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The Impact Of The Reciprocity (1854-1866) On The Development Of Canadian American Relations
The Impact Of The Reciprocity (1854-1866) On The Development Of Canadian American Relations
Contents
TOC o “1-3” h z u HYPERLINK l “_Toc379016169” Introduction PAGEREF _Toc379016169 h 1
HYPERLINK l “_Toc379016170” Canadian American relations PAGEREF _Toc379016170 h 1
HYPERLINK l “_Toc379016171” Conclusion PAGEREF _Toc379016171 h 9
IntroductionCanada was known as the British North American Province in the year 1855, and later on became ratified through a Reciprocity Treaty. The previous year, the treaty was signed and joined together with the rest of America. The reason for coming up with the treaty was to enhance trading activities between the two countries. Furthermore, it was to ensure that the Corn Laws introduced by the British would not affect Canada as much. Also, it sorts to make sure that goods originating from Canada would have markets. Moreover, any natural resource, which existed, had a market, and this is due to the existence of free trade. The Reciprocity allowed for American access on St. Lawrence River and the Maritimes. Canadian ships benefited as well, as they had similar toll rates as that of the Americans.
This paper seeks to give a critical analysis on the impact of the Reciprocity Treaty (1854-1866), to the development of Canadian American relations. It further seeks to find out the impact it had on their trading activities, as well as their economies.
Analysis of the impact of the Reciprocity Treaty (1854-1866), to the development of the
Canadian American relationsThere is a need to know how Canada has benefited from the Reciprocity agreement. According to research done during the time the agreement existed, it was found out that trade between the two countries had increased. America is referred to as Canada’s mother colony, as it offers the market needed for the latter’s products. After the Reciprocity Treaty was completed, trade increased significantly. The relations based on trade that existed between the United States and Canada was of a healthy nature. This began as the Reciprocity treaty was initializing. According to statistics, from the years 1853 to 1856, America’s and Canada’s trade increased to around 250%. In turn, the Gross Domestic Product of Canada improved significantly as Canadian exports were of high value.
Controversy exists concerning whether Canada benefited from the agreement meant to facilitate trade. Some authors have suggested that it is difficult to find out the exact impact of the Reciprocity treaty. Changes were brought about in Canada when the agreement was implemented. There are many variables that have proven this to be true, as they are confounded to be valid. Other factors have played a role in ensuring that trade succeeds on Canada.
Currently, Canada places a lot of confidence and importance on its relations with the United States. They are economic in nature, and they contribute to the Canadian GDP. Canada has many partners that it trades with, but the United States is the most vital partner. The percentage of exports and GDP that are exported to the United States is 70% and 30% respectively. In turn, technology and capital and provided by the united states to Canada. The latter takes place in the form of foreign investment. The Canadian economy is controlled and owned by the United States in many ways. The United States boasts that Canada is its principle customer because of the trade they are involved. Most of the products, which are exported to the United States, are manufactured. The United States industries benefit from natural resources that are found in Canada.
Canada is being affected by the commercial arrangements that exist with the United States. Furthermore, the number of people in the two countries is high, and it is affecting trade that exists. American policies affect the vulnerability and dependency of the relations that Canada has with America. The need to obtain services and goods from the Canadian market has made investment firms step up their game. The US government and corporate world are now aware of the benefits of working together to improve trade. In turn, the US is ensuring that Canadian polices do not have the strength to interfere with American policies. Other attempts, which are being, made include; implementing fair land and tax regulations and controlling investment.
Free trade is the main issue why there have been relations between Canada and America concerning economics. For a long time in Canadian history, some of its citizens have been against achieving free trade that is extremely complete. They believe that Canadians will lose out on all their political sovereignty. Also, it will lead to industrial and economic policy integration, which will have adverse effects on people. Canada will also find it difficult to come up with policies that are economically independent. Many other options exist concerning how the US will benefit from such arrangements. Canadians will not benefit from the agreement as gains will be hindered by non tariff barriers implemented by the American congress. On the other hand, its supporters believe that Free Trade is beneficial to the economy of Canada. Also, manufacturers in Canada will have the opportunity of becoming producers with sales volume that are high. In turn, development and research will be supported to assist Canadian manufacturers. Canada is involved in an industrial strategy that seeks to improve its development through research.
The Reciprocity treaty of the year 1854 was abrogated in 1866 by the United States. The confederate states were being taken over by the British, and the US had to assist. The Washington treaty of the year 1871 was formed as an attempt to come up with meaningful negotiations. Unfortunately, it did not succeed as the Reciprocity treaty could not be restored. The Fenain Raids brought about a lot of damage, and there was no compensation awarded to those who were affected. Fortunately, Canada was recognized as a North American country by the United States. There was a federal election in the year 1891, and unrestricted free trade was advocated by the liberals. They were not successful in addressing this issue and in turn lost, but only to a small extent. Policies, which were high-tariff and protectionist, were maintained by the United States. Canadian proposals on free trade were rebuffed by the United States.
In the years between 1875 and 1900, there was a need to come up with economic integration. In turn, Canada and the United States became suspicious about their political situation. Branch plants were established all over Canada by the US, as the latter had made heavy investments. It also took over a majority of enterprises owned by Canadians, and an example is the Imperial Oil. In the year 1898, it was the largest Canadian oil company, which was bought by a company known as Standard Oil. The improvements were seen in other sectors of the economy such as transport, trade, business, labor and finance. Canada adopted a national policy that focused on ensuring that existing policies were high tariff based. The latter were responsible for attracting many of the American investors. By the year 1914, non –resident investment was obtained from the United Kingdom and brought to Canada. It is estimated to be at 72%, while investment obtained from the US was twice that amount. The United Kingdom benefited in its manufacturing and mining industries as it received capital from the US for direct investment. During this time, the United States and Canada ensured that they were affiliated as burgeoning took place.
It seems that the year 1911 will be forever be remembered by Canadians as it affected them. Some manufactured products were to benefit from tariffs introduced by William Howard the then president. He wanted to ensure that a pact that focused on limited free trade existed. This was possible through his efforts and that of his prime minster known as Wilfrid Laurier. They wanted to bring American protectionism to an end and improve the lives of Canadians. Canadian opposition took their stand and thus, the US congress legislation did not succeed. The issue of free trade was extremely vital in the 1911 Canadian election. Canada was on its way in becoming politically annexed due to Laurier’s defeat.
As the 20th century approached, expansion of industrialization was taking place in Canada and America. The former benefited from a lot of money provided by the United States through various methods. The US wanted to have control of Canada through the creation of branch plants and subsidiaries. In turn, it would enjoy profits from British and Canadian markets. Furthermore, metal processing, machinery processing, electric and motor vehicles were upcoming industries. Problems were bound to occur as Canadians had heavily depended on the US also, due to the Great Depression. This means that they were vulnerable and could easily be influenced by decisions made by the US. A tariff known as the Hawley-Smoot was passed by the American congress in the year 1930. It meant to make sure that imports brought to the United States were heavily taxed. This moment will forever be in the minds of Canadians as it is the harshest and toughest duty that they have had to pay. Canada did not lag behind as it took its own measures to counter attack that of the Americans. It came up with tariffs that were high as those of the Americans. It tried to find a way to reduce its dependence on the US, as well as to penetrate world markets. The tariffs, which existed, were revised during the Imperial economic Conference, in the year 1932, in Ottawa.
In a bid to increase trade and lower tariffs, negotiations took place between the United States and Canada. By the year 1938, the trade agreement between the US and Canada had been signed. In turn, the various tariffs were reduced after two meetings held by the two parties. During the Second World War, Americans and Canadians supported each other due to their renewed relationship. The Permanent Joint Board on Defense was formed in the year 1940. It brought about close economic relations between America and Canada. Canada benefited from projects such as the Canol, Alaska Highway, and the Norman Wells oil production. The projects were financed by the US as part of the PJBD agreement.
Consumer goods demand increased after the second world war, due to need to obtain war machinery and immigrant influx. In turn, industrial machineries and consumer goods were purchased by the United States. Canada benefited as the rest of Europe, and the United Kingdom suffered from the effects of war. They did not have sufficient foreign exchange and Canada could not rescue this situation. Before, it had to find ways to solve the trade surplus and trade deficit obtained from its US relations. During the 1950’s Canada benefited from the investment boom as its problems seemed to have disappeared. Since Canada has vast natural resources such as uranium, gas and oil, the US had to find ways to develop and locate them. Fusion of both economies was possible because they engaged in parallel investment. The US assumed a notable corporate control and ownership over Canadian Manufacturing industries, gas, oil and mining.
Canada is facing a dilemma concerning the policies of international trade, which affect it. For many years, it has had relations with the US, and this is a fact that is known to many people. Canada is a member of the Canada-US Free Trade Agreement and this integration is of significant value to it. Developing worlds have not been left behind in the process of growth as they are expanding fast. These changes are affecting the economies of the North American Countries. Canada has been blamed for relying on the US, until it has forgotten that other markets exist. In turn, they are not making enough profits as they should be doing. There are many calls, which seek to ensure that effective polices are implemented, before it is late for the situation to be saved. Policy matters have come up, and they need to be addressed as soon as possible. The Reciprocity treaty is the reason why Canada depends a lot on the US. Other organizations formed to enhance the two countries relations were the North Atlantic Treaty Organization and the General Agreement on Tariffs and Trade. There was a need to ensure that direct confrontations between the US and Canada did not take place.
The two countries need to find ways that they can survive and to prosper. Technology and Industrial capacity are supplied by the US, while raw materials are supplied by Canada. The latter often held meetings with the US on an annual basis to discuss the problem of surplus disposal. Canada made losses as the grains it was meant to obtain were handed out to developing countries. The sovereignty, which Canada held, was being infringed upon Cuba and China, which were subsidiaries of the US. Many Canadian presidents have made attempts to reduce the ties that exist between the US and Canada, but no success so far. It seems that Canadians are not controlling their destiny as the US seems to be handling this matter on Canada’s behalf. Other critics believe that the US is taking advantage of this situation to profit alone. There is distortion of the Canadian economy as it is not developing as it is meant .
By the year 1965, most Canadians felt the need to free themselves from the power, which the Americans held. They believed that they had to control their economy as well as have foreign ownership reduced. In fact, there was controversy surrounding US magazines that had a market in Canada. This issue led to diplomatic quarrels, banking policy, and tax disputes. The Canadian financial market was affected when the US ensured its funds would not flow freely into Canada. This move became possible after congress passed a law that imposed heavy taxations on Canadians borrowing money from the US. It is extremely clear that the US has more power as compared to Canada. The US did not stop victimizing Canada as it ensured that American multinationals invested their money in the US. When the US makes changes regarding its policies, Canada is affected as it is vulnerable. Canada had to find a way to depend on other able countries rather than America.
The Canadian- American policy was affected by the policy that existed concerning energy. Import quotas imposed by the US had an enormous impact on the gas and oil exports by Canada. The former made it difficult for Canada to sell its oil and make a profit. The Oil Producing and Exporting Countries assisted Canada in matters related to oil. At least, Canada is today enjoying success in this sector, as it can effectively supply and sell its oil. The US was not happy as Canada enjoyed the benefits of increased prices of oil. This matter did not go down well with the US who had to find a way of containing Canada.
Currently, the US has close economic ties with Canada as they seem to have put their differences aside for purposes of achieving success. Since the 1990’s the two governments in Washington and Ottawa have made progress in strengthening their relations. The Liberal Party of Canada has from time to time proven that it does not want to be actively involved with American matters . It will only do so it the matter is extremely urgent and vital, as well. During the time when George Bush held power, there was bilateral communication between the two countries. The Canadian-American relation has entered a new phase since the 2008 Obama election into office. Most Canadians seem to view Obama as a savior and thus, the reason for being popular with Canadians.
The other sectors, which the two countries corporate is in political and international security issues. This is witnessed and possible through the help of the many international organizations and through bilateral trade. The US and Canadian policies are almost similar in terms of defense and foreign policies. There are only a few areas that are still in contention, but it seems that the matter will soon be solved. They are actively involved in fighting terrorism and enhancing border security. So far, they have worked together in NATO and UN Libyan mission. It seems that the two countries are actively involved in matters related to peace and security.
The largest relationship in the world that deals with bilateral trading is maintained by Canada and the US. So far, it has lasted since the time the Reciprocity Treaty came into existence. This is proven by the fact that free trade agreement approvals have been awarded to them. In the past, the two countries were affected by commercial issues dealing with the economy and trade. Currently, they are constant negotiations on how to improve their various economies. These are in the sectors of entertainment, culture, agriculture, natural resources, and trade among others. The stimulus law of the year 2009, concerning the provision of ‘Buy America’ is what is being debated. It has brought about disputes between the two countries. Luckily, it is only affecting a few of the services and goods that the two countries need and use. At the moment, their relationship based on trade is being affected by the issue on energy. Moreover, they are engaged in ensuring that border waterways are maintained, as well as monitoring transfers of solid waste and air quality. They want to make sure that there territories are not invaded by terrorists.
ConclusionIn conclusion, the Reciprocity Treaty (1854-1866) has shaped the relations, which the US has with Canada. The relationship that exists is beneficial to both of them as well as other countries. The treaty has influenced the way in, which the US and Canada trade with each other. The creation of trade organizations such as NAFTA has made the agreement beneficial to all the parties that are involved. The knowledge that one acquires from the Reciprocity Treaty is more valuable, as compared to the economical aspects. This means that other countries that have similar relations should follow the example of the agreement to improve theirs. The outcome of the American-Canadian relationship has the potential of becoming even better. This means that they have found a solution that will eliminate any barriers to their corporation and growth.
Bibliography
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Norrie, Kenneth, & Douglas, Owram. & Emery, Herbert. A History of the Canadian Economy. Toronto: Harcourt Brace & Company, Canada, 2002.Print.
Stevens, P. “Resource Impact: Curse or Blessing? A Literature Survey,” Journal of Energy Literature, 9, 1, (2003): 3-42.
Sachs, J. & Warner. A. “The Curse of Natural Resources,” European Economic Review, 45, (2001): 827-838.
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End Notes
The Impact of the Recent Global and Australian Stock Market Downturns on the Ability of Australian Companies to Raise Equity
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The Impact of the Recent Global and Australian Stock Market Downturns on the Ability of Australian Companies to Raise Equity Capital
Introduction
The recent global and Australian stock market downturns emerged as a result of Global Financial Crisis (GFC) that began in early 2007 and ended in late 2009. The turmoil engulfed global markets and economies in a way that had not been witnessed for a long time. Its impact on Australian markets was heightened by the collapse of Lehman Brothers based in United States (ASX b 5). Domestic money markets in Australia receded, commodity prices dropped sharply, the local currency depreciated, offshore financing tightened and most significantly, equity prices dropped sharply. In response to this, a joint Commonwealth-government guarantee scheme for wholesale funding and banking deposits was introduced. This resulted into a large-scale government guaranteed issuance of medium term issuance of loans by the banking sector leading to a shift of funds from non-guaranteed investments to those that had been guaranteed. This restricted the availability of funding to companies which did not have the support of a guarantee. In the primary market, asset prices fell, leading to instability in the equity market prospects. According to ASX b (8), this led to a decrease in the level of IPO activity in the market. For ASX listed companies seeking to finance their operations, the inability to find wholesale funding sources implied that companies had to seek to raise capital through the equity market. As such, the secondary capital raisings particularly for larger companies remained strong during the whole period of the crisis. Thus, this paper seeks to examine deeply the impact of the global and Australian stock market downturns that occurred between 2007 and 2009 on the ability of Australian companies to raise equity capital. But first, it will be prudent briefly revisit the events that led to the recent stock market crash globally and in Australia and hence, the environment in which Australian companies sought debt or equity capital.
Events that led to the Recent Global and Australian Stock Market Downturns
As noted earlier, the recent global and Australian stock market downturns emerged as a result of GFC that began in early 2007 and ended in late 2009. According to ASX a (5), the GFC had a huge impact on credit and debt markets globally. The most dramatic impact of this was in the interbank credit market. As ASX a (5), notes, the interbank markets are essential in the functioning of the many associated financial markets through benchmark spreads between bank borrowing rates, risk free rates and credit spreads to a diverse range of bank customers ‘which span the width and breadth of a nation’s economy.’ over the course of mid-2007 to mid-2009, the interbank spreads for Australia, Europe and the US experienced extreme swings and heightened volatility. Before the GFC, credit market spreads in all markets in the three nations tended to average approximately 10 basis points. But according to ASX a (5), spreads spiked in August, 2007 and remained high and volatile for the next twelve months, before widening further in US and Europe. In Australia, it moved even higher than in US and Europe at the time of the collapse of Lehman Brothers. This blow-out in spreads led to very tight liquidity conditions and sharply high credit risks especially since market participants anticipated possible defaults by large financial institutions.
The spreads only began to reduce following aggressive interventions through monetary policy that calmed nerves and hence lowered the risk of systemic default. In Australia, this included injections of liquidity into the financial system and government intervention through offering of guarantees to financial institutions. As a result, the Australian spreads generally remained below those prevailing in oversees markets during the peak of the crisis. This reflected the relatively lesser concerns around the financial position of most major banks in Australia, which retained their strong ratings throughout the period of the crisis. However, according to Brown & Davis (2010, p.2), the dislocation in the credit and debt markets and the problems brought about by the global credit default swap market made it difficult for companies to tap short or long-term debt markets. This occurred at a time when banks were seeking to wind back their business lending so as to concentrate on their own liability management imperatives.
From the mid 2007, short term borrowing rates for the private sector in the US declined significantly and despite spiking in the late 2008 when the financial crisis was at peak, they continued to decline to historical low levels, (RBA c). In contrast, similar short term rates in Australia did not take the same trend at the beginning until when the Reserve Bank of Australia (RBA) began to aggressively ease monetary policy following the collapse of the Lehman Brothers. By March 2008, RBA had made reductions in the interest rates totalling 425 basis points. Despite the sharp reduction in interest rates in the financial market in Australia, the very tight credit conditions severely constrained the availability of short-term debt finance and bank lending to companies. Further, existence of restrictive environment for issuance of long-term corporate loans in Australia and overseas implied that non-financial entities had limited opportunities to roll over an existing debt funding or tap new resources, (RBA c). Generally, the GFC saw a fall in Australia financial turnover by 16.3%, the first decrease in a period of 10 years. Noteworthy, the turnover statistics were varied across sectors and products (Robinson, 2010). For example, OTC market turnover dropped by 4.3% while the Exchange Traded volumes reduced by 37.5%
The impact of the crisis on the Ability of Australian Companies to Raise Equity Capital
As noted earlier, the impact of the recent global and Australian stock market crisis was magnified by the collapse of Lehman Brothers. According to McKinsey Global Institute (2009, p. 8), the collapse of this entity saw a dramatic flight to government securities as uncertainty over banking systems in Australia and in overseas reached extreme levels. During the crisis a Commonwealth government guarantee scheme for wholesale funding and banking deposits was announced. This led to a large scale government guaranteed issuance of medium term issuance of loans by the banking sector which further saw a shift of funds from non-guaranteed investments to those that had been guaranteed. As a consequence, this severely restricted the availability of funding to companies which did not have the support of a guarantee. Further, lending was severely rationed leading to a reduction of corporate bond issuance and a requirement that all securitization of issuance had to be directly supported by the government. As such, liquidity in financial markets in Australia was restricted to participants who focussed on minimizing exposure to counterparties across the board.
According to ASX a (6), the severe movements in asset valuations and unprecedented volatility associated with global and Australian stock market downturns led to uncertainties for Australian companies due to the heightened risk aversion of investors to commit more capital in the extreme financial and global circumstances. According to the data collected by the National Australia Bank, the overall business confidence among investors declined at an accelerating rate in 2008 and bottomed in early 2009 (ASX a 6). This led to a significant increase in the price of discounts required to get raisings completed. As well, other costs associated with making secondary issues such as the cost of obtaining underwriting support increased.
During 2007 and 2008, deposit flows into Australian banks increased significantly above historical levels. According to the ASX a (9), a conventional safer haven investment and cash management trusts indicated large inflows during 2007. However, this was subjected to a net outflow in 2008 as redemption freezes in several hedge funds as well as other managed investments developed a contagion effect. There were also notable net withdrawals from managed equity funds between 2007 and 2008 as retail investors aimed to lower their exposure to equity investments. This explains the fact that the largest industry sector in Australia raising capital between 2008 and 2009 was the financial sector. The situation was dominated by raisings by the large four trading banks in Australia during the peak of the crisis and in the early stages of recovery.
According to the ASX a (7), the listing of new companies dried up completely in 2008 and 2009 while raisings of capital through IPOs declined considerably. The primary issuance market started to gain life again during the last quarter of 2009. New companies were completely unable to come to the market while the listed companies relied more on secondary capital, though secondary raisings dipped in early 2008 before stabilizing during the rest of the crisis period. The value of the IPOs listed on ASX was $2.5bn in 2008, which was the lowest value of $2.2bn in 2001 when global technology bubble collapsed, leading to a period of recession in the US (ASX a 7). New listings started to decline in 2007. In 2009, only 47 companies were listed, the lowest figure since 1995. According to the ASX a (7), the average value of new IPOs listed on ASX since 1995 had been worth $9.7bn with around 124 new listings every year. These trends indicated a strong increase in of risk aversion among investors which also negatively affected their drive to participate in new capital raisings. As a result of this, demand for IPOs was non-existence in financial year 2008-09, with only less than $300 million raised from this source. This performance is much low compared with the $10 billion and the $6 billion that wasa raised from IPOs in 2006-07 and 2007-08 respectively.
Further, according to Bazzani, mergers and acquisitions during the period of the crisis reduced considerably during the financial years 2008-09, 872 completed transactions were recorded, with a total value of $85 billion. In fact, out of this value, $19 billion represented a single transaction (Westpac’s acquisition of St George Bank). These trends likely affected the options to be made by companies in capital raisings. This represented a drop from $135 billion derived from 1240 transactions in the year 2007-08. As Bazzani notes, these trends represented reluctance by lenders to support such transactions.
According to Wylie (2009), there was a significant increase in financial flows into banks such as deposits which indicated that the retail investors’ appetite for risk assets had declined significantly during 2007 and 2008. This led to market volatility, which severely constrained credit conditions during the September quarter of 2008 and the March quarter of 2009 (Wylie). Consequently, the ability of companies to obtain underwriting support for their issues was greatly reduced and thus, their ability to make choices on capital raisings was affected. In fact, as ASX a (6) further suggests, “the very tight credit market conditions and very uncertain financial situations facing major global investment banks (including concerns about the solvency of some) during the period September 2008 to March 2009, made obtaining underwriting support very difficult for periods beyond a few days.” Such support was vital during the period given that companies needed to protect themselves against the high risk of a shortfall in capital raising. But Wylie notes that, during that period, underwriters were able and willing to take on underwriting risks for only a short period of time. However, as market volatility reduced, the asset values started to recover, risk appetite among retail investors returned and rights offerings started to rise in an accelerating rate. In the late 2009 companies moved back towards reliance on pro-rata issues. Generally, as Bazzani points out, the Australian equity prices mirrored international price levels over the period of crisis. During the financial year 2008/2009, ASX/S&P All Ordinaries Index had lost about 40% of its value by the third quarter of the year before its recovery in the final quarter. See the figure below.
Source: Bazzani (originally from Bloomerg)
In short, the increased volatility during the period of the crisis was particularly problematic for companies seeking to raise equity capital since the uncertainty created by the situation negatively affected the willingness of investors to commit new capital. Other impacts of the crisis on entities’ ability to raise equity capital included tighter terms and conditions, longer time taken for lending approvals and limitation of tenors.
However, as Bazzani points out, the actual capital raisings experience in Australia over the course of the global and Australian stock market downturns remained strong despite the extreme market turmoil. Responses to initial public offerings reduced considerably in the second half of 2008 and the first half of 2009, before picking up in the second 2009, when some confidence returned to the market. Listed companies in Australia relied largely on secondary capital raisings to repair their balance sheets and to reduce their debt exposures. As well, according to Bazzani companies took advantage of relatively robust profit during the period to increase the extent of reliance on internal funding to support their operations. The following figure demonstrates the steep fall in share prices and number of new equity raisings that was sustained during the first half of 2008. As indicated in the diagram, the value of new equity issues started to recover during the final quarter of the year 2008/2009 as companies took advantages of recovery in prices.
Source; Bazzani (originally from Thomson SDC, Bloomerg)
The secondary capital raisings remained strong with $98.6bn raised in 2009. This represented a 58% increase above the previous record year 2007 (ASX a14). In fact, more than half of the ASX listed companies raised some additional capital during 2009. On average, over the period of crisis, the most common secondary equity raising methods (by value) were placements which comprised of 41%; dividend re-investment plans which comprised of 18%; rights and accelerated issues which constituted 31% and others amounting to 5%. The crisis was most severe during the first quarter of 2009 during which placements comprised of 55% of the total value of secondary raisings and rights issues made up of 20%. The markets started to recover six months to September 2009 when the above proportions reversed with placements amounting to 30% and rights issues 50%. Also, the proportion of the capital raised through SPPs increased from 4% of total secondary to 9% between the first and the last quarter of 2009 (ASX a 14). According to Bazzani, entities relied on these funds to reduce leverage, increase their assets, preserve their credit ratings and make use the opportunity derived from the distressed asset sales. The prices of the placements and rights issues were arrived accurately to the advantages of the entities.
But it should be noted that a company’s size is vital in the determination of the most appropriate type of capital raising as the OECD (10) asserts. Small companies have a limited range of options and thus, they tend to rely more on placements. One of the reasons for this is the different shareholder register structures existing in smaller companies, which comprise a large retail shareholder base. Another cause is limited or no access to internal sources of finance or lending/debt finance. Also, there are various limitations on the ability of small companies to raise significant capital via a rights issue in such periods of crisis. Other reasons include the need for companies to move quickly to take advantage of the emerging favourable market conditions and in some cases, the desire of a particular entity to attract a large cornerstone investor (OECD 10).
During 2008 and 2009, around 95% of all secondary capital was raised by companies which have a market capitalisation of more than $100m (RBA b). The main capital raising choice for such companies was placements, with DRPs and rights issues also being significant options. On the other hand, smaller companies (with a market capitalization <$100m) only accounted for 5% of total secondary raisings. For such companies, placements were made up of almost two thirds of all raisings, with rights issues also being a significant contributor. From the first quarter of 2009 until the third quarter of 2009, smaller companies had limited access to new capital and during the last quarter of 2008 and the first quarter of 2009, access to new capital for the small companies virtually diminished. In contrast, large companies were still capable of raising capital for most of this period. In fact, the last quarter of 2008 was a record quarter for secondary raisings (RBA a).
Conclusion
In conclusion, the Recent Global and Australian Stock Market Downturns had a huge negative impact on the ability of Australian companies to raise equity capital. As noted in the essay, the crisis emerged as a result of the Global Financial Crisis that began in early 2007 and ended in late 2009. In Australia, the impact of the crisis on the stock market performance was magnified by the collapse of Lehman Brothers based in the US. During the crisis a Commonwealth government guarantee scheme for wholesale funding and banking deposits was announced leading to a large scale government guaranteed issuance of medium term issuance of loans by the banking sector. This further saw a shift of funds from non-guaranteed reserves to those that had been guaranteed. This move severely restricted the availability of funding to companies which did not have the support of a guarantee. As well, the crisis was characterized by sharp declines in asset values and heightened volatility that led to uncertainties for Australian companies. This was mainly due to the heightened risk aversion of investors to commit more capital in the extreme financial and global circumstances. However, as demonstrated in this essay, a strong capital raising performance among Australian companies enabled them to strengthen their balance sheets, providing them with an important buffer against the adverse effects of the crisis. The experience of the crisis demonstrates that the relatively flexible capital raising that applies in Australia allowed companies to raise significant amounts of equity capital at a time of severe market dislocation. Though this was unfavourable for small companies, the heightened volatility and sharp declines in asset values led to a shift of approach from renounceable rights issues towards reliance on placements and other non-renounceable rights issues.
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The impact of the lack of financial education amongst consumers a South African perspective
The impact of the lack of financial education amongst consumers: a South African perspective
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Abstract
The purpose of this article is to investigate how financial literacy interface models contribute towards financial information comprehensibility to decision makers in the South Africa. The way South African consumers and institutions use financial literacy concept suggest that various people attach different meanings to the financial literacy aspect. To establish a theoretical model for any given financial literacy, this study accomplishes what financial literacy entails.
CHAPTER 1: INTRODUCTION
Financial stress occurs when an individual or a system is undergoing some strain (Tytell et al, 2009, p. 12). When somebody is undergoing financial stress, he or she finds it difficult to meet some of his or her financial obligations. Performing his or her duties at home or at work might also be challenging for the individual, even though the origin of the problem is financial in nature. This is a dilemma that so many people across the world go through and finding ways of overcoming these problems might turn out to be beneficial. Diamond and Vartiainen, in their book Behavioral Economics and Its Applications (2007) indicate that the financial literacy relates to how the individual behaves in regards to how they handle their finances (Diamond and Vartiainen, 2007, p. 25).
Financial stress has a negative impact on the employee performance. When an employee goes through financial stress, the possibility of being absent from work is high, he or she does not get the satisfaction from the payment given, committing to the job also becomes a challenge and the general performance of the employee diminishes (XIAO, 2008 p. 382). Researchers have also found financial stress as one of the reasons that can affect an individual’s health negatively, which in turn affects the performance of the employee at the work place (XIAO, 2008 p. 382). According to Xiao (2008), the workers that have higher stress levels are likely to have the be absent from work frequently and if they are at work, they spend a lot of time thinking about their finances, which reduces the time that they spend working (XIAO, 2008 p. 382).
Managing an employee well is an asset for an organization. This is because managing an employee well leads to his or her commitment to performing tasks, which is an asset to the organization (Aftab & Javeed, 2012 p. 10). If the employer ignores their stress and does not cater for the needs of the employees, there is a possibility of having counterproductive behavior at the work place. This behavior does not only affect the organization, but when a majority of the work force in a nation is not productive in their work place, it might end up affecting the economy of the whole nation. In the first class and emerging economies, there is a big challenge on how to handle stress that is a product of mismanagement of finances on a personal level. It is a challenge because there are consequences to the performance of the economy when the work force cannot perform their work-related duties efficiently. Changing the attitudes that people have over money is not easy because people tend to prefer immediate gratification when spending their money. Not so many people think of saving for the future needs after retirement.
Problem Statement
Many South Africans face economic hardships brought about by the lack of financial literacy. Lack of financial literacy causes several problems; one of the major problems being the unequal distribution of resources. In South Africa, including some other countries in the world, many people go through hardships because of the lack of financial education. This does not only affect the personal lives of the people but also the economy as a whole. It affects the economy through a decrease in production that results from the financial stress that the work force goes through. Little or lack of money can be something that affects relationships, health and even the performance of an individual in the work place. The stress reduces their ability to work efficiently, which might create an economic underperformance. When the country goes through this type of crisis, distributing resources across the population becomes difficult.
It is important to fix the problem of financial illiteracy because of a number of reasons. The main reason would be to change the attitude of people towards how they handle their finances. This attitudinal change focuses on directing people towards making wise financial decisions, consequently reducing their stress levels, and enhancing their productivity in the workplace. The lessons should not only focus on the benefits of making wise financial decisions in their daily lives but also on the need to have a plan for the retirement years.
Purpose of the study
This study aims at analyzing the current levels of financial education among the consumers in South Africa. After the analysis of the current education levels among the consumers, the identification of the weaknesses becomes easy, making it possible to look for ways to improve the situation. The analysis will also make it easy for the identification of the strengths. Improving in the strengths is necessary not only for the individual but also for the entire country. It is important for the entire nation in the sense that the improvements might work in reducing the stress levels that the people go through, which would make them more productive in their work place. Once their productivity improves, the entire output of the country might also improve.
OECD defines financial education as the process that people go through to improve their understanding of the financial products and financial concepts. They get this information through advice from experts in the field and through reading materials with the information. This makes them have the ability to develop skills essential for making wise decisions in the management of their finances. The education does not only make the people aware of the financial opportunities and the risks, but it also improves their financial decision-making ability (OECD, 2005, p. 26). The financial information includes data that gives the individuals the knowledge necessary for the discovery of opportunities and for making valuable choices. The individual is also able to make financial decisions while fully aware the consequences of some of the decisions they make (OECD, 2005, p. 26).
The experts on the other hand provide the individuals with the skills necessary for understanding some of the financial concepts. They do this through training the individuals and through providing guidance to enable the people to acquire the necessary skills when making investments (OECD, 2005, p. 26). The lack of financial education determines the attitude that people have when it comes to investments and saving for the future, which is not positive. There are quite a number of investment programs available for the people in South Africa to use in the improvement of their financial status. Apart from these investment programs, there are pension schemes that individuals could use to ensure that their life after retirement will be comfortable. Because of the poor saving culture in South Africa, not so many people invest in such programs. A majority of the people only focus on the fulfillment of their immediate needs. Living in debt is also a problem that the people go through which contributes to the crisis. Because of the poor saving culture and the reluctance that people exhibit towards savings, they might experience a crisis in case they lose their job (Shorb, 2009). To prevent this crisis, the only appropriate thing to do would be to offer financial education to the people (OECD, 2005, p. 123).
Importance of the study
It is vital for the individual to have the necessary skills for preventing a financial crisis on a personal level. This would also go a long way in preventing a crisis in the economy of a country. The most vital component that requires a lot of emphasis is changing the saving culture that the people have. Through this, an individual can easily manage his or her finances, which would influence their performance in the work place (Schreiner & Sherraden, 2008, p. 233).
Some people know the importance of saving and they are aware of some of the most appropriate saving schemes. These people might still show some reluctance in participating in these programs. This shows that the saving culture is heterogenic among the people. According to some studies on behavioral economics, an individual’s behavior towards saving relates to the individuals psychological factors (OECD, 2005, p. 123). The studies reveal that very few people prefer saving to spending their money. Through financial education, it is possible to change the attitudes of these people toward the saving culture. This education is vital for enabling the people to gain planning skills necessary for cushioning them from the crisis.
South Africa is a middle-income country with a marketing economy, which enjoys considerable natural resources. The country has proper financials, with one of the largest stock exchanges around the world. The country also boosts of proper communication and energy systems around the continent. South Africa boosts of modern transportation systems, which enables proper distribution of goods and services throughout the nation. In 2007, the country had one of the best economic performances in the entire globe but this drastically slowed down in the following years. This was due to the country’s economic constraints in addition to the decline in global economy, which was heavily associated with Great recession in 2008. However, in 2011, the country’s economic performance rebounded. Despite the country’s good economy performances in 2011, the unemployment levels in the country remained a big challenge in both the private and public sectors.
The United States government analysts claim that the South African economic policy is financially traditional. The country’s financial traditions are evident on how the country controls its price increase, balances its budget, and generates a budget surplus. As the country pursues its economic goals, its economy is still on the rise despite the fact that it faces an increasing pressure from its citizens to make use of its own enterprises. The South African citizens believed that the state-owned enterprises would be beneficial in delivering basic services to low low-income regions and rural areas. Despite some of these constraints, the country boosts of the most developed economies in the entire continent. The country’s telecommunication systems, paved roads, skilled professionals, and banking systems are among the best in the Africa. South Africa is globally viewed as a commercial jewel among the sub-Saharan nations and Africa in general. With these, most of the South African consumers and citizens are seeking a fair share of the nation’s resources. However, the country’s scarcity of financial literacy between the customers still constrains the country’s financial resources.
Background
South African consumers are poor at financial literary and this heavily contributes to the country’s constrains in financial resources. It is with these aspects that Vartianen and Diamond insist that also the wealthy countries, the collective existing studies reflect a poor picture of financial literacy and economy. One of the confusing aspects involved in financial literacy rates improvement in any nation is the general tendency of individuals to make use of the seat-of-the-pants financial planning designs which various families and friends use. There is also the cultural factor, which prohibits consumers from searching for professional assistance. On this note, Vartiainen and Diamond report that, financially illiterate people should seek guidance from professionals. Practically, 60% of almost every population subgroups depends on relatives, parents, personal judgments, and friends. Despite this, every consumer’s situation is different and unique.
There are various demographic factors, which indicate that financial literacy is a challenging prospect. Vartiainen and Diamond stresses the fact that individuals with poor education levels are likely to depend on their personal judgment. The analysts further claim that a minority of individuals seek advice from print media or financial professionals. Such tendencies have a lasting impact on the financially illiterate consumers. They also have a severe effect on the society in which the consumers exists. Financial literacy is closely related to behavior. Individuals who have poor financial literate levels tend to save minimum finances. Furthermore, there are various measure to which have been designed for consumers to address the financial illiteracy. These financial illiteracies have various significant effects on the choices the people make. In the South African, various initiatives are in place to help in the improvement of financial literacy for the young consumers. These policies are similar with the steps, which are taken in most countries for the same intentions. Some of these initiatives are beneficial outcomes to these countries. The policies, which mandate financial education for students in high school, result to higher asset accumulation in case the students reach adulthood. Similarly, financial education in a workplace can increase employee participation in employee-directed retirement fund plans and motivate savings. There are various positive outcomes which are associated with improve in financial literacy rate. These issues are beneficial in forming the basis of this study.
As demonstrated in the study on how levels of financial literacy are troubling the success of individuals and financial decisions, this study will identify some of the importance associated with consumer financial literacy and decisions among the consumers in South Africa. Regardless of the low consumer financial data and acquaintance in the South African nation, the country still boosts of one of the best economies in the entire continent. This demonstrates that, a financial development of any given country depends on the country’s budget instead of the financial knowledge and decisions of the consumer. In such a study, financial literacy questions will be beneficial in the whole research work. The financial literacy questions will also be beneficial in research surveys since it helps in evaluating the financial literacy influences especially during decision-making process. Generally, financial literacy is a challenging aspect especially to the poorly educated individuals, race, or gender. The outcomes from previous analysis as shown in this study indicate that people with low educations standards, women, and children are less knowledgeable especially on issues that relate to financial matters.
Research studies indicate that financial literacy is important in accounting also plays an important role during planning of financials. Planning for retirement is essential during wealth accumulation. In most cases, individuals who accommodate the plan tend to record twice the quantity of wealth than those individuals who do not embrace the same. Despite the positive aspects of financial literacy, some people disagree with the whole idea of financial literacy. For instance, most people still argue that reverse victims is a distress hence suggesting that financial planning improves consumer financial understanding. This demonstrates that financial literacy is native therefore; people who plan to invest in retirement plans will need to seek further financial knowledge and information. A person seeking financial plan will require various aspects and not just the basic knowledge. The basic knowledge is important since most financial plans including the retirement plans require a deeper understanding of the financial planning literacy and knowledge. Further studies demonstrate that, there is a positive relation between the household financial decisions and financial knowledge. For instance, a person who cannot interest rates in any payment correctly will tend to end up with more borrowings and a minimum wealth accumulation. Additionally, people with poor financial knowledge will not invest in the stock market or any other investments. This will mean that only the few consumers who are financially literate or those individuals with proper knowledge in financial matters will invest in stock markets and other investments plans packages. For individuals who undermine compound interests accumulation strengths have difficulties with debt matters because they will likely disagree with the calculation matters and interest rates. In such financial matters, results will tend to indicate how the young or the aged individuals are poor in calculation matters and financial knowledge. Most of these individuals will commit financial errors and mistakes unlike the middle-aged individuals. These two subgroups will also tend to record low levels of financial behavior and informed ability especially in the financial matters. Financial behaviors and financial knowledge demonstrates the linkage in various ways. In most cases, investors tend to ignore such subgroups especially when it comes to mortgage payments during a decline in interest rate. Generally, individuals with poor financial literacy and knowledge will tend to experience poor finances. Some of the investors also have poor knowledge on the terms and conditions of their mortgages and investment plans.
This study on financial illiteracies will be guided by various research questions.
Some of the research questions include; what are the outcomes of the current financial literacy levels among the South African consumers?
What are the main financial services that the South African consumers use today?
How do the existing levels of intelligence and financial education impact on the average South African consumers and their ability to acquire credit, secure mortgages, negotiate loans, and navigate through the financial service industries?
This study will make use of different methodologies and data collection methods. For most of the study, the proposal will use the qualitative analysis. The study will also use a critical review of the scholarly literature and peer-reviewed literature concerning the general financial literacy and its repercussions for the consumers in South Africa in particular. The research method in this study is congruent with financial literacy guidance. The study will highlight a clear understanding on the appropriate concepts and theories, outcomes of past research in the area, types of research designs and methodologies, which will, employed are in similar researches. One of the most significant outcomes
This study will use various approaches to data analysis and processes. The qualitative research process will then follow then classic inverted pyramid design, thus, beginning with an overview of primary issues interests followed by research, which are increasingly fine-tuned to develop conversant opinions and recognize different these which might undiscerned.
The increasing roles and complexities in financial markets in South Africa at all development stages have been beneficial in reinforcing the needs to improve consumer’s capacity to efficiently manage and access different interactions with such services especially among the middle and low income countries which have financial inclusions that have poor and educational accomplishments which are low. To facilitate consumers in South Africa to understand and make a better financial decision about bank accounts, savings, credits, retirements and insurance and a collection of various complex products, program development which aim at improving knowledge, attitude and skill in this aspect are required.
Rationale of Study
The basis of this study is to examine how financial literacy interface models contribute towards financial information comprehensibility to decision makers in the South Africa nation. The way South African institutions and consumers use financial literacy perception, suggest that various people attach different meanings to the financial literacy aspect. To establish a hypothetical model for any given financial literacy, this study bases on what financial literacy entails. Financial Information complexity and an increase in volume usually exceed the abilities of the users to comprehend and interpret it during decision-making purposes. A financial literacy interface gives the decision makers in institutions and organizations the window opportunity to infiltrate their concerns and fears while using the financial language and figures. Financial information users differ vastly depending on their financial capability levels and sophistication. They also differ in terms of financial information preparedness, which should take the fact’s cognizance. The basis of this study thus financial literacy is complex while the term covers various terms apart from financial and literacy. It further attempts to develop financial literacy interfaces as the coordinating interface between decision makers in South Africa and financial information. The main reasoning behind this study is to establish South African consumer’s financial education levels. Based on the study’s analysis, the rationale of the study is to recognize various opportunities, which will be beneficial in improving visible flaws in South Africa consumer financial cultures and education. The study also aims to build South African consumer financial education strengths in ways which will allow them to actively participate in the economic development of the country.
Scope of Study
This study aims at assisting South Africans in achieving financial literacy goals by highlighting various opportunities, which exists; to assist the consumers acquire knowledge and skills, which relate to financial literacy. Various institutions and the South African Government will work to entrench financial literacy various opportunities and expectations in financial aspects. This study will have been updated to reflect on the changes, which relate to financial literacy in South Africa.
Overview of the study
Financial literacy is an ability to recognize and comprehend how money works globally. It is also the ability of how someone can manage to earn or make money, how an individual manages money, or how an individual can invest the money to get more money. Generally, financial literacy is the skills and knowledge, which allows individuals to be conversant and effective while making decisions that affect his financial resources. Financial literacy gives individuals the opportunity to understand financial decisions and management of money.
In South Africa, there are various programs, which sensitize individuals on money matters, an example being raising interests in personal finances. There are various institutions in South Africa and other parts of Africa, which assists consumers in achieving financial literacy. The institutions also focus on helping the consumers improve their financial opportunities through various ways such microcredit initiatives, which provide them with small loans for their enterprises. Some of these problems have been effective in trying to bring marginalized South African consumers into the conventional economy. There are also some indications concerning the ongoing commitments and dedications from International countries to help in the improvement of financial literacy in the country. Most recently, the current Nobel Peace Prize winner has committed himself in providing microfinance with few loss ratios, which would rival any ordinary bank. He also helps in ensuring a free enterprise system and entrepreneurships work for the poor.
South Africa’s general financial literacy score stands at 54 percent. This means that the score is not distressingly low; however, the score conceals gross inequalities in the country’s financial literacy. The result shows that most South Africans living in poor conditions or lower living standards have lower financial literacy levels compared to people who have an average living standard. Generally, increase in financial literacy levels depicts an increase in schooling levels. This means that the rich and the well-informed South Africans have to score higher than the poor and less educated individuals do. Financial literature goes hand in hand with financial planning. In this study, financial plan are the goals and steps, which individuals and businesses use. They are also the cumulative and progressive attainments, which intend to achieve financial goals. Examples of these include retirement preparedness and debt elimination. In most cases, it involves a budget that will benefit an individual financially. Sometimes it includes a person’s specific goals and savings for the future. Financial plan allocates future income in to different types of expenses including utilities and rent. It also preserves a little income for long-term and short-term savings. Financial plans are also investment plans. On the same aspect, financial knowledge help in assessing people’s proficiency and familiarity levels with fundamental financial concepts.
Objective
The main objective of this study is to assess financial literacy levels and understanding of financial schemes in South Africa. The study also aims at recognizing and comprehending how money works around the world. Through the study, individuals will have the ability to manage and make money; individuals will also have the skills to invest the money to get more money. Generally, financial literacy gives individuals the skills and knowledge, which allows individuals to be conversant and effective while making decisions that affect his financial resources. Financial literacy gives individuals the opportunity to understand financial decisions and management of money.
This study also aims to determine the current financial education levels among the consumers in South African. Depending on this study, the study aims at identifying various opportunities, which are beneficial in improving visible weaknesses among the South African consumers and their financial education. Through the study, the South Africans will be able to develop their existing strengths and potentials in ways, which will enable them to participate in the development of the country’s economy. The study will investigate how financial literacy interface models affect financial information lucidity to decision makers in the South African nation. How various institutions and the South African consumers use financial literacy theories to suggest that various people attach different meanings to the financial literacy aspect. To establish a theoretical model for any given financial literacy, this study aims at accomplishing what financial literacy demands.
The specific aims of this study are;
Analyzing the current financial literacy and financial knowledge among the South African consumers;
Analyzing the South African’s financial literacy levels and how they heavily contribute to constrains in financial resources;
Identifying the constraints, which affect South Africa and its consumers because of financial illiteracy
Providing estimates among the South African consumers and further market developments in the country.
Defining strategic options for the South African consumers and their development through financial literacy
CHAPTER 2: REVIEW OF RELATED LITERATURE
In young people, financial literacy concerns the relationships they have with other people, institutions, and the way that they perceive the world. In adults, and institutions like banks, financial literacy may focus on educating the masses on managing their finances since the role of profit and consumerism hampers the capacity of an individual to manage and save money. The issue on financial literacy extensive as it touches on various elements in terms of finances and human issues such as credit and consumerism. The household proportion debt in South Africa, to the disposable earnings is 60%. The society South Africa is a buy now, pay later culture. Individuals through institutions such as micro finances or retail outlets easily reach credit card accessibility in South Africa. Majority of the population, experience problems in accessing credit cards from reliable places like banks. According to a study by Di Turpin, SASI, majority of the household in South Africa use debt as a saving alternative. People have a tendency of borrowing money first, then using their savings and lastly sell their assets (Barr et al, 2007, p. 200).
Noelani King-Conradie, ABSA bank economics defines savings as the amount of resources that an economy produces within a specified year, which the country puts to use in a manner that will provide profit to the economy in the years that follow. A country requires 25% domestic savings in order to boost its economic growth but South Africa has only 16%. This suggests the country puts more emphasis on investment inflows rather than domestic savings. This is evident that the government considers direct foreign investment as a solution to the development of the economy and creation of jobs. The saving instruments in this country are not favorable for the poor people who need to access income particularly emergency needs. The savings that poor households make are out of their livelihood strategies, which call for regular withdrawals to smooth income flows from savings. Since 1995, the government of South Africa makes efforts to develop land accessibility for the purpose of production. The foundation of this program was that giving black people financial assistance would enable them to purchase land based on willing-buyer willing-seller. This will enable the forces in the market play their part thus minimize the government’s role. (Beck, 2011, p. 50).
Camac & Gordon argue that, the government has the responsibility of making land acquisition grants available to the people thus encouraging them to form associations and club together. It is also essential for the government to coordinate with other stakeholders such as NGOs who take up a lobbying position in the processes of land reform. The issue of redistribution; therefore, sets right the off-centre land distribution ownership between smallholder and large farmers. This is essential as it ensures that the smallholder farmers can access land for productive and residential purposes in order to improve their livelihoods. However, for this reform program to be effective, the government should ensure that the farmers have an access to farmer support services. This is since most smallholder farmers are in the rural areas in former homelands, where both the institutional and physical infrastructure pose a challenge to their expansion (Lucey & Laney, 2012, p. 300).
The farmer’s inaccessibility to proper roads limits their ability to transport produce, inputs and access information. Poor infrastructure results to lack of markets for their agricultural inputs and outputs thus becoming unreliable for these farmers. Due to this, the smallholder farmers cannot acquire the agricultural resources and supply their market services; therefore, this hinders them from participating in potentially profitable markets. High cost of transaction is among the key factors constraining the growth of agriculture in African countries as this cost relates to poor infrastructure. The cost of transaction can come from various sources such as monitoring, cost of information, negotiation, and enforcement of contracts. According to Vink & Kirsten, unreliable distribution and po