Economic: North Torbia

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The Democratic People’s Republic of Torbia (DPRT), commonly called North Torbia, is an unreformed, isolated, tightly controlled, dictatorial command economy. North Torbia is one of the poorest nations in the world due to an oppressive military regime that pursued a policy of political and economic isolation over much of the last 75 years. During the 1960s, North Torbia was actually one of the more productive nations in the region. It boasted a significant minerals industry, and was a major producer and exporter of nickel, copper, zinc, and silver. Since the early 1960s, however, the minerals industry in North Torbia – mirroring much else about the country – suffered significant decline, with an almost complete economic collapse in 1986. Collectivized agriculture and state-owned enterprises (SOEs) account for about 90% of all economic activity, neither of which demonstrate sustainable economic productivity. The last two years saw increased economic instability. During this period, North Torbia suffered a supply shock from heavy flooding, a slowdown in new investment, and a more challenging external environment, including lower commodity prices on the few exports that North Torbia manages to trade. The dilapidated command economy created a situation so dire that it forced overseas diplomatic staffs to fend for themselves financially. In Olvana, the embassy staff ran a gambling casino to keep the lights on, while in Donovia, they rented out two-thirds of the building to a bar and a youth hostel. This is not to say there is not hope for the future. The agriculture sector should bounce back over the short-term based on higher international commodity prices and more favorable weather conditions. Demand for services and infrastructure construction could become the main drivers of long-term growth. Over the medium-term, mining and manufacturing sectors continue to hold promise as potentially important economic drivers of inclusive growth for the country. A large component of this is economic momentum in Olvana, North Torbia’s main export destination.

Table of Economic Data

Measure	Data	Rank in World	Remarks (if applicable)
Nominal GDP	$6.75 billion	149
PPP/Capita	$1597.84	186	Purchasing Power Parity
Real GDP Growth Rate	1.0%	170	Five-year average is 3.4%
LFPR	79.5%	20	Labor Force Participation Rate
Unemployment	7.1%	163
Poverty	45.0%	36	Percent below poverty line
Net FDI	$82.9 million	115	Entirely inbound
Budget	$1.2 billion revenue $1.3 billion expenditures
Public Debt	59.1% of GDP	65
Inflation	55.0%	3	9% over last decade
Value of Exports	$27.4 million	193
Value of Imports	$71.8 million	218

Sources of GDP are 39.9% consumer spending, 41.7% government expenditures, and 22.0% investment, while net exports reduces GDP by 3.6% due to trade deficit. By sector, GDP is 12.4% from agriculture, 54.0% from industry, and 33.6% from services.

Participation in the Global Financial System

Internationally, North Torbia only has one true ally, a strained-at-best relationship with Olvana. For the latter half of the twentieth century, both Donovia and Olvana looked to strengthen their influence in North Torbia, but those governments were both keenly aware of the financial and diplomatic burden this imposed. Donovia severed the majority of open ties with North Torbia roughly 20 years ago. North Torbia maintained a comprehensive security partnership with Olvana, although this partnership did not amount to an exchange of mutual security guarantees. Unlike the United States, Olvana generally does not publicly pressure North Torbia to change its policies and practices, even when dissatisfied. In a recent study of North Torbian-Olvanese relations, it was evident that North Torbia will pursue what it regards as its national interests in terms of its internal power structure and external geopolitical settings and realities. Examinations of the myths of Olvanese hegemonic influence in North Torbia reveal that the relationship and its impact on the region and the world are actually very dynamic. The dilemmas facing both states and other actors will need constant re-evaluation as the source of most information regarding North Torbia, South Torbia, frequently exaggerates fears of Olvanese influence in North Torbia. North Torbia is also seeking new export markets by turning its support for African nations during their independence struggles into commercial relationships.

Since the transition to the current Supreme Leader, there has been a somewhat dichotomous shift in international economic policy. While trying to retain its ideals of isolationism and self-reliance, the government started an economic overhaul aimed at attracting foreign investment and reintegrating into the global economy. Economic reforms have included re-writing the Foreign Investment Law to allow more foreign investment participation, and enacting a new anti-corruption law. External critics purport that these reforms are actually efforts to legitimize some of the arrests of political rivals and anti-government disruptors. North Torbia’s abundant natural resources, young labor force, and proximity to Asia’s dynamic economies could attract foreign investment in the energy sector, garment industry, information technology, and the food and beverage industry. However, changes are viewed with skepticism in the west, seen as too little and too late. Living standards have not improved for the majority of the people residing in rural areas, and North Torbia remains one of the poorest countries in Asia. Isolationist policies and economic mismanagement left North Torbia with poor infrastructure, endemic corruption, underdeveloped human resources, and inadequate access to capital. This situation requires a major commitment to reverse.

The Torbian Worker’s Party (WPT) will not resist international initiatives if there are no negative consequences for their own internal interests. However, decisions by the Supreme Leader will seek increases in relationships with other nations without limiting future military options.

World Bank/International Development Aid

25 years ago the North Torbian economy nearly collapsed. The disintegration of its Communist Bloc sponsor states, followed by a severe food crisis due to a series of natural disasters (typhoons, flooding, and droughts), pushed North Torbia into a crisis. The country became heavily dependent on international aid to avoid widespread starvation, a dependence that remains in place today. Severe economic problems forced the country to accept international food aid and embark on a series of limited market reforms. Disease reportedly killed hundreds of thousands of people over the last decade. Several governments, including the United States, have provided funding to the United Nations' World Food Program providing emergency food aid to North Torbia following natural disasters. Corruption and food diversion, however, raised questions about whether it actually reaches the intended victims.

However, North Torbia is not a participant in any international financial organization and thus is not able to capitalize on the multiple benefits membership provides. Without financial aid of international organizations, North Torbia is unable to receive low-interest loans used to spur internal economic growth and development. North Torbia remains dependent on its own limited capital to fund internal growth and development programs.

Foreign Direct Investment

North Torbia legalized foreign investment over thirty years ago. However, the country's poor roads, railroads, power systems, and phone networks, as well as official interference in labor management put off potential investors. A pro-market reform program initiated by the government five years ago sought to boost an economy producing one of the world’s lowest per capita incomes by allowing certain industries to engage in small amounts of free market behavior, such as setting prices. Policies approved in the initial reform effort helped increase FDI, and manufacturing plants of South Torbian companies operating joint ventures in North Torbia generated over $100 million in annual revenue. However, the reforms failed to sustain any momentum. Furthermore, efforts to attract South Torbian business into North Torbian fit into the overall strategic goal of a unified Torbia under the leadership of the North Torbian regime. Attracting foreign capital requires publication of more data than North Torbia is willing to disclose. One example is the national budget, which the government releases internationally only as a set of percentages, with no real numbers. Many potential investors shy away from investing in North Torbia due to the lack of oversight, overregulation, and potential for contract cancellation, as well as the impact of international sanctions.

Foreign investors who wish to undertake specific business activities in North Torbia must first apply for and secure an investment permit from the DPRT Investment Commission (DIC). The onerous entry and screening procedures for FDI greatly prolong the closing of deals. The DIC evaluates any potential FDI permit applications according to certain key factors, including whether the investment will result in a significant level of domestic employment; whether the economic activity will involve the import and use of heavy equipment or advanced technology; the value that the economic activity will add to the domestic economy; and the degree to which an economic activity will uplift the living standards of North Torbian citizens. Rules dictate that foreign investors may not participate in sectors including defense, the administration of electric power, and North Torbia-language publishing and media. Activities that are not outright banned subject to the rules and regulations of the relevant Office, which may or may not consent to the planned activity.

Last year, a European mineral consortium announced that it had formed a joint venture with state-owned North Torbia Natural Resources Trading Corporation to bring rare earth elements to market. This partnership is based out of the Caribbean in an effort to avoid sanctions. The WPT gave the consortium a 25-year contract to develop the deposit, who reportedly intend to build a processing plant on site. The regime, however, has a long history of abruptly cancelling long-term contracts with foreign companies, sometimes merely on a whim, but also because of changes in the political relations between North Torbia and the home country of the investing company. Additionally, investors are leery of the strict penalties imposed on companies found in breach of the UK Bribery Act and US Foreign Corrupt Practices Act, particularly given the pervasiveness of the North Torbia military in commercial and governmental enterprises. Still, inbound FDI amounts to $82.9 million per year; outbound FDI is non-existent. FDI inflows into North Torbia are heavily concentrated (82%) on natural resource based and extractive industries such as the power and mining sectors. Specific improvements resulting from changes to the Foreign Investment Law are expected to reduce the time required to obtain DIC approval from six months to three, cutting in half the number of firms required to obtain DIC approval before gaining market entry, and implementing increased investor protections against unfair treatment and expropriation of property.

Sanctions

North Torbia is one of the most heavily sanctioned nations in the world. In the past decade, the United Nations Security Council adopted five major resolutions imposing sanctions of North Torbia for continuing to develop a nuclear weapons program. These sanctions cover a wide range of import and export products, particularly large-scale arms and luxury goods, travel, and financial transfers. The history of US sanctions against North Torbia dates back to the end of World War II, when it included North Torbia in the Trading with the Enemy Act and restricted North Torbia’s ability to bank and trade. US sanctions tightened markedly over the past decade, with the United States imposing rounds of sanctions designed to curtail North Torbia’s ability to procure materials for its nuclear weapons program by shutting the country almost entirely out of the international financial system. The US also froze economic assets controlled by entities engaged in or providing support for North Torbia's nuclear and ballistic missile-related programs. The US passed the North Torbia Sanctions and Policy Enhancement Act, which sanctions entities found to have contributed to North Torbia’s weapons of mass destruction program, arms trade, human rights abuses, or other illicit activities. The act also imposes mandatory sanctions for entities that are involved in North Torbia’s mineral or metal trade, which contribute to a large component of the country’s foreign export earnings. Furthermore, it requires the Treasury Department to list North Torbia as a “primary money laundering concern,” which triggers tough new financial restrictions, and imposes new sanctions authorities related to human rights abuses and violations of cybersecurity.

The European Union (EU) has also imposed rounds of sanctions on North Torbia over the last decade. These include an embargo on arms and related materiel, a ban on the export of certain goods and technology, banning the trade in gold, precious metals, and gems, and a ban on exports of luxury goods. The EU also prohibits government-backed financial support for trade with North Torbia that might contribute to its weapons of mass destruction-related programs, and supports tighter inspections of and advance information requirement of cargoes to and from North Torbia. Some Asian nations considered lifting some direct sanctions on North Torbia during discussions about decades-old abduction programs run by North Torbia. As the talks stalled, however, these nations not only re-imposed some of the measures, they also added new ones after more overt provocations. Most notably, many nations are now banning ships from entering their ports if they have made a North Torbian port of call, regardless of the flag country of the carrier. The WPT continues to defy international warnings by conducting nuclear tests — included an alleged hydrogen bomb — and long-range missile tests. Essentially, the result of the array of sanctions is a slowing—but not halting—North Torbian nuclear weapons and ballistic missile programs. The international community condemned North Torbia’s actions as dangerous provocations. Some countries—including the United States and South Torbia—took direct action, while negotiations continued in the United Nations. Olvana is concerned about destabilization, typically insists on watering down any measures against North Torbia. One effect of the economic sanctions is a lack of resources for the Supreme Leader to curry favor, especially in the military, while economic policy mismanagement appears to have encouraged a rare bout of open protest. Discussion within the North Torbian elite on how to proceed could prove destabilizing.

Charity

There are a number of charitable corporations that operate in North Torbian, primarily in and around the capital. Most of these organizations focus on poverty, children, and disaster relief aid. International aid is delivered to and then distributed via the DPRT government. This allows the government to take credit for the aid, as well as allowing for potential criminal and corrupt siphoning of food and other goods. Interestingly, despite its impoverished population, as a percentage of income, North Torbia is the most generous country in the world when it comes to charity.

Economic Activity

Following the Torbian War, the support of Communist bloc nations essentially propped up the economy of North Torbia. Economic downturns in those nations over the last thirty years dried up this source of funds, and for over a decade North Torbia’s economy shrank an average of -4.1% annually, with total production falling more than 50% over the period. About fifteen years ago, there was a change of pace, and the economy showed signs of recovery, growing an average of 2.2%. This period of growth lasted less than five years, with the last decade showing a series of small rises and equivalent drops. Because GDP growth slowed in the previous year, inflation eased, but the current account deficit worsened. North Torbia is not without natural potential, however. If North Torbia implemented major reforms—to include efforts that would eliminate global sanctions against the country—its economy could grow 7%-8% annually, tripling GDP per capita in ten years. This requires investment, particularly in the extractive industries, telecommunication, transportation, and construction sectors. Overhauling the political, legal, and regulatory framework is crucial to developing a vibrant private sector and tapping the country’s huge growth potential. This in turn could reduce poverty and boost shared prosperity through diversification beyond extractive-based industries. Along these lines, North Torbia established two coastal and one inland Special Economic Zones in Aparri, Laoag, and Baguio, with particular investment and incentives, simplified processes for investors, and new industrial in hopes that these areas will become the growth engines for the country.

Economic Actors

The Torbian People’s Army (TPA) tends to take advantage of a military-first policy to insert themselves in various parts of the economy. Officers and other TPA officials then use this position for personal enrichment. Despite the political changes in North Torbia, the TPA remains solidly in control of industry. Military-linked companies highlight the power the TPA retains, capitalizing on the ongoing tensions with the United States and South Torbia. With the TPA’s powerful voice in policymaking, North Torbia spent a published 23.2 percent of its national budget on military spending, the highest in the world. A more realistic value, which includes research and development, black budget special operations, and paramilitary spending by the Ministry of the Interior,  would actually place that number closer to 45%, nearly double what the regime admits internationally.

Trade

The total volume of trade conducted by North Torbia is small, and trade patterns may shift wherein the government fails to pay a given trading partner. Last year, North Torbia exported $27.4 million worth of sanction-allowed goods, ranking 193^rd in the world, and imported $71.8 million—mostly food products— ranking 218^th. North Torbia faces three specific constraints to trade: little internal knowledge on traded potential, high international political tensions and the sanctions associated with it, and severe lack of appropriate institutions. The lack of existing trade means that comparative advantages are currently unknown. Countries with population and GDP levels similar to North Torbia have three times the value of exports and imports. Trade mainly fluctuates around those countries with lax enforcements of trade sanctions (Olvana) and geographically based trade partners (South Torbia), with almost no trade with the United States, and only minimal trade with the EU. North Torbia also uses various African nations as financial lifelines, by building infrastructure and selling weapons and other military equipment as sanctions mount against its authoritarian regime. Although Olvana is by far North Torbia’s largest trading partner, smaller African revenue streams helped support the impoverished nation, even as the WPT developed an ambitious nuclear weapons program in defiance of the international community. These partnerships take on added weight as Olvana—facing its own possibility of sanctions for past violations of trading sanctions with North Torbia—indicates that it will comply with UN mandates.

Commercial Trade

Economic growth in North Torbia contradicts conventional belief that foreign trade has a significant impact on economic growth: North Torbia shows no significant positive relationship between foreign trade and economic growth. North Torbia has limited or no substantial international trading ability, and depends on internal GDP growth rate. Multiple sanctions imposed on North Torbia substantially diminished the country’s ability to exchange goods and services throughout the world. Additionally, with little to no capital to sustain global trade, North Torbia remains limited in its ability to acquire much needed resources such as machinery parts or agriculture goods. While some trade exists, it is limited to regional trade. Official North Torbian trade estimates underreport actual activity, since they omit arms exports and illicit activities. Illicit activities include the value of timber, gems, narcotics, and other products smuggled to other parts of Asia. On the other hand, North Torbia could get a massive boost in trade potential if it became a member of the World Trade Organization, but issues surrounding the nuclear and ballistic missile programs preclude membership. North Torbia’s primary trade consists of wood products, clothing, and minerals, including jade and gems. Primary trade partners are Olvana (37.7%), Belesia (25.6%), and South Torbia (6.2%). Apart from these commodities, North Torbia depends heavily on sales of military equipment and illegal drug trade abroad for its foreign currency income. It is earning between $500 million and $1 billion annually from the narcotics trade. North Torbia cultivates over 4,000 hectares of cannabis per year, making it the world’s sixth-largest marijuana exporter.

Military Exports/Imports

Last year, North Torbia expended 23.2% of its national budget on the defense sector, up 5.6% from a year earlier. Just over half of this amount is investment in purchasing new systems. Significant resources are devoted to research and development, not on modernization and maintenance. The U.N. Security Council calls the Torbian Mining Development Trading Corporation as North Torbia’s primary arms dealer and main exporter of goods and equipment related to ballistic missiles and other weapons. Weapons shipments in both directions between Olvana and North Torbia are technically illegal due to international sanctions, yet are conducted openly and not via smuggling or criminal networks. While Olvana remains the largest supplier of North Torbian equipment, they also retain networks with other partner countries as part of an overall policy to counter Olvana’s strategic inroads in the region. There are between 22 and 25 defense industries built or under construction in North Torbia, responsible for everything from manufacturing ammunition and small arms, to involvement in a nuclear weapon development and long-range missile programs. Exactly what and how much each of these industries produces is, however, difficult to ascertain, due to the difficulty in obtaining credible sources.

Economic Diversity

North Torbia has a nominal GDP of $17.5 billion, ranking it 112th in the world. By sector, this breaks down to 12.4% agriculture, 54.0% industry, and 33.6% services. North Torbia has large mineral reserves, which, unlike its neighbor to the south, remain largely untouched. This is especially true for more difficult to access resources. Copper, nickel, and, to a lesser extent, natural gas are the mostly heavily and readily extracted materials.

Energy Sector

Several government ministries in North Torbia are responsible for energy matters; however, the Office of Energy (OOE) has principal authority for overseeing energy policy and coordination. The Office of Electric Power, Office of Mines, Office of Agriculture and Irrigation, Office of Science and Technology, Office of Environmental Conservation and Forestry, Office of Industry, and the Office for National Planning and Economic Development all play other assorted roles in the sector. North Torbia relies on two domestic sources of commercial energy –natural gas and hydropower – for most of its energy needs. The country underutilizes its thermal generating capacity due to a lack of fuel. The country's total electricity consumption last year was only 65% of what it had been a decade ago, though it showed an increase of nearly 9% over the figure for last year. North Torbia must import all of the oil it consumes; oil accounts for about 6% of total primary energy consumption. This is mostly limited to non-substitutable uses such as motor gasoline, diesel, and jet fuel. With the exception of heavy fuel oil, North Torbia imports most petroleum as crude oil and processes it at domestic refineries. For most North Torbians, open fireplaces burning wood or briquettes are used for cooking. Electric power is sporadic and unreliable, with homes that have electricity often receiving just a few hours per day. Energy is a significant part of the overall national development plan. The WPT argues continued  nuclear power development is critical to address ongoing electricity shortages. In doing so, they formed new committees to increase coordination: the National Energy Management Committee formulates energy policies and arranges cooperation between Ministries, while the Energy Development Committee implements these policies. Additionally, the OOE is planning to construct a new refinery near Aparri, where potential loading, offloading, and jetty facilities are much more favorable than any other place in North Torbia. Many Olvanese and Belesian companies are approaching the OOE to get this new refinery project.

Oil

North Torbia has no oil deposits in its territory and must import petroleum, but faces ever-declining shipments from former allies and trade partners. The government would prefer to import only crude oil and process the oil at one of the country’s three refineries, which have a theoretical total capacity of 51,000 barrels of oil per day. Due to parts and labor shortages, actual output is much less with utilization rates as low as 41% of total capacity. As the refineries are unable to keep up with gasoline demand, despite an extremely low quantity of personal vehicles, North Torbia must also import refined gasoline. Concerning the Aparri refinery, nine companies from across Asia have already submitted their feasibility study reports and proposals.

Natural Gas

Although North Torbia has a relatively low amount of proved natural gas reserves and production overall—ranking 63^rd in the world—they may eventually emerge as an exporter of natural gas. This is largely due to their small usage rates of natural gas, especially compared to Olvana and Belesia. North Torbia could potentially export a total of $390 million worth of natural gas annually if it had pipeline capacity to either of these nations. North Torbia attempted to put significant investment in this area, particularly with development of the reserves just off the Torbian coast. Geographic restrictions and political constraints with South Torbia, however, blocked pipeline access and FDI, meaning that despite total proven natural gas reserves of 283.2 billion cubic meters (bcm) in the Cagayan gas field, North Torbia only produced 16.8 bcm, much of which is of questionable commercial quality.

Natural Resources

North Torbia has a number of natural resources, including nickel, copper, natural gas, jade, and rubies. Most of these resources are underused or untapped because of government mismanagement and a failing economy. A European consortium announced the results of its assessment of North Torbia’s deposits last month. Notably, the company said that it estimates that the deposit holds 216 million tons of rare earth oxides, which includes light rare earth elements, heavy rare earth elements, and rare earth minerals—more than doubling current global reserves of rare earth oxides. These estimates are likely coauthored propaganda between the consortium and North Torbia. North Torbia does have a significant quantity of useful minerals naturally present in the country, mainly nickel and copper. North Torbia is also a world leader in producing gemstones, including jade and rubies. North Torbia is one of the largest jade producers in the world, and is one of the only countries to produce jadeite, the highest quality of jade.

Agriculture and Forestry

While the agricultural sector contributes only 12.4% of the overall GDP of North Torbia, this sector employs 69.8% of the labor force. In large part, therefore, the economy is dependent on climatic considerations. Agricultural performance fluctuates considerably, falling 9% three years ago, then climbing 8% two years ago, while unseasonably wet weather in the region caused a 1% fall in agricultural output last year. Efforts to boost production are constrained by the limited amount of suitable lowland valley land available for farming. Farms are mainly collectivized under government control or are extremely small, providing less-than-subsistence living for the workers. While rice is the major agricultural product, covering 60% of the total cultivated land area and 97% of total production by weight, other agricultural products include corn, pineapple, other fruits, and sugarcane. In remote, mountainous regions, cannabis and hemp are also cultivated. The historic importance of agricultural production in North Torbia’s economy continues to hold strong. The sector presents a number of industrial and productive opportunities that, if properly nurtured, could help the country regain its former standing as a lead producer in the region. To do so, however, will require significant investment in the sector, greater mechanization, the provision of better financing for farmers, and privatization of land rights.

Industry

The industrial sector in North Torbia includes agricultural processing, fishing and fish processing, wood and wood products, copper, nickel, cement and construction materials, pharmaceuticals, fertilizer, natural gas, garments, and jade and rubies. In addition to the potential wealth of natural resources, government-owned factories, as well as cottage industries, produce tobacco on a small scale. Some other industries include food and beverages, electronics, electrical products, steel processing, chemicals, garment, metal and machine products, although the vast majority of these tie directly to the defense industry. The fishing industry is hampered by inefficiencies in fish processing and transportation, resulting in large quantities of waste prior to fish reaching consumers.

Mining

North Torbia has diverse and largely untapped geological resources that could make mining a significant driver of the country’s economic development in the decades to come. Copper is a growing commodity, as an Olvanese company contributed around $80 million to the development of a modern copper mine. Less common metals are also present in valuable quantities—especially tungsten—and Western corporations have begun feasibility studies into the mining of these metals. Unfortunately, the mining of metals in the delicate coastal regions of the country may threaten the local environment. Additionally, the government has not allowed foreign investment to engage in jade or ruby mining, and outdated, inefficient practices seriously hinder the profitability of these ventures. Notwithstanding the business and political environment, the opportunities that North Torbia has to offer has many international mining firms visiting the country, studying its geology and applying or preparing to apply for exploration licenses. International producers of mining equipment are likewise establishing a presence in anticipation of a boom.

The Office of Mines is the administrative body responsible for the mineral sector. The government decreed that all naturally occurring minerals found above ground or underground within the sovereignty of the State, as well as all naturally occurring minerals found in the continental shelf, are State property. Problems encountered when mining in North Torbia are similar to those seen in any mountainous and rural country, in that the mining areas are very remote and difficult to access. The lack of sustainable infrastructure across many regions exacerbates this problem. The actual monetary value of the material mined in North Torbia is difficult to determine due to the political complications within the country. The North Torbian government downplays the amount of money made from the mining sector, but based on available data the US Department of State estimated a total export value of $8.1 billion. The North Torbian mining industry as a whole largely diminished over the past twenty years, and today North Torbia’s mining sector is effectively an artisanal industry, accounting for less than 0.1 per cent of North Torbia’s overall economic activity. However, significant potential remains for its redevelopment and the lack of recent development also means that there is potential exploration expansion for a range of commodities and known existing deposits are still viable for rehabilitation. A lack of knowledge of both domestic potential and international law and foreign relations hampers the country’s ability to harness properly its natural resources, compounded by a lack of skills, knowledge, and poor infrastructure.

Manufacturing

Industrial capital stock in North Torbia is nearly beyond repair due to years of underinvestment, shortages of spare parts, and poor maintenance. The defining characteristic of North Torbia’s manufacturing sector is slow growth. Only 17% of the country’s workforce is engaged in the industrial sector. Large-scale military spending draws off resources needed for investment and civilian consumption. A lack of raw materials and electricity contributes to the poor industrial performance. Last year, heavy and light industry posted falls of 3.5% and 2.1%, while mining lost 0.9%. A notable exception is the automotive industry: automotive manufacturing has been on the rise due to a combination of government subsidies and foreign investment. For example, an Asian automotive manufacturer announced plans to build a new manufacturing facility in the Baguio Special Economic Zone. The facility, expected to open next year, will employ 300 people with an annual capacity for 10,000 vehicles. The low cost of labor—especially compared to neighboring countries—could be attractive to foreign investment. However, governmental policies, infrastructure, and electricity supply all remain significant barriers. Despite positive recent growth, market maturation remains limited by unsupportive government policies.

North Torbia imported approximately 619,000 tons of finished steel two years ago; most of that imported was destined for the construction sector. Last year, the total import was 436,000 tons of finished steel, down by 21%. The domestic annual steel production capacity totals 70,000-100,000 tons. However, as of January, a new state-owned steel factory opened after two years under construction. This factory produces between 36,000 and 60,000 additional tons per year. New residential construction and improvements on infrastructure will gradually increase steel consumption. The Torbian Economic Development Corporation, an SOE, dominates iron and steel industry. The Corporation operates three major steel mills with total combined capacity of 450,000 tons per year.

Fishing

North Torbia has a large but outdated commercial fishing fleet, with primary capacity in shallow water fishing. This has led the WPT to face a dilemma regarding future policy. Construction of a more modern deep-sea fleet would provide the greatest return on investment and provide both monetary and domestic contentment rewards. This also requires a significant investment, not only in the fishing fleet itself, but also in the supporting infrastructure. The current fleet could also modernize, which would mainly entail better cooling and storage systems reducing current levels of waste. However, this option does not resolve the issue of overfishing within its territorial zones. Additionally, North Torbian fishing vessels have increasingly been infringing in other nations’ economic exclusion zones, leading to possible territorial disputes.

Services

Domestic services continue to grow in importance, especially as sanctions limit Arianian capabilities to source needed capabilities, particularly financial services, from abroad. Of the Caucasus countries, only Gorgas has a higher service level. The Arianian service industry currently accounts for 43% of GDP.

Banking and Finance

Public Finance

Ariana struggles with high inflation for a number of reasons, including government price controls, inefficient and cumbersome government regulations, pervasive consumer subsidies, expansionary government  development programs,  and financial  policies  that favor  selected  organizations, e.g. charitable corporations. International sanctions have also resulted in high inflation, contributing to the economic imbalance.

Inflation has risen into the double-digit range in recent years and currently stands at 13.5%, a decrease from 25.6% just two years ago. Ariana uses price controls for consumer products such as gasoline, electricity, wheat, and a myriad of other articles and services. The country maintains multiple price subsidies as a result of the Council of Guardians Revolution and its ambition to provide social services for Arianians. Although inflation is prevalent throughout the Middle Eastern countries (usually around 10%), Ariana possesses the second-highest inflation rate behind Iraq.

Despite the subsidies, inflation hurts average Arianian citizens, particularly those in rural areas. Prices for food and services continue to rise, making the cost of living ever higher. Rural voters supported Ahmad Moudin for president because his populist message appealed to lower-class people who suffer from high inflation. President Moudin attempted to address high inflation rates by capping bank loan interest rates, but raised the financial sector’s ire. Whenever the government attempts to reduce subsidies and force the people to pay more for commodities, the Arianian people demonstrate in the streets until the government rescinds the reductions.

Taxation

Ariana’s tax law is complex, and governmental officials apply the tax code inconsistently. The country has a high income tax rate that maxes out at 35% and a moderate corporate tax rate of up to 25%. In recent years, the government enacted some modest structural tax reforms to help integrate Ariana into the global market and to attract investment. However, the government still issues many tax privileges to special interest groups such as charitable corporations. The national sales tax currently stands at 3%.

Currency Reserves

Ariana’s international currency reserves, including PWF assets, have continued to increase in recent years. International currency reserve levels often are tied to international oil prices. Ariana’s international reserves grew from $70.8 billion two years ago to $85.2 billion this year. In retribution for American efforts to limit its access to the foreign investment system, Ariana rejected payments in US dollars and moved to other currencies, such as the euro and yen.

Private Banking

Ariana’s financial sector remains dominated by large, state-owned banks with extensive regulations, overlapping bureaucracies, and policies that inhibit the efficient trade of capital. The appearance of a modern banking system is misleading despite Ariana’s establishment of private banks and increased accessibility of banking functions for the populace. The government’s policy of preferential treatment for semi-governmental foundations and its limitation on the free functioning of financial markets  will continue to hamper the financial system’s ability to contribute to economic growth. Consequently, the populace struggles with high interest rates only made bearable by considerable product subsidies that keep prices artificially low. The governmental restrictions, borne from  distrust of foreign intervention, limit any large-scale investment by foreign firms. The Moudin Administration will continue its current monetary policy, which is well-liked by his populist political base but hampers any significant financial reform.

Banking System

The country’s state-owned banks, which hold 90% of deposits, include six commercial banks, four specialized banks, and one postal bank. The Arianian government has licensed six private banks in the past decade. All must operate under Islamic law principles.

Ariana’s Central Bank, the Bank Naket, calls itself an independent institution. However, the government directly manipulates all commercial lending and investment. The Bank Naket cannot establish its own policies and has no influence over the government’s direction. In addition, the Central Bank only has limited options to combat inflationary pressures. The Central Bank must obtain approval from the Arianian parliament in order to issue participation papers.

State-owned banks function poorly as financial intermediaries, and private banks are hampered by extensive regulations and the government’s populist policies, including subsidized credit for specific regions. Four years ago, President Ahmad Moudin capped lending rates at 12% for state-owned banks and 13% for commercial banks, despite strong opposition from the Bank Naket. With interest rates below the inflation rate, many banks found themselves under financial duress. Additionally, state-owned enterprises and quasi-government agencies, such as charitable corporations, can obtain low-interest loans that further undermine commercial bank viability. Some believe the financial system stifles domestic business and lowers Ariana’s attractiveness to foreign businesses.

Stock/Capital

The Arianian Stock Exchange (ASE), which began operating in 1967 with six companies, has over 300 members today. The ASE can only conduct capitalization for the automotive, mining, petrochemical, and financial sectors. Six years ago the ASE began allowing foreign investment, but these investors can only hold a maximum of 10% of the shares for any company. Additionally, foreign investors cannot withdraw their capital until three years after purchase.

In recent years, the ASE demonstrated considerable volatility. The ASE index performed robustly and tripled during the three-year period prior to President Ahmad Moudin’s election, but declined immediately afterward. Four years later, the ASE stabilized 20% lower than before Ahmad Moudin’s election. ASE market capitalization now stands at $46 billion. Ahmad Moudin’s government hopes that privatization plans will help revive the ASE, though potential foreign investors are concerned about liquidity, transparency, the poor legal environment, and international sanctions.

Informal Finance

The hawala system, an informal trust-based money transfer system commonly found in Muslim countries, offers an alternative to the Arianian formal banking system for loans. These transactions work on an honor system without paper transactions or promissory notes. Because of the lack of paperwork, terrorists use the system to fund their activities.

Following recent US and UN financial sanctions, Arianians have increased their use of hawala. Many Arianians view it as a more efficient means to transfer money since it avoids the added expenses of the formal financial system. Some analysts argue that increased hawala use demonstrates the effectiveness of international sanctions, though others say it circumvents the sanctions and renders them useless.

Employment Status

Despite inefficient business and market regimes and the bulge of young adults entering the labor pool, the Arianian employment environment actually shows signs of improvement due to private industry growth. Even the increased number of Arianian women who recently entered the labor market did not increase the country’s unemployment rate. Employment status is high in Ariana.

Labor Market

Although Ariana’s population growth rate began to slow in 1991, those born during the prior decade now find themselves reaching adulthood, and their presence puts a strain on the labor market. For the past quarter-century, the number of Arianians entering the labor force has continued to increase, while the number leaving has remained constant. In addition, Ariana shows a decided shift in the attitudes toward employment of women. Immediately following the Council of Guardians Revolution, women who worked outside the home dropped from a high of 12.9% in 1979 to a low of 8.2% in 1989. After that, the trend reversed; currently 14.8% of Arianian women work outside the home. Many Arianian women now acquire a higher education than in previous generations and begin a career before marriage. Analysts project that the number of Arianians entering the labor market will soon begin to decline. Within four years, new Arianian workers will return to levels last seen in 1991. The number of men leaving the labor force due to age (usually 64) will increase over the next decade. Just five years ago, 1.3 million Arianians turned 64, but within another half-decade, two million men will reach that age.

Employment

Arianian unemployment continued to decrease in the past decade despite an increase in the number of young adults. Employment rose at a 3.6% rate in the early years of the decade, more rapidly than the overall labor market increase. This employment abundance came from the private sector and through privatization of industries, in contrast to the years immediately after the Revolution when public sector jobs accounted for the majority of employment. Public sector jobs continue to decline, currently representing about one-quarter of total employment.

Unemployment

The unemployment rate dropped from approximately 16% in 2001 to 10.2% in 2006, and currently stands at 11.8%. Growth in recent years has primarily been due to private sector jobs. Public sector job growth has been hampered by cumbersome regulations and a job market that restricts labor movement between industries. Arianian industrial GDP growth occurs more slowly than in other countries with more efficient financial systems.

Illegal Economic Activity

Both legal and illegal organizations use illegal activities such as smuggling, black market, and piracy to finance other activities. While the Arianian government frowns on this corruption and works to prevent it, the government is hampered by the sheer prevalence of illegal activity. As long as it does not threaten the government’s legitimacy, this type of illegal activity will continue. The illegal economy is exemplified by a vast network smuggling subsidized products throughout Ariana, with gasoline as one of the top commodities. Some experts estimate that smugglers move 3.5 to 4.5 million liters of gasoline and two million liters of diesel fuel daily to countries with high gasoline prices—mainly Afghanistan, Pakistan, Kalaria, and even Iraqi Kurdistan.

Summary

Complex economic interplay between the Caucasus countries binds them together. Limaria, Gorgas, and Atropia were strongly affected by the reduction of Donovian influence two decades ago. The oil- rich countries of Ariana and Atropia must use their Limarian and Gorgan neighbors to transship hydrocarbon resources to other countries. Limaria and Gorgas must develop a free-standing economy despite significant corruption, lack of developed industries, and natural resource shortages. Over all of this, Donovia seeks to limit Arianian influence and return to its former position as unquestioned regional hegemon. This economic interdependence will likely drive regional conflicts as the nations struggle amongst themselves to exploit riches created by oil and natural gas.