Germany, the greenest of green countries, and probably the world’s most enthusiastic investor in renewable energy, is finding it very hard to breakaway from coal fired plants. The German government were all set to impose a levy on the coal industry but instead gave a subsidy of 1.6 billion euros to mothball eight coal-fired plants and shut them down permanently by 2023. The main cause of this change of policy was that there was significant pressure from labour unions and local governments in the coal industry. The resistance in the greenest of green countries is indicative of workers and retirees, local economies and communities still depend on coal.
So from Germany to India, strategies to increase the share of renewable energy in the power mix have relied on a coal base. Although governments worldwide are focused on cleaning up energy sources that cause significant emissions, there needs to be some regard for displaced workers from traditional energy sources like the coal industry. Coal miners skills will hardly be transferable to other occupations – structural unemployment.
Nevertheless, coal remains one of the easiest and cheapest form of energy and this is very apparent in India where usage is about 62% of energy needs. India is the second largest consumer after China and ahead of the USA. Also coal consumption is growing about 7 percent a year to power the country’s economic catch-up. As China is going through a growth period similar to Europe many years earlier, their argument will be that European countries polluted the environment by a similar amount
Climate change activists have highlighted concerns of rising temperatures by 2100, however are rising temperatures as significant when you consider the long-term implications of much higher unemployment?
Source: New York Times – 30th August 2016
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:
- Resource-rich, labour-poor – Gulf sheikhdoms with lots of oil and gas but few people;
- Resource-rich, labour-abundant – Algeria and Iraq, that have natural resources and larger populations;
- Resource-poor, labour-abundant – Egypt, that have little or no oil and gas but lots of mouths to feed (see chart).
To 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
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
Below is a very good video from the Marginal Revenue University. Specifically, you learn how variations in real GDP per capita can set countries leagues apart from one another. It takes a dive into the growth of the US economy over time and see how the economies of other countries stack up in comparison. The Indian economy now is like a trip back to the US of 1880. You’ll see why China today is like the America of the Jazz Age. They also explain why living in Italy today is related to a time when Atari was popular in the US.
The Economist produced an excellent graphic on the contribution to global growth over the last 5 years. Points to note:
- World economy grew by 2.7% in early 2016
- Brazil, Russia, India and China contribution to global growth rose from 1.4% t0 1.6% over the last year
- Although Britain has contributed the most to GDP growth in the EU, the decision to leave the EU has forecasters predict that GDP in the Union will be 1% lower in 2018
- Emerging economies continue to dominate world growth and are essential for jobs etc.
- From growth of around 4.5% in 2010 the global economy has stuttered along reaching just over 2.5% in the first half of 2016
The UK economy is paying the price for the severe imbalance in its economy with the over-emphasis on the financial sector at the expense of the manufacturing. The UK hasn’t recovered from the 2008 Global Financial Crisis with real income per person only increasing 0.2% since its peak in 2007 – this is less than the per person increase in Japan during its lost decades of 1990’s and 2000’s.
What is alarming is that since the GFC the Pound has depreciated by around 30% make UK exports more competitive and imports more expensive. Within most countries a depreciation of this magnitude would give a huge boost to manufacturing sector but in the UK the impact was minimal which is indicative of the state of the sector itself. It is the poor performance of manufacturing that has seen UK’s deficit grow to 5.2% of GDP in 2015.
Although the UK is the 8th largest producer by output value but if you look at the per head output and % of national output it is much further down the pecking order – see table. Also of note is that the UK’s manufacturing output as a % of national output has dropped from 27% in 1970 to 10% in 2013. Although some have tried to play down the role manufacturing sector there has been a fundamental misunderstanding of the role of manufacturing in economic prosperity.
1. Manufacturing is the main source of productivity growth and economic prosperity – machines and chemical processes raise productivity. Also most R&D is carried out in this sector so recent increases in the service sector came about by using more advanced units in the manufacturing sector. This includes fibre-optic cables, routers, more fuel efficient cars, GPS recorders etc.
2. Many knowledge based industries have been around for a number of years – they include research, engineering etc. The vast majority of them used to be conducted by manufacturing firms and have become more visible as they have been ‘spun off’ or ‘outsourced’. Changes in a firm’s organization should not be confused with changes in the nature of economic activities.
It is important to note that the majority of this knowledge-intensive services sell to manufacturing firms, therefore their success is dependent on the state manufacturing sector.
Reversing three and a half decades of neglect will not be easy but, unless the country provides its industrial sector with more capital, stronger public support for R&D and better-trained workers, it will not be able to build the balanced and sustainable economy that it so desperately needs.
Source: The Guardian
National income figures, usually GDP at factor cost, are the man figures used to compare living standards. This is because most countries keep and publish detailed national income data.
However, care has to be taken in using national income figures to compare living standards both over time and between countries. It is important to use GDP at constant prices (i.e. real national income) so that a misleading impression is not given because of the effects of inflation. It is also important to take into account differences in population size. A country with a large population is likely to produce more than a country with a small population. However, this output has to be shared out among more people so living standards are not necessarily higher. This is why economist divide output by population and compare real GDP per capita. Even when adjustments have been made for inflation and differences in population size, national income figures as a measure of living standards have to be interpreted cautiously.
A rise in real GDP per capital may have resulted from an increase in the output of capital goods. In the longer run this will increase productive capacity and result in more consumer goods being produced. However, in the short run people may not feel any benefit from more capital goods being made. An increase in weapons will also increase GDP but, again, may not necessarily improve living standards. If more police are employed and crime is reduced, the quality of people’s lives will be improved. However, if more police are employed to keep pace with rising crime, people will be feeling worse off. So economists have to look not only at the amount of goods and services produced but also at the composition of those goods and why the quantity has changed. In addition, the quality of goods and services produced should be examined. The same quantity could be produced this year as last year or five years ago but if the quality of the output has risen, living standards will have improved.
The distribution of income also has to be taken into account. National income may rise but if it is concentrated in the hands of a few, the living standards of the majority may not rise. See graph below from The Economist showing the Gini coefficient of income inequality.
National income figures also fail to take into account some items which affect the quality of people’s lives. A certain amount of economic activity is not declared, either to avoid paying taxes or because it is illegal. If there is an increase in, say, people providing home hairdressing services but not declaring them, people’s living standards may rise, although this increase will not be reflected in the official figures.
Differences in working hours and working conditions are also not taken into account. If output remains constant but working hours fall, people are likely to have a higher quality of life.
National income figures only take into account economic activities for which a payment is made. They do not take into account externalities and non-marketed activities. So, for example, an increase in pollution will reduce living standards while an increase in people decorating the homes of old people, on a voluntary basis, will improve the quality of life of the elderly. Neither of these will be recorded in national income figures.
All of these factors have to be taken into account in using national income figures to make comparisons both over time and between countries. However, some additional factors have to be considered when making international comparisons. Different statistical methods are employed in some countries and the degree of accuracy can vary. Tastes and needs can be different in different countries. For example, people living in a cold climate have to spend more on heating than those in warm countries, merely to enjoy the same standard of living. There is also the problem of selecting a rate of exchange to make the comparison. Exchange rate fluctuate and do not always reflect relative prices in compared using purchasing power parities which compare the cost of a given basket of goods in different countries.
Recently The Economist wrote a piece on the port of Rotterdam as a global indicator. The port has been heralded as the instant indicator of the state of the global economy. In 2014 it handled 446m tonnes of cargo which was double the amount in Antwerp Europe’s second largest port. So why is Rotterdam such a prevalent indicator? Well the trends that are transforming the port include those that are rapidly growing in the global economy – e.g. automation and the reduction of fossil fuels.
The port has evolved and kept up with new ideas and before the post-war boom Rotterdam built new storage facilities for oil and chemicals. Furthermore, with the onset of globalisation the port started to accepts mega-ships bringing sneakers and flat screen TVs from Asia to Europe. Activity in the port bears witness to four trends in the world economy:
- The low price of oil
- Slow growth in China and Emerging markets
- The sluggish euro-area recovery
- The global slowdown in manufacturing and trade.
Rotterdam’s vast storage tanks (see photo below) quickly filled, as traders bought cheap crude on the spot market and sold futures at a higher price, locking in a profit. The slow down in China has led to the appearance of Chinese ships offloading surplus steel as demand for German cars in China has dropped which means less demand for steel. Therefore the drop in shipments of bulk goods arriving in Rotterdam is a result of this threatening cycle.
Global trade has been falling for the last few years (down by approximately 14% in 2015) and has been less than global growth (usually the other way around). The port of Rotterdam has been felt this pinch as one in four containers originates form China. Although the volume of goods in the port has increased by 4.9% in 2015 it was almost entirely due to the increased trade in oil and oil products as container volumes dropped by 1.1% and agricultural bulk by 3.8%. As the production of oil becomes concentrated in fewer countries there will be the requirement of shipping oil as well as storing it which will add to the activity of Rotterdam.
Another indicator that is prevalent in Rotterdam is automation. A lot of the work usually carried out by labour has been replaced by automated guided vehicles (AGV’s). The cranes lift the containers onto these vehicles who then deliver them to stacks to be distributed by truck train or barge. Furthermore these new technologies are powered by electricity as solar panels and an increasing number of windmills provide much of the power the port consumes.