Part 334

Japan In the years following World War II, government-industry cooperation, a strong work ethic, mastery of high technology, and a comparatively small defense allocation (1% of GDP) helped Japan advance with extraordinary speed to the rank of second most technologically powerful economy in the world after the US. Today, measured on a purchasing power parity (PPP) basis, Japan is the third-largest economy in the world after the US and China. Two notable characteristic of the post-war economy were the close interlocking structures of manufacturers, suppliers, and distributors, known as keiretsu, and the guarantee of lifetime employment for a substantial portion of the urban labor force. Both features are now eroding under the dual pressures of global competition and domestic demographic change. Japan's industrial sector is heavily dependent on imported raw materials and fuels. A tiny agricultural sector is highly subsidized and protected, with crop yields among the highest in the world. Usually self sufficient in rice, Japan imports about 60% of its food on a caloric basis. Japan maintains one of the world's largest fishing fleets and accounts for nearly 15% of the global catch. For three decades, overall real economic growth had been spectacular - a 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s. Growth slowed markedly in the 1990s, averaging just 1.7%, largely because of the after effects of inefficient investment and an asset price bubble in the late 1980s that required a protracted period of time for firms to reduce excess debt, capital, and labor. In October 2007 Japan's longest post-war period of economic expansion ended after 69 months and Japan entered into recession in 2008, with 2009 marking a return to near 0% interest rates. The 10-year privatization of Japan Post, which has functioned not only as the national postal delivery system but also, through its banking and insurance facilities as Japan's largest financial institution, was completed in October 2007, marking a major milestone in the process of structural reform. The Japanese financial sector was not heavily exposed to sub-prime mortgages or their derivative instruments and weathered the initial effect of the global credit crunch, but a sharp downturn in business investment and global demand for Japan's exports in late 2008 pushed Japan further into a recession. Japan's huge government debt, which totals 170% of GDP, and the aging of the population are two major long-run problems. Debate continues on the role of and effects of reform in restructuring the economy.

Jersey Jersey's economy is based on international financial services, agriculture, and tourism. In 2005 the finance sector accounted for about 50% of the island's output. Potatoes, cauliflower, tomatoes, and especially flowers are important export crops, shipped mostly to the UK. The Jersey breed of dairy cattle is known worldwide and represents an important export income earner. Milk products go to the UK and other EU countries. Tourism accounts for one-quarter of GDP. In recent years, the government has encouraged light industry to locate in Jersey, with the result that an electronics industry has developed, displacing more traditional industries. All raw material and energy requirements are imported, as well as a large share of Jersey's food needs. Light taxes and death duties make the island a popular tax haven. Living standards come close to those of the UK.

Jordan Jordan is a small Arab country with insufficient supplies of water, oil, and other natural resources. Poverty, unemployment, and inflation are fundamental problems, but King ABDALLAH II, since assuming the throne in 1999, has undertaken some broad economic reforms in a long-term effort to improve living standards. Since Jordan's graduation from its most recent IMF program in 2002, Amman has continued to follow IMF guidelines, practicing careful monetary policy, making substantial headway with privatization, and opening the trade regime. Jordan's exports have significantly increased under the free trade accord with the US and Jordanian Qualifying Industrial Zones (QIZ), which allow Jordan to export goods with some Israeli content duty free to the US. In 2006 and 2008, Jordan used privatization proceeds to significantly reduce its debt-to-GDP ratio. These measures have helped improve productivity and have made Jordan more attractive for foreign investment. The government ended subsidies for petroleum and other consumer goods in 2008 in an effort to control the budget. The main challenges facing Jordan are reducing dependence on foreign grants, reducing the growing budget deficit, attracting investments, and creating jobs. Jordan is currently exploring nuclear power generation to forestall energy shortfalls. Jordan's conservative banking sector has been largely protected from the worldwide financial crisis, but many businesses, particularly in the tourism and real estate sector, are predicting a slow-down in 2009.

Kazakhstan Kazakhstan, the largest of the former Soviet republics in territory, excluding Russia, possesses enormous fossil fuel reserves and plentiful supplies of other minerals and metals. It also has a large agricultural sector featuring livestock and grain. Kazakhstan's industrial sector rests on the extraction and processing of these natural resources. Kazakhstan enjoyed double-digit growth in 2000-01 and 8% or more per year in 2002-07 - thanks largely to its booming energy sector, but also to economic reform, good harvests, and increased foreign investment; growth slowed to 2.4% in 2008, however, as a result of declining oil prices and a softening world economy. Inflation reached 10% in 2007 and 17% in 2008. In the energy sector, the opening of the Caspian Pipeline Consortium in 2001, from western Kazakhstan's Tengiz oilfield to the Black Sea, substantially raised export capacity. In 2006, Kazakhstan completed the Atasu-Alashankou portion of an oil pipeline to China that is planned in future construction to extend from the country's Caspian coast eastward to the Chinese border. The country has embarked upon an industrial policy designed to diversify the economy away from overdependence on the oil sector by developing its manufacturing potential. The policy changed the corporate tax code to favor domestic industry as a means to reduce the influence of foreign investment and foreign personnel. The government has engaged in several disputes with foreign oil companies over the terms of production agreements, most recently, with regard to the Kashagan project in 2007-08. Since 2007, Astana has provided financial support to the banking sector which has been struggling with poor asset quality and large foreign loans.

Kenya The regional hub for trade and finance in East Africa, Kenya has been hampered by corruption and by reliance upon several primary goods whose prices have remained low. In 1997, the IMF suspended Kenya's Enhanced Structural Adjustment Program due to the government's failure to maintain reforms and curb corruption. A severe drought from 1999 to 2000 compounded Kenya's problems, causing water and energy rationing and reducing agricultural output. As a result, GDP contracted by 0.2% in 2000. The IMF, which had resumed loans in 2000 to help Kenya through the drought, again halted lending in 2001 when the government failed to institute several anticorruption measures. Despite the return of strong rains in 2001, weak commodity prices, endemic corruption, and low investment limited Kenya's economic growth to 1.2%. Growth lagged at 1.1% in 2002 because of erratic rains, low investor confidence, meager donor support, and political infighting up to the elections. In the key December 2002 elections, Daniel Arap MOI's 24-year-old reign ended, and a new opposition government took on the formidable economic problems facing the nation. After some early progress in rooting out corruption and encouraging donor support, the KIBAKI government was rocked by high-level graft scandals in 2005 and 2006. In 2006, the World Bank and IMF delayed loans pending action by the government on corruption. The international financial institutions and donors have since resumed lending, despite little action on the government's part to deal with corruption. Post-election violence in early 2008, coupled with the effects of the global financial crisis on remittance and exports, reduced GDP growth to 2.2% in 2008, down from 7% the previous year.

Kiribati A remote country of 33 scattered coral atolls, Kiribati has few natural resources and is one of the least developed Pacific Islands. Commercially viable phosphate deposits were exhausted at the time of independence from the UK in 1979. Copra and fish now represent the bulk of production and exports. The economy has fluctuated widely in recent years. Economic development is constrained by a shortage of skilled workers, weak infrastructure, and remoteness from international markets. Tourism provides more than one-fifth of GDP. Private sector initiatives and a financial sector are in the early stages of development. Foreign financial aid from the EU, UK, US, Japan, Australia, New Zealand, Canada, UN agencies, and Taiwan accounts for 20-25% of GDP. Remittances from seamen on merchant ships abroad account for more than $5 million each year. Kiribati receives around $15 million annually for the government budget from an Australian trust fund.

Korea, North North Korea, one of the world's most centrally directed and least open economies, faces chronic economic problems. Industrial capital stock is nearly beyond repair as a result of years of underinvestment and shortages of spare parts. Large-scale military spending draws off resources needed for investment and civilian consumption. Industrial and power output have declined in parallel from pre-1990 levels. Severe flooding in the summer of 2007 aggravated chronic food shortages caused by on-going systemic problems including a lack of arable land, collective farming practices, and persistent shortages of tractors and fuel. Large-scale international food aid deliveries have allowed the people of North Korea to escape widespread starvation since famine threatened in 1995, but the population continues to suffer from prolonged malnutrition and poor living conditions. Since 2002, the government has allowed private "farmers' markets" to begin selling a wider range of goods. It also permitted some private farming - on an experimental basis - in an effort to boost agricultural output. In October 2005, the government tried to reverse some of these policies by forbidding private sales of grains and reinstituting a centralized food rationing system. By December 2005, the government terminated most international humanitarian assistance operations in North Korea (calling instead for developmental assistance only) and restricted the activities of remaining international and non-governmental aid organizations such as the World Food Program. External food aid now comes primarily from China and South Korea in the form of grants and long-term concessional loans. In May 2008, the US agreed to give 500,000 metric tons of food to North Korea via the World Food Program and US nongovernmental organizations; Pyongyang began receiving these shipments in mid-2008. During the October 2007 summit, South Korea also agreed to develop some of North Korea's infrastructure, natural resources, and light industry, but inter-Korean economic cooperation slowed in 2008 as Pyongyang restricted tourism and manufacturing joint ventures in the North, and food aid from South Korea was suspended. Firm political control remains the Communist government's overriding concern, which will likely inhibit the loosening of economic regulations.

Korea, South Since the 1960s, South Korea has achieved an incredible record of growth and integration into the high-tech modern world economy. Four decades ago, GDP per capita was comparable with levels in the poorer countries of Africa and Asia. In 2004, South Korea joined the trillion dollar club of world economies. In 2008, its GDP per capita was roughly the same as that of the Czech Republic and New Zealand. Initially, this success was achieved by a system of close government/business ties including directed credit, import restrictions, sponsorship of specific industries, and a strong labor effort. The government promoted the import of raw materials and technology at the expense of consumer goods and encouraged savings and investment over consumption. The Asian financial crisis of 1997-98 exposed longstanding weaknesses in South Korea's development model including high debt/equity ratios, massive foreign borrowing, and an undisciplined financial sector. GDP plunged by 6.9% in 1998, then recovered by 9% in 1999-2000. Korea adopted numerous economic reforms following the crisis, including greater openness to foreign investment and imports. Growth fell back to 3.3% in 2001 because of the slowing global economy, falling exports, and the perception that much-needed corporate and financial reforms had stalled. Led by consumer spending and exports, growth in 2002 was an impressive 7% despite anemic global growth. Between 2003 and 2007, growth moderated to about 4-5% annually. A downturn in consumer spending was offset by rapid export growth. In 2008, inflation increased in the face of rising oil and food prices before easing in the fourth quarter. Korea was hit hard by the global financial turmoil that began in September 2008. Stock prices fell by more than 40% for the year and the value of the won fell by approximately 26%. Korean GDP shrank in the fourth quarter and GDP growth for the year was just 2.2%. The Korean government adopted several measures to combat the credit crunch and stimulate the economy.

Kosovo Over the past few years Kosovo's economy has shown significant progress in transitioning to a market-based system and maintaining macroeconomic stability, but it is still highly dependent on the international community and the diaspora for financial and technical assistance. Remittances from the diaspora - located mainly in Germany and Switzerland - are estimated to account for about 15% of GDP, and donor-financed activities and aid for another 15%. Kosovo's citizens are the poorest in Europe with an average annual per capita income of only $2,300. Unemployment, around 40% of the population, is a significant problem that encourages outward migration and black market activity. Most of Kosovo's population lives in rural towns outside of the capital, Pristina. Inefficient, near-subsistence farming is common - the result of small plots, limited mechanization, and lack of technical expertise. With international assistance, Kosovo has been able to privatize 50% of its state-owned enterprises (SOEs) by number, and over 90% of SOEs by value. Minerals and metals - including lignite, lead, zinc, nickel, chrome, aluminum, magnesium, and a wide variety of construction materials - once formed the backbone of industry, but output has declined because of ageing equipment and insufficient investment. A limited and unreliable electricity supply due to technical and financial problems is a major impediment to economic development. Kosovo's Ministry of Energy and Mining has solicited expressions of interest from private investors to develop a new power plant in order to address Kosovo and the region's unmet and growing demands for power. The official currency of Kosovo is the euro, but the Serbian dinar is also used in Serb enclaves. Kosovo's tie to the euro has helped keep core inflation low. Kosovo has one of the most open economies in the region, and continues to work with the international community on measures to improve the business environment and attract foreign investment.

Kuwait Kuwait is a small, rich, relatively open economy with self-reported crude oil reserves of about 104 billion barrels - 8% of world reserves. Petroleum accounts for nearly half of GDP, 95% of export revenues, and 80% of government income. Kuwait experienced rapid economic growth over the last several years on the back of high oil prices and in 2008 posted its tenth consecutive budget surplus. As a result of this positive fiscal situation, the need for economic reforms was less urgent and the government did not push through new initiatives. The drop in oil prices in late 2008 will reduce Kuwait's fiscal surplus in 2009. The global financial crisis may slow the pace of investment and development projects, but Kuwait has vowed to use its considerable financial resources to stabilize the economy if necessary.

Kyrgyzstan Kyrgyzstan is a poor, mountainous country with a predominantly agricultural economy. Cotton, tobacco, wool, and meat are the main agricultural products, although only tobacco and cotton are exported in any quantity. Industrial exports include gold, mercury, uranium, natural gas, and electricity. Following independence, Kyrgyzstan was progressive in carrying out market reforms such as an improved regulatory system and land reform. Kyrgyzstan was the first Commonwealth of Independent States (CIS) country to be accepted into the World Trade Organization. Much of the government's stock in enterprises has been sold. Drops in production had been severe after the breakup of the Soviet Union in December 1991, but by mid-1995, production began to recover and exports began to increase. The economy is heavily weighted toward gold export and a drop in output at the main Kumtor gold mine sparked a 0.5% decline in GDP in 2002 and a 0.6% decline in 2005. The government made steady strides in controlling its substantial fiscal deficit, nearly closing the gap between revenues and expenditures in 2006, before boosting expenditures more than 20% in 2007-08. The government and international financial institutions have been engaged in a comprehensive medium-term poverty reduction and economic growth strategy. In 2005, Bishkek agreed to pursue much-needed tax reform and, in 2006, became eligible for the heavily indebted poor countries (HIPC) initiative. Progress fighting corruption, further restructuring of domestic industry, and success in attracting foreign investment are keys to future growth. GDP grew more than 6% annually in 2007-08, partly due to higher gold prices internationally, but growth is likely to decline from that level in 2009, due to declining demand and lower commodity prices in the wake of the international financial crisis.

Laos The government of Laos, one of the few remaining one-party Communist states, began decentralizing control and encouraging private enterprise in 1986. The results, starting from an extremely low base, were striking - growth averaged 6% per year from 1988-2008 except during the short-lived drop caused by the Asian financial crisis that began in 1997. Despite this high growth rate, Laos remains a country with an underdeveloped infrastructure, particularly in rural areas. It has no railroads, a rudimentary road system, and limited external and internal telecommunications, though the government is sponsoring major improvements in the road system with support from Japan and China. Electricity is available in urban areas and in many rural districts. Subsistence agriculture, dominated by rice, accounts for about 40% of GDP and provides 80% of total employment. The government depends upon aid from international donors for over 80% of its capital investment. The economy has until recently benefited from high foreign investment in hydropower, mining, and construction. The fiscal crisis of late 2008, and the rapid drop in commodity prices - especially copper - has slowed these investments. Several policy changes since 2004 may help spur growth. Laos, which gained Normal Trade Relations status with the US in 2004, is taking steps to join the World Trade Organization. Related trade policy reforms will improve the business environment. On the fiscal side, a value-added tax (VAT) regime, which began with a few large businesses in early 2009, should slowly help streamline the government's inefficient tax system. Economic prospects will improve gradually as the administration continues to simplify investment procedures and as a more competitive banking sector extends credit to small farmers and small entrepreneurs. The government appears committed to raising the country's profile among investors. Foreign donors have praised the Lao government for its efforts to improve the investment regime. The World Bank has declared that Laos' goal of graduating from the UN Development Program's list of least-developed countries by 2020 could be achievable.

Latvia Latvia's economy experienced GDP growth of more than 10% per year during 2006-07; but entered a severe recession in 2008 as a result of an unsustainable current account deficit and large debt exposure amid the softening world economy. The IMF, EU, and other donors provided assistance to Latvia as part of an agreement to defend the currency's peg to the euro and reduce the fiscal deficit to about 5% of GDP. The majority of companies, banks, and real estate have been privatized, although the state still holds sizable stakes in a few large enterprises. Latvia officially joined the World Trade Organization in February 1999. EU membership, a top foreign policy goal, came in May 2004. The current account deficit and inflation remain major concerns.