Global Economic Watch


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  • Oil and Economic Cooperation

    There is a common school of thought that a country like Russia can only go so far in antagonizing major economies. Russia has goods to export--not least of which is oil--and the U.S. and Europe are good places to sell those goods. So if Russia goes too far in Ukraine, for example, they run a big economic risk. At The Monkey Cage , Michael Ross and Erik Voeten find that the opposite may be true. When the good one country has is oil, then that country can actually be more brazen and get away with it. To measure cooperation we looked at a wide range of indicators –including the number of treaties that a country signs, the number of international organizations it joins and its willingness to abide by decisions made by international courts. The graph below shows the correlation in 2005 between per capita oil income and one of these indicators for cooperation: the KOF Index of political globalization, which represents the number of international organizations that countries have joined, the international treaties they have signed, the number of peacekeepers it contributes (per capita), and the number of embassies against the oil revenues per capita. We find that beyond a certain level of oil income (around $100 per capita) more oil wealth is correlated with sharply lower levels of political globalization. Strikingly, this pattern shows up when we compare oil-rich states to oil-poor states, and when we look at individual states over time, as their oil production rises and falls. The findings also hold when we control for possibly confounding factors, such as democracy, economic development, and regional effects. We find very similar effects when we use other indicators to measure the degree to which states are integrated into and cooperate with international institutions. Read How oil wealth can make Russia and other countries less cooperative here .
  • Nouriel Roubini's Top Six Risks for Global Markets

    At Project Syndicate , Nouriel Roubini writes that the major risks to global markets have shifted. The leading risks from the last two years, while not quite resolved, are not as predominant. But there is plenty to be concerned about. Namely: For starters, there is the risk of a hard landing in China. The rebalancing of growth away from fixed investment and toward private consumption is occurring too slowly, because every time annual GDP growth slows toward 7%, the authorities panic and double down on another round of credit-fueled capital investment. This then leads to more bad assets and non-performing loans, more excessive investment in real estate, infrastructure, and industrial capacity, and more public and private debt. By next year, there may be no road left down which to kick the can. There is also the risk of policy mistakes by the US Federal Reserve as it exits monetary easing. Last year, the Fed’s mere announcement that it would gradually wind down its monthly purchases of long-term financial assets triggered a “taper” tantrum in global financial markets and emerging markets. This year, tapering is priced in, but uncertainty about the timing and speed of the Fed’s efforts to normalize policy interest rates is creating volatility. Some investors and governments now worry that the Fed may raise rates too soon and too fast, causing economic and financial shockwaves. Third, the Fed may actually exit zero rates too late and too slowly (its current plan would normalize rates to 4% only by 2018), thus causing another asset-price boom – and an eventual bust. Indeed, unconventional monetary policies in the US and other advanced economies have already led to massive asset-price reflation, which in due course could cause bubbles in real estate, credit, and equity markets. Fourth, the crises in some fragile emerging markets may worsen. Emerging markets are facing headwinds (owing to a fall in commodity prices and the risks associated with China’s structural transformation and the Fed’s monetary-policy shift) at a time when their own macroeconomic policies are still too loose and the lack of structural reforms has undermined potential growth. Moreover many of these emerging markets face political and electoral risks. Fifth, there is a serious risk that the current conflict in Ukraine will lead to Cold War II – and possibly even a hot war if Russia invades the east of the country. The economic consequences of such an outcome – owing to its impact on energy supplies and investment flows, in addition to the destruction of lives and physical capital – would be immense. Finally, there is a similar risk that Asia’s terrestrial and maritime territorial disagreements (starting with the disputes between China and Japan) could escalate into outright military conflict. Such geopolitical risks – were they to materialize – would have a systemic economic and financial impact. Read The Changing Face of Global Risk here .
  • The Rise and Fall of Orange Juice

    At Quartz , Roberto Ferdman has a nice abbreviated history of orange juice. It is not so much a food history or even a fruit history, but is, rather, an interesting economic short story with lessons in commodities trading, scarcity, and consumer behavior. Ferdman was prompted to rite about orange juice by some startling data. Orange juice consumption (per capita) has dropped 40% in the last decade. It is a "big deal," says Ferdman. After World War II, a group of scientists changed the American orange juice landscape forever. Determined to find a more palatable intersection between preservation and flavor, these scientists developed a new process roughly based on the one they saw used to dehydrate food during the war effort. Instead of boiling the juice, they heated it lightly until water evaporated. Then, they’d add a touch of fresh orange, which gave the concoction a “fresh” taste. Orange juice “from concentrate” was born. As was the industry’s marketing push. The product was a hit. Per capita orange juice consumption jumped from under eight pounds per person in 1950, to over 20 pounds per person in 1960. Florida’s production of concentrated juice leapt from 226,000 gallons in 1946 to more than 116 million in 1962, according to a report by agricultural economist Robert A. Morris. By 1970, 90% of Florida’s oranges were being used to make orange juice and the vast majority of that was from concentrate. The increased popularity of flash-pasteurized, ready-to-drink juice advertised as “not-from-concentrate” helped drive consumption still higher in the 1980s and 1990s. But as you can see, things started to roll over in the late 1990s. Since 1998, US orange production and orange juice sales have fallen virtually every year. That decline comes despite strong population growth in the US, which means the average American consumes far fewer oranges today than she did in 2000. Why? Read How America fell out of love with orange juice here .
  • The Curious Economics of the Coffee Bean

    When commodity prices shift, consumers should see a change in prices in products that use those commodities. Like the coffee bean. When coffee bean values go up or down, the coffee we drink should shift, right? Well, not so fast. Marketplace 's Stacey Vanek Smith was wondering why her $4 latte is still $4 when coffee beans prices have dropped to "near record lows." Listen in to the answers she finds:
  • Economist Intelligence Unit Projects These Five Economies Will See Fastest Growth in 2014

    Want your economy to be fast-growing in 2014? It doesn't hurt to have some sort of direct line to the world's most populous economy: China. A gas pipeline or shipping line for minerals will do. Or even a line of wealthy Chinese at your booming casinos. The Economist Intelligence Unit has put out its top five nations for projected growth in the coming year. Numbers 2 through 5 all have economies where growth is tied to China. #1's growth depends more on its ability to stabilize politically, but then it too depends greatly on China.
  • The Rise and Fall of Eike Batista, Brazil's Richest Man

    Eike Batista likes to play the role of the star. But he may be less than thrilled at what got him onto the cover of the latest issue of Businessweek . Batista built a bit of an oil and mineral empire to become the wealthiest man in Brazil. And then he lost it. Or at least a lot of it. And when "it," amounts to $34.5 billion, the loss is historic. Juan Pablo Spinetto , Peter Millard , and Ken Wells take us through the story of Batista's rise and fall. It’s a cloudy April afternoon in 2012, but Batista is full of blue skies and endless vistas. To date he’s founded five publicly traded companies and is soon to launch a sixth. His personal wealth is estimated at $34.5 billion; most of his enterprises are managed under the umbrella of a holding company bearing his initials, the EBX Group. At 55, he’s Brazil’s richest man—and the eighth-wealthiest man on earth. With him onstage is a roster of Brazil’s political and business elite: President Dilma Rousseff, Rio Governor Sérgio Cabral, and Mines and Energy Minister Edison Lobão. The audience of 400 includes foreign corporate luminaries such as Kim Jung Rae, co-chief executive officer of Hyundai Corp. Batista has gathered them to show off Açu, which he predicts will be the largest port in the Americas. He also wants to share some good news. His oil company, OGX Petróleo e Gás, has begun production on what he describes as a “new frontier” of petroleum 37 miles off the Brazilian coast. “This is an historical moment,” says Batista. “It’s the first time an independent Brazilian company has produced offshore oil.” That Batista, new to the oil business, had brought in wells gushing with crude was the sort of announcement investors had come to expect of him. At that moment, Batista embodied Brazil’s decade-long economic expansion, and for international investors wanting a piece of the new Brazil, he could do no wrong. Many of those investors were American. BlackRock (BLK), the world’s largest money manager, had bought millions of OGX shares. Pimco (ALV:GR), manager of the world’s largest bond fund, owned $576 million in OGX bonds. General Electric (GE) took a 0.8 percent share in EBX valued at $300 million. Brazilians “should be very proud” of what Batista and OGX had achieved, said Rousseff, sporting her own orange OGX jacket onstage at the Açu port. “OGX has a big contribution to make in the offshore oil production of Brazil.” Batista, in an interview a few days later with investment conference host Michael Milken in Beverly Hills, declared Rousseff’s appearance at his port not simply a feather in his cap but also “a major event for Brazil.” To say Batista overreached would be to seriously undersell what has happened in the 18 months since that self-regarding presstravaganza of hubris and magical thinking. In what is shaping up to be one of the largest personal and financial collapses in history—if not the largest—Batista may be nearing bankruptcy. On Oct. 1, OGX missed a $45 million interest payment on bond debt it had racked up during its rise. Batista has sold his planes and his helicopter, and creditors are arguing over the remains of his companies. He’s no longer on the Bloomberg Billionaires Index and has become the butt of jokes in Brazil. One suggests that Pope Francis plans to return to Brazil soon and will again be visiting the poor, including Batista. Read How Brazil's Richest Man Lost $34.5 Billion here .
  • The Looming Slowdown in Latin America and Structural Issues for Commodity-Dependent Economies

    After a strong several years for many merging economies, the last few months have brought some troubling signs. In Andrés Velasco 's analysis, the biggest problems of the moment seem to be large external deficits and investors in advanced economies anticipating higher interest rates, and then pulling some investment from emerging economies. Velasco, a past president and finance minister of Chile, sees some all too familiar dark clouds across Latin America. While he doesn't think the coming slowdown will be as catastrophic as past regional crises--"the question is not whether these countries’ financial sectors will explode, but whether their growth trajectories will implode"--he argues that the region's policy makers have not done enough to change basic structural weaknesses. From Project Syndicate : When commodity prices are sky-high and money is cheap and plentiful, economic growth is almost inevitable. In Latin America over the last decade, countries with sound macroeconomic policy frameworks, like Colombia, Peru, and Chile, grew rapidly. But so did Argentina, a country whose government seems to start every day wondering what more it can do to weaken economic institutions and damage long-term growth prospects. Now that nirvana is over, where will growth come from? To answer that question, it helps to note, as Harvard University’s Ricardo Hausmann has done recently, that some of the emerging economies’ recent growth was illusory. Wall Street became enamored with the rapidly rising dollar value of these countries’ national income, but that rise had more to do with strong commodity prices and appreciating exchange rates (which raised the value of their output when measured in dollars) than with sharp increases in actual output volumes. During the boom years, structural transformation in many emerging economies, particularly in Latin America, was limited. Countries like Ireland, Finland, and Singapore – and also South Korea, Malaysia, and Indonesia – export different goods (and to different markets) than they did a generation ago. By contrast, Chile’s export basket is pretty much the same as it was in 1980. There is nothing wrong with exporting copper, wine, fruit, and forest products. But economic history suggests that countries seldom – if ever – get rich by doing just that. Commodity-rich advanced economies like Canada, Norway, or Australia export lots of natural resources, of course, but they also export many other goods and services. That is not true of Chile, Peru, or Colombia – or even of Brazil, with its much larger population and more developed industrial base. To make matters worse, unlike their Asian counterparts, Latin America’s economies are not integrated into regional and global value chains. A producer in Indonesia, Malaysia, or the Philippines can easily take advantage of the local currency’s depreciation to sell more electronic components to an assembly plant in China with which it has a long-standing and well-developed supply relationship. A business in Concepción, Arequipa, or Medellín, by contrast, must seek new customers in new countries, which takes time and money – and may not succeed. Latin American governments could have used the opportunities afforded by the global commodity and liquidity booms to diversify their economies, working with local business communities to move into new products and sectors. They did not. Read Emerging Markets’ Nirvana Lost here .
  • Making the Economic Case for an Independent Scotland

    Scotland's First Minister, Alex Salmond , is leading the charge for Scottish independence. Were this a political science or government blog, we'd have a lot to unpack on the underlying cultural and historical push for independence. But here, we are more interested in the economic justification for such a bold move. Speaking at the Carnegie Council , Salmond put prosperity front and center, and pointed to the success of small nations as one selling point for an independent Scotland. And he raises an interesting question: in today's global economies, is is better to be smaller? Here is an excerpt from his talk: You can heard the full talk here .
  • Long Term Drivers of the Commodity Super-cycle

    Commodity prices remain high, and Dambisa Moyo says we better get used to it. Moyo, author of Winner Take All: China’s Race for Resources and What it Means for the World , has a piece at Project Syndicate in which she outlines how long term factors will continue to drive commodity prices. One key factor: the rise of emerging economies and their growing hunger for oil, copper, iron, and other commodities: Worst-case estimates have China’s real GDP growing at around 7% per year over the next decade. Meanwhile, the supply of most commodities is forecast to grow by no more than 2% annually in real terms. All else being equal, unless China’s commodity intensity, defined as the amount of a commodity consumed to generate a unit of output, falls dramatically, its demand for commodities will be greater this year than it was last year. As long as China’s commodity demand grows at a higher rate than global supply, prices will rise. And the rapid economic growth that China’s leaders must sustain in order to lift enormous numbers of people out of poverty – and thus prevent a crisis of legitimacy – places a floor under global food, energy, and mineral prices. To be sure, intensity of use has fallen for some commodities, like gold and nuclear energy; but for others, such as aluminum and coal, it has risen since 2000 or, as is the case for copper and oil, declines have slowed markedly or stalled at high levels. As the composition of China’s economy continues to shift from investment to consumption, demand for commodity-intensive consumer durables – cars, mobile phones, indoor plumbing, computers, and televisions – will rise. There is also the issue of the so-called reserve price (the highest price a buyer is willing to pay for a good or service). The reserve price places a cap on how high commodity prices will go, as it is the price at which demand destruction occurs (consumers are no longer willing or able to purchase the good or service). For many commodities, such as oil, the reserve price is higher in emerging countries than in developed economies. One explanation for the difference is accelerating wage growth across developing regions, which is raising commodity demand, whereas stagnating wages in developed markets are causing the reserve price to decline. By implication, if nothing else, global energy, food, and mineral prices will continue to be buoyed by seemingly insatiable emerging-market demand, which commands much higher reserve prices. Read Commodities on the Rise here .
  • IMF on Oil and Growth: The Haves and the Have-Nots in the Middle East and North Africa

    To describe the economic outlook for the Middle East and North Africa as mixed doesn't quite tell the story. It is more accurate to say that the outlook is a divided one. According to the IMF 's newly released outlook for the region, there is a sharp distinction between members of the Gulf Cooperation Council (GCC) and non-members, and it all comes down to who has the oil. The IMF labels the exporters as "Faring well:" But the importers are not growing enough to support their communities' basic needs: As divided as these two graphs are, they are connected, and the IMF warns oil exporters to shore up their economies to prepare for slower growth. Read the IMF's Regional Outlook for the Middle East and Central Asia here . The IMF's Masood Ahmed discusses the top findings of the report below:
  • QE3, 'Fat Fingers,' and the Price of Oil

    At Econbrowser , James Hamilton has yet another instructive post on oil prices. Last week, he noticed this dip in the price of West Texas Intermediate crude oil: Hamilton wondered to what extent this drop could have to do with supply and demand. He writes: Those who doubt that oil prices are determined solely by fundamentals would naturally ask, what aspect of the supply or demand for oil could have possibly changed in the course of less than a minute last Monday? The obvious and correct answer is, there was no change in either the supply or the demand for physical oil over the course of that minute. The minute-by-minute price of a NYMEX contract is determined by how many people are wanting to buy that financial contract and at what price, not by how much gasoline motorists burned in their cars that minute. But since changes in the price of crude oil are the key determinant of the price consumers pay for gasoline, doesn't that establish pretty clearly that the whims or fat fingers of financial traders are ultimately determining the price we all pay at the pump? In one sense, the answer to that question is yes-- last week's decline in the price of crude oil will soon show up as a lower price Americans pay for gasoline. But here's the problem you run into if you try to carry that theory too far. There are at the end of this chain real people who burn real gasoline when they drive real cars. And how much gasoline they burn depends in part on the price they pay-- with a higher price, some people use a little bit less. Not a lot less-- the price of gasoline could change quite a lot and it would take some time before you could be sure you see a response in the data. That small (and often sluggish) response is why the price of oil can and does move quite a bit on a minute-by-minute basis, seemingly driven by forces having nothing to do with the final users of the product. But if the price of oil that emerges from that process turns out to be one at which the quantity of the physical product that is consumed is a different amount from the physical quantity produced, something has to give. Indeed, the bigger price drops we saw on Wednesday followed news that U.S. inventories of crude were significantly higher than expected . Read Fat fingers and the price of oil here .
  • China's Rare Earth Metals Wealth

    We follow coverage of China's economic ups and downs closely here at The Watch. Or, should we say, China's ups and ups-but-not-as-up-as-other-ups. One of the key factors for China's future growth in the global economy of the 21st century is that nation's access to the types of raw materials that have become essential in the manufacturing and high tech sectors. The below infographic makes China's advantage in rare metals clear. And that advantage is really quite astounding. This was produced by Buckyballs , a company that depends on rare metals in its products. (Hat tip Barry Ritholtz ) [Via: Buckyballs rare earth metals ] Get the full size graphic here .
  • Managing Trade, Resources in the Vibrant Arctic

    When you see the term "emerging markets," what comes to mind? Brazil, China, India, Viet Nam all seem likely answers. But the Arctic? It isn't a place that comes to mind as an emerging market for us. But according to Bruce Jones of Brookings , not only should we see the Arctic as an emerging market, we should see it as one of the globe's most vital markets for trade and natural resources. Jones, director of the Managing Global Order (MGO) project at Brookings and director of the Center on International Cooperation at New York University, says that the future of the Arctic economy depends on sorting out sovereignty in the region in a way that encourages trade rather than provokes conflict:
  • IMF: African Economies Still Outpacing Global Growth

    The IMF 's latest economic outlook for Sub-Saharan Africa is relatively strong. IMF economists expect African nations to continue to outpace global economic growth. The region's 5% growth rate for 2011 was down a bit from the 6.5% growth before 2008, but still quite strong. Most countries participated in this expansion, although drought slowed growth in many West Africa Economic and Monetary Union (WAEMU) member countries and post-election civil strife saw GDP decline by close to 5 percent in Côte d'Ivoire. Supportive macroeconomic policies played an important role in sustaining growth in many countries across the region. Rising global food and fuel prices contributed to inflationary pressures in many countries, although food prices across the region were significantly affected by local supply conditions. Large and sustained jumps in inflation were mostly concentrated in eastern Africa-eventually inducing sharp monetary tightening in several affected countries that is expected to cut inflation over the course of 2012. For 2012, regional growth is expected to rise slightly, helped by new resource production in several countries and by recovery from drought and civil conflict in the WAEMU countries; adjusting for these one-off factors, the pace of growth would be slightly lower than in 2011. For the region's two largest economies, growth in South Africa is set to slow (to below 3 percent), held back by weaker exports to advanced country markets, and to remain broadly unchanged in Nigeria (around 7 percent), notwithstanding some fiscal consolidation. For most countries in the region, growth rates will either be unchanged or slightly weaker than in 2011. Here is a look at the growth trend for the region's different economies: Read the full report here .
  • Impact of Oil Prices on Gas Prices: or What drivers can expect to pay at the pump

    With Iran cutting off its oil from Britain and France, oil prices have climbed to a nine-month high this week . So what will the impact be on gas prices here in the US? The answer may not be quite as simple as "gas prices rise when oil prices rise," says Econbrowser 's James Hamilton . There's speculation involved, and the price fluctuations do not always follow as we expect: Here's a closer look at the data over the last year. Average U.S. gasoline prices fell more than you would have predicted based on the Brent price. They have since come back up. But Brent has surged another $10/barrel over the last two weeks, and gasoline prices have yet to catch up to that latest move. Based on the historical relation, we might expect to see the average U.S. gasoline price rise from its current $3.59/gallon up to $3.84. One factor that's been driving Brent and WTI up over the last few weeks has been rising tensions with Iran. But why should threats or fears alone affect the price we pay here and now? Phil Flynn, a senior market analyst at PFGBest Research in Chicago, offered this interpretation: We're seeing panic buying in Europe and Asia because they're absolutely convinced that they're not going to be able to buy Iranian oil or there's going to be some kind of conflict that disrupts the transport of oil through the Strait of Hormuz.... there is a lot of hoarding in case the worst-case scenario happens. Asian buyers have been buying up West African crude like it's going out of style. Does it make sense for consumers to suffer now just because of something that may or may not happen in the future? If there are significant disruptions, the answer will turn out to be yes. We'll be glad that we used a little less today, and left a little more in storage, to help us better cope with the huge challenges we'll be facing in a few months. If the answer turns out to be no, then this is all just a lot of pain for nothing. Read Crude oil and gasoline prices here . Also see Oil Prices and Consumer Spending from the Richmond Fed .