Developing economies energy vs ESG

By trying to restrict investments in oil and gas ventures, is the ESG movement going to have the effect of reducing supply of oil as global demand increases? With this scenario the price of energy will increase and developing countries will find it even more difficult to provide its citizens with electricity, water etc which requires energy in the form of oil, gas and to some extent coal. Developing countries will need significant financial help from the developed world if they are going to grow in a sustainable and environmentally favourable way. The concern is the reliance on oil and gas and the ever increasing demand – see graph:

Environmental, social, and governance (ESG) investing is used to screen investments based on corporate policies and to encourage companies to act responsibly. There has been a lot of anti ESP feeling as a focus on environmental and social issues conflicts with the corporate duty of maximising the return for shareholders. Banks in particular have indicated that they may withdraw from corporate alliances that have promised to cut carbon emissions across entire industries. Oil companies are following suit as both Shell and BP, after years of headline-grabbing management changes, splashy deals and ambitious attempts to woo ESG investors with forays into low carbon businesses, have promised to focus on their core business and return as much cash as they can to shareholders – see video from the FT below. But as Gillian Tett points out:

The challenges around sustainability and business are not going to disappear. On the contrary, they’re becoming more urgent than ever.

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Remittances and their importance for developing countries

In most high school economics courses there is a unit on ‘Development Economics’ and within it the importance of remittances. Remittances are money that is earned by migrant workers that is sent back to their country of origin which are predominately developing countries. In 2022 global remittances were estimated to be $647bn which is three times the amount of official development assistance which is government aid for economic development and welfare in developing countries. However, when you consider the amount of informal channels, that figure is much higher. Some interesting statistics from the IMF are above.

In the Gulf countries (Saudi Arabia, Qatar, UAE, Kuwait etc) the proportion of foreign workers can exceed 70% of the population and this was the case in the preparation for the Football World Cup in Qatar. Although this figure might begin to diminish as countries start to employ more of the domestic population.

Cost of remittances
Sending money back to their country of origin canoe expensive. On average customers pay $12.50 for every $200 they send back to low-middle income countries – 6.3% of the transaction which is more than double the target set by UN Sustainable Development Goals. Africa tends to be the most expensive:

• Africa average – 8% of transaction for $200
• Tanzania to Uganda – 35% of transaction for $200

The advent of digital wallets are the cheapest way to send money but most transfers still involve cash at both ends. The market for remittances is expensive as it is oligopolistic in nature with a small number of providers who have control over networks. Add to that underdeveloped financial infrastructure, regulatory obstacles and a lack of access. Governments have tried to tax remittances arguing that they could use it productively to help migrant workers. However as well as being hard to administer this would lead to an increase in the informal arrangements.

Growing remittances
With more than 1 billion people expected to join the working age population by 2050 (mainly in Africa and South Asia) and the aging population in advanced countries, the demand for migrant workers will increase. Climate change and extreme weather will add to migration pressures. Remittances will continue to provide stable income to millions of people.

Source: Resilient Remittances by Dilip Ratha. September 2023 IMF F&D

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Argentina and the practicalities of dollarisation

Argentina’s new president, Javier Milei, in his campaign spoke fervently of abolishing the central bank and replacing the peso with the US dollar. Although Milei, a far right libertarian, has some quite extreme ideas there are arguments in support of adopting the US dollar. See video below from Deutsche Welle.

The big concern for the Argentinian government is that dollarisation means the country gives up the ability to influence its own economy through monetary policy by adjusting the money supply. Basically Argentina outsources monetary policy to the US Fed Reserve and interest rates are set at a rate that is applicable to the US economy and not other dollarised countries. Furthermore, the central bank of Argentina would be unable to be the lender of last resort and inject money into the economy.

The October inflation figure in Argentina was 143% with interest rates at 133% – the latter being one of the highest levels in the world. Underlying this inflation problem is how the central bank is trying to reduce the amount of pesos that are in the economy. They issue LELIQS (letras de liquidez) which are short-term bonds that they sell to commercial banks in exchange for pesos therefore taking pesos out of the economy in the hope it reduces the inflation rate. However the problem is that the central bank have to print pesos to pay for the interest of 118% on these bonds, and the national debt of the central bank more than doubles each year. Therefore it is a vicious cycle of issuing short-term bond (LELIQS) to reduce money in the banking system but then having to print money to pay for the interest on the bonds which injects more money into the banking system. The more pesos the central bank prints, the high the inflation and the increasing number of pesos people need to buy food etc therefore deposits in the bank have dropped drastically even with record high interest rates. This also means demand goes up for US dollars on the black market and more scarcity in official markets. The more pesos you hold means the more you lose in dollar terms and therefore increases the incentive to buy dollars with pesos.

Does Argentina have enough US dollars?

One of the main criticisms is Argentina doesn’t have the dollars to do it. At the end of 2022, Argentines held over $246 billion in foreign bank accounts, safe deposit boxes, and mostly undeclared cash, according to Argentina’s National Institute of Statistics and Census.  This amounts to over 50 percent of Argentina’s GDP in current dollars for 2021 ($487 billion). Hence, the dollar scarcity pertains only to the Argentine state.

Ecuador and El Salvador dollarisation

In 1999 Ecuador made the decision to dollarise its economy which basically curbed hyperinflation and helped prevent the sudden slide of the currency (sucre). With dollarisation people bring their dollars into the economy from overseas as was the case in Ecuador. Figure 2 shows how deposits in pesos in Ecuador fell by 50% when measured in dollars from February 1998 to December 1999 and then bounced back exactly when the economy was dollarised, recovering the February 1998 level by June 2002.

As for El Salvador, after dollarising the interest rate fell from 20% to 6% for mortgages, increasing their maturity from 5 to 25 years. El Salvador’s inflation and interest rates have been among the lowest in Latin America for 22 years regardless of the government budget deficit and of international crises, including the 2008 global financial crash and the COVID-19 pandemic.

The experience of dollarisation in Latin American has populations not wishing to reinstate a national currency. The monetary experiences of daily life have taught them that dollarisation’s noticeable benefits far outweigh its theoretical drawbacks.

Sources:

Dollar deliberations DEHEZA – 1-9-23

The Economist Gets It Wrong on Dollarization in Argentina – CATO Institute – 25-9-23

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Chile and the global supply of lithium

Following on from a previous blog post on ‘EVs and the supply chain of minerals’ below is a video from the ‘FT Moral Money’ series concerning the demand for lithium. In 2023 demand for lithium was around 930,000 tonnes but is forecast to increase to 3.5m tonnes by 2030.

Future supply from Chile

Chile definitely will have to be one of the future supply countries and the Chilean government has announced clear rules of the game for future supply from Chile. The government’s strategy would encourage new lithium operations to use new forms of technology, such as direct lithium extraction by removing lithium from brine at the site of extraction and then re-inject the processed liquid back into the brine body. Although not fully proven it would make extraction more sustainable but Chile’s indigenous population are concerned about the impact it might have on their land. Water scarcity is a major issue in Chile’s Atacama Desert as it affects local farmers and communities. The two principal mining companies operating in the region are estimated to extract around 63 billion litres of water a year.

Recycling in Norway

With the growing number of electric cars there comes used batteries. Hydrovolt run the biggest recycling plant in Europe and are located in Norway as this is the most mature market for EV cars. They can recover, with today’s technology up to 95% of the critical raw materials and creates an above-ground mine which has much less environmental impact on the economy.

The global economy is moving towards electrification and decarbonisation with lithium being a significant part in its use of battery storage. Lithium therefore could be seen as the oil of the 21st and 22nd century and one of the cornerstones of the global industrial and technological landscape for the next 100 years.

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EVs and the supply chain of minerals

The most important component of the the EV in the battery and the global market for batteries is projected nine fold. In 2020 China held over 75% of the global lithium-ion battery cell capacity, and accounts for nearly half of the global lithium carbonate and cobalt refining capacity. Figure 1 shows that the US and EU will only meet around 25% each of the global manufacturing capacity by 2030.

EV market
In 2020 sales of EV’s were over 10 million. As well as Tesla the market consists of VW, GM and Toyota as well as Chinese companies such as BYD and Geely. New entrants include Tong from Turkey and Vinfast from Vietnam. In order to remain competitive in the EV market countries have subsidised the industry which is a sort of green protectionism:
-China – industrial policy since 2000’s
-US – $369bn Inflation Reduction Act – reducing carbon emissions by roughly 40% by 2030
-EU – €250bn Green Deal Investment Plan

EVs need more mined raw materials
Compared to the petrol/diesel motor vehicle today EVs require more minerals in its production. Demand for lithium, nickel, cobalt, manganese, graphites and rare earth elements. With the rapid increase in demand for and constraints on the supply of these materials, prices have increased significantly. Demand for lithium is expected to increase by up to 89 times the current demand by 2050. According to the IEA (International Energy Agency), coping with this extra demand involves long lead times – averaging 16.5 years. Therefore the market will remain quite changeable not forgetting the environmental concerns about extracting more minerals. Those countries that need to import raw minerals for EV production are also concerned about the high concentration of their origin – China, Russia, Australia and African countries being the most prevalent see Figure 2.

Opportunities for developing countries
Developing countries rich in these minerals for EVs have a great opportunity to grow their economy’s as production is scaled up. However to take advantage of this it will be vital that developing countries avoid the dreaded ‘resource curse’ a paradoxical situation in which a country underperforms economically, despite being home to valuable natural resources – see previous posts on the resource curse. However, empirical evidence on the resource curse increasingly points to “the importance of strong institutions and capacity to help limit the risk of inefficient and mistimed public investment, and adapt to industry procyclicality, which can foster boom-bust cycles, debt overhang and credit market issues” – B. Jones et al 2023

ESG risks
With extraction of natural resources comes environmental, social and governance (ESG) risks EG:
– Democratic Republic of Congo (DRC) – environmental damage, child labour, unsafe working conditions, forced replacements of communities.
– Chile – lithium production impacts water scarcity in the Atacama Desert, affecting local farmers and communities.

Buyers have been prioritising responsible sourcing – 2018 London Metal Exchange (LME) made it mandatory for all traded cobalt to undergo audit assessments for compliance with the OECD due diligence guidance. This requires strong government frameworks to enforce and promote ESG standards and to decarbonise commodity supply chains.

As mining, processing and manufacturing tend to take place in different geographical locations with different regulatory environments, the challenge is how to navigate such a rapidly changing geopolitical landscape. – B. Jones et al 2023

Sources:
‘The Electric Vehicle Revolution: Critical Material Supply Chains, Trade and Development’ by Benjamin Jones, Viet Nguyen-Tien and Robert Elliott, published in The World Economy in 2023.

Geopolitics and the electric vehicle revolution – LSE – CentrePiece Autumn 2023

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Developing economies debt crisis

External debt can be a major obstacle to future economic development. Repaying the debt can divert funds away from improving the welfare of the population and increasing the economy’s growth potential. A high level of external debt can make it difficult and expensive for a developing economy to attract more funds for development. Some governments reduce their ability to borrow more in the future by defaulting on past loans. These governments may consider that, for instance, avoiding cutting spending on education and health care may be more important than meeting their obligations to repay loans.

2022 – debt crisis. As rich countries switch on their firefighting mode to tame soaring inflation, highly indebted developing countries are feeling the heat. Sri Lanka has already defaulted on its debt, many others are on the brink. Global interest rate rises have led to spiralling, decades-high external debt payments for 91 low or lower-middle income countries. In a few cases the IMF and creditors like China have stepped in with additional aid or restructure deals, but economists say institutions and wealthier nations need to do more to ease the burden of debt. See FT video below.

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Argentina – an economy that never misses an opportunity to miss an opportunity

Below is a video from The Economist that looks at the problems facing the Argentinian economy. It is well documented that Argentina’s economic woes since the 1940’s have impacted the economy today. Some of the main teaching points from the video:

• There has been mismanagement of the Argentinian economy for decades
• Argentina’s inflation rate – above 100% for almost all of 2023 – see graph.
• Argentinians save in US$. Black market for currency as Argentinians can only legally buy US$200 per month at the offical exchange rate. Official rate – 360 pesos, Black market rate – 760 pesos.
• GDP US$650bn – one of the largest in South America but 1946 strong interventionist government through President Peron. Also protected industry from foreign competition.
• Country hasn’t embraced globalisation and Peronists have been in power for 16 of the last 20 years.

• Argentina has both huge reserves of lithium and copper but doesn’t use them to its advantage.
• Government overspending on price subsidies – electricity bill in EU $40/month. Argentina electricity bill is $5/month. Cost to Government – $12.5bn = 2% GDP
• Of the 13 million employed in Argentina over a third are employed by the state which there is a crowding out of investment money.
• Argentina has had a fiscal deficit for the last 13 years so therefore becomes dependent on the central bank printing money = more inflation.
• With Argentina regularly defaulting on its debt it has been the IMF that is prepared to lend to them. Argentina holds almost a third of all of the IMF’s total lending.
• Criticisms that most economists have of the IMF is that the conditions of the loans to Argentina were not strict enough. No requirement to stabilise the economy which was a missed opportunity,
• Loans are repaid in foreign currency – to access US$ they impose export taxes – 33% on soybeans. To stop farmers hoarding beans in silos waiting to a better exchange rate they introduced the Soybean dollar exchange rate (better than the official rate for farmers). For overseas bands coming into Argentina promoters have to pay the official dollar plus a tax – it is called Dollar Coldplay. Using your Argentinian credit card you pay an extra tax which they call Dollar Qatar.
• Solutions tend to result in the same outcome – more debt and higher inflation. Things need to get worse before they get better. Short-term pain for long-term gain but for this to happen there must be trust.

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Guyana – fastest growing economy at 62%

Guyana is a country the size of the UK but has a much smaller population – 720,000 compared to 60m in the UK. Located on the north-east corner of the Amazon the country has recently become an oil bonanza with production increasing 57% in 2021 to 110,000 bpd. It is projected to reach 720,000 bpd by 2026. Guyana’s economy grew by 62% in 2022 which was the highest growing economy on the planet according to the IMF.

In 2015 GDP per capita was US$11,000 but according to the IMF this is now expected to be US$60,000 by the end of this year. Furthermore with oil coming on tap it is projected to grow a further 37.2% in 2023 and with that comes oil reserves of 11bn barrels. See table below for present value of oil reserves per capita

Resource curse – the term resource curse refers to a paradoxical situation in which a country underperforms economically, despite being home to valuable natural resources. A resource curse is generally caused by too much of the country’s capital and labor force concentrated in just a few resource-dependent industries. Some economies rely on exports of oil, iron ore or other resources to fund its spending. This has the effect of increasing the value of the currency and although this will make imports cheaper once the resource runs out or global prices start to drop the overvalued currency falls causing a large increase in imported prices. So what can Guyana’s government do to minimise the impact of the resource curse?

1. Set up a fund like that of Norway’s sovereign wealth fund. This has been actioned with the establishment of a natural resources fund (NRF) which is governed separately from the executive. A law has been created that if the finance minister does not declare, within a period of time, the total revenue from oil paid into this fund each year, he/she could face up to 10 years in prison. Also the use money in the NRF has to be approved by the parliamentary system. The concern is if power comes with the chance to get rich by corruption and stealing form the state, the competition for office can become violent.
2. Greater subsidies into non-commodity industries like tourism as Guyana has significant potential with its natural environment.
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. With such a small population they need skilled labour to build up infrastructure, including roads, schools, health care and climate protection. As better infrastructure helps citizens educate their children, improve the quality of their homes and start or expand businesses, the state should gradually increase the sums released directly to people.

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Africa’s resource paradox and market failure

I have blogged a few times on the resource curse that affects some developing countries but it seems that in Africa a lot of resources go unused when they are actually demanded in an economy. There seems to be a lack of planning for supply and demand and build an infrastructure linking the two. The Economist came up with some good examples of this:

• Ghana – generation vs distribution. The country produces too much electricity as Ghanaian usage per year equates to what someone in the US uses a fortnight. More than 25% of households in Ghana are not connected to the grid and 25% of electricity is lost due to derelict distribution infrastructure and theft. With regard to oil, Ghana spent over $4.7 billion on importing petroleum last year, despite having domestic petroleum refineries which are lying idle – they could produce 30% of its petroleum needs.
• Uganda – like Ghana supply is greater than demand as capacity if nearly double peak demand. Trucks wait on the side of roads even though traders can’t find vehicles to transport their goods.
• Ethiopia – largest livestock in Africa and tanneries to turn hides into leather but shoe and glove makers import leather from China. Local tanneries are concerned with how the leather is treated.
• Nigeria – tomato-processing plant to make tinned paste but closed down due to crop failure caused by a voracious moth

Another issue is the completion of infrastructure projects – according to McKinsey approximately 80% of African infrastructure projects fail in the cost benefit analysis stage whilst fewer that 10% get the stage of acquiring funding. For Africa to further development there has to be some acknowledgement of market failure and a willingness to separate commercial power and political power amongst its government officials.

Source: How market failures are holding Africa back. The Economist 5th May 2022

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BRICS expansion – a threat to the West?

The BRICS (Brazil Russia India China and South Africa) countries have long been concerned about the dominance of the West in global financial institutions and trade. In order to try and increase its influence the BRICS countries agreed to add new members to the Alliance – Saudi Arabia UAE Iran, Egypt, Ethiopia and Argentina. BRICS countries represent 42% of the global population and over 25% of global GDP – see table. BRICS have overtaken the G7 leading industrialised nations in their share of World GDP (PPP based) 32% compared to the G7 of 30% – see graph.

However BRICS’ voting power in the IMF and the World Bank does not equate to its share of global GDP. Recently they have been increasing trade in their own currencies to reduce their reliance on the US$ and there has been talk of creating their own common currency. However, although India South Africa and Brazil are all keen on a positive relationship with the West the same could not be said about Russia and China. Add to this the cross border issues between China and India. Below is a video from Al Jazeera – ‘Counting the Cost’- where they discuss the impact on the West and the threat to the US$ dominance.

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Impact of higher interest rates on developing economies

Useful video from the IMF that addresses the impact of higher interest rates on developing economies. The increase in the US Fed Funds rate increases the likelihood of financial crises among vulnerable developing countries. The main concerns are:

• Public debt burdens in developing countries have been exacerbated in recent years by back-to-back global crises.
• A lot of the debt accrued by low-income countries is coming due over the next couple of years.
• Rising interest rates mean these countries will find it increasingly difficult to meet their repayments.
• Raising U.S. interest rates has the effect of making American government and corporate bonds look more attractive to investors. The result is money flows out of developing countries as they are seen as too risky. This makes the exchange rate weaker and imports more expensive.
• With interest rates still rising and global growth slowing, more collaborative efforts from international bodies and developed economies would be needed.

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Using photographs to teach cross-country differences in real GDP per capita

I came across this novel idea of using photographs to teach cross-country differences in real per-capita GDP in the Journal of Economics Teaching. It draws on over 44,000 internationally comparable photographs (of households and their living conditions). Most courses focus on how real GDP per capita is calculated, the concept (and the data underlying it) may be disconnected from what students know (e.g., a home and its defining characteristics, the availability of utilities, occupants’ health and hygiene, quality of food, etc.) or can relate to (e.g., educational attainment, political regime characteristics, crime rates, access to electricity and sanitation, pollution levels, etc.).

The activity requires students to record living conditions for households of various income levels by investigating a set of images that depict bedrooms, kitchens, bathrooms, health/personal hygiene of household members, and the next “big thing” they plan to buy. Students then link the households’ characteristics with the data on real GDP per capita through a series of exercises in order to reveal the extent to which real GDP per capita captures the living conditions within and across countries. The proposed assignment also caters to development economics courses, where forming an accurate and palpable idea about the living conditions within and across countries represents the first step towards understanding the factors that facilitate or inhibit economic growth, thereby allowing students to think about possible policies aimed at facilitating development. The images are taken from the GapMinder Project and the Dollar Street platform were created in an effort to challenge and dismiss common misconceptions that surround global issues (e.g., the “mega-misconception that the world is divided in two,” rich versus poor, West versus the rest, developed versus developing, or North versus South. The Dollar Street features 428 households from 66 countries. Households, which are described by over 44,000 photos, are placed onto a virtual street in accordance with their monthly income level (i.e., from lowest to highest).

The paper also has all the resources required to run the Dollar Street Assignment and would be a good introductory exercise when teaching Development Economics. Furthermore it is a very good way of showing that comparisons between countries using real GDP per capita are rather simplistic and tell little about the cross-country differences in living conditions and the socio-economic realities behind the data. Below are some images from the Gapminder Project’s Dollar Street platform.

Pros and Cons of Foreign Direct Investment.

In the A Level syllabus FDI is part of Unit 11. One way that developing economies can achieve a rise in investment is to attract multinational companies. A multinational corporation (MNC) is defined as a firm that operates in more than one country. Through their activities, MNCs provide foreign direct investment (FDI) to the economies in which they operate. Foreign Direct Investment involves a multi-national corporation building a manufacturing plant, or other physical investment, in the economy in question. Such investment will undoubtedly bring benefits for the selected country; but there are also some serious drawbacks which must be taken into account in evaluating the desirability of FDI. In 2022 FDI dropped by 24% – see graphic.

Benefits

• FDI can help to plug the savings gap – the difference between the level of savings and the amount of investment needed.
• The MNC will import valuable foreign exchange into the country
• A large amount of jobs will be created directly – i.e. employed in the new factory
• But employment will also be created indirectly, through the multiplier effect.
• MNCs can introduce new technology into the country – and educate their workers as to its use
• If profitable, they generate valuable tax revenue for the government.

Drawbacks

• MNCs tend to invest in urban areas. This widens the gap between urban and rural incomes – and aggravates the problem of rural-urban migration [see previous note].
• Many MNCs have been accused of exploiting their workforces. For example, they may force workers to work in unsafe, or simply miserable, conditions; they may employ children, and pay shockingly low wages (by Western standards). For an alternative view on this, see Paul Krugman’s article, ‘In Praise of Cheap Labour: bad jobs at bad wages are better than no jobs at all’ – but this isn’t essential for the exam.
• MNCs are also accused of exploiting local environments, by polluting air and rivers, cutting down rainforests, or by reducing biodiversity. See previous note on ‘environment and sustainability’.
• Any dividends and profits are likely to be shipped back to the international headquarters somewhere in the developed world.
• Finally, MNCs often use inappropriate, capital-intensive production methods, thus preventing countries from exercising their comparative advantages in labour-intensive industries.

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How to deal with a resource curse – Venezuela and Norway

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. 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.

A future resource curse in Indonesia: The political economy of natural resources, conflict and development.

Venezuela could learn off the Norwegians
Venezuela is home to the world’s largest oil reserves, and its economy has been tied to the ups and downs of the international price of oil for decades — oil constitutes about 25% of the country’s GDP and 95% of its exports. But the country’s oil production reached its lowest point since 2003 this year, when production went from 1.2 million barrels per day in the beginning of 2019 to an average of 830,000 barrels per day. The energy sector is only producing a fraction of the 4 million barrels of oil a day it could be producing.

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.
In 1969 the discovery of oil off the coast of Norway transformed its economy with it being one of the largest exporters of oil. A lot of countries in similar positions have succumbed to the ‘resource curse’ in which countries tend to focus on a natural resource like oil. 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. 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.
2. 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.

Norway – has a different approach.
In Norway hydrocarbons account for half of its exports and 19% of GDP and with further oil fields coming on tap Norway could earn an estimated $100bn over the next 50 years. Nevertheless there is a need to wean the economy off oil and avoid not only the resource curse that has plagued some countries – Venezuela is a good example as approximately 90% of government spending was dependent on oil revenue – but also the impact on climate change. Norwegians have been smart in that the revenue made from oil has been put into a sovereign wealth fund Its value on 31 December reached 10.9tn kroner, or US$1,311bn – equal to assets worth US$241,000 for each of Norway’s 5.39 million inhabitants. This ensures that they have the means to prepare for life after oil.

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Developing countries and paying for climate change.

An informative video from Deutsche Welle on climate change and the options available to reduce global emissions. The developed world has contributed 70% of the stock of greenhouse gases causing global warming but developing economies now contribute over 63%. Economies now need to accelerate their investment into green technologies especially in the developing world. But how are they going to fund it? Outside of China, the high cost of capital in developing countries – almost always two or three times the cost in developed economies – means we are only seeing a trickle of the necessary foreign private investment. The video refers to Climate Reparations, Tax Big Oil, Pollution Levies and Canceling Debt.

This issue can be represented by a negative externalities of production graph which is part of the A2 and NCEA Level 3 syllabuses.

• When there is a negative production externality, marginal social cost (MSC) exceeds marginal private cost (MPC), as in Figure 1.
• Firms take decisions on the basis of MPC, so the market settles at Q1, rather than at Q*.
• The shaded area represents the welfare loss for society in this position – i.e. the damage caused by ‘slash’.
• This is where there is ‘slash’ caused by the forestry companies which imposes costs on households, farms, infrastructure etc that are not reflected in the costs faced by the forestry company.

Externalities – Key definitions

• Private cost or benefit: a cost that is incurred (or a benefit that is enjoyed) by an individual (firm or household) as part of its economic activities
• External cost: a cost that is associated with an individual firm or household’s production or other economic activities that is borne by a third party, and is not reflected in market prices
• Social cost: private cost plus external costs
• Marginal social cost: the cost to society of producing an extra unit of a good
• External benefit: a benefit that is associated with an individual firm or household’s production or other economic activities that is received by a third party, and is not reflected in market prices
• Social benefit: private benefit plus external benefits
• Marginal social benefit: the benefit received by society from consuming an extra unit of a good

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The Marshmallow Effect needed to address global economy

You might have heard of the marshmallow experiment that was carried out with young children. A child was offered a choice between one marshmallow immediately or two small marshmallows if they waited for a short period, approximately 15 minutes, during which the the person running the experiment left the room and then returned. Researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores.

Can this experiment be applied to societies today in that by deferring instant consumption (in order to save and invest) people will enjoy greater incomes as they age?

High saving rates = High investment rates

Jeff Sachs, of the Project Syndicate, recommends 4 actions that are needed to rectify this problem:

1. Global economic progress depends on high global saving and investment. In economic development, as in life, there’s no free lunch: Without high rates of investment in know-how, skills, machinery, and sustainable infrastructure, productivity tends to decline (mainly through depreciation), dragging down living standards.

2. Saving and investment flows should be viewed as global, not national. China has a high savings rate which exceeds local investment needs therefore they can support the low income countries which have limited capital and a very young population. These countries can borrow from China to fund education, infrastructure development etc so to secure greater prosperity.

3. Full employment depends on high investment rates that match high saving rates. Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.

4. High private investments by business depend on high public investments in infrastructure and human capital. Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.

Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.

Investments such as low-carbon energy, smart power grids for cities, and information-based health systems depend on government and private sector partnerships. A lot of private investment needs tone backed by the government to get in the buy in from the private sector. Examples of this are the rail networks, aviation, semiconductors, satellites, GPS, hydraulic fracturing, nuclear power and the Internet would not exist but for such partnerships.

Our global problem today is that the world’s financial intermediaries are not properly steering long-term saving into long-term investments. Global investments are falling short of global saving at full employment which results in inadequate demand as short-term investments tend to be volatile to finance consumption and property.

Advice to China fails the Marshmallow Test

Some economists have stated that China needs to boost consumption (C) and let the renminbi appreciate to reduce exports. However this encourages overconsumption and underinvestment in a country that has high savings and industrial capacity which the global economy can make use of.

Central banks and hedge funds cannot produce long-term economic growth and financial stability. Only long-term investments, both public and private, can lift the world economy out of its current instability and slow growth. Jeff Sachs

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Economics of Coffee

Below is a very good graphic from Visual Capitalist about how coffee prices are broken down. One of the most popular commodities, coffee is supported by a massive $200+ billion industry. You can enlarge the image by clicking on it. However it is the developing countries who lose out and in some instances grow things like ‘chat’ (narcotic) instead of coffee beans. This has been especially prevalent in Ethiopia

Kate Raworth on ‘Rest is Politics’ Leading

In the recent Rest is Politics ‘Leading’ interview Alastair Campbell and Rory Stewart spent time interviewing Kate Raworth on their ‘Leading’ show. Kate Raworth is the author of “Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist” which offers an alternative to the all too familiar policy of economic growth to solve the issues of poverty, inequality, unemployment in the global economy. Simon Kuznets, who normalised the measurement of economic growth, stated that national income cannot be a accurate measure of total welfare in an economy as it only measures annual flows of money and not stocks of wealth and their distribution. Raworth states that the current model of endless economic growth using up the finite resources of the planet is not the way forward. Most textbooks refer to the circular flow as the model of the economic system – households, firms, banks, overseas markets and the government which bears little relationship to reality today. Instead Raworth goes beyond this simple circular flow model and includes social and environmental issues – energy, the environment, raw materials, water pollution etc. The big question that is addressed in the interview is how could this work politically? Well worth listening to. Click link below:

Kate Raworth – The Rest is Politics ‘Leading’

The Doughnut
Raworth’s circular flow consists of two rings – see graphic below.

Inner Ring – this consists of the social foundation and those things we need for a good life – food, water, health, education, peace and justice etc. People living within this ring in the hole in the middle are in a state of deprivation.

Outer Ring – this consists of the earth environmental limits – climate change, ozone depletion, water pollution, loss of species etc.

The area between the two rings is the “ecologically safe and socially just space” in which humanity should strive to live. As stated in The Guardian review, the purpose of economics should be to help us enter that space and stay there. As the graphic shows we breach both rings as billions of people live below the poverty line and climate conditions, biodiversity loss, land conversion etc are at concerning levels. The video below is a useful explanation.

Higher interest rates by US Fed hits developing countries currencies.

Contractionary monetary policy by the US Federal Reserve to keep inflation in-check has impacted African currencies. With higher interest rates in the US and a volatile global environment investors tend to run to the safety of the US dollar and higher paying US treasury bonds. This has led to a depreciation in African currencies and inflation as import prices increase. For most African countries more that 60% of imports are priced in US dollars and a 1% depreciation against the US dollar = an average of 0.22% increase in inflation.

The graph below from the IMF shows the extent of the depreciation. Two countries’ currencies depreciated by more than 45% – Ghana and Sierra Leone. Some central banks have used their supply of foreign reserves in an attempt to prop up their currencies – giving foreign exchange to importers.

Weaker currencies push up debt – approximately 24% of public debt in most African countries in denominated in US dollars so with a weaker currency they have to find more of their currency to pay back the US dollars. Furthermore, the weaker currency has meant that public debt has risen on average by 10% of GDP in the region. Below is a mindmap showing the impacts of a falling currency.

Source: IMF Blog

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Internal flights in Africa – cheaper to fly out and then back in.

An interesting podcast from the BBC’s Business Daily looked at why internal airlines prices in Africa are around 45% more expensive than equivalent trips elsewhere. So why are they so expensive and what impact does this have for a lot developing economies that are dependent on tourism? In many cases if you want to travel domestically in Africa it is not possible to get direct flights between major cities and in some cases the cheaper option is to fly out of the continent and then come back in eg:

Nairobi to Cape Town – cheaper to fly to Dubai and then to Cape Town than flying direct.

In Africa there are: 54 countries – 1.5 billion people – 18% of world population – but less than 2% of global air traffic is in Africa
With no discounts, no budget airlines and no direct flights to destinations Africa is losing a lot of commercial opportunities as well as tourism. Aviation directly impacts an economy’s GDP through employment, tourism (bringing in foreign currency) and trade which Africa is missing out on. Add to the fact that a lot of the African countries are landlocked and with limited road / rail networks it is essential that there is a functional airline network. A further problem is that most airlines in Africa are bankrupt.

The distance from Kinshasa (DR of Congo) to Lagos (Nigeria) is comparable distance to flying from Berlin to Istanbul. The prices in the two continents are as follows:
Berlin to Istanbul.
US$140 one-way – direct flight – 2 hours and 50 minutes

Kinshasa to Lagos
US$700 one-way – via Jo’burg (South Africa), Kigali (Rwanda) – 18 hours

One of the issues about the carriers in Africa is that the vast majority of them are in financial bankruptcy. Africa airlines are bounded by bi-lateral agreements between countries which leads to restrictions if a country is not part of an agreement. This would include taxes, restricted flight times etc. Also standalone carriers are not viable as the cost structure is very inefficient. There needs to be some sort of African alliance between national carriers if the sector is to be capable of survival and stimulate growth in the African economy. If you look at the whole of Europe they have essentially just 3 carriers:

IAG – International Airlines Group
Aer Lingus – British Airways – IAG Cargo – Iberia – Iberia Express – LEVEL – Vueling – Avios Group

Lufthansa Group
Air Dolomiti – Austrian Airlines – Brussels Airlines – Eurowings – Lufthansa Cargo – Lufthansa- Swiss International Air Lines – Edelweiss Air

Air France / KLM Group
Air France – KLM

You also have the low-cost airlines like Ryanair and Easyjet.

Ethiopian Airways – a success story
In 2004 they looked at a new strategy focusing on the future growth of Africa and Asia – they now fly 45 destinations / week. They also appointed people into senior positions from within the company and although government owned it is run like a business. Ethiopian Airways were one of the few airlines not be bailed out during the COVID-19 crisis and reconfigured 35 of their passenger aircraft into cargo and became the go-to airline for PPE globally. Back in 2003 they employed 4,000 employees, today 17,000 and they own 6 other airlines in Africa.

If 12 key countries of Africa work together to open up markets, the increased connectivity could boost GDP by over $1bn and create 150,000 jobs across the continent. In 2000 Ethiopia was one of the poorest countries in the world but now fastest growing economies in the world – third largest GDP in subsaharan Africa. Ethiopian airlines is now the largest carrier on the continent therefore a lot of the passengers pass through the capital Addis Ababa which adds to the GDP as well as bringing in foreign currency

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