BRIC Wage Pressures Start to Materialise

Throughout the 2000s, virtually unlimited supply of labour kept a lid on wages in the BRIC countries. The rural hinterland released masses of labour to the cities who accepted wages not far from the subsistence levels people could earn at home. BRIC labour markets were more Ricardian than classic, with the rents going to the corporate sector that was happy to save through retained earnings and to reinvest. Stolper-Samuelson effects translate higher low-wage jobs into lower prices for low-wage goods. So despite stagnant wages in advanced countries, their purchasing power was roughly maintained. These times seems to be over.

In its 81st Annual Report, the Bank for International Settlements has documented the wage pressure in the BRIC countries. (Disclaimer: You need to know that I belong to those who hold the BIS reports in highest esteem as no other mainstream international organisation is more professional and independent from policy interference.) Recently, inflation in emerging market economies has been much more volatile mostly due to more volatile food and fuel prices. And wages pressures have been rising.

The BIS does not , as I did,  focus on the labour supply side to explain wage inflation.  "Dwindling economic slack and persistent inflation in these countries have been pushing up wage demands. Moreover, given the globalised nature of many supply chains, underlying inflation pressures in the advanced economies are affected indirectly by a pickup in unit labour costs in the emerging market economies. Indeed, profit margins may have become tighter and a further squeezing of price margins due to higher costs may eventually force firms to pass on a greater share of the increase in input prices to consumers.

My prediction in November 2007, given in the Vienna Hofburg at an IIASA conference (www.iiasa.ac.at) came a touch too early but it seems now validated. Then I had concluded: China's impact on wages and inflation worldwide will morph drastically in the forthcoming years, as both salaries and prices are growing steadily.

BIS concludes:  "As a consequence, advanced economies may see core inflation pick up through the back door of global supply chains despite moderate wage pressures in their domestic labour markets." The Stolper-Samuelson effect, it seems, has stopped to support advanced-country central bankers in their job to keep inflation pressures down.

Zambia, China and theworldofhillaryclinton.com

Too bad that the US Secretary of State has not been briefed on the AEO 2011 (http://www.africaneconomicoutlook.org/) before she recently went on a trip to Zambia. She should have and does know better than this, as do readers of this blog:

Hillary Clinton warns in Zambia against “new colonialism” in Africa

Zambia/Lusaka: Africa must beware of “new colonialism” as China expands ties there and focus instead on partners able to help build productive capacity on the continent, U.S. Secretary of State Hillary Clinton said.

Clinton, asked in a television interview in Zambia on Saturday about China’s rising influence on the continent, said Africans should be wary of friends who only deal with elites.

“We don’t want to see a new colonialism in Africa,” Clinton said in a television interview in Lusaka, the first stop on a five-day Africa tour (Video will follow. Please leave a comment with Link if you found the TV interview. Thank's!).

“When people come to Africa to make investments, we want them to do well but also want them to do good,” she said. “We don’t want them to undermine good governance in Africa.”

China pumped almost $10 billion in investment into Africa in 2009 and trade has taken off as Beijing buys oil and other raw materials to fuel its booming economy.

Clinton, appearing on the “Africa 360” program, called for long term “sustainable” investment that would benefit Africa.

“We saw that during colonial times it is easy to come in, take out natural resources, pay off leaders and leave,” she said.

Clinton pointed to U.S. efforts to improve political and economic governance in countries like Zambia as an example of a different approach.

“The United States is investing in the people of Zambia, not just the elites, and we are investing for the long run.” African states, she said, could learn much from Asia on how governments can help support economic growth but said she did not see Beijing as a political role model.

“We are beginning to see a lot of problems” in China that will intensify over the next 10 years, she said, pointing to friction over Chinese efforts to control the Internet as one example. “There are more lessons to learn from the United States and democracies,” Clinton said.

Source: http://www.theworldofhillaryclinton.com/2011/06/hillary-clinton-warns-in-zambia-against.html

Emerging Partners Create Policy Space for Africa

The tenth edition of the African Economic Outlook (AEO) is being released today, 6th June, in Lisbon. The special theme of the AEO 2011: Africa and Its Emerging Partners. Jean-Philippe Stijns, the lead author of the chapter, and myself have tried to summarise the major points:

The term “Rogue Aid” has become infamous as a blatant misnomer for the cooperation of emerging partners, above all of China, in particular with Africa’s poor countries. Misconceptions run from bringing down governance standards in Africa, to re-indebting, de-industrializing and cornering African countries into the production of commodities. It turns out that emerging partners neither provide ‘aid’ nor is it ‘rogue’. Nor is it perceived this way by Africans themselves.

Just guessing the importance of emerging countries for Africa is coming of age. The 2011 edition of the African Economic Outlook (AEO) gathers hard evidence on how emerging countries have evolved from relatively marginal to first-rank trading partners in Africa within the span of just a decade. The Outlook defines emerging partners as countries which were not members of the club of Western donors - i.e. the OECD Development Assistance Committee - back at the turn of the millennium. Leading the pack are China, India, Brazil, Korea and Turkey, not only in terms of the scale of their economic engagement with African countries but also in terms of the breath of countries and sectors they are active in on the continent.

Perceived Advantages



Source: AEO 2011 stakeholder survey (AfDB, OECD, UNDP and UNECA, 2011).

 

Who amongst Africa’s economic partners are typically most effective at meeting the development objectives of the country? Emerging partners are perceived to be more effective than traditional partners and multilaterals to provide infrastructure, including water, transport and energy and to help with innovation. These results are striking given all the efforts that traditional donors have put into these sectors.

Economic cooperation between Africa and its emerging partners is more than just China, it is more than just trade, and it is increasingly more than just commodities. These new powerhouses offer broader sources of finance, more appropriate expertise, technology and training, low-cost and speedy infrastructure, generics, machinery and consumer goods. Most importantly, African governments have won “policy space”, or in plain English, the ability to make decisions to pursue their self-defined development objectives, not those of their donors, after decades of quasi-unilateral dependence on Western donors. And since Africa is prone to shocks, it is safer with a more diverse set of partners and clients.

It is more than just China. Looking at the big picture, trade between African countries and their emerging partners has grown with astounding speed over the last decade alone. The share of Africa’s trade conducted with emerging partners has doubled to nearly 40%. Emerging partners’ share of trade is now comparable to that of the EU while it was just half at the start of the decade. And in 2009, China replaced the United States as Africa’s leading trade partner. So, is it just a change in dependencies? It is rather more promising than this. Africa can now choose between partners. China has not replaced the West altogether. In fact, all emerging partners except China combined represent almost double the amount of Africa’s trade with China.

It is more than just trade. New partners boost new sectors and finance mechanisms. China, India and Brazil in particular offer alternative modalities to finance development. These emerging actors blur the borders traditionally drawn between investment and aid; trade and aid; and between private and public sector involvement. Aid is only one element of their engagement toolbox, reflecting striking differences in engagement philosophies between traditional donors and emerging partners. Western “charity” focuses on “assistance” seeking poverty reduction. The “Asian” model for co-operation emphasizes the partner’s potential and seeks mutual benefits. In fact, it quite resembles the way Japan once practiced cooperation with China.

It is increasingly more than commodities. It will surprise many that the increase of African trade performance is not just based on resources. Manufactured goods actually constitute a growing share of the imports of emerging countries from Africa whereas it is a shrinking share of the imports of traditional partners from African countries. Likewise, foreign direct investment flows from the emerging partners to Africa are in fact less concentrated in oil-producing countries than those of OECD countries.

Of course, these new partnerships do come with challenges for African countries. African authorities need to ensure that they get their fair share of the corresponding benefits; that these are shared across society; and that competition play in favor of African countries rather than pit themselves against each other. A small African country on its own cannot be expected to have a negotiation of equals with a large emerging country. But thanks to improving cross-border infrastructure, African countries can now foster regional co-operation and economic integration, the next source for sustainable development. Greater transparency on behalf of the emerging partners would help to dispel the myths that some Africans and too many donors in Western capitals harbor about Africa’s emerging partnerships.