Friday, 29 April 2011

Food Follies & Vulnerabilities

A darker side of Shifting Wealth is the stress it has imposed on the supply-demand balance of cereals and other food staples. Good: World cereals consumption/person/day has been rising continuously over the last two decades. Scary: the stock-to-use ratio for world cereals has been falling pretty consistently since at least the late 1990s. With such a tense supply-demand balance, bad harvests can lead to nasty – and for the poorest, deadly - price spikes. Notwithstanding the many, many international organisations dealing with food, the 2008 food riots erupting in countries along the equator took many by surprise.

The G20 and others are working hard at coming up with action plans to avoid food riots that can easily bring down governments, as indeed happened in Haiti in April 2008. But how close is the link of food riots and, yes, what exactly? Are we talking food insecurity, food price volatility, or food price levels? That is rarely made clear, perhaps as some ‘constructive ambiguity is the common denominator on which unanimous official declarations can be based.

Consulting ,the award-winning website and a treasure of economic and social information on Africa, it collects interesting data on the number of civil unrest. (New numbers on civil tensions will be published on the 6th June, when the AEO 2011 will be released; for 2010, they went down further while 2011 is an entirely different story, and not food related). Link those data to an index of food prices from the IMF WEO October 2010 (with 2005 = 100), and you find a graph that is not very clear about the relation of civil tension and either food price level or volatility. This deserves further investigation as we ignore the degree of political repression behind the apparently loose connection of food prices and civil unrest.

Food price vulnerability, we learn from an interesting recent Citi study* (not online, unfortunately, but I am sure you get it on request from the author, or from me), can take an entirely different meaning. For central bankers and investors, that is, especially in combination with higher energy prices that stimulate demand for biofuels which in turn reduce the food share in agricultural output, leading to even higher food prices. Generally, food prices weigh more in consumption baskets and thus price indices when countries and citizens are poor. For investors and central bankers, however, the equation is a bit more tricky.

The biggest inflation risks – and thus the biggest upside risks to interest rates – will come from countries that have three characteristics, we learn from a simple Citi model:
  • High correlation of yearly changes in food and general prices,
  • A small output gap, and
  • Loose monetary policy (compared to the past).

Guess who leads Citi’s food price vulnerability list:

* Lubin, David (2011), “Food Prices Revisited: Who’s Vulnerable?”,  CITI, Emerging Markets Macro View, 19th January, London.

Monday, 18 April 2011

S&P revises U.S. debt status outlook to negative

"Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable." So spoke the rating agency S&P on Monday, 18th April. The former safe haven is officially, well, less safe. Let's put this rating event into perspective.

Public Debt Dynamics
Source: IMF World Economic Outlook, October 2009

The remorseless accumulation of the global economic imbalances of the past decade has brought about a significant shift in the world’s wealth in favour of those countries running surpluses. These are often linked to fossil-fuel production or high savings and exports. The United States, a political and military leader in the world, finds itself (in common with some of its OECD peers) being financed by countries such as China, the Gulf states, Brazil and Russia—countries which until recently played no substantial role as international investors.

The United States is now the world’s biggest debtor: its net international investment position (NIIP–the difference between a country’s residents’ financial claims on the rest of the world and their equivalent liabilities) had sunk to minus USD 3.5 trillion by 2008, equivalent to 24 per cent of GDP. China (including Hong Kong) held more than a quarter of all US Treasury securities by the end of 2009—contributing to the more than half that were held outside OECD member countries (Table 6.2). China and other converging countries now fund the United States to a meaningful degree. The title of Cohen and DeLong’s book* (2010) points to the potential implications: The End of Influence: What Happens When Other Countries Have the Money.
* Cohen, S. and B. DeLong (2010),
The End of Influence: What Happens When Other Countries Have the Money, New York: Basic Books

Major Non-OECD Holders of US Treasury Securities
Holding (a)
USD billions
Proportion of Total
Oil exporters (b)
Caribbean banking centres (c)
Hong Kong, China
Non-OECD Total
2 053
Source: Data as at November 2009

Friday, 15 April 2011

Global Imbalances - Two Tales from the Recent Past for the G20

The FT reported yesterday that "Deep divisions over the sources of global economic fragility intensified on Thursday before the Group of 20 meeting of finance ministers and central bank governors, undermining talk of greater international co-operation. The US strengthened its rhetoric on inflexible exchange rates as the main causes of economic imbalances, while China’s president insisted that the most pressing concern was inadequate development of emerging economies." It may help if participants were reminded of some basic facts (just the facts, Ma'am!).
Global imbalances arguably started in the mid 1990s when the United States started to increase its deficit on the current account, a deficit that was covered by the sum of corresponding surpluses by 100+ countries around the world. My colleague Chris Garroway has kindly put up the video chart on Watch it (clickstart on the bottom left), and watch it again: you will be able to see egg and hens, or hen and eggs.

Global reserves and imbalances in the current account, 1990-2008 from Chris Garroway on Vimeo.

Despite this evidence, it is increasingly clear also to the Chinese authorities that the renminbi has to appreciate further to dampen socially costly inflation and to help shrink the country's enormous surplus that has developed over the last decade. A new OECD Development Centre paper* shows that current account imbalances (savings-investment imbalances, that is) are not all structural: exchange rate changes can help bring them down. Using data for 128 countries between 1960 and 2008, we have found 25 episodes of large sustained exchange rate revaluations, which we define as both nominal and real effective exchange rate appreciations of 10% (and more) within a two year window (or less). We argue that these cases represent instances of exogenous appreciation shocks that we can use to estimate the macroeconomic impact of large appreciations and assess the robustness of estimates based on a wider definition of appreciation and revaluation events. Using a dummy-augmented autoregressive panel model we could indeed show that such large appreciations episodes have strong macroeconomic effects. Most importantly, we established four key stylised facts that can prove useful in the ongoing debate about the role of exchange rate adjustment for global rebalancing. The graph summarises, for the group of developing countries, the effects of (exogenous) appreciations on output and current accounts (and its components)over the subsequent ten years: 

  • First, the current account balance typically falls strongly in response to large exchange rate revaluations. Three years after the revaluation, the current account balance deteriorates by about 3 pp. relative to GDP. This is due to a reduction in aggregate savings without a concomitant fall in investment. The effect on the current account balance is statistically significant and robust to variation in the country sample and the definition of appreciation events.
  • Second, the effects on output seem limited. Our point estimates suggest a negative effect of output growth, albeit of relatively small magnitude: on average, the aggregate level effect on output amounts to about 1% after six years. The confidence intervals are also considerably wider than for the current account. The output effects are statistically not significant.
  • Third, while aggregate output is not strongly affected, export growth falls significantly after appreciation shocks. Import growth remains by and large unchanged resulting in the observed deterioration in external balances. As aggregate economic growth is much less affected, our results point to a positive domestic demand response following appreciation episodes.
  • Fourth, these effects seem to be more pronounced in developing countries. The sensitivity of the current account balance to revaluation shocks is higher. The effect reaches almost 4 percentage points of GDP after three years and is statistically significant. But also the potentially negative effects on output are larger. Our point estimates indicate a loss in output of 2% over ten years. But confidence intervals remain wide, so that these results miss statistically significant levels. Why these effects are stronger in developing countries will be an important question that we aim to address in future research.
In sum, the historical record of large exchange rate revaluations that we have studied in this paper lends some support to the idea that large exchange rate appreciations and revaluations have an impact on the current account as they lead to marked changes of savings and investment within countries. Appreciation shocks impact external balances, but this effect potentially comes at the cost of a reduction of dynamism in exports. While the domestic economy seems to pick up some of the external slack, leaving overall growth relatively unaffected, the prospect of sharp decelerations in export growth will remain a concern for policy-makers and bears watching especially in the context of developing countries.

*Kappler, Reisen, Schularick and Turkisch (2011), "The Macroeconomic Effects of Large Exchange rate Appreciations", OECD Development Centre Working Paper No. 296.

Wednesday, 13 April 2011

Ebrahim Rahbari (Citi) responds to last post (Citi`s 3G)

 Ebrahim wanted to post this comment but either it was too long or other technical problems prevented him (and me) from doing so. Here it is:

The first criticism Helmut raises in this post is that our statement that many emerging countries have reached a modicum of political stability seem particularly questionable today, mostly based on the observation of widespread unrest in the Middle East, North Africa and other parts of Africa. Now these developments are clearly significant from an individual country and often a regional perspective. Our work mostly predated the recent unrest and it is probably worth pointing out that predicting the incidence and timing of such outbursts of unrest is usually a very tricky business and that we certainly did not foresee how the developments in many of these countries are panning out.
So there is risk of unrest in many countries currently, including risk of major escalation, even armed conflict in some parts (mostly Africa and the Middle East), but also of somewhat milder unrest in other parts (say, austerity-induced in Europe, food price-induced in South Asia). But even including these very recent developments, it remains far from clear that we are observing a particularly vicious chapter of recent history. The political transitions in Tunisia and Egypt were remarkably peaceful. Confrontations in Bahrain, Libya, Syria, Yemen and elsewhere are unfortunately less so, but even in these cases, the scale of human suffering caused is arguable much lower than in previous decades. According to the latest World Bank World Development Report 2011 (, battle deaths in civil wars regularly exceeded 100,000 people in the 1970s and 1980s, a number which according to the same report fell to 50,000 in 2008. That number sadly is likely to rise this year, but I remain hopeful that we will remain far off the levels observed in earlier episodes. What is more, many regions, even in Africa, but notably in Emerging Asia and Latin America have – by their own relatively modest historical standards – enjoyed a degree of tranquility that is promising. Relatively peaceful democratic transitions have made their debut in places such as Nigeria and Indonesia in the recent past. And incidents such as the questionable removal of Nobel laureate Yunus from the board of Grameen are certainly bad news, but it is more difficult to argue that these are definite signs of a deterioration relative to previous decades.
So far I have only spoken about about the assessment of current developments. A different issue are long-term projections about the future evolution of political and institutional development. There again, it remains far from clear what outcomes will result from the ongoing transition processes in many of the countries currently or recently embroiled in turmoil – or in many other countries. We (and this ‘we’ includes Willem as well as our local economists and myself) had to make up our mind of what we perceive to be the likeliest outcome: whether we expected the recent unrest to be a sign of a reversal of the trend towards less conflict and some institutional development or whether we expected the recent uprisings to usher in a new era of populist, growth-inhibiting and market economy-constraining policies. In the end, we - generally speaking – were fairly optimistic that modest market-based reforms, including investments in human and physical capital will continue, and this view informed our growth forecasts. We may well turn out to be wrong. But we will most certainly be wrong only with hindsight, as it is far from obvious that the current developments herald a distinctly negative future.
A second, related criticism is that we do not provide specific evidence on political and institutional improvements in some of the countries that we deem promising and that we rely on subjective, qualitative indicators, such as those which are part of the World Bank World Development Indicators, which have been criticised on various points. I would agree that more detail on political and institutional developments in individual countries would have been desirable and an – admittedly weak – excuse are the space constraints that we are subject for projects such as this one. The indicators that are criticised are not actually an input into our growth forecasts. The forecasts were largely made by our local economists on the basis of their – subjective – assessments of the prospects of the economies that they cover. We don’t have complete information about the exact data and methodology our economists use to produce the forecasts so I cannot guarantee that our economists have not relied on some of the discredited measures you mention. Neither can I guarantee that our economists are immune to excessive optimism or what you call positive ‘sentiment’ about developments in their coverage countries. But at the very least, they do possess detailed local knowledge of relevant developments and were explicitly asked to take these into account. Nevertheless I look forward to have a careful look into the OECD publications you mentioned – and I am hoping they will offer us some more appropriate alternative data sources!
A third criticism of our work is that levels of trade barriers remain substantial in many emerging markets and that they are in fact much higher, on average, than in rich countries. But Helmut already notes himself that trade barriers have come down somewhat in 3G countries. We argue that this opening has likely contributed to the relatively benign growth performance of the likes of China (though robust evidence is lacking). The fact that trade barriers remain high is most relevant in the sense you allude to - that lowering them further would potentially provide a source of further growth in the future and the assumption underlying our forecasts is indeed that we will see some further opening.
Finally, there is a criticism that we do not give due weight to the lessons learned by development economists and the relatively dismal historical growth record of poor countries. Now, I probably agree that we do not discuss in sufficient detail the reasons underlying the poor growth performance of these countries in the past. But this should not be taken as a sign of disregard. Rather, it could be interpreted as a sign of disagreement about any fatalism implied by the historical record. After all, China and India, accounting for almost 2.5bn people among them, did manage to launch themselves on new and promising growth and development trajectories after centuries of poverty and stagnation. They were not and are not the slaves of history. The notion that it might be possible for Bangladesh, Indonesia, Vietnam, Nigeria, Egypt and other nations to learn from these successes and to emulate their examples seems less far-fetched than the notion that these countries will be incapable of growth and development.  
There are important complementarities between private and social efforts at low levels of development and these can be amplified by more or less recent experiences of disaster, conflict or simply poverty and may prohibit even initiating the journey to prosperity. Some of these are even explicitly touched upon in our report (investment in education to combat illiteracy, the ‘resource curse’), but I agree that others, notably rising inequality as economies develop do not receive adequate treatment. But our view is that policymakers tend to have the tools to deal with many of these – at least to a degree sufficient to jump-start the convergence process. We don’t advocate seeing development as an automatism, but at the same time, we want to point out that history is not always a good guide for the future. There are ‘game-changers’ or structural breaks. Precedents exist: Not just China, but also Chile or Botswana or a number of countries in Central and Eastern Europe. Taking the historical experience of these countries as a predictor for their future performance when they engaged in reforms that would move them closer to a market-based economy would have been given and inadequately pessimistic picture of their outlook. Put differently and simplistically, I cannot think of any country in which policymakers did comply with the - admittedly very general - prescriptions we advocate and poor performance still ensued.
I want to stress that we do not deny that there are substantial risks to our projections – and even that these are mostly to the downside. Nor do we reject criticism that we do not come close to covering all relevant aspects of the development process in enough detail. But we take the view that many of those risks are challenges that will be met by policymakers and the private sector to an extent sufficient to validate our projections (we also assume that bad luck will visit these countries somewhat less often than in the past), or at least that they would have the tools to do so. We’ll undoubtedly revise our projections over the years. This will reflect more data points and better information – but also an improved understanding of the mechanisms at work that will partly result from discussions such as this one and for which I am grateful. I look forward to more of those in the future.
With my very best regards,

Sunday, 10 April 2011

Citi’s Global Growth Generators

What have the BRIC countries Brazil and Russia in common? Sure, they’re part of the BRICs – the group acronym coined by Goldman Sachs (see, e.g. “Dreaming With BRICs”, 2003*). And no, they’re not part of the 3G (“short for global sources of growth potential and of profitable investment opportunities”), the new Citigroup selection of “Global Growth Generators”*, released in February 2011. Brazil and Russia share that de-classification with other prominent ‘emerging markets’ (a term whose time has gone) – namely, Chile, Mexico, South Africa or Thailand. So you could be forgiven to think that this is merely a PR exercise by Citigroup to give its distinguished chief economist Willem Buiter a sharper profile also in the investment community. It is much more than that, a dense 81-pages tour de force on global growth trends, drivers and scenarios, lining up scholarly godfathers from Alexander Gerschenkron via Robert Solow to Danny Quah to cement the thesis.

Global Growth Generators” considers a weighted average of six growth drivers that Citigroup and the literature surveyed identify as important. The six components of the so-called 3G index are measures of (1) domestic saving/investment, (2) demographic prospects, (3) health, (4) education, (5) quality of institutions and governance, and (6) openess to trade and investment.Apart from BRIC members China and India, the list of 3G countries includes Bangladesh, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka, and Vietnam. (A similar analysis on regions, cities, commodities and products is announced for later reports).

Developing Asia and Africa are forecast to be the fastest growing regions, essentially driven by a drop in young-age dependency (before old-age dependency turns to burden) and by beta-convergence, the tendency of poorer countries to grow faster once we control for other growth determinants:  

”For poor countries with large young populations, growing faster should be easy: open up, create some form of market economy, invest in human and physical capital, don’t be unlucky and don’t blow it. Catch-up and convergence should do the rest (sic!)”.

That sentence on page 1 almost stopped me from reading on! The naïve growth optimism applied to developing and emerging countries that seems common to reports issued by financial services companies often goes along with neglect of the 50-year lessons of development economics and politics.

Absolute Convergence in Per Capita GDP 2010 - 2050

 Citigroup optimism (best visualised in the Figure above which relates expected annual GDP/capita growth over 2010-2050 to the natural logarithm of 2010 GDP/capita) is underpinned by the authors’ presumption that many emerging countries have opened up to foreign trade and investment, and that they would have surpassed a critical threshold level of institutional quality and political stability.

Political stability? Bad timing, indeed! The first quarter of 2011 has been among the most turbulent of Africa’s history. While peaceful popular uprisings toppled long-standing authoritarian governments in Tunisia and Egypt, Libya descended into a civil war in which the international community intervened with military force.  Civil war in Côte d’Ivoire after a contested presidential election and civil strife in Burkina Faso round up the current situation. The Middle East is largely infected by political instability, with upward risk for oil prices that have the potential to bring the current super cycle to a sudden stop.And 3G country Bangladesh is producing bad headlines with the removal of Nobel laureate Yunus from the Grameen bank he himself has founded. 

As for specific progress in governance and institutions, little convincing evidence is given for the 3G countries.  The quality measures of institutions on which the Citigroup report seems to rely to marshal some general evidence is based on a logical fallacy - post hoc ergo propter hoc. These indicators are based on sentiment of business and diplomats, and thus endogenous to growth – they can’t be used to explain why ‘This Time is Different’! As the developing world has grown and converged during the last decade, sentiment of interviewees has arguably been on sugar high. Who says that 3G country Nigeria, the protype of the resource curse in the past, will do better in the future?  

As for governance indicators, OECD Development Centre analysis Uses and Abuses of Governance Indicators, has shown that most compilers produce composite indicators that lack transparency in themselves. The scoring criteria are opaque because of the diversity and large number of underlying indicators they embody. The underlying conceptual framework – the meaning of governance – remains unclear, so there is lack of clarity about how the scores are finally arrived at. China and India have been classified repeatedly, among others by the OECD, as those countries whose capital account has remained the most restricted in a large sample of countries.

While  3G countries have opened up to foreign trade and investment, there remains large scope to further opening in the South where average trade tariffs remain a multiple of those exerted by the North.  The OECD report Shifting Wealth has estimated that for trade in manufactures average trade tariffs are eight times as high in South-South than in North-North trade. To be sure, further trade opening in developing countries is an untapped source of future (in some cases, more than past) welfare and growth benefits.

The Citi report on the 3G fails to address why there are poverty traps in the first place that have hindered young and poor countries to catch up in the past, except for the past ten years when exceptional global liquidity, unsustainable global imbalances and China’s growth lifted a majority of developing and emerging countries.  Child labour, persistent high fertility, illiteracy, debt bondage, soil erosion, profitable criminality, and conflict in resource-rich rentier economies are just some examples that define the vicious circle of sustained poverty. The lack of social cohesion and rising inequality in the emerging countries, often linked to exceptional growth in a dual-economy setting through Kuznets effects, will perhaps be the most important stumbling blocks for global growth generation. Ignoring them may help sell fancy financial products but is way too easy.

Arndt, C. and Oman, C. (2006), Uses and Abuses of Governance Indicators, OECD, Paris.
Buiter, W, Rahbari, E (2011), Global Growth Generators: Moving Beyond ‘Emerging Markets’ and BRICS, Citi, Global Economics View, 21 February, NYC.
Goldman Sachs (2003), Dreaming with BRICs, Global Economics Paper No.99, NYC.
OECD (2010), Shifting Wealth, Perspectives on Global Development, OECD, Paris.

Wednesday, 6 April 2011

Super cycle – third, fourth or none?

Are we experiencing  a super cycle for commodities that supersedes the ordinary business cycle? The answer is worth gold (or silver these days!)  – for central bankers fighting core inflation, for public finances of raw material exporters and importers alike to set tax and spending plans, for business using or exporting the stuff – and for investors.  

The mechanic often assumed to operate is based on rising demand resulting from a growing world population and structural changes in consumption patterns in developing countries combined with supply constraints in a range of sectors suggest that prices may need to rise rather steeply in order to incentivise higher supply.  Super cycles are extended periods of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanisation and technological innovation, characterised by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world.

The world economy may now enjoy its third super cycle, after the first 1870-1913 and the second  1946 – 1972. Note that the first super cycle which coincided with America’s industrialisation and Germany’s Gründerjahre was stopped in the tracks on the eve of World War I. Note also the end to the second cycle which followed the World War II and coincided with Japan’s and the Asian NIEs rapid convergence was stopped by the oil price shock. So war and oil prices are potential party poopers.

          Super cycles and real world growth

None seems to get more excited about the prospect of a new super cycle than the financial industry, at times suitably packaged with a noted regret as to the cost of inflation, in particular for the poor. Commodities as an asset class can produce large diversification gains when added to portfolios with stocks and bonds – just as emerging-market stock market returns did in the past before their correlation rose to developed stock markets.

Take a recent heavy 145-pages report (one could pick many more but this is by far the best), issued in November 2010 by a team led by Gerard Lyons at Standard Chartered*. The report postulates that we have entered a new super cycle since the 2000s, not just in commodities but for world GDP growth. Lot of evidence is marshalled to support the hypothesis. As for commodities:
·         Large-scale urbanisation and growing middle classes will drive commodity demand, in particular for food.
·         Despite better energy efficiency, demand will drive energy prices much higher. Supply constraints in metals and coal will create dramatic price spikes.
·         Commodity producers should be big winners as consumers pay more.
·         Climate change will exacerbate pressure on food, energy and water resources.
·         Policy needs to address resources issues if super-cycle growth potential is to be realised.
·         Solutions lie in increased efficiency and technology, presenting investment opportunities.

This is convincing stuff, or is it? Academic economists are generally skeptical about the presence of long cycles, arguing that long cycles may be an statistical artefact. Cuddington and Jerrett (2008)*, however, identify four - not three! – super cycles over the past two centuries, after applying state-of-the-art (I must guess…) methods for detrending and causality directions, in order to extract super-cycle components. Their finding adds another earlier cycle than usually observed, roughly round 1860 - 75, with strong correlation across six industrial metals. They conclude that by 2005 we were in the early phase a fourth super cycle.
But do stay cool! In a widely underappreciated pamphlet, the Research Department of the Inter-American Development Bank (2008)* suggests that, even if the favorable external environment persists, one may expect GDP growth rates to slow down significantly in raw material producing countries, because some of the improvements in external variables may have level effects rather than growth effects. So even if raw commodity prices stay on the elevated levels we observe today, their impact would not necessarily lead to higher growth in commodity exporting countries, but just produce a short-term level effect. And did you say Resource Curse?

* Cuddington, J., Jerrett, D. (2008), Super Cycles in Real Metal Prices?, IMF Staff Paper, Vo. 55.4
   Inter-American Development Bank (2008), All that Glitters may not be Gold, Washington, D.C.
   Standard Chartered (2010), The Super Cycle Report, London.

Tuesday, 5 April 2011

The world now grows in Fosbury style

Compare the world economy with a high jump event in track and field athletics. The Straddle technique held the playing field for half a century before the Fosbury flop technique began to spread. With the Straddle technique, both the top and the centre of mass of jumpers’ bodies cleared the bar simultaneously, the feet dragging behind. Using the Fosbury flop, competitors bend their body in such a way that their top clears the bar with the centre of the mass and the feet behind.

Translate this event to the world economy: For the first time in history, we will find ourselves in a situation where the countries with the largest economic mass in the world are not also the richest in the world, or the most advanced technology leader. This complicated configuration corresponds to the Fosbury flop technique. Until now, we have been used to a world in which the most advanced countries were identical with the global center of gravity, akin to the Straddle technique. With the sustained growth of large emerging countries, the world economy has been moving from Straddle to Fosbury technique; the world may become more complicated, but it can jump higher – grow faster - than before.

Just consider what the switch toward Fosbury flop style did for high jump records.


What will be the consequences of the Fosbury world for low-income developing countries, the feet in the metaphor? Will they grow faster, lifted up by the weighty fast-growing emerging countries? A recent long-run development model (Chamon and Kremer, 2009), says yes: As emerging countries succeed in becoming advanced economies, their success will improve export opportunities for the remaining developing countries, which can lead to accelerating global growth. As countries get richer, they experience a demographic transition with a drop in fertility and young age dependence. If differentials of population growth are small between developing and advanced economies, economic development accelerates over time. Both migration and aid from rich to poor countries can support this process. Once China and India become rich and once their poor share the new wealth, over two billion more people will live in countries that import labour intensive goods and fewer in a countries that export them, opening up opportunities for other countries to fill this niche. Their initial opening may have hurt developing countries in the short term, but their sustained growth improves the long-term prospects of low-income developing countries. First empirical evidence (Garroway et al., 2010) does indeed suggest that poor countries, oil and non-oil, have been changing their growth locomotive during the 2000s, from the G7 countries to China.

Further reading:
Chamon, M., Kremer, M. (2009), Economic transformation, population growth and the long-run world income distribution, Journal of International Economics,
Garroway, C. et al (2010), The Renminbi and Poor-Country Growth, OECD Development Centre Working Paper No.292,

Monday, 4 April 2011

Defining Shifting Wealth

Shifting Wealth is the title of the 1st OECD Global Perspectives, a new annual publication that researches the impact of the changing dynamics of the global economy toward large emerging countries on the poor - people and countries. 

Sustained growth that large emerging countries have experienced over the last decade and more have conferred them a considerable growth delta over OECD average. Combined with very large populations, these growth differences  translate into a new world economy.  For the first time in history, the countries with the largest economic mass are not also the richest countries. The shorthand for this complex event is Shifting Wealth.

The global macroeconomic effects emanating from the rise of the converging countries crucially define future core development strategies in poor countries. The macroeconomic output linkages between converging and developing countries, the shape of relative prices for goods and services, wages and terms of trade, the potential for development finance that arises from the new asset positions in the emerging countries delineate the new strategic setting for development partners and policy. As a result of their demographic and economic weight in the world as well as their superior growth performance, China and increasingly India matter in particular.

In the past two decades there has been an acceleration in the realignment of the global economy, which was reinforced during the crisis years 2007 and 2008 as large converging countries remained in recession only shortly. Three developments have been particularly important. First, the initial wage shock resulting from the absorption into the global labor force of massive numbers of workers in emerging economies; second, the increase in commodity prices that has transferred wealth to raw material exporters mainly in the emerging world; and third, the switch of many emerging countries from a net debtor to a net creditor position.  So the world has recently witnessed new directions for global macroeconomic parameters that constituted a marked change from patterns experienced over the preceding decades and that require to recalibrate development perspectives and strategies:
·         growth in many poor countries began to pick up durably, stopping long histories of underperformance, notably in Africa; emerging-country growth has been increasingly linked to China’s growth and implicitely benefitted from China’s competitive exchange rate;
·         the relative price of many raw materials and the terms of trade of raw material exporters started to rise, reversing their decline which for so long had been perceived as ‘secular’;
·         labour-intensive manufacturing production, by contrast, became subject to increasing price pressures, as did low-skilled wages, resulting from the absorption into the global labour force of massive numbers of workers in emerging economies;
·         as an initial response to the convergers’ economic opening,  global inflation, interest rates and capital returns were steadily sinking, as did the spreads on emerging-market bonds as savers invested their assets increasingly outside the OECD area;
·         in emerging countries, the need for asset management capabilities increasingly complemented the traditional policy focus on  debt sustainability and management, as official reserves and sovereign wealth fund assets rose and many emerging countries turned from net capital importer to global financier.

To be sure, the unique geo-economic constellation of the 2000s, combining Asian export-led growth with US overconsumption - in a dollar-based reserve system that is akin to create liquidity bubbles in a rapidly growing world economy - is unlikely to continue as the 2008-09 financial crisis has concentrated minds on the urgency to rebalance the world economy toward stronger, cleaner and fairer growth.  The need to switch from export-led to consumption-led growth in China and rising inflation pressures in leading convergers makes it questionable whether their superior growth performance is here to stay. Nothing could be more deceptive than to assume a linear continuation of trends seen during the last decade.


Sunday, 3 April 2011

Welcome to ShiftingWealth!

Better too late than never ever...Welcome!

The blog ShiftingWealth will be about the recalibration of global assets, business, trade and governance toward the east - and the policy implications for poor and rich. The blog will serve as a spot for links, studies, cartoons etc, and hopefully for some new thoughts! 

Let's see what we will make of it - you are invited to contribute.