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Africa’s Resource Curse

July 1, 2017 Leave a comment

Below is a link to an excellent podcast from the BBC World Service. I have blogged on the resource curse before and the falls in commodity prices – oil and mining – over the last year have affected the sub-Saharan African countries that are dependent on their primary industries. There is also mention of GDP being a stupid model. Worth a listen – click on link below.

Africa: The Commodity Curse Returns

In the balance - Resource Curse

For most economies that have natural endowments like oil (Nigeria) or minerals, there is the risk of the economy experiencing the ‘resource curse’. This is when a natural resource begins to run out, or if there is a downturn in price, manufacturing industries that used to be competitive find it extremely difficult to return to an environment of profitability. According to Paul Collier, Nigeria has a resource curse of its own, the civil war trap in which 73% of the low income population have been affected by it, as well as a natural resource trap- where the so-called advantages of a commodity in monetary value did not eventuate – on average affecting only 30% of the low income population. It seems that in Nigeria there is a strong relationship between resource wealth and poor economic performance, poor governance and the prospect of civil conflicts. The comparative advantage of oil wealth in fact turns out to be a curse. governments and insurgent groups that determines the risk of conflict, not the ethnic or religious diversity. Others see oil as a “resource curse” due to the fact that it reduces the desire for democracy.

Click here for more on the Resource Curse from this blog

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Categories: Growth, Trade Tags:

New Zealand – Resource Curse in reverse with falling dairy prices

July 7, 2015 Leave a comment

nz dairyI have mentioned the resource curse in previous posts especially those countries with natural resources. Below is an extract from a previous post.

Africa may have enormous natural reserves of oil, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from oil. This refers to the fact that once countries start to export oil their exchange rate – sometimes know as a petrocurrency – appreciates making other exports uncompetitive and imports cheaper. At the same time there is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports.

For New Zealand it seems to be working in reverse. New Zealand’s biggest export earner is dairy and with prices dropping by 23% since last year and the outlook of continued monetary easing from the RBNZ the dollar has dropped from US$0.77 on 27th April to US$0.67 today – a level not seen since 2010.

However, going against what the resource curse suggests, the weaker exchange rate will provide extra revenue for exports like the tourism industry which has been enjoying high numbers especially from Asia. Furthermore, there have been suggestions that it could surpass the dairy industry as the biggest earner of export receipts. There are further benefits for domestic companies competing against imports as the weaker dollar makes competing overseas goods more expensive relative to those produced in New Zealand.

Is there a Resource Curse?

March 26, 2012 Leave a comment

I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies with a lot of natural resources – energy and minerals. The curse comes in two forms:

1. With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.

2. This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.

In 1995 Jeff Sachs, then a Harvard Professor, co-authored a paper with Andrew Warner in which they stated that countries with a higher proportion of resource exports had experienced a slower rate of economic growth. However, The Economist recently noted the research of two Swiss-based economists which draws different conclusions. They basically say that it is crucial to distinguish between the following:

Abundance – having lots of resources
Dependence – having a high proportion of exports in resource-related industries.

They found that greater resource abundance leads to better political institutions and more rapid growth. Those with poor political institutions – Zaire, Nigeria etc – are unlikely to develop other sectors of the economy to reduce dependency on natural resources. The chart below from The Economist shows that the recent growth of OECD countries that are energy exporters against other members that are neutral or oil importers. Although they have grown more over the years with an increasing oil price, their strengthening currency hasn’t affected their economy’s that much. The key test is when the resource runs out – have countries reinvested in areas that they can fall back on or has this investment gone into the energy industry itself. For the Aussies this is very important especially if China has a hard landing. Time will tell.

First sign of the resource curse for the Aussies

January 25, 2012 Leave a comment

Today the Melbourne manufacturing plant of Toyota laid off 350 workers – the cause is the high Aussie dollar. It recently traded at US$1.05.

“Toyota Australia is facing severe operating conditions resulting in unsustainable financial returns due to factors including the strong Australian currency, reduced cost competitiveness and volume decline, especially in export markets,” Toyota spokesman

This is the first sign of the resource curse that has plagued so many resource-rich countries. The strength of the exchange rate and higher interest rates is already putting pressure on some industries, particularly the tourism, manufacturing, education exports and retail industries.

Aussie minerals are a potential ‘curse’ as it is mainly dependent on the Chinese economy. So what can the Austalian government do to minimise the impact of the resource curse?

1. Like Norway, it could put export revenues into Sovereign Wealth Funds (SWF).
2. Greater subsidies into non-commodity industries
3. With greater income from commodity industries it should develop domestic demand when international demand is subdued.
4. Investment in infrastructure and training/education is essential so that the entrepreneurial environment is vibrant. Avoid inertia and use the good times to plan ahead
5. Be prudent with borrowing and avoid exposure to debt because commodity prices might be high. Just like the sub-prime crisis – using your property as security.

They might be beating India at cricket but the economy is showing the first signs of the dreaded Dutch Disease – DDD.

Categories: Growth Tags: ,

A different resource curse

November 15, 2011 Leave a comment

Nigeria, the eleventh largest producer and the eighth largest exporter of crude oil in the world, typically produces over 2.4 million barrels per day (b/d) of oil and natural gas liquids. However, according to the IMF, while the Nigerian economy has benefited $800 billion dollars in oil revenue since 1960, this has added basically nothing the Nigerian economy or the standard of living of the average Nigerian. In fact the World Bank estimates that since 1960 $100 billion of the $800 billion in oil revenues have gone missing.


For most economies that have natural endowments like oil or minerals, there is the risk of the economy experiencing the ‘resource curse’. This is when a natural resource begins to run out, or if there is a downturn in price, manufacturing industries that used to be competitive find it extremely difficult to return to an environment of profitability. According to Paul Collier, Nigeria has a resource curse of its own, the civil war trapin which 73% of the low income population have been affected by it, as well as a natural resource trap- where the so-called advantages of a commodity in monetary value did not eventuate – on average affecting only 30% of the low income population. It seems that in Nigeria there is a strong relationship between resource wealth and poor economic performance, poor governance and the prospect of civil conflicts. The comparative advantage of oil wealth in fact turns out to be a curse. governments and insurgent groups that determines the risk of conflict, not the ethnic or religious diversity. Others see oil as a “resource curse” due to the fact that it reduces the desire for democracy. You can read the full version of this article by going to the econoMAX website below:

econoMAX

China – a blessing or curse for Developing Countries of Africa?

May 20, 2017 Leave a comment

I recently read in the New York Times Magazine a very interesting article on China and how it has built up enormous holdings in poor, resource-rich African countries. Although it may seem as a blessing to the local economy it does have its drawbacks. You can read the full article here but I have edited it for students doing Development Economics topic at A Level.
—————————————————————
Everywhere you look on the globe China’s presence can be felt, driven by its insatiable demand for resources and new markets as well a longing for strategic allies. In 2000 China had 5 countries as their largest trading partner but that has increased today to more than 100 countries including New Zealand, Australia and the USA.  Although there has been a slow down in China, President Xi Jinping has indicated that over the next decade approximately $1.6 trillion will be put into infrastructure and development throughout Asia, Africa and the Middle East. This is serious money that makes a bold statement as to their intentions globally.

China hasn’t held back in trying to secure sufficient resources to keep their economy going. Besides oil and gas China’s state-owned companies have bought mines around the world eg:

  • Peru – copper
  • Zambia – copper
  • Papua New Guinea – nickel
  • Australia – iron ore
  • South Africa – iron ore
  • Namibia – uranium

However as the Chinese economy slowed recently the demand for imports of commodities dropped thus impacting on some of these commodity exporting countries – in particular mines in Western Australia, Zambia and South Africa have been forced to close.

When China met Africa
You maybe aware of a previous blog post in which I talked about the DVD documentary  ‘When China met Africa’ which focused on Chinese investment in Zambia – a very good look at the micro environment that businesses operate in.  Investment in Africa by the Chinese started in 1976 with a 1,156 mile railroad through the bush from Tanzania to Zambia but it wasn’t until the 2000’s that Chinese authorities realised that there was a need for resources to fuel its own internal growth. With this in mind Chinese companies were given free reign to go and seek these resources.

With the end of the Cold War and the Middle East becoming a major conflict area, the US involvement in Africa started to dwindle. Furthermore with the Trump administration raising doubts about free trade agreements and global warming there is an opportunity for China to push its own initiatives and push for global leadership. A Trans Pacific Partnership without the US is very appealing to the Chinese authorities as it allows to become a dominant player in negotiations with other members.

husab mine.jpegChina tends to provide no-strings financing that, unlike Western aid, is not conditional on human rights, clean governance or fiscal restraint. The Namibian finance minister welcomed China as an alternative but although the Chinese want you to be masters of your own destiny and dictate what you want, there are conditions which doesn’t necessarily make their presence truly beneficial. Namibia has seen significant Chinese investment especially in the Husab Uranium Mine ($4.6bn) the second largest uranium mine in the world. It is estimated that it will increase Namibia’s GDP by 5% when the mine reaches full production although almost all of the uranium will go to China for nuclear energy and thereby reducing its dependence on coal. Approximately 88% of China’s energy comes from fossils fuels, 11% from hydropower, solar and wind and only 1% from nuclear power. In order to reach clean energy goals and lose the mantle of chief polluter in the world, China has put a lot of emphasis on nuclear power and they have 37 nuclear reactors with another 20 under construction. The aim is to have 110 reactors by 2030 and become an exporter of nuclear-reactor technology.

The Chinese company China General Nuclear (CGN) has a 90% stake in the mine with the Namibian government 10%. Although Namibians are benefitting from all the infrastructure investment by the Chinese they have saddled the country with debt and have done little to reduce the 30% unemployment rate – Namibia has one of the most unequal societies in the world. In China independent unions are essentially illegal but Namibians have the Metal and Allied Namibian Workers Union (MANWU) which accused Chinese state-owned companies of paying Namibian workers only one third of the minimum wage and also using Chinese workers for unskilled jobs that by law should be going to Namibians. As the unions’s secretary said “the Chinese will promise you heaven but the implementation can be hell”. Also scandals involving Chinese nationals  include tax evasion, poaching endangered wildlife, money laundering have done little to enhance the mood of locals.

Over the last decade China has got a reputation for pillaging and pilfering the natural world with its growing demand natural resources as well as the illegal wildlife trade. Chinese businesses have had public backlash over their proposals that could do damage to the environment. One company wanted to clear a 30,000 acre forest so that it could plant tobacco – the soil in the forest is totally unsuitable for this purpose. Another wanted to set up donkey abattoirs to meet China’s demand for donkey meat and skin whilst a Nambian-based Chinese company requested to capture killer whales, penguins, dolphins and shark in Namibian waters to sell to aquatic theme parks in China. Under pressure from activists the Chinese firm withdrew their request.

Is China the World’s New Colonial Power?

Categories: Development Economics Tags: ,

Africa and the curse of oil

August 19, 2010 Leave a comment

I have been doing exchange rates with my AS class and we talked about the problems some countries have when they are blessed with natural resources – the resource curse. Africa may have enormous natural reserves of oil, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from oil. This refers to the fact that once countries start to export oil their exchange rate – sometimes know as a petrocurrency – appreciates making other exports uncompetitive and imports cheaper. At the same time there is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. Take for instance Gabon which produces 300,000 barrels/day but although the vast majority of the country is covered in a tropical rainforest it is hard to find bananas that are grown there – most are imported from the Cameroon. In a book entitled “Untapped: The Scramble for Africa’s Oil” John Ghazvinian states that over $20bn has been spent on exploration and production of oil since 1990. This figure is estimated to climb to $50bn by the end of 2010, the largest investment in the continent’s history. Click here for a very good review of the book.

Economists also refer to this as the Dutch Disease which makes reference to Holland and the discovery of vast quantities of natural gas during the 1960s in that country’s portion of the North Sea. The subsequent years saw the Dutch manufacturing sector decline as the gas industry developed. The major problem with the reliance on oil is that if the natural resource begins to run out or if there is a downturn in prices, once competitive manufacturing industries find it extremely difficult to return to an environment of profitability.

Norwegian Model
Norway, the world’s third largest oil exporter behind Saudi Arabia and Russia, puts away a large share of its wealth in a national pension fund, now worth more than $300 billion. The problem here is that Norway is a small, homogeneous country of about five million people that was relatively advanced when its oil started to flow. It already had the sorts of public institutions that enabled it to cautiously manage its newly found wealth. Countries like Chad where 80% of its citizens living below the poverty line and Nigeria with hundreds of distinct ethnic groups living
in civil unrest, would not be able to adopt to the Norwegian model. The situation in other African oil-producing countries is just as difficult. Equatorial Guinea is a family business camouflaged as a country and is seen as one of the most closed societies on earth. Look at the two graphs below – Nigeria and Norway have similar oil revenues but this is very different when you look at the GDP/Capita. In Nigeria it is thought that as much as two-thirds of all economic activity takes place in the informal sector


Sub-Sahara economies hit by fall in commodity prices.

January 12, 2017 Leave a comment

Commodities have been the engine of growth for many sub-Saharan countries. Oil rich nations such as Nigeria, South Africa and Angola have accounted for over 50% of the region’s GDP whilst other resource-intensive countries such as Zambia, Ghana and Tanzania to a lesser extent.

I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies like in sub-Sahara Africa which have a lot of natural resources – energy and minerals. The curse comes in two forms:

  • With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.
  • This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.

However it is the fall in commodity prices that is now hitting these countries that have, in the past, been plagued by the resource curse. As a lot of  commodities tend to be inelastic in demand so a drop in price means a fall in total revenue since the the proportionate drop in price is greater than the proportionate increase in quantity demanded.

The regional growth rate for 2016 is approximately 1.4% but it is not looking good for commodity driven economies:

  • Nigeria – oil – 2016 GDP = -2%
  • Angola – oil – 2016 GDP = 0%
  • South Africa – gold – 2016 GDP = 0%

In 2016 resource rich countries will only grow by 0.3% and commodity exporting countries have seen their exports to China fall by around 50% in 2015. Furthermore, public debt is mounting and exchange rates are falling adding to the cost of imports. With less export revenue the level of domestic consumption has also decreased.

It is a different story for the non-resource countries of sub-Sahara. It is estimated by the IMF that they will grow at 5.6%. By contrast they have been helped by falling oil prices which has reduced their import bill and public infrastructure spending which has increased consumption.

africa-oil-effectAs is pointed out by The Economist numbers should be read wearily as GDP figures are only ever a best guess, and the large informal economy in most African states makes the calculation even harder. Africa may have enormous natural reserves of resources, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from resources. There is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. What is needed is diversification.

After oil what’s next for Saudi Arabia?

August 3, 2016 Leave a comment

With oil prices being at historically low levels, oil exporting countries have been struggling to generate the revenue that was once apparent not so long ago. In Venezuela, for instance, oil accounts for 95 percent of Venezuela’s export earnings and plummeting world prices have severely hit the government’s revenue stream. The Middle Eastern countries with their abundant supply of oil and the ease at which it extracts it, are starting to look at alternative revenue streams as the rent from oil is no longer sufficient to sustain public goods and services. As noted in The Economist the Arab world can be divided into three broad categories:

  1. Resource-rich, labour-poor – Gulf sheikhdoms with lots of oil and gas but few people;
  2. Resource-rich, labour-abundant – Algeria and Iraq, that have natural resources and larger populations;
  3. Resource-poor, labour-abundant – Egypt, that have little or no oil and gas but lots of mouths to feed (see chart).

Oil Rev Mid East.pngTo a degree the whole Arab world is an oil-driven economy: all three groups tend to rise and fall with the price of oil. However although some countries have significant reserves of wealth this does not offer an alternative to weaning them off their dependence on the oil industry.  Saudi Arabia’s Vision 2030 intends to be free of oil dependence by 2020 and among the proposals is a plan to launch a new defence company, combining Saudi industries under a single company and be floated on the Saudi Stock Exchange.

The country plans to list less than 5 per cent of Aramco (Saudi Arabian Oil Co), which is worth more than US$2 trillion. The sale of Armco would be big enough to buy Apple Inc., Google parent Alphabet Inc., Microsoft Corp. and Berkshire Hathaway Inc. – the world’s four largest publicly traded companies. The plan is for the government to be a lot more prudent in its spending and making sure that the budget deficit doesn’t exceed 15% of GDP which is a very high figure. Furthermore using the private sector to provide education and health care as well as selling valuable land to developers, will reduce the burden of the State. But this will bring about significant social change that the population of Saudi Arabia may not be prepared for. As The Economist said:

A generation of men that expected to be paid for do-nothing government jobs will have to learn to work. The talents of women, who already make up the majority of new university graduates, will have to be harnessed better. But for now even the limited reforms to give women more opportunities have gone into reverse. To achieve its goals, Saudi Arabia will have to promote transparency and international norms, which will mean overcoming resistance from the powerful religious establishment and the sprawling royal family.

Source: The Economist – May 14th 2016

Resource Curse

For most economies that have natural endowments like oil (Saudi Arabia) or minerals, there is the risk of the economy experiencing the ‘resource curse’. This is when a natural resource begins to run out, or if there is a downturn in price, manufacturing industries that used to be competitive find it extremely difficult to return to an environment of profitability. According to Paul Collier, Nigeria has a resource curse of its own, the civil war trapin which 73% of the low income population have been affected by it, as well as a natural resource trap- where the so-called advantages of a commodity in monetary value did not eventuate – on average affecting only 30% of the low income population. It seems that in Nigeria there is a strong relationship between resource wealth and poor economic performance, poor governance and the prospect of civil conflicts. The comparative advantage of oil wealth in fact turns out to be a curse. governments and insurgent groups that determines the risk of conflict, not the ethnic or religious diversity. Others see oil as a “resource curse” due to the fact that it reduces the desire for democracy.

Click here for more on the Resource Curse from this blog

Pining for the Fjords or higher oil prices?

December 9, 2015 Leave a comment

Although Norway is a capitalist country, it is state-owned enterprises that seem to be most prevalent in business circles. Oil revenues have been at the forefront of Norway’s development and it is, behind Luxembourg, the richest country in Europe. Ultimately the economic welfare of the country is heavily influenced by the price of oil and the peak of $150 a barrel in 2008 had huge benefits for the government purse. Oil and gas now account for about 25% of Norway’s GDP and almost 50% of its exports. However with the recent fall in oil prices to below $50 a barrel, oil companies have had to lay off workers – estimated to be 30%. According to The Economist the falling oil price has exposed two weaknesses in the Norwegian economy.

  1. Bureaucracy is a problem in Norway with the government owning about 40% of the stockmarket. Furthermore, as the vast majority of the country’s top executives attend the Norwegian School of Economics there is an unhealthy cultural uniformity which is not a catalyst to change.
  2. The welfare state has been too generous. The public sector employs 33% of the workforce (compared to 19% for the OECD countries) and as people enjoy a 37 hour week and sometimes a 3 day weekend there is a concern that the state is undermining the work ethic. In 2011 Norway spent 3.9% of GDP on incapacity benefits and early retirement, compared with an OECD average of 2.2%.

However, the government has been very prudent with its saving in that it now has the biggest sovereign-wealth fund in the world at $873 billion. The country also has a fish industry which is worth $10 billion a year.

Norway fjord

Where to from here?

Are we seeing a classic resource curse where an economy has become reliant on a particular resource? Does Norway have a real alternative to oil to generate revenue for its economy?

Norway needs to allow the entrepreneurial spirit more room to grow and also apply some free market reforms to the welfare state. Shrinking the role of the state will help as the private sector cold  start to be more involved in the running of schools, hospitals, and surgeries. So far the country’s reaction to the oil price drop is to be become even more left wing especially in the cities of Bergen and Oslo.

Source: The Economist – Norwegian Blues – October 10th 2015

New Zealand: Reliance on a single product and a single market?

April 1, 2014 Leave a comment

I’ve written a lot on this blog about the resource curse and how it is an economic paradox. It refers to the fact that once countries start to export a natural resource like oil their exchange rate appreciates making other exports uncompetitive and imports cheaper. At the same time there is a gravitation towards the natural resource industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports.

For New Zealand there is a similar scenario with a reliance on the dairy industry and the Chinese market for trade.

The BNZ Economy Watch reported that dairy contributed the most (63 percent) to the total exports to China, valued at $774 million, in November 2013. This is the highest value of dairy exports to China for any month. Total dairy exports were valued at $1.7 billion – also the highest for any month.

China is now our top export destination on an annual basis, just under two years after it became our top annual imports partner in December 2011, industry and labour statistics manager Louise Holmes-Oliver said. In November 2013, goods exports were valued at $4.5 billion, up $647 million (17 percent) from November 2012. Exports to China hit record levels in October 2013 and November 2013. Exports to China were valued at $1.2 billion. In 2013 China accounted for 22% of NZ’s goods exports, 17% of NZ’s goods imports and 20% of total two-way goods trade.

NZ Mrechandise Trade

The last thing New Zealand wants to become is nothing more than a milk powder exporter to China. Economic diversification is as important as investment diversification from a risk profile perspective. The answer is not to kill off existing trading relationships or reduce dairy production but to look to other sectors to play a bigger part. Furthermore if the purchaser gets too dominant they can exploit monopsony power.

Share of NZ Primary Produce going to China
Share of NZ Prim X going to Chine

Commodity prices drop but Aussie dollar holds firm

January 5, 2014 Leave a comment

Aus dollar Commod PricesSince the Aussie dollar was floated in 1983 its value closely followed that of its commodity exports – see graph from The Economist. However since 2003 commodity prices have increased 400% but the dollar rose by much less and no longer had a direct relationship to commodity prices. There are 3 possible reasons for this:

1. The deregulation of financial markets which facilitates the ease of currency trading
2. The current account deficit in Australia which got to 6.2% of GDP in 2007
3. Interest rates in Australia up to the GFC were realtively low compared to other developed countries

2011 saw commodity prices drop but the Aussie dollar has remained strong. As most economies employed a lose monetary policy and proceeded to drop interest rates aggressively after the GFC, the Aussie economy didn’t in fact go through a recession and its interest rates remained relatively strong – see below.

CB Interest Rate Nov 13

Although a weaker exchange rate could help the Aussie economy especially as it has been susceptible to the resource curse – the strength of the exchange rate and higher interest rates is already putting pressure on some industries, particularly the tourism, manufacturing, education exports and retail industries.

Chile, China and Copper

June 2, 2013 Leave a comment

Chile copperOne cannot underestimate the importance of copper to the Chilean economy. Copper provides 20% of Chile’s GDP and makes up 60% of its exports. Chile’s economy is growing at approximately 6% per year while inflation is at 1% and unemployment 6.4%. Although Chile does have a productive agricultural sector and tourism, the price of copper does have a significant impact on the economy.

Chile has done very well out of the shift of China’s rural population to the more urban areas – new homes with copper wire and pipes are needed. Furthermore Emerging markets everywhere are using vast amounts of copper to put in bridges, cars, fridges and more or less anything that uses electricity. However China’s recent slowdown has caused copper prices to slide by 15% since the beginning of the year.

The Economist reported that in 2000-05 the government’s income from mining averaged $2.1 billion a year. As Chinese growth accelerated, that rose to $11.5 billion a year between 2005 and 2011. But the boom owed almost everything to the copper price. Chile’s output of the red metal has hardly grown in a decade.

The biggest threat to Chile’s copper boom comes from China. If the country that buys 40% of the world’s copper slows further, the price of the metal will fall again and Chile will have rely on something else. Is this another resource curse waiting to happen? Below is a short report from AlJazeerah which also looks at the positives from lower copper prices – lower currency value, the peso, and ultimately more competitive exports.

Categories: Growth, Trade Tags: , ,

Are oil exporters the reason behind the global imbalance?

June 3, 2012 Leave a comment

The Economist ran an article that focused on the global imbalance in the world economy. We have been accustomed to hearing about the USA being great spenders and running large deficits and the Chinese being big savers and running large surpluses. However those that have been running even bigger surpluses are the oil exporting countries which have enjoyed a huge windfall from high oil prices – according to the IMF $740bn of which 60% will come from the Middle East. This compares to China’s suprlus of $180bn.

The Economist stated that only a fraction of this oil surplus has gone into official reserves and therefore hasn’t attracted much attention. A lot the money has been put into equities, hedge funds etc through intermediaries in London. The affect of higher oil revenues on the world economy depends on whether the money earned is then spent on buying goods and services from oil importing countries – this maintains demand and the velocity of the circulation of money in the circular flow. In the oil crisis years of 1973 (400% increase) and 1979 (200% increase) 70% of the revenue earned by oil exporting countries was injected back into the circular flow on purchasing goods and services. The IMF estimates that less than 50% will be spent in the three years to 2012. For each dollar spent on oil from OPEC countries in 2011 there was the following spent on the exports from that country:

USA – 34 cents came back into the economy
EU – 80 cents came back into the economy
China – 64 cents came back into the economy

Normally a large current account surplus would be eroded over time by a stronger domestic spending and a higher exchange rate. However the Gulf currencies are pegged or closely linked, to the US$. The best way to reduce the current account surplus of the oil exporting countries is to increase public spending and investment which might reduce dependence on oil revenues and therefore less likely to become part of the resource curse.

Categories: Economic Cycle, Growth, Trade Tags: , ,

Oil dependent Saudi – an artist’s impression

February 19, 2012 Leave a comment

Full-time doctor but part-time artist, Ahmed Matter creates some very interesting art. Using x-rays and magnetism the art he produces is a critical voice against the insanity of oil dependency and the oil production that has had a decisive impact on the region as a whole. The petrol pump below is gradually transformed into the body of a human being – in blue-tinted x-ray pictures of the head and upper body. And the pump nozzle itself becomes a pistol, which the spectral human figure holds to its head – a portent and probably also a criticism of the Saudi government, which places reckless emphasis on oil exports. Do we have another case of a classic resource curse?

China now mining in Australia

May 1, 2011 Leave a comment

The Chinese government are no longer satisfied with buying iron ore and coal from Australian miningcompanies, Rio Tinto and BHP Billiton. China is now funding its own operations on Australian soil by leasing land in the Pilbara region in the north-west of Australia. China expects to mine at least 2bn tonnes of ore from this region in the next 25 years and with it comes royalities and taxes for the Australian economy. It seems that China is the only country that is able to invest such large amounts of money in the mining industry and infrastructure – they are currently funding a port with a 1.6km-long breakwater protruding into the Indian Ocean.

Resource Curse
But as I have mentioned in previous posts there is the resource curse issue and here are indicators that economically the Australians should be worried:

* the windfall from mineral exports has strengthened the Aus$ which has made manufacturing exports uncompetitive.
* In Perth restaurants and farms are struggling to find labour as unskilled workers are attracted to the high earning potential of the remote mines- average yearly wage is Aus$112,000. A truck driver can earn more than a surgeon.

Economists also refer to this as the Dutch Disease which makes reference to Holland and the discovery of vast quantities of natural gas during the 1960s in that country’s portion of the North Sea. The subsequent years saw the Dutch manufacturing sector decline as the gas industry developed. The major problem with the reliance on oil (minerals in the case of Australia) is that if the natural resource begins to run out or if there is a downturn in prices, once competitive manufacturing industries find it extremely difficult to return to an environment of profitability.

Below is a clip about China’s demand for Australian minerals taken from AlJazeera early last year.

Categories: Growth, Trade Tags: ,

Mining Boom Manufacturing Doom – WA

September 28, 2010 Leave a comment

Currently in Western Australia for a family wedding and notice that the workforce here is undergoing a significant change. The numbers employed in the manufiacturing sector is likely to be elcipsed by the number employed in the mining industry. Have a look at these figures:

2008 – Manufacturing 105,000 – 70,000 mining
2010 (Aug) – Manufacturing 87,700 – 86,900 mining

The commodity boom has simply led to resources flowing from one part of the economy to another. The labour market is allocating its resources in a more efficient and wealth maximising manner. However with the continued rise of the AUS$ the manufacturing sector is finding it increasingly hard to compete and it is difficult to make things when a nation’s capital, labour force and financial resources are focused on the resources sector to capitalise on high prices. It sounds very like a case of ‘The Resource Curse’ – click here to see earlier post on this topic. The Reserve Bank of Australia (RBA) worried about another commodities boom are suggesting a rise in interest rates. This might not impact the mining sector but it will definitely affect manufacturing.

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