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.

Dreaming with…BRINCS

Reading my IHT over breakfast this morning, I find Jeffrey Sachs, director of the Earth Institute at Columbia University,  so enthused about Nigeria’s prospects that by the end of the decade he thinks we will be dreaming of…BRINCs. The week of President Goodluck Jonathan’s inauguration he feels that Africa’s most populous country (almost 160 million inhabitants) is on the verge of economic takeoff. (Recall that eight years ago, Goldman Sachs set investors on Dreaming with BRICs. No African country featured in that list, as the “s” stood for plural, not for South Africa.)

Sachs lists “five solid reasons for optimism” on Nigeria:

• reform has paved the way for a restoration of civilian rule and the strengthening of critical institutions, including the National Assembly and state and district governments;
• the president’s democratic mandate is not in doubt, even if tensions linger in Nigeria’s traditional north-south ethnic divide;
• the rise of China and India is reshaping the world economy, and providing solid support for Nigeria’s growth. Nigeria can expect to sell not only its vast hydrocarbon deposits at good prices, but also a wide range of agricultural products and manufactured goods. Moreover, China is determined to be a major partner, financing core infrastructure — highways, rail and power grids — and developing major industrial capacity;
• the fourth reason is the “age of convergence,” the tendency of developing countries like Nigeria to make unprecedented economic advances through the deployment of best practices and advanced technologies;
• finally, Nigeria’s commitment to tackling extreme poverty and disease throughout the nation, including a bold mechanism to transfer federal funds to state and local governments in a robust and accountable manner. All over the country, schools, clinics and water points are being built.

 

Indeed, the forthcoming  African Economic Outlook 2011, to be released on 6^th of June in Lisbon,  shows real GDP growth at around seven percent for the recent past and over the next two years. What is more, the source of growth is increasingly agriculture, rising by more than five percentage points to 37.2% over the past five years – thanks to good weather and cheaper agricultural credit.

Make no mistake: Oil-rich Nigeria, until recently the quintessential showcase for the havoc wrought by  the resource curse, faces huge challenges. The 2010 Human Development Index ranks Nigeria number 142 out of 169 countries, placing her firmly in the Low Human Development category. Infant and under-five mortality rates and the prevalence of HIV/AIDS tear the country down. Nigeria’s education system, while reporting better primary-  and secondary-school enrolment scores, faces disarray in the state university system through strikes and long closures. Un- and underemployment, especially amongst Nigerian youths, remain serious concerns; they will be the ultimate yardstick on which President Jonathan will be judged at the end of his mandate.

IMF: Is Lagarde Avantgarde?

On 25 May, Christine Lagarde, the French finance minister, formally launched her bid to become the next managing director of the International Monetary Fund. Mrs. Lagarde has strong support from European heavyweights, such as Germany and the UK. A day earlier, Press Release No. 11/195 was posted on the IMF website: Statement by the IMF Executive Directors Representing Brazil, Russia, India, China and South Africa on the Selection Process for Appointing an IMF Managing Director. Its major points:

• The convention that the selection of the Managing Director is made, in practice, on the basis of nationality undermines the legitimacy of the Fund.
• The recent financial crisis which erupted in developed countries, underscored the urgency of reforming international financial institutions so as to reflect the growing role of developing countries in the world economy.

Despite Shifting Wealth, the first point carries more weight than the second.

The growing role of developing countries in the world economy is well-documented and undeniable. But it is often exaggerated by the common use of world GDP shares adjusted for purchasing power parities (PPP) rather than based on nominal dollars, Euros or SDRs. PPP adjustment makes sense when comparing living standards or PROSPECTIVE shares in world GDP, as poor countries’ currencies are undervalued but tend to appreciate once countries converge to advanced-country levels. But PPP adjustment makes little sense when comparing economic weights TODAY. Such a comparison requires to relate GDPs through current nominal dollar, Euro or SDR values.

According to latest IMF data, world GDP in 2011 is estimated to total US$ 68.7 trn. (One trillion –trn – ist 1000 billion – bn). Of that product, 64.6% is attributed to advanced countries, 35.4% to the rest, the group of emerging and developing countries. So while the role of developing countries has been growing (especially over the last decade), the group of advanced economies still stand for roughly 2/3 of world GDP. On that account then, a European managing director looks still like a natural choice, as Europe totals a higher share (46.8%) than North America combined (40.7%) within the advance-country group.

The first point made by the BRICS executive directors - that the selection of the Managing Director if made, in practice, on the basis of nationality will undermine the legitimacy of the Fund – carries much more weight. The rise of regional funds that could obscure the IMF role as a global economic enforcer is particularly notable in Southeast Asia, which now holds the bulk of the world’s reserve assets. In that region, the push toward economic integration raises the prospect of an Asian Monetary Fund as Southeast Asian leaders develop a centralised fund known by its acronym as the CMIM, the Chiang Mai Initiative Multilateralisation. Asia could find regional rules more appealing than those of supranational organizations like the IMF  if its leadership remains dominated by developed nations. In Martin Wolf’s words “this would Balkanise management of the global economy, to no one’s true long-term advantage”. 

To sum up: Christine Lagarde as IMF head is more Ancien Régime than Avangarde.

Global Rebalancing: A Modest Role for the RMB

At the forthcoming Franco-Chinese colloquium  Croissance et déséquilibres mondiaux. Approches chinoises et européennes, I plan to argue that growth-oriented global rebalancing on current accounts can – and should - rely to only a very limited extent on RMB appreciation. That role has almost certainly to be smaller than most economists assume, so my thesis is likely to stir debate.

First, consider the history of US-Sino imbalances. As large emerging countries integrated for earnest into the world economy over the past 20/30 years, a global convergence process started – Shifting Wealth. This process depressed low-skill goods prices and wages (through the Stolper-Samuelson effect). The corresponding super cycle in raw material prices shifted purchasing power and wealth toward oil, iron ore and copper exporters. The switch from net debtor to net creditor positions of many emerging countries, based on oil or sweat, depressed US treasury rates as most of the underlying trade surplus was invested in the deepest, most liquid financial market.

The US Federal Reserve led by Alan Greenspan clearly misread Shifting Wealth as cheap goods and cheap savings from China & Co nourished the illusion of permanently depressed inflation. So while the natural interest rate – the real return on capital – was rising in a world of Shifting Wealth, the capital market rate was falling. Austrian overinvestment theories*  from Knut Wicksell to Friedrich August von Hayek provide two reasons for a fall of the capital market rate below the natural rate: First, the central bank supplies more liquidity at unchanged rates via money creation, underestimating future inflation. This allows for accelerating credit growth of the banking sector and low capital market rates. Second, the banking sector (or capital market) keeps interest rates low via money creation, thanks to financial deregulation in the US. The consequence of this configuration was a strong drop in US household savings that started in the mid 1990s. China’s current account meanwhile remained fairly balanced until the early 2000s, from when reserves started to explode.

Second, consider the  size of US-Sino imbalances, in other words the size of the transfer problem in order to get current account rebalancing. In 2006, the China’s surplus on the current account was equivalent to 8% of its GDP, the US deficit 6%. In 2010, both countries have been running a surplus, resp. deficit, closer to 3% of their respective GDP. This rebalancing has mostly been caused by the crisis; debt limits on further rises in US household consumption; and China’s  huge fiscal stimulus to cope with the global crisis and temporary export slump.  While China is gradually correcting its (far from outlandish) currency undervaluation, most of the remaining US-Sino imbalances are arguably of structural nature: US credit culture and financial system; China’s surplus household and corporate savings. Overall, however, the graph shows clearly that global imbalances have become less US-Sino centric. All these considerations point to a modest role for RMB appreciation, mostly to lower its corporate savings surplus.

Third, for global rebalancing to be growth-conducive, the speed and size of RMB appreciation has to be slow and low, best driven by further income convergence. Homi Kharas, in his excellent

OECD Development Centre Working Paper No. 285 “The Emerging Middle Class in Developing Countries” (2010) has made two crucial points. He didn’t link them to the RMB debate but they can be used in the context of RMB appreciation and global rebalancing:

• Strong currency appreciation in the convergence process usually picks up once countries reach 30% of US per capita income levels. China is at half that level. It is a country much poorer than Germany and Japan were in the 1970s when their currencies appreciated 40, resp 60% against the dollar.
• The debt-limited US consumer can be replaced by the emerging middle class in China and elsewhere, provided these countries are allowed to grow fast enough to transfer their poor segments to the middle class, defined as > 10$_PPP/day/capita.

Further reasons that growth and rebalancing can hardly be reconciled with strong RMB appreciation is Dani Rodrik’s (2010) finding that currency undervaluation stimulates growth more in China than in other developing countries. RMB appreciation translates into more competitive currency valuation elsewhere, but there it tarnslates into lower growth than it did in China. And as OECD Development Centre research has recently shown, China has become the growth engine to emerging and developing countries alike during the past decade, replacing the G7 countries.

* Schnabl, G. and A. Hoffmann (2008), “Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View”, The World Economy,  Vol.31.9, pp 1226-52.

Jean-Philippe Stijns on "Emerging Partners: Anything but Rogue Aid"

Dear Helmut,
 
I meant to respond to your post earlier but I was myself tied up with the drafting of our own forthcoming report about Africa and its Emerging Partners, prepared for the 2011 edition of the African Economic Outlook. The report is under embargo until its official launch on June 6 in Lisbon at the occasion of the annual meetings of the African Development Bank, so I won’t comment on it. However, I can allow myself to share a few personal opinions.
 
I very much support the major points you make, especially that it’s not ‘rogue’. The following is thus a matter of nuances. You are quite right to points that out emerging partners, China but also typically all other emerging countries engaging African countries, do tend to take a more holistic approach to promoting the export-oriented industries and cooperating with fellow southern countries. Consequently, and even more so since they tend to use different funding modalities, it is difficult to identify and even more so quantify how ‘aid’ these emerging countries provide, say, to African countries.
 
But as you also rightly point out, the number of these new ‘donor’ countries has been rising steadily. Interestingly, as they mature, these emerging donors tend to adopt some of the practices of the older donors. For instance, South Africa is considering the establishment of a South Africa Development Partnership Agency (SADPA) during the last quarter of 2011. The key is that as these emerging partners are confronted with similar challenges than those of traditional donors, they will naturally try some of recipes that have helped traditional partners to cope with the same challenges. If you want to monitor and control where your cooperation money goes, whether you want to call it ‘aid’ or not, you will quickly realize that you need an agency that does that…
 
My point is that it does not matter whether you or I or they want to call it ‘aid’ or not. “L’argent n’a pas d’odeur” as Emperor Vespasian told his son who was shocked to see his dad collecting money on public toilets. Yes, some of the aid money that emerging donors give takes the form of concessional conditions on otherwise commercial lending. But so does, Western aid money too in some cases, and this concessionality component in lending to developing countries for development-related purposes is estimated and counted as aid by the good old DAC itself.
 
So, why do Southern donors typically insist as much that their money not be labeled as aid as western donors insist that it be? It’s not as much an ideological tendency rooted in some cooperation culture that does not want to infringe on the sovereignty of fellow Southern countries. Southern countries can play hard ball with each other and do not refrain to attract attention to their cooperation efforts when there is a good diplomatic reasons to do so.
 
The real reason is that they are countries that still have a large chunk of their own population that is poor. In other words, they still developing countries themselves. They are therefore not so keen to make it obvious to their own poor citizens that some of their tax money is spent abroad for ‘altruistic’ purposes. Rather, they are more comfortable to argue that it is not a giveaway but a win-win transaction and that they are pursuing their own development / national agenda in doing so…
 
So, I would argue that while there important differences between DAC and non-DAC aid / cooperation that may warrant the use of a different term, such as perhaps ‘international development cooperation’, aid it still is and we should try to avoid falling victim to the emerging countries’ effort to cast themselves as less altruistic than they actually are J
 
That’s it for now. Some other thoughts may come later.
Have a great week-end!
 
 
Jean-Philippe
 

 
Jean-Philippe Stijns, Ph.D.
Economist, EMEA Desk
 
Tel. :  33 (0) 1 45 24 99 93
Fax. : 33 (0) 1 44 30 61 30
jean-philippe.stijns@oecd.org
www.oecd.org/dev/aeo
 
Mailing address
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75775 Paris Cedex 16, France
 
Visiting address
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Emerging Partners: Anything but ‘Rogue Aid’

Moisés Naím, the former editor of Foreign Policy magazine and currently a fellow at the Carnegie Endowment for International Peace, a fortnight ago received Spain' s prestigious Ortega y Gasset Award for Journalism. Let’s hope for the Award jury that he did not get the prize for his 2007 Foreign Policy article  “Rogue Aid”, which has become infamous as a blatant misnomer for the cooperation of emerging partners, above all China, with poor countries. Emerging partners neither provide  ‘aid’ nor is it ‘rogue’, it turns out.

At its April 2011 Senior Level Meeting, the old Western aid donor cartel - the OECD Development Assistance Committee (DAC) -  sounded almost enthusiastic (or a touch subservient?) in its  declaration “WELCOMING NEW PARTNERSHIPS IN INTERNATIONAL DEVELOPMENT CO-OPERATION” , acknowledging the essential role that major nations from beyond their membership have had in global progress towards the Millennium Development Goals.

Doesn’t sound that rogue, does it? It is not aid either.

As another sign of ‘Shifting Wealth’, the number of non-DAC countries that today provide development cooperation rose steeply to more than 30 during the first decade of the twenty-first century. The shift manifests itself mostly in decreasing OECD shares in bilateral trade, export credits and direct foreign investment.  Joint with migration and technology transfer, all these integration vehicles are increasingly South-South.

There are critical differences in the way development cooperation is provided by traditional and emerging partners. For the latter,  aid is only one element of a broader economic engagement toolbox. Whereas the Western “charity” model is focused on the notion of “assistance” seeking primarily a reduction in poverty, the “Asian” model emphasises to a larger extent the partner’s potential seeking to create mutually beneficial cooperation, just as Japan cooperated with China* in the past, in a investment-for-resources swap, and as China, India, Korea, Malysia, or Turkey practice these days.

Chinafrica: Change of Ownership!

Until recently, a collection of blames against China’s and other new partners cooperation programmes, including by the DAC  invariably warned that they amounted to

• violation of corporate and national governance standards

• free riding on debt relief

• unfair company competition

• scramble for extraction rights and resource curse.

These accusation smelled sour grapes as the ‘chasse gardée’, as the cartoon visualises nicely, had been opened by the appearance of new players. Moreover, the growing relevance of ‘Eastern donors’ is weakening the efficiency of Western soft-law standards in the field of development co-operation and raises the question of how compliance with these standards can be assured in a changing donor landscape. 

Experts give a cautious but rather positive assessment about the impact of the emerging partners on poor countries' development*. There is increasingly less evidence to suggest that the new players are hindering poor countries' industrialisation, debt sustainability or governance. Prospects have improved for the transfer of technology, diversity of financing sources and policy space.It can be expected that poor countries will also find more voice in global governance as the world is moving to multipolar governance under the headline of US-Sino rivalry.

* Paulo, Sebastian and Helmut Reisen (2010), "Eastern Donors and Western Soft Law: Towards a DAC Donor Peer Review of China and India?," Development Policy Review, Overseas Development Institute, vol. 28(5) 535-552, 09.

Sung Jin Kang , Hongshik Lee , Bokyeong Park (2010), “Does Korea follow Japan in foreign aid? Relationships between aid and foreign investment”, Japan and the World Economy 23 (2011) 19–27.

UN OSAA, 2010. Africa’s Cooperation with New and Emerging Development Partners: Options for Africa’s Development. New York: United Nations Office of the Special Adviser on Africa.


UNCTAD, 2010a. South South Cooperation - Africa and the New Forms of Development Partnership. Economic Development in Africa Report 2010. Geneva: United Nations Conference on Trade and Development.

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 www.africaneconomicoutlook.org ,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:

中國!!!

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

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

Holder	Holding (a) USD billions	Proportion of Total %
China	790	21.9
Oil exporters (b)	188	5.2
Caribbean banking centres (c)	188	5.0
Brazil	157	4.4
Hong Kong, China	146	4.1
Russia	128	3.6
Non-OECD Total	2 053	57.0

Source: http://www.ustreas.gov/tic/mfh.txt Data as at November 2009