Edward Seaga
The perfect setting for a riddle is when an unknown solution exists for a puzzling problem. Predicting the solution is as much speculation as it is a product of reason. But that is no cause to relax and go with the flow, or grope in the dark. A reasoned approach is the appropriate starting point to problem solving. Whatever then remains as unknown, will provide room for speculation. This is precisely the setting emerging for 2008.
There are some critical problems on crucial global issues which emerged more fully in 2007 and will be dominant in 2008. The Economist magazine, which authoritatively publishes weekly on global issues, has, in a series of articles (November 17, December 1, 8 and 17), pointedly assessed these dominant issues. It is now possible to integrate them into a big picture format.
The Economist has raised these global issues (November 17):
"The world is experiencing one of the biggest revolutions in history as economic power shifts from the developed world to China and other emerging giants. Thanks to market reforms, emerging economies are growing much faster than developed ones. There is a widening gap between their growth rate and that of the sluggish developed world. According to the IMF, this year they are growing almost four times as fast."
Some of the features of this revolution are pin-pointed by The Economist:
Account surplus
"On many measures, emerging economies look sounder than some developed ones. As a group they are no longer financially dependent on foreigners; (see my article of Sunday, December 18). Together they run a current account surplus, and thanks to large reserves and reduced debts, are now net foreign creditors. They have smaller budget deficits, on an average, than rich countries and inflation rates remain historically low."
But, with this phenomenal achievement, the question posed by The Economist is: "More than ever before, emerging economies are being relied upon to help lift the world economy. But can they keep up the effort? They may be able to."
That expectation of future prospects is linked to specific factors. These factors do not include the nature of their political systems which run the whole spectrum of ideological beliefs, from communism (China) to market-driven capitalism.
Nor are the future prospects linked to a religious base, where, even if religion plays a strong role in the cultural life of the country (India, Brazil), there is no religious imperative involved in production.
The linkages on which future prospects rest are the availability of raw materials and the international strength of the currency.
"Emerging economies account for 45 per cent of the world's total export. They consume over half of the world's energy and have accounted for four-fifths of the growth in oil demand in the past five years; they are sitting on 75 per cent of global foreign exchange reserves", says The Economist in its November 17th issue when explaining why oil is in such great demand and prices so high.
Dwindling supplies
This crucial commodity, on which the world economy rests, is already looking at dwindling supplies. As I noted in my article of November 22, 2005, 'The End of Oil':
"Journals, studies, reports, and eminent authorities speak not of if but when reserves (oil) will reach the point of diminishing produc-tion. As the peak point is perceived to approach the price of oil will increase and continue to increase dramatically. The psychological factor regarding the onset of decline could drive the price of oil to more than US$100 (J$7,100) per barrel."
Unles energy sources quickly come to the rescue, the near future is one of prices rising higher and higher, now that the US$100 per barrel barrier appears achievable and likely to be broken.
As the total stock of reserves diminish what is left will command prices well beyond the reach of that part of the world economy which is not sufficiently dynamic. This includes Jamaica.
Ethanol has become th fuel of choice since it can be derived from cereal crops, such as corn, wheat and soya or sugar cane, which have been traditionally grown on a massive scale. Food prices are spiralling upwards as a consequence of corn being diverted to produce ethanol and other crops shifting to replace the shortfalls in the production cycle. The Economist (December 8) reports that, "the 30 million tons of extra maize going to ethanol this year amounts to half the fall in the world's overall grain stock." Prices are moving rapidly and as a consequence, the Economist's food price index is higher today than at any time since 1845.
Competitive costs
But there is a good side to this. Higher prices for food is bad for the urban poor, but could be good for rural people if they produce the exportable cereals which the higher cost will encourage. Jamaica does not produce these crops so the poor generally will suffer unless it can produce sugar at the new competitive costs.
The beneficiaries of higher food prices could be India, China, Brazil and Argentina with vast land areas, or cheap labour, to produce corn, wheat, soya, sugar cane etc.
It is within this framework of a paradigm shift of energy/food resources that the capability of the emerging economies will face the challenge to keep their pace of growth in holding up their share of the world economy.
The other major concern on which the world is turning is the health of the U.S. economy. This is of particular importance since the U.S. dollar is the currency in which most of the rest of the world has invested the savings of their financial reserves. These countries have done so because the U.S. economy is regulated, transparent and strong. But these conditions are not to be taken for granted.
The U.S. economy has demonstrated its vulnerability more than once. Twice within 50 years it brought the global economy to its knees by inappropriate policies. The Great Depression of 1929, so weakened the world that it opened a wide door for socialists and communists to raise rampant and militant demands for the working class and unemployed in countries ravaged by collapsing trade and the ensuing higher inflation. It was though this same door that Adolf Hitler marched, with the support of the powerful German industrial empire, promising to save them from seizure of their properties by communists. Of course, he did not reveal his plan to seize countries and violate civil rights.
Five decades later, the U.S. policies again humbled economies of the rest of the world with its inappropriate policies devised to deal with the monstrous increase in oil in 1974. These policies set off a chain reaction which led to massive unemployment, "near collapse" of the housing industry, huge bank losses and a contraction of trade with a resulting deep recession of the global economy.
Jamaica in the 1980s, lost half its bauxite exports, which was 78 per cent of the country's foreign exchange earnings and 30 per cent of its revenue, setting the stage for a possible economic collapse. Only radical restructuring of the economy based on strong policy prescriptions spared us that disaster.
Regulatory regimes
This vulnerability of the U.S. economy is now further emphasised by the lack of regulatory regimes which could have prevented the excessive expansion of easy credit. The housing market gobbled the easy money without adequate securitization. The resulting sub-prime mortgage market collapse has so far escalated to US$150 (J$10,650) billion in bad loans. According to U.S. Federal Reserve Chairman, Ben Bernanke, this is now projected by others to reach US$400 billion. The systems failure is raising the question about another severe U.S. economic recession.
At the same time, to deal with the need for American goods to compete with goods from China and elsewhere, the U.S. has allowed the American dollar to depreciate substantially to cheapen its exports and increase the cost of imports. This has worked in increasing U.S. exports, but it has given rise to concern by some holders of the huge amount of U.S. dollars in American investments which are held as their foreign currency reserves. The value of these reserves accordingly has now depreciated significantly, a situation which has raised questions about using other reserve currencies. Any such switch would deplete the U.S. banking system of the investment inflows which the American economy has to borrow to finance the high-consumption, low-savings lifestyle of Americans.
Should this happen, the American people would go into something of a culture shock by having to cut expenditure, save more and borrow less, a quantum change in adjustment which could shake the foundations of the American society. It would also shock the global economy which depends on heavy American imports of consumer goods for its own export earnings.
None of this is likely to happen by 2008 because it is election year. But the time required to absorb the bad mortgage loans is unlikely to be short and if the economic distress lingers, it could exceed the level of tolerance for preventing global recession. This time around, the American economy would not save the world; it will be preoccupied with saving itself.
Jamaica is caught in this web of interdigitating economic forces because of its high interest rate and high debt structure, which leaves little wiggle room to survive another global recession with massive losses of tourism and bauxite earnings, or to cope with the market pressures of higher and higher prices.
It appears very likely that oil prices will continue to grow in keeping with the demands of the emerging economies for more oil and food prices will spiral as America tries to shift its demand to less oil. Will these twin shocks be dynamic enough to push the United States into another recession which could crunch the global economy?
Riddle me dis and riddle me dat !
Edward Seaga is a former Prime Minister. He is now a Distinguished Fellow at the UWI. Email:odf@uwimona.com.
