Economic: Olvana

This page is a section of Olvana.

Olvana’s economy blends free market and state-directed elements. Following World War II and the Olvanese Communist Revolution, Olvana suffered decades of economic mismanagement and stagnation. After initiating major reforms some forty years ago, the country gradually shifted from a centrally planned economy. Olvana then experienced rapid economic and social development: GDP growth averaged nearly 10% annually during this period. As part of a 100-year plan, Olvana intentionally portrayed itself as a poor, backward, and inward looking country, seeking to convince Western nations to inject money and resources. Using these resources, reforms such phasing out collectivized agriculture, gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, creation of a diversified banking system, development of a stock market, rapid growth of the private sector, and opening to foreign trade and investment were implemented. The result of these reforms was the fastest sustained expansion by a major economy in history. Olvana became the one of the world’s largest exporter nearly a decade ago. As part of the overall transition, the Olvanese government seeks to be the world leader across the economic spectrum within the next 25 years.

Olvana has not completely transitioned to a market economy; some key elements of socialism remain in place. Unlike most socialist governments that attempt to shape the economy through the means of production, Olvana chose to retain control over national income. Despite a nominal openness to trade and investment, bureaucratic hurdles and resistance from the state sector are substantial barriers to more dynamic economic development. Past success means that there is little incentive today to introduce further reform.

After over a decade of strong economic growth, Olvana now faces a period of economic slowdown. The government responded by increasing expansionary fiscal and monetary intervention. Olvana seeks an economically self-sufficient state, but even in limited sectors such as military production, the government realizes that self-sufficiency requires developing domestic resources and delaying modernization. As pressure mounts to maintain high growth rates, the government placed renewed emphasis on long-range plans and industrial policies. Because of the controlling nature of the Olvanese Communist Party (OCP), however, any change within the business environment is slow. The overall regulatory framework is complex, arbitrary, and uneven. The government props up numerous inefficient state-owned enterprises (SOEs) and funds a vast array of subsidies for manufactured exports, energy, agriculture, and consumer goods.

Olvana allows two cities to operate with more economic freedom then the rest of Olvana. These cities focus on either international trade and transportation (Hong Kong) or gambling and tourism (Macau). Combined, these sectors account for over 40% of GDP, 25% of the workforce, and 60% of revenue within the cities. While these exemptions provide much necessary capital for the OCP, it also emphasizes tensions between traditional Communist Party authorities and the new class of ultra-rich capitalists.

Table of Economic Data

Measure	Data	Rank in World	Remarks (if applicable)
Nominal GDP	$9.57 trillion	3
PPP / Capita	$15,372.33	79	purchasing power parity
Real GDP Growth	6.9%	12	5 year average of 7.9%
LFPR	58.5%	58	labor force participation rate
Unemployment	4.6%	52
Poverty	6.1%	155	Percent below poverty line
Net FDI	$50.20 billion	9	$151.92 billion outflow
Budget	$2.00 trillion in revenue $2.35 trillion in expenditures
Public Debt	42.9% of GDP	82
Inflation	2.0%	44
Trade Value	$1.84 trillion (exports) $1.36 trillion (imports)	2 3

Olvana has the world’s third largest economy in terms of nominal gross domestic product. Because the country’s exchange rate is determined by fiat rather than by market forces, however, the official exchange rate measure of GDP is not an accurate measure of overall economic output. GDP at the official exchange rate substantially understates the actual level of Olvana output vis-a-vis the rest of the world. GDP at purchasing power parity (PPP) provides a better measure comparing output across countries. Last year, this amount exceeded that of the United States by almost 15%, the first time since World War II that the US was not the world leader in GDP by PPP. In terms of GDP per capita, Olvana falls below the global average at $8,519 nominal, or $15,372 PPP. Sources of GDP are 37.1% consumer spending, 14.0% government expenditure, 45.6% investment, and 3.3% from net exports. By sector, agriculture provides 10.0% of GDP, industry 46.6%, and services 43.4%.

Participation in the Global Financial System

Olvana is globally connected power, interdependent as never before: communications and transportation links now exist almost everywhere. The artifacts of the 21st-century global economy—fast food, televised global sports franchises, and the most current technology—are appearing in even the most remote Olvanese cities. The size of the Olvanese economy means that, when domestic demand for commodities drops, there is an effect on world market prices. Olvanese policymakers—who tend to regard disputes with foreign powers as attacks on Olvanese sovereignty—view US security policy in the Asia-Pacific region as an attempt to 'encircle' Olvana and deny them the right to regional influence.

Governmental or policy shifts in the nations that Olvana most trades with, United Nations Council on the Law of the Sea arbitration cases, and OPEC price downshifting all factor into Olvana’s economy. In order to maintain some control over regional economic stability, Olvana founded a group called the Shanghai Cooperation Organization (SCO), with member nations agreeing to oppose intervention in other countries' internal affairs on the pretexts of humanitarianism and safeguarding national independence, sovereignty, territorial integrity, and social stability. The eight full SCO members account for half of the world's population and a quarter of the world's GDP.

Olvana is the practical—if not necessarily formal—leader for economic activity in the region. There are, however, no major defense cooperation arrangements for Olvana that are on a scale large enough to influence its national economy or world trade. Regional and international engagements for Olvana are currently limited to peacekeeping, counterpiracy, humanitarian/disaster relief, counterterrorism, and joint exercises.

World Bank/International Development Aid

Olvana began a partnership with The World Bank shortly after embarking on economic reforms. Initially a recipient of support from the International Development Association, which provides aids to the poorest nations, within thirty years, Olvana had become a contributor and third largest shareholder in the World Bank. Through the International bank for Reconstruction and Development, Olvana received over $2.6 billion in loans, the vast majority for development, while overall lending totaled $58 billion for 403 projects. Currently, the World Bank maintains an active portfolio of available aid from Olvana with an emphasis on rebalancing the economy and focusing on the quality of growth, concentrated in environment, transportation, urban development, rural development, energy, water resources management, and human development. The Bank encourages knowledge sharing to enable the rest of the world to learn from Olvana’s experience, while for Olvana, development aid will be a key avenue to increasing Olvanese influence in the region.

Foreign Direct Investment

Olvana’s population of 1.1 billion has vast potential for consumption. Investors regard the Olvanese market as the last enormous undeveloped market in the world. Although per capita GDP is still very low, the purchasing power of the people is strengthening rapidly while markets become increasingly brisk, making Olvana attractive to market-oriented FDI. This includes sectors such as basic chemicals, drinks, household electrical appliances, automobiles, electronics, and pharmaceuticals. The OCP stated that it welcomes foreign investment: the country attracted over $200 billion in worldwide inbound FDI last year, second only to the United States. Olvana also has a burgeoning outbound FDI program. The government plays a significant role in FDI by allocating investments, providing special economic zones that provide incentives to foreign companies, and creating incentives for specific industries of outbound FDI. Olvana has liberalized some previously controlled industries—including oil drilling and defense technology—to private investors in order to cope with slowing growth. The government is also luring private investment into strategic emerging industries by setting up industrial investment funds. The current focus is on decreasing FDI in the manufacturing field—which has contracted by as much as 60% over the last decade—while increasing service trades, such as finances, telecommunications, and wholesale and resale commerce. Foreign investors often temper their optimism due to uncertainty about the willingness of the government to offer a level playing field vis-à-vis domestic competitors. In addition, foreign investors report a range of challenges related to the current investment climate in Olvana. These include industrial policies that protect and promote SOEs and other domestic firms, equity caps, lack of transparency, restrictions on foreign ownership in many industries (mainly military and heavy equipment), weak intellectual property rights protection, corruption, and an unreliable legal system. Olvana is also interested in the importation of state-of-the-art practices in management and banking practices, including personnel management, physical practices (environmental policies and enforcement, construction, planning), and technical management of resources (networked electrical grid systems). The OCP allows third-party input from consulting firms to ensure all potential stakeholders and shareholders have some play in the development of a progressive infrastructure, but state regulation and State Security Agency monitoring limits how foreign assistance and participation function.

Sanctions

There are currently no official international economic sanctions against Olvana. Policy within the US, EU, South Torbia, and elsewhere, however, have economic effects in Olvana. For example, the US and the EU imposed an arms embargo on Olvana following human rights violations almost 30 years ago, but there is no common definition of what this embargo actually entails, and individual nations apply the embargo differently. Therefore, while the US embargoes a full range of national munitions, the United Kingdom only bans lethal items and major weapons systems, allowing sales of such as search radars and utility helicopters. More recently, sanctions levied against North Torbia and other nations caused a slowdown of Olvanese electronics and maritime production due to decreased access to low-cost copper and nickel.

Officially, Olvana complies with international sanctions regarding trade with North Torbia. Trade in sanctioned goods and services has diminished, but the volume of official trade in non-sanctioned goods has increased. Officially, Olvana attempts to strike a balance between maintaining a healthy trading relationship with North Torbia while avoiding international tensions with the west. Historically, however, Olvana has not enforced many sanctions, especially in nickel sales. Additionally, copper-intensive businesses purchase North Torbian copper on an off-book basis, avoiding recording by customs officials.

Charity

There are over a thousand organizations operating as charities in Olvana, of which only 24 are foreign entities. These organizations are broken into three legal forms. First are social associations such as trade unions, religious organizations, and other “people’s organizations” that were created by the OCP as links to specific social constituencies. Examples include the All Olvana Federation of Trade Unions, Communist Youth League, and the All Olvana Women’s Federation. These people’s organizations are governed by unique laws, and they often present themselves to the outside world as non-governmental organizations (NGOs). The second form is civil non-enterprise institutions. These are closest to what the western world describes as a nonprofit organization. The third form is private foundations, nonprofit organizations that promote public benefit undertakings through grants and donations. Olvana’s charitable organizations do not significantly influence social or political behavior in Olvana. Thanks to the influence of foreign NGOs, Olvana’s charitable organizations have a better understanding of advocacy, but lack the political influence to make real change. A new law, passed last year, forces NGOs to operate under the strict supervision of OCP security services. It also clarifies rights and responsibilities of NGOs, strengthening the internal philanthropic sector as more and more wealthy individuals establish private foundations. Governmental control over charitable organizations—and the distribution of charity itself—often brings conflict with Olvanese understanding of the charitable gift: governmental control is in direct contradiction with the religious ethic stating gifts should not be tied to a web of reciprocity or obligation. Additionally, the number of foreign NGOs registering with the Ministry for Public Security fell far short of expectations, as there remains considerable uncertainty around the implementation of the Overseas NGO Management Law.

Economic Activity

Olvana began an economic liberalization program some forty years ago that resulted massive economic growth, despite periods of foreign sanctions due to human rights violations and regional and global financial crises. For over two decades, Olvana maintained double-digit growth, taking it from less-developed country to economic superpower. The economy now stands as the second largest in the world, behind only the United States. Olvana achieved this through a gradual market reforms that matched the political climate of the country. The primary resource driving growth was inexpensive but disciplined labor, aided by the world’s largest collection of FDI and foreign exchange reserves.

The Olvanese economic growth rate has slowed in recent years due to a number of factors. The current rate of 6.7% would be significantly less were it not for the continued willingness of Olvana authorities to subsidize real estate, financial, and SOE sectors. Risks of this policy are substantial, not just for economic prospects in Olvana, but also to world financial markets. At the local level, access to financing, high corporate tax rates, and an inadequately trained work force are the main obstacles to corporate expansion. The Olvanese labor force—once the driving force behind expansion—has dwindled such that Olvana can no longer rely on excess labor to overcome technological deficiencies, particularly as Olvana transitions from unskilled to skilled labor requirements. Job growth in the public sectors—government and SOE—are stagnant, and possibly in decline, as job growth in the private sector is on the rise. The government’s most recent Five-Year Plan emphasizes continued economic reforms, coupled with need to increase domestic consumption in order to make the economy less export-dependent. The plan highlights the need to address environmental and social imbalances, setting targets to reduce pollution, to increase energy efficiency, to improve access to education and healthcare, and to expand social protection. The annual growth target in the Five-Year Plan is 6.5%, reflecting the rebalancing of the economy and the focus on the quality of growth, while still maintaining the objective of achieving a moderately prosperous society.

Olvana has made only marginal progress toward these rebalancing goals. Economic slowdowns in other parts of the world slowed growth in Olvana. SOEs still dominate the financial sector and many basic industries; sources often refer to these as “zombie” enterprises since they generally operate at overcapacity. Total national debt (household, corporate, and government) approached 300 percent of GDP, a level comparable to crisis-ridden southern Europe. A massive anticorruption campaign, though popular with the public, reduced provincial spending and economic growth. The slowdown in economic growth—which may be more severe than reflected in official statistics—poses serious challenges for a government whose legitimacy depends largely on its ability to increase living standards throughout the large population. Most experts concur that Olvana’s GDP will continue to grow, but at less significant levels. Manufacturing is slowing while services are expanding. Electronics and pharmaceuticals are expanding, while coal, iron, and steel are contracting. Consumer goods are expanding, while intermediate and investment good production is falling. Migrant flows and labor hoarding in overcapacity sectors, while moderately beneficial in the short run, can cause long-term inefficient allocation of resources and curtail longer-term productivity gains. Olvana faces the same problems other nations do regarding an aging work force and lack of technical training to upgrade workers, but Olvana has the political advantage of being a dictatorship and can plan beyond the typical democratic 4-5 year election cycle. Domestic demand and investment are on the rise, the latter at twice the speed of GDP growth in the last quarter, flowing mainly into housing and property development.

Economic Actors

Olvana maintains a unique blend of government and private actors. In many cases, the government— especially the Olvana People’s Army (OPA)—directly or indirectly controls the market through monopolistic SOEs, subsidies, and complicated tax strategies. In other cases—dependent on sector or industry—individuals have more economic freedom, so long as the net result furthers the goals and aims of the OCP. In the financial sector, the OCP maintains complete control directly through the Olvana Banking Regulatory Commission, the Ministry of Finance, the State Administration of Foreign Exchange, and the Olvana Securities Regulatory Commission. These governmental agencies are far more directive and less regulatory than would be seen in most developed nations. Additionally, due to the size of the Olvanese economy, financial actors in Olvana also have significant influence on the global economy. This includes the Olvana Insurance Regulatory Commission, the central bank (People’s Bank of Olvana), and the four state owned banks (Bank of Olvana, the Agricultural Bank of Olvana, the Olvana Construction Bank, and the Industrial and Commercial Bank of Olvana). There is a clear separation of the military from economic power in some cases, but in other cases, there is no separation at all. There are current and former military members among the military and industry power elite, a result of favoritism, patronage, and workplace environment. The OPA has influence in every province, and is actively conducting or paying for research and development, security infrastructure, supporting logistics/ transportation hubs and collecting goods/services throughout Olvana. People are its primary resource, though the push from some OPA units for a more technologically advanced communications infrastructure necessitates economic involvement. In addition, because of their OCP membership, high-ranking OPA officers also have roles in the bureaucracy that support economic growth.

The OCP is an entrenched bureaucracy, whose elite have been firmly in control of state power and all SOE for more than six decades without any pretense of making the state economically neutral. The OCP controls all levels of administrative, legislative, and judicial power, as well as the OPA. This control extends to media and publishing houses, as well internet access and content. The state owns the land, and protection of foreign intellectual property is erratic and ineffective. The bureaucracy does not necessarily obstruct economic growth, since economic growth is in support of the party objectives. Historically, however, central government control, steeped in cronyism and corruption, causes economic slowdowns, barriers to economic development, and long-term risks for future trade.

An anticorruption campaign accelerated last year, but corruption remains endemic. OCP leadership states it wishes to eliminate corruption yet rejected fundamental reforms such as requiring public disclosure of assets by officials, creating genuinely independent oversight bodies, or lifting political constraints on journalists and law enforcement agencies. Corruption ranges from the government playing favorites in granting privileges to selected special interest groups, to patronage, favoritism, and social corruption having a direct role in individual economic success. At the lower end of the bureaucracy, corruption may be truly functional as bribery is expected and sometimes even necessary to basic government functions. Executives in the large state-owned financial institutions are effectively high-level government officials, in practice if not in theory. All executives hold political ranks equal to or greater than that of provincial officials, the Organization Department of the OCP appoints the highest executives in the banks, and many bank executives aspire to top government jobs. This is a major concern, as individual bank executives consider their future career paths instead of what is best for their current banking institution. Those in elevated positions within the OCP are far less likely to face charges for criminal wrongdoing. However, according to the Organization for Cooperation and Economic Development, Olvana’s corruption rating has been improving, likely due to the ongoing campaign, efforts to reduce poaching of rare or protected animals, and post-production piracy. Additionally, the level of corruption, though still prevalent throughout the country, is much less than would typically be expected given the regional and cultural context. This is likely the influence of the historically Hindu makeup of the populace.

Within certain export sectors, the central government maintains far less control. Olvanese Basic Law recognizes a greater degree of autonomy to formulate operational and financial policies, safeguard free trade, and regulate and supervise these transactions in accordance with law. These economic freedoms resulted in the world’s highest growth rate of high net worth individuals, which has led in turn to an increased domestic demand for high-end luxury items.

Trade

Olvana is the world’s second largest exporter. Annual trade value is more than $3.2 trillion, with a balance of payments exceeding $480 billion. Olvana faces trade competition both regionally and internationally; competitors include South Torbia, the US, and the EU, with emerging threats from Belesia and its trading allies. Olvana is very integrated into World Trade Organization (WTO), and, through that membership, provides extremely low interest rate loans to small nations. Olvana hopes to leverage these loans into acceptance of Olvanese basing or logistics support requests in expansion of its trade routes.

Torbia and Belesia sit in between Olvana and access to major trade routes in the Pacific Ocean. Maritime transport accounts for 80% of global trade by volume and 70% by value. Olvana is reliant on these routes for its economy, and is thus dependent on the US Navy to maintain freedom of navigation. To offset this reliance, it is seeking to expand overland routes to Europe, Africa, and alternate ports for shorter maritime routes. Olvana adopted the soft power tool of money—via investments and project funding—to expand its influence. Joint economic and political projects between Olvana and other Asian nations have been on the rise. These include trans-Eurasian trains, streamlined customs procedures, more investment from, and trade with Olvana, increased cooperation in industries such as aerospace, science and finance, as well as initiatives to trade in currencies other than in US dollars.

Olvana developed one of the largest trading economies in the world based largely on labor abundance that offset labor inefficiencies. Increased capital—both physical and financial, technological advances, depletion of readily-accessible natural resources and switching to more technically demanding skill sets has begun to minimize that advantage. On the other hand, Olvana can use third country surrogates to bypass diplomatic restrictions for both legal and illegal goods, maintaining the flow of over $5 billion worth of Olvanese products transiting to South Torbia and the United States.

Commercial Trade

Olvana’s trading relationships are both global and within limited regional groupings. Their trade projects are robust and lucrative, but not necessarily beneficial for individual Olvanese. The central government tends to reinvest its wealth into military and infrastructure commitments. While the government’s focus regarding commercial trade has been on exports, it is now turning to attracting greater foreign importation trade. Outside producers are well aware of the emerging potential of Olvana’s consumer markets. Their investments and trade practices are not very transparent or fair, so Western investors have not been very ambitious at putting money into the Olvanese system that appears to be corrupted or corruptible. Thus, Olvana tends to gravitate towards Eastern markets.

Overall, commercial trade value in Olvana is over $3.48 trillion, of which $1.84 trillion is in exports and $1.36 trillion in imports. The largest export partners are the US (18.0%), the EU (15.5%), South Torbia (10.4%), OPEC Nations (5.5%), Belesia (4.4%), and North Torbia (0.1%). The rest of the Western Pacific region receives 30.2% of Olvana’s exports and the rest of the world the remaining 15.8%. Exported goods include aircraft parts, electrical machinery, machinery, and vehicles. The mix of traded goods is shifting as Olvana decreases the importation of intermediate goods it now produces domestically and demonstrates increased competitiveness in exporting goods it formerly imported.

Leading sources of Olvanese imports are South Torbia (18.9%), the EU (12.4%), the US (8.8%), OPEC (6.6%), Belesia (4.5%), and North Torbia (0.2%), while the rest of the region provides 30.9% and 17.8% from the rest of the world. The largest percentage of imports remains intermediate products such as crude petroleum, integrated circuits, gold, and iron ore, although the quantity of imported cars has been rapidly increasing. Copper and nickel are noteworthy imports; in that Olvana’s largest trading partner for these metals was North Torbia, as domestic production cannot keep pace with increased demand for electronic components. While overall trade with North Torbia grew 37.4% in the final quarter of the year over the same period the previous year, coal imports decreased by 51.6% keeping in line with international sanctions.

Military Exports/Imports

Military spending has long been a major factor in Olvana’s economic policy. Over the past five years, a perception of threats to its sovereignty, increased capabilities for shipbuilding and technology transfers from other nations, as well as outright theft, have increased this focus. Olvana is expanding its capability for power projection and territorial claim defense in the South China Sea, the Western Pacific, and the Indian Ocean, with ongoing R&D in submarines, surface-to-air missiles, and combat aircraft.

Defense spending growth in Olvana remains consistent with overall GDP growth—increasing, but at a slower rate. Even though Olvana only spends 2% of its GDP on the military, that spending accounts for 39.4% of defense spending in the region. The most recent 5-year government plan focuses on development of high tech weaponry, civil-military integration, and consolidation of military manufacturing. To meet these needs with slowing economic growth, Olvana is opening up defense industry to the domestic capital markets. The first half of last year displayed the success of this program: private investment the first six months exceeded the entirety of the previous year. These investments focused primarily on naval, aviation, electronics, and space capabilities. The President is accelerating efforts to develop science, technology, and innovation, with the military as prime beneficiary. Olvana implemented increased intellectual property protection measures and attempted to create an innovation-friendly environment for firms involved with defense contracting. Olvana intends to establish a series of large-scale national laboratories, similar to the Los Alamos National laboratory in the United States. Project focuses include aircraft propulsion, quantum communications, cyber security, and information dominance, supplementing their robust cyber and industrial espionage programs.

Olvana is currently constructing and fitting two aircraft carriers, with more expected within a decade. Experts believe that the carriers are just the start of Olvana as a true maritime power, as the country will deploy larger and more capable surface ships in the coming years. Olvana developed logistical network sufficient to meet future sustainment needs for its current inventory. Logistically, it will have to work to maintain assets abroad, since they have very few basing rights for its military vessels at sea.

This focus on military development has benefitted Olvana’s foreign military sales. Over the last five years, arms sales totaled approximately $15 billion. Sales to other countries include fighter, transport, and jet trainer aircraft; tanks; air defense equipment; rockets, military vehicles; patrol boats; missiles and missile technology; and small arms and ammunition. Olvana is looking to expand its export capacity in light of political and economic limitations of its competitors to do so—namely the United States. Olvana conducts arms sales and training both to enhance foreign relationships, and to generate revenue to support its domestic defense industry. Olvana sells primarily to developing countries, where low-cost weapons sales serve both commercial and strategic purposes. The Olvana Defense Minister recently sealed a deal for an Olvanese arms factory to build a production and maintenance facility for Olvanese weapons in Belesia. As Olvanese arms become more capable and comparable to sophisticated systems sold by Western or Donovian suppliers, and thus more expensive, these low-cost arms sales have declined in importance as a tool of influence. Nonetheless, arms sales continue to play a key role in Olvana’s efforts to influence cash-strapped countries—many of which do not have access to other sources of arms, and are willing to trade quality for lower cost. As its own fielded arms quality improves, Olvana may be able to sell off outdated equipment as a competitive tool of influence.

Economic Diversity

Prior to the start of economic reforms some 40 years ago, Olvana’s GDP by sector was 29.4% agriculture, 47.1% industry, and 23.5% services. This has since shifted to 10.0% agriculture, 46.6% industry, and 43.4% services. Likewise, the labor force by sector has shifted from 68.7% agriculture, 18.2% industrial, and 13.1% services to current levels of 39.6% agriculture, 27.2% industrial, and 33.2% services. Olvana is the world leader is gross value of agricultural and industrial output, and second only to the US in the value of produced services. Olvana sees developing services as the number one area for development and job creation. Olvana defines its business sectors as they relate to labor markets. These sectors are heavy industries (shipbuilding, assembly line work, etc.), state-owned enterprises (energy, mining, transportation, military), private businesses (home businesses, small family run shops, etc.), finance/banking, construction, leisure/hospitality, retail, and agriculture.

There is an ongoing transition from manufacturing to domestic consumption and services, driven by an increasingly unsustainable credit program. As Olvana develops economically, collaborative research and analysis are becoming an important part of the Olvanese engagement. Olvana identified six strategic initiatives. The primary initiatives are completing the transition to a partial market economy, accelerating the pace of open innovation, and transforming environmental stresses into green growth as a driver for development. Additionally, the government hopes to expand opportunities and services such as health, education, and access to jobs for all people, modernize and strengthen its domestic fiscal system, and seek mutually beneficial relations with the world by connecting Olvana’s structural reforms to the changing international economy.

Olvana is now the world’s largest and fastest growing source of entrepreneurial start-ups. It is also an incubator for large businesses, both foreign and homegrown: foreign investors have established nearly 300,000 businesses in Olvana. Decreases in fiscal freedom, monetary freedom and freedom from corruption have dampened some enthusiasm for foreign investment, but analysts expect further market liberalization, particularly in the services sector. Most notably, investment in tourism and gambling in certain regions are up 90%.

Energy Sector

The energy sector in Olvana is modern and progressing into a very technical segment of the economy. The energy sector consists exclusively of SOEs. These SOEs manage nuclear, oil, and coal based power production and distribution, as well as renewable energy power distribution—solar, geo-thermal, wind and hydroelectric. Government authorities very closely monitor the energy sector in comparison with other sectors of the national economy: the SOEs must meet five-year and annual deadlines in producing energy to give the appearance of self-sufficiency and, if possible, profit. The predominant source of electricity is coal, which produces approximately 80% of total energy consumed with an expansion in capacity of approximately 9% per year. Cheap oil prices in the 1970s and early 1980s saw a shift to oil, which then reversed with a rise in global prices. Olvana currently uses more coal that the rest of the world combined. This coal use not only causes issues concerning carbon emissions and particulate pollution, it also requires large quantities of imports. Use of natural gas use has steadily increased; it currently contributes approximately 10% of total energy consumption, with projections that this will increase to 20% over the next five years. Olvana produces a small amount of nuclear power, as it has for the last 25 years. New approaches are also being introduced to finance investments to improve energy efficiency, pilot and expand the use of innovative renewable energy sources, rehabilitate and modernize urban district heating systems, and address air pollution. On the other hand, planned efforts to increase the use of renewable sources have not been successful. Olvana possesses the largest potential for the use of hydroelectric power in the world, and plans and policies favor renewable energy sources over fossil fuels. However, bureaucratic emphasis on growth means short-term solutions, while the construction of hydroelectric generation facilities requires very long-term and high-investment projects.

Oil

The Dastet region, near the Iraqi border, contains the vast majority of Ariana’s onshore crude oil reserves. Ariana operates 40 oil production fields—27 onshore and 13 offshore. Currently, Ariana exports about 2.4 million barrels per day (bbl/d) primarily to Asian markets, making it the world’s fourth-largest exporter. The remaining 1.7 million bbl/d is used domestically. Ariana produces about 4.5% of all global oil, and its primary crude oil export market is East Asia, followed by Europe.

Currently, Ariana meets half its domestic energy needs with oil and the remainder with natural gas. Ariana refines most of its internal use oil into gasoline or diesel fuel. Because of its limited domestic refinery capability, Ariana imports much of its refined gasoline requirements. The Arianian government intends to shift a greater share of its domestic energy requirements to natural gas, hoping to become self-sufficient for gasoline and possibly a refined-gasoline exporter. Currently, however, substantial governmental gasoline subsidies encourage wasteful domestic gasoline use.

Natural Gas

Ariana has massive natural gas resources along the Persian Gulf coastline and shares the large South Pars gas field with Qatar, which is in the center of the Persian Gulf between  the  two countries. South Pars is Ariana’s largest natural gas field and represents an estimated 27% of Ariana’s total natural gas reserves. In addition to these developed natural gas fields, another two- thirds of Ariana’s total natural gas resources are in undeveloped fields. Ariana has the world’s second-largest known natural gas reserves after Donovia.

Over the last 20 years, Ariana has increased both its natural gas production and consumption. Natural gas currently accounts for nearly half of Ariana's current total energy consumption, and the government plans to invest billions of dollars to increase this share. To encourage consumption, the Arianian government significantly subsidizes natural gas prices for residential and industrial consumers. Despite large gas reserves, the artificially low domestic price promotes consumption and encourages waste, leaving only a minimal supply for export. The Arianian government hopes to increase its gas exports as a means to increase its revenue.

Ariana likely will face stiff natural gas competition given that many current gas suppliers—Oman, Qatar, and the UAE—have locked up much of the Far East market. International sanctions also limit Ariana to non-US liquefaction technology, an outdated process as most liquid natural gas  (LNG) plants use newer US-developed processes. Ariana has no modern LNG facilities. Because of this, Ariana continues to court China, Donovia, and India to invest in its natural gas development.

Agriculture

Agriculture constitutes approximately one-tenth of Ariana’s GDP and employs one-quarter of its labor force. The country is a major world exporter for caviar and pistachio nuts, and Ariana’s climate and terrain also support tobacco, tea, wheat, barley, and smaller amounts of other food crops. Ariana emphasizes agriculture as an important development focus in its governmental five-year plans but still struggles to become self-sufficient in subsistence crops because of resource underfunding, climatic issues, and rural population migration to urban areas.

Traditionally, Ariana has paid for agricultural imports with oil revenue. Despite recent high oil prices, international food price increases and a population growth surge continue to place pressure  on the country’s economy. The Arianian government supports substantial agricultural subsidies, which create artificially low food prices. If Ariana converted to a market-driven agricultural  economy, it would likely cause domestic unrest due to higher food prices.

Mining

Despite large reserves of minerals like zinc, copper, iron, uranium, and lead, mining in Ariana is generally underdeveloped, accounting for less than 1% of GDP. Mining is likely to increase in importance, as the US government estimates that Ariana possesses 7% of global mineral reserves.

Manufacturing

Arianian industrial development shows tremendous promise coupled with extraordinary handicaps. Ariana has the most mature steel, automotive, and petrochemical industries in the Middle East. However, Arianian companies remain dependent upon oil export profits despite various government reforms to spur industrial growth.

Steel

Ariana produces nine million metric tons of steel, the most in the Middle East and 20th in the world. Despite this high production level, Ariana still must import steel to meet its domestic demands. Steel requirements continue to increase because of the rising need for project infrastructure and construction expansion throughout the Middle East.

Automotives

Ariana produces the most vehicles, both light and heavy, in the Middle East. However, outdated technology that depends on repair parts supplied through third-world countries hinders production, especially for the two largest automakers—Ariana Automobile and Nalia. Domestically produced cars are fuel inefficient and contribute to the country’s pollution problems. Since Ariana’s automobile demands outpace its domestic production, the country must import a variety of cars ranging from basic to luxury models.

Petrochemicals

Ariana manufactures many petrochemicals. The government funds petrochemical industrial development as part of efforts to diversify its exports.

Defense Industries/Dual Use

Ariana has a significant defense construction capability, and the government has identified increased defense industry self-reliance as a key strategic goal. Though Ariana has had few new, homegrown accomplishments in military production or design, the Arianian industrial base has proven its ability to reverse-engineer and build foreign military aircraft, radios, and vehicles.

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.