Responding to the food crisis: free up

Soaring food prices in recent months have triggered a real crisis, riots in various countries, and all sorts of government responses that do not seem to work. Striking moves are export restrictions in Asia, and other countries such as Russia or Argentina, or a ban on trading in agricultural futures in India…

Nancy Birdsall, Center for Global Development, and Arvind Subramanian, from the Peterson Institute cannot be said to be absolute free market fundamentalists. Subramanian for example advocates a limitation to international capital flows, a matter on which I profoundly disagree. But the oped both wrote on how to respond to the food crisis in the Wall Street Journal Asia give their views the more weight when addressed to market skeptics. The problem they identified is thus:

“To prevent future crises, the fundamental incentives in agriculture need to be fixed. That in turn means efficient and food-friendly trade policies around the world. But not only are we far away from that objective, we are moving in the wrong direction.”

Both attack in particular the current fashion of biofuel subsidies (see my previous post on climate change too) and export bans:

Good sense into the climate change debate

This is a document that inspired me so much that my announced blogging pause will have to do away for now. At an international think tank forum in Atlanta, USA, this week-end, I grabbed a few publications on display for visitors, and must say I was gripped by one in particular: the Civil Society Report on Climate Change, published in November 2007 (I am posting this in my “Always late in my readings category ;-))by a coalition of 41 international free market and free society think tanks. Finally, some reason into the climate change debate! Neither denial of the fact of climate change nor Al Gore style alarmism and new-wave Bali five-star hotel bigotry.

What it says is basically the following: Kyoto-type protocols are not going to solve the problem. Imposing emission targets, as the current protocol does, will cost too much and contribute to impoverishing the world. At the same time, given the projected changes in temperatures, the targets imposed by Kyoto are largely insufficient.

An apocalyptic end to the Greenspan era. On bailing out, regulating, or simply stopping taking risks

 

The Credit Crunch has reached unprecedented proportions, not least with the last bail-out of Bear Stearns. More losses are announced. When’s the next bail-out?

Until recently hailed the big guru of the financial world, former Fed chief Alan Greenspan, is now seen as at least partly responsible. He is also the author of a book I haven’t yet come round to read with a telling title: “The Age of Turbulence” (here a few comments on it). In the meantime the cacophonia on “what to do now” has started…..

Even “The Unthinkable” is being thought about, so we are told. 

BRIICS in the global economy

No, not BRIC countries, the BRIICS: Brazil, Russia, India, Indonesia, China, South Africa. BRICs was a term coined by Goldman Sachs to name today’s new high-growth emerging economies. BRIICS is the term used by the OECD: the rich-country think tank adds Indonesia, probably for reasons of regional, and demographic representativity. Indonesia is a South-East Asian middle-income country with an enormous population (223 million). And South Africa is added there as well too: it’s the most dynamic African economy. ECIPE’s director Razeen Sally is currently working on trade and investment policy of the BRIICs. If you are into graphics and statistics, you might find the powerpoint presentation (link Here: briics.ppt) he used for a speech in Australia recently quite a gold mine. What sticks out is the following:

• The most protectionist country is India. Across the board.
• The most expensive country to trade across borders with is Russia.
• The most complicated country to do business in is Indonesia.
• The country which is least capable of controlling corruption is no, not Russia (although it does badly), but Indonesia.
• The greatest foreign investor is Brazil.
• And the best performer in trade and FDI is China - no surprise.
• Interestingly, South Africa has the most FDI restrictive regime in the electricity sector - see slide number 14. Given the enormous electricity shortages South Africa is having, maybe it’s time to let investors in….?
• Yet those giants remain small.: 12.7% of world trade in goods and services (if one adds up the figures on slide 28). China itself has 6.9% of it. These countries however represent almost 3 billion people, nearly half the world’s population.

Inflation, globalisation, agricultural liberalisation, and maybe a new chance for the Doha Round

(with slightest updates)

Until recently, we thought that the spectre of inflation had faded away. Monetarist theses had triumphed. Central banks have become independent in most OECD countries to shield monetary policy from populist demands to abuse the printing press. Increased globalisation, keeping imports and consumer goods cheap while acting as disciplining force on wages and policies had a positive effect on prices. Inflation is historically, a nightmare: the role of the 1920s hyperinflation in the rise of Nazi Germany is well ascertained. It is also an economic headache - no, a chronic migraine: raising uncertainty over returns, thus acting as a brake to long-term investment decisions. Obviously, rising prices hit the poor most, and developing countries such as those in Latin America suffered enormously during the 1970s and 1980s from excessive levels of inflation. Since the 1990s, inflation has become much less of a concern, and only pariah states like Zimbabwe have been prone to hyperinflation. Until the “credit crunch” last year, the international economic press was rejoicing about an era of low inflation and low interest rates – pretty unprecedented in history – that contributed to the general borrowing binge ranging from “subprime” homebuyers in the US to all the emerging markets, and even poorer nations in Africa.

A recent paper by Gernot Pehnelt at ECIPE corroborated the thesis that globalisation contributes to keeping inflation down. The paper reminds us that
 

“the world has experienced a remarkable process of disinflation, with average inflation rates in industrialized countries falling by 10 percentage points and an even sharper decline of the mean rate of inflation in developing countries.”

In his study, Pehnelt focuses on the case of 20 OECD countries and looks at the relationship between their growing international economic integration and their inflation rates between 1980 and 2005. I’ll let you to the joys of working through the technical details of this econometric study. The result points clearly to a positive effect (checked for its robustness) of globalisation on disinflation - although admittedly it is not all.

Having said all that, we have recently found ourselves faced with a new outburst of inflation all over the world. The European Central Bank is fighting hard to keep its 2% target, emerging markets such as Russia are faced with two-digit inflation rates again, and along with China or Venezuela, they try to fight the spectre by introducing price controls, which are likely to fail (price controls on e.g. food lead to lower supply and a booming black market with skyrocketing prices, that hit most, whom do you think: the poor).

The culprit? Food and commodity prices

Fallout from previous two posts…

This is to react to a comment made by one of France’s most popular econ-bloggers, on my previous post. First: thanks, Alexandre! I wanted to react with a just few words to your comment, but then one topic led me into the other… This led me to think that I gathered material for a proper post, and since I enjoy spending my time on random activities like blogging on some week-ends, then why not just go ahead…? It must also be noted that my previous post was born out of a pure, quasi-sentimental, concern for the UK economy on a Saturday morning lingering around at home and listening to BBC radio online. I happened to live in the UK for a few years until a few months ago. The post was not the result of concern for the global, European and other fallout of the Credit Crunch, which I was determined to leave to specialists.

Yet the ramifications of this Thing Called the Crunch, are enormous. What implications for the unwinding of global financial imbalances, and even the status of the United States in the World? What implications for the stock markets – with their turbulences all over this week? Can Central Banks cope? What is now the place of structured finance in global financial markets? How should regulatory systems respond, adapt, and be reformed to make sure such a thing never happens again? What can the IMF do? And: Who else will be hit? Etc etc….

And the UK in all this?

One of the big victims of the credit crunch is the United Kingdom, which I didn’t mention in my previous post on the “turbulences” below Davos. The Northern Rock debacle, where the British mortgage lender suffered an embarrassing run and was rescued by the British authorities to avert a general banking and financial crisis was a shock to the nation and the rest of the world.

Annual Christmas presents

Christmas is coming soon, like every year. The pre-Christmas period November and December brings with it its serial release of Annual Reports or Surveys relevant to this blog. Please find below a few presents:

For an update: globalisation & inequality; world investment

IPE Zone has a good overview of recent reports released:

- by the IMF on globalisation and inequality

- by UNCTAD for its annual World Investment Report.

What to watch out for this autumn

Slowly but steadily the world’s decision-makers are coming back from their summer breaks. While the summer remained busy in terms of trends and events that are related to this blog, the hot economic globalisation topics for this autumn will probably be the following:/font>

• World financial markets, what next? The subprime mortgage crisis in the US has had interesting ramifications. Hedge fund and investment vehicles bankrupt or in crisis, German banks stumbling, central bank interventions on money markets including a big one by the European Central Bank today, etc. After several years of relative calm and buoyant growth, the current turbulences could still become a hurricane. I am not a specialist, and it seems that for the moment the crisis is being weathered not too badly. Yet who knows? 
• World trade – growth trends. China continues growing, EU economies, except France’s are still doing well, commodity markets boom. The autumn will see the release of new world trade figures by the WTO (here the latest available). We’ll see what is really happening on the ground. 
• World trade – Doha round and future of the multilateral system. Sounds incredible, but Doha talks are still going ahead (the ICTSD newsletter confirming this will soon be online). Can anybody believe that people still believe it’s going to happen? One never knows after all. 
• World trade – EU policies. The EU is changing tack in many areas, and especially Asia. It is going further down the bilateral path and launched negotiations with South Korea, ASEAN, India. (Here a post, here more on the strategy on EU Commission’s website), Economic Partnership Agreements with African and Caribbean Countries should normally be concluded by the end of the year to replace the preferential Cotonou-Agreements. The negotiations are in dire straits. For nerds, to note, the EU is changing its anti-dumping policies. Very important in terms of clarification of how it deals with its imports from poor countries and namely China. The first time I actually started to understand something about is was when I read this paper.
• World trade - US policies. The US isn’t giving in on agricultural subsidies. Hillary Clinton does not want to extend the Trade Promotion Authority to the Bush administration which could help finalise the Doha Round. US-Americans and the Democrats are trade-sceptics at best. The climate in the US is one of anti-China, anti-trade, and anti-immigration hysteria (not only France, hey, is having its crisis..!). As it is a pre-election year things will not be getting better.
• Geopolitical consequences of globalisation – emerging powers. China and Russia. This blog has written quite extensively on the matter, to be monitored closely. The German Die Zeit had an interesting analysis last week-end on the matter. Turkey – Turkey’s recent election and the rise of Abdullah Gul as president with an Islamist background is actually very good news: a new prosperous if very conservative middle-class has emerged as Turkey integrates with Europe and the world and plays by the rules of democracy, the role of the military is dwindling. This bodes well in many ways: integration into world markets and economic growth is good for democracy and stability in appears in the case of Turkey, and Islam can be compatible with democracy and modernity. Let’s see where things will ultimately be heading in this crucial country. Maybe Sarkozy will end up wanting Turkey into the EU (he he)?
• The global economic fuel - Energy geopolitics. The EU is revising its strategy and integrating energy into its Neighbourhood policy. Oil countries are tightening their grip on their oil reserves (see Kazakhstan recently. Russia, Venezuela have received coverage in the blog), and generally also on their populations.
• Global institutions and globalisation – the controversies over the successions of Wolfowitz at the World Bank and of De Rato at the IMF reflect a profound malaise over the discrepancies between a changing economic power balance and the institutional setting governing the economy based on a post-1945 order. The malaise is going to last. Will anything happen? Surely not this autumn, but the debate will need to be followed closely.
• Europe’s political, economic policy, social and welfare systems adapting to globalisation – watch out for reforms (or not) happening in France. Will Germany and Italy ever be able to shake themselves up? EU-level policis. In 2008 – i.e., in a few months, we will celebrate ten years of the so-called Lisbon agenda that pledged to make Europe the world’s most competitive economy by 2010. Anybody seeing it happening?
• Keeping open minds, borders and political systems – the current globalisation backlash in the rich countries, and the revisionist trends within the rich-country-based economics profession (even Paul Krugman is going down the path of pop-antiglobalism…!) are a sign of the deeper sense of crisis of a part of the world that feels it no longer is in control. There is no reason to think one is doomed. It is about reinventing oneself. On the other side of the spectrum, the current emerging nations could go down a dangerous path of militarisation, and reversal of political democratisation. Russia comes to mind. But China isn’t reassuring either. The middle-income countries haven’t found yet a way out of their impasse. There must be shrewd methods to climb up the economic ladder. In Latin America especially: Chavismo, US-FTA-“ismo”, or a Chileanismo (the most effective so far) - what will prevail? A book I am currently enjoying reading at the moment for the description of the political mental state and a turn to pragmatism in economic policies in Latin America is Santiso’s Latin America’s Political Economy of the Possible published last year at the MIT press.
• Africa – it will certainly not join the global era this autumn. But its marginalisation needs to be tackled. Urgently.