrational exuberance plunges into contraction. the loss of consumer confidence leads to the consumers to limit their expenditures and hence they stop buying leading to a decrease in demand. The issue escalates when most consumers get into panic mode leading to decrease in retail sales slow. Therefore, this paper tasks to identify the causes of business cycle and recessions while also interpreting Fred’s Graph that shows both the business cycle and recession.

To begin with, business cycle refers to the changes observable in Economic growth and the various phases the economy goes through such as boom and bust. There are several factors associated with the economic cycle and they include interest rates, the confidence of the consumers, multiplier effect and the credit cycle (Ruhm, 2015). Other factors contributing towards economic cycle include technological shocks.

The above graph represents the Gross Domestic Product of the US in different years since early 1975-2015. As shown the GDP is neither constant nor does it have an upward trend. Instead, it goes through the various economic cycles which represent the boom and recession period over different years. For instance, in 1975 there was a recession as per the graph and then the subsequent years the production rate of the country increased positively where it reached the peak before 1980, and then started dropping, however, it did not drop to the lows of 1975.

First, the recession is caused by high-interest rates. High-interest rates limit liquidity and hence the amount of money available to invest (Iacoviello, 2015). High-Interest rates other than affecting the economy, does affect the Federal Reserve more. The Federal Reserve is involved with several functions some of them is to ensure sustainable growth within the United States Economy, they are also involved with ensuring that there is high employment rate and that prices are stable. They achieve their goals by managing the amount of money in circulation within the economy. One tool which they apply in managing the amount of money in circulation in the economy is the interest rate. Iacoviello (2015) connotes that higher interests rate results in an expensive money and hence contraction in the amount of money in circulation within the economy. Also, lower interest rates translate to cheaper money and hence more money in circulation within the economy. The 1980 recession was thus caused by the result of the FED raising interest and hence less money in supply and hence recession.

The second cause of the recession is the stock market crash.  Stock market plays a significant role in determining the consumer confidence. Stock refers to the share of ownership in a company and hence their significant role in determining the investors’ confidence based on the future earnings of the company. Since corporate income is dependent on the health of the US economy, and the performance of the shares in the stock market determines the corporate income, it, therefore, implies that stock market is also an indicator for the health of the country’s economy. It thus means that a crash signal in the stock market translates to a massive loss of confidence in the economy which if not rectified leads to recession (Odekon, 2015). However, it is not always that a crash in stock market leads to recession. Sometimes, a crash in the stock market only serves as a warning in the loss of confidence and if the Federal Reserve’s steps in on time, it will rectify the damage and hence restores back the investor’s confidence and hence avoidance of recession. Such is the case of what happened in the first quarter of 2007, where there was a slight stock crash but later in the year, it recovered, and the stock market value increased thus avoiding recession.

The other cause of the recession is the falling housing prices and sales. A fall in sales and house prices leads to a fall in the spending power of the investors and hence translates to a fall in confidence. Also, a fall in house prices leads to a fall in consumers’ source of wealth and hence lowering expenditure and hence, in turn, lowers the economic growth (Mian et al., 2017). For instance, in the boom periods of 1999-2007 when the economy experienced the rising house prices, there was an increased confidence in the consumer’s expenditure and there was also a reduction in saving. The result was an observable growth in the economy due to increased consumer confidence. Increased house prices also lead to an increase in wealth implying there is enough income for re-mortgaging and hence motivated the development in the construction sector.  The result for depreciating house prices is the same as the opposite of the rising house prices. Whereby, a fall in house price will lead to many investors getting trapped in the negative equity and hence they are discouraged from spending and usually opt to save mode.

As shown in the Above graph above, an increase in the house prices boom period of 1990 – 2007, led to an increase in economic growth, and so is the drop-in house prices which lead to a fall in GDP. Besides, an increase in house prices which translates to a growth in the economy would lead to an increase an expenditure and a decrease in savings as shown in the graph below:

 

Having discussed some of the causes of the business cycle, for instance, the recession, the government can play a role in ensuring the stability of the economy and to avoid the effects associated with the business cycle. The government through the federal reserve can control the flow of money within the economy to help rectify recession and other business cycles (Sheikh, 2015). Adaptation of viable monetary policies, for instance, the monetary inflation during a recession can help rectify it and monetary deflation during the boom periods can help stabilize the economy. For instance, during the economic boom of the period between 2004 and 2005, the government should have adopted a monetary policy which would increase interest rates and hence would have helped in preventing of boom period that followed. The government would also adopt the use of economic stabilizers to help tack recession should it arise.

 

 

References

Iacoviello, M. (2015). Financial business cycles. Review of Economic Dynamics18(1), 140-163.

Mian, A., Sufi, A., & Verner, E. (2017). Household debt and business cycles worldwide. The Quarterly Journal of Economics132(4), 1755-1817.

Odekon, M. (2015). Booms and Busts: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis. Routledge.

Ruhm, C. J. (2015). Recessions, healthy no more?. Journal of health economics42, 17-28.

Sheikh, S. (2015, November 17). How to Control the Business Cycle? | Managerial Economics. Retrieved from http://www.economicsdiscussion.net/business-cycles/how-to-control-the-business-cycle-managerial-economics/13495

PART A: DATA COLLECTION, PRESENTATION AND ANALYSIS

Q1. Browse the Australian Bureau of Statistics webpage (www.abs.gov.au). Download and plot the seasonally adjusted nominal GDP (in levels) and real GDP (in levels) for the period 1990-2016 (in quarterly frequency) from ‘Table 1. Key National Account Aggregates’. Now using the same Table 1, download and plot the percentage changes of these two GDP series (use trends) for the same time period. From the plots, could you find any relationship between nominal and real GDP in levels and growth rates? Explain your answer.

 

If we start analyzing the first two graphs that plot the seasonally adjusted values of Nominal GDP and real GDP, we can clearly see that the GDP growth in both real and nominal terms has been following a constant growth. There exists a clear one-to-one relationship between the two series as both of them have upward secular trend. However, the important thing to note here is that the nominal GDP has a steep growth i.e. has a higher growth rate than the real GDP values.

In order to analyze the relationship with more detail, let’s have a closer look to the trends of these two series i.e. percentage changes. Plotting the values in the same graph reveal that real GDP growth rates have higher volatility for the economy of Australia. However, in most of the cases, both the growth rates have movements in similar direction and a high correlation can be seen. The only exception in the plot is the time period of financial crisis where nominal growth rates can be seen as the predictor of real growth rates before the financial crisis, however after the crisis, the situation seems reversed for a short period of time.

 

 

 

Part B: Short Answer Questions

Q4. The Government is contemplating a tax cut of $20 billion to boost the economy which is experiencing some recessionary pressure. Use the aggregate expenditure model to analyse what will happen to the equilibrium GDP. If the marginal propensity to save is 0.2, how much would it influence the equilibrium GDP? Explain your answer.

Recessionary pressures are the periods in a typical business cycle, where the economy is below its potential. This creates a gap between the demand and supply of many markets simultaneously causing surpluses and shortages in every market. In a typical recessionary period, it is advisable to boost the economy through fiscal and monetary measures. One such fiscal measure to boost the economy is tax cut. In the situation above, the government is thinking of providing a tax cut of $20 billion to bring the economy out of the recessionary pressures.

According to the aggregate expenditure model, the tax cut would increase the disposable income of the consumers in the economy. This would consequently increase the consumption expenditures of the consumers in the economy which would eventually lead to a higher gross domestic product in subsequent years. By this way, the recessionary pressures would be normalized and the economy would again be brought closer to its potential (NAIRU).

The effect of a tax cut on the GDP of the economy goes through a multiplier process which was first explained by Keynes. The Keynesian multiplier approach can be used to determine the influence of any particular measures on the final level of the economy. The simplest tax multiplier in a three sector closed economy model is   where b is the marginal propensity to consumer. With the information given above i.e. marginal propensity to save is 0.2, we can immediately identify marginal propensity to consume being equal to 0.8. Plugging the values into the multiplier formula reveals that the value of tax multiplier in the economy is -4. This implies that a $20 billion tax cut would increase the GDP of the economy by $80 billion through multiplier process.

 

Q5. Starting from an initial long-run equilibrium, use the dynamic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in investment expenditure. What policy action would the central bank take in such circumstance?

Starting from the initial long run level of equilibrium, the figure 3 below depicts the situation where all the markets were initially in an equilibrium state. The Aggregate Demand curve with intersecting the long-run and short-run aggregate supply curve at a single unique point, forming the equilibrium price levels and full employment level of real GDP.

Figure 3: Dynamic AD-AS model showing the initial equilibrium

Now suppose that due to some unknown reasons, there is a sharp decline in the investment expenditures of the economy. Due to this decline in the investment, the aggregate demand curve will shift downwards to the left. This is due to the fact that Investment expenditure is a component of aggregate expenditure and aggregate demand is equivalent to aggregate expenditures due to the equivalence of different GDP calculation approaches. The effect of a decline in investment is depicted in the figure 4 below:

Figure 4: Dynamic AD-AS model showing the effect of investment decline

As we can see in the figure 4 that a decline in investment shifted the aggregate demand curve from AD(0) to AD(1), causing a temporary surplus due to the concept of wage-price stickiness. If the markets were frictionless, the new aggregate price levels would be P*, however, the stickiness will not let the markets clear at the lower prices. The surplus would curve the market to react accordingly and the SRAS will be shifted back to SRAS(1).

Similarly the Long-Run aggregate supply curve will also shift backwards to bring the market into its long-run equilibrium state after the decline in investment, however the output will not be lower at the same general price levels in the economy.

 

 

Part C

  1. A brief introduction on the organisation you have chosen, and the industry or sector they operate in

The Organization that I have chosen as my employer is NERA Economic consulting. It is a consultancy firm that provides its consultancy services in economics, finance and quantitative principles to its clients. The aim of this organization is to provide efficient solution to all its clients by integrating the theoretical principles will the real life data set. NERA is the best example of amalgamation of theoretical foundations with the practical approaches to design effective and efficient solution for complex situations. The economists at NERA are renowned not only for providing consultancy services to private sector but also to provide policy solutions to the governments.

  1. A summary of the role you have chosen, including the skills required for the role. Use the Economics Learning Standards for Australian Higher Education to aid your reflection. Break down where you meet these expectations, and your areas for improvement. How would you show a recruiter that you have the required skills and experiences for your chosen economics position?

The role that I have chosen for myself in NERA economic consultancy is “Research Officer / Economic Analyst, Competition Economics”. The job description of the role states that the incumbent would be responsible for carrying out analysis and providing technical expert opinion in the areas of Competition and Antitrust, mergers and acquisitions of telecommunication and energy companies, financial litigation as well as environmental regulations.

The role demands an in-depth knowledge of financial data analysis as well as experience of quantitative model building in order to assess whether the firms under consideration can be justified for or against the charges of being involved in anti-competitive activities. Heavy use of econometric models and proficiency in computer programming and statistical packages are the dire requirements for this post.

In terms of meeting these expectations, I can justify myself being an industrial economist having done the required coursework. My aptitude and flair towards competition economics and my grasp over the tools of microeconomic analysis coupled with the skills of data analysis and model building would help to fit the role swiftly. Although, I may not be able to produce astonishing results right after joining the company, however, after sufficient training and acquaintance with the true nature of this role, I would certainly be able to produce above expectation results.

In my opinion, I need to brush up a little-bit my knowledge of time-series econometrics and financial modeling to get down with the modeling component of this job easily. Moreover, I would also need to a have a quick review of business law and financial reporting standards to tackle the financial litigation matters easily. However, my experience of handling large data sets and analyzing them on everyday basis would certainly be a big advantage when working in this role.

  1. Describe what drew you to your selected position. Link the chosen position to your VIPS (values, interests, personality and skills) and how the chosen position is relevant to your long-term career plan

My passion for working with different types of data sets and microeconomic analysis of the problems drew me to this position. I have deep interests for analyzing the anti-competitive behavior of firms i.e. collusion to drive out competitive efficiency from