Posts Tagged ‘commodity prices’

Weekend reading, 8 October 2010

Friday, October 8th, 2010


A version of this list of recommendations also comes out earlier in the day as part of the weekly Policy Progress e-newsletter.

“Begun the Currency wars have” – Raf Manji

Yves Smith (Naked Capitalism) – Currency War Threats Escalating
Matthew Yglesias – How I Learned to Stop Worrying and Love Currency Wars
Raj Manji -The Art of Currency War
David E. Sanger and Michael Wines (New York Times) – More Countries Adopt China’s Tactics on Currency
Phil Izzo (Wall Street Journal) – Stiglitz: Central Banks Creating ‘Chaos’
Matt Nolan (The Visible Hand in Economics)  - Race to the bottom actually race to the top
Bernard Hickey – Opinion: Why NZ can’t step aside and wait to be slaughtered in the currency wars to come
Bernard Hickey – Five ways to control the NZ$ and capital flows
So what has been the big news story this week? Paul Henry? Chris Carter? The Hobbit? Um, how about the threat of competitive currency devaluations amongst the leading economies? Last week Brazil’s finance minister Guido Mantega introduced the phrase “currency war” into the discussion and it seems to have stuck. The range of articles above provides a pretty good introduction to the issues and differing views about the implications (and they include links to further articles). (Note – Raf Manji is an occasional commenter here at Policy Progress.)

Amidst the potential turmoil, Bernard Hickey offers a New Zealand perspective:

There is a significant risk that as central banks in the Northern Hemisphere crank up into a series of competitive devaluations that the New Zealand dollar is pushed up vs the US dollar, the euro and the Japanese yen, but not versus the Australian dollar.

. . . Luckily for New Zealand exporters to Australia, the one currency more in demand than our own is the Australian dollar.

But in the end that won’t save us. Our trade with China, now our second largest trading partner, is in US dollars and the Chinese are reluctant to let their currency appreciate vs the US dollar.

. . . If the New Zealand dollar surges under the weight of capital inflows from carry-trading, yield-hunting investors and those hunting for safety away from the money printing, then the Reserve Bank needs to be ready to sell New Zealand dollars. It worked before in 2007 and made the taxpayer a tidy profit. It can work again.

Simon Kennedy (Bloomberg) - Wall Street Sees World Economy Decoupling From U.S.
B’vedeni Snapshot – Food, glorious food! Will food become the new crude?
Meanwhile, some other emerging signs on the world economy front look more hopeful. From Bloomberg:

A book published last week by the World Bank . . . “The Day After Tomorrow” concludes that developing nations aren’t only decoupling, they also are undergoing a “switchover” that will make them such locomotives for the world economy, they can help rescue advanced nations. Among the reasons for the revolution are greater trade between emerging markets, the rise of the middle class and higher commodity prices, the book said.

And from B’vedeni Private Wealth (hat-tip Alison):

A decade ago, it would have been hard to imagine a world where giant multinationals and cashed up venture capitalists were battling each other for a share of the world’s fertiliser, irrigation water, and soybean markets. Yet today almost everything to do with large scale agriculture and the marketing and processing of agricultural products is a much sought after investment prospect.

Patrick Diamond - Labour’s failed renewal campaign
The Policy Network’s Patrick Diamond was one of those who accused Eurpoean progressives of “the politics of evasion”. Here’s what he has had to say about the Labour leadership contest in the UK:

At a deeper level, the contest has suffered from lack of sustained reflection about why the theories of social democracy – a stakeholder economy, democratic reform and an ethical foreign policy – proved so difficult to achieve in practice, despite three huge majorities. That insufficient work was done in opposition before 1997 is all too apparent. Only in Mr Blair’s second term did he develop a compelling reform mission, but even then Labour proved notoriously reluctant to challenge powerful institutional interests in the City, the media and public services. New Labour’s mind-set was one in which making enemies risked ceding electoral advantage to the Conservatives. But why this was, and how it stopped it governing in the public interest, has barely been discussed. As a result, whoever emerges as leader will likely lack a mandate to overhaul Labour’s programme.

And:

. . .  the current contest could have done with louder calls, for instance, to escalate Britain’s faltering war on poverty. But the mind-set that the state and social justice are inescapably linked remains, when it should be discarded . . . Labour’s next leader must deliver a radical speech that breaks out of the impasse created by the campaign. Their task will not be to detoxify their brand, as Mr Cameron fought to do, but to seek a dramatic new Clause 4 moment – one that once and for all announces an end to Labour’s fixation with traditional state power, and makes it again the party of moral, not mechanical reform.

Note: (free) registration is required for access to this Financial Times article.

A few other dispatches from the UK, following on from our Ed Miliband special edition last week:

And, on the ‘To Read’ pile:

And finally, a reminder: if you haven’t voted in the local body elections yet, you can still hand-deliver your ballot paper to a polling booth by midday tomorrow; check your local council website for details. (And if you live in Wellington or in the neighbouring areas covered by Capital and Coast, then as an added bonus you can vote for me for election to the District Health Board!)

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Commodities and Krugman

Thursday, May 13th, 2010


Sometimes when I hear stern warnings about the need for New Zealand to move away from its current reliance on primary sector commodities (dairy, wool, meat, wood), I’m reminded of Paul Krugman.

Specifically, an article by Krugman that I read some years ago. At that time, Krugman was known primarily as an academic economist with specialisations in trade theory and economic geography. He was regarded with some scepticism by many progressives for his criticisms of the anti-globalisation movement and of “policy entrepeneurs” “peddling prosperity” through active industrial policy.

Shortly afterward, however, everything changed. Krugman began writing a regular column in the New York Times and became a trenchant critic of President George W Bush on matters ranging from tax policy through to Iraq, at a time (post-9/11) when many mainstream progressives were scared to be labelled unpatriotic. As public opinion swung against Bush and the war, Krugman was embraced as “the most important political columnist in America“.

The fascinating story of how this transformation came about has recently been detailed in a profile in The New Yorker.

Today, Krugman continues to write his column along with a blog, The Conscience of a Liberal. He writes in support of the Obama administration, though is often frustrated by their perceived timidity and quixotic pursuit of bipartisanship. Much of his recent writing has been on health reform, and he is currently focussed on financial market regulation. He has also branched into climate change, with a lengthy feature article in the Times.

But the article that keeps recurring to me is one entitled White Collars Turn Blue, originally published in 1996. It was done for a special centennial issue of the New York Times magazine and written it as if it were in an issue 100 years in the future, looking back at the past century.

Krugman uses this as a device to challenge some aspects of the conventional wisdom about how things are likely to develop. For instance:

In the 1990s everyone believed that education was the key to economic success, for both individuals and nations. A college degree, maybe even a postgraduate degree, was essential for anyone who wanted a good job as one of those “symbolic analysts”.

But computers are very good at analyzing symbols; it’s the messiness of the real world they have trouble with. Furthermore, symbols can be quite easily transmitted to Asmara or La Paz and analyzed there for a fraction of the cost of doing it in Boston.

. . . These days jobs that require only six or twelve months of vocational training . . . pay nearly as much as one can expect to earn with a master’s degree, and more than one can expect to earn with a Ph.D. And so enrollment in colleges and universities has dropped almost two-thirds since its turn-of-the-century peak . . . Today a place like Harvard is, as it was in the 19th century, more of a social institution than a scholarly one — a place for the children of the wealthy to refine their social graces and make friends with others of the same class.

And here we come back to commodities, where Krugman applies a similar argument:

The first half of the 1990s was an era of extraordinarily low raw material prices. Yet it is hard to see why anyone thought this situation would continue. The Earth is, as a few lonely voices continued to insist, a finite planet; when 2 billion Asians began to aspire to Western levels of consumption, it was inevitable that they would set off a scramble for limited supplies of minerals, fossil fuels, and even food.

. . . it became clear that natural resources, far from becoming irrelevant, had become more crucial than ever before. In the 19th century great fortunes were made in industry; in the late 20th they were made in technology; but today’s super-rich are, more often than not, those who own prime land or mineral rights.

So what does this prediction mean for New Zealand? Can we really expect that the decades-long decline in the price of agricultural commodities to turn around over the course of this century?

Well, it is possible. Remember, back before the Global Financial Crisis, there was a boom going on in commodity prices. Indeed, as James Surowiecki wrote in late 2008:

This spring, disaster loomed in the global food market. Precipitous increases in the prices of staples like rice (up more than a hundred and fifty per cent in a few months) and maize provoked food riots, toppled governments, and threatened the lives of tens of millions.

Earlier that year Paul Collier, author of The Bottom Billion, could write in a paper for a Progressive Governance conference:

The current global commodity boom is generating an enormous transfer of income to many, but not all, of the societies of the bottom billion. This transfer dwarfs aid and any conceivable changes in aid.

And Duncan Green of Oxfam could report to the same conference that:

The impact of China may also be refuting the received wisdom that getting out of commodities into industry is the route to development. Booming Chinese demand has reversed the long-term decline in commodity prices and what economists call the “terms of trade” between raw materials and manufactured goods, sometimes presented as the number of bags of coffee (or barrels of oil) needed to buy a truck. For the moment, coffee and oil prices are high, and the price of trucks is falling. Opinions differ as to whether this is the start of an extended period of high prices that defies the normal rules of boom and bust and long-term terms of trade decline.

Maybe the commodity boom was just a blip. Or maybe it has just been temporarily interrupted by the Global Financial Crisis. I don’t know.

And indeed I’m not sure Krugman intended all of his 2096 scenarios to be taken a serious predictions, anyway. I think he was making some general points about economic theory (such as “When something becomes abundant, it also becomes cheap”) and sounding a cautionary note about assuming that things will just keep on the way they’ve been going.

I think this, more than anything, is the lesson for anyone who thinks they can state with certainty what New Zealand’s future economic trajectory is going to be.

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Posted in Progressive Path to Prosperity | 5 Comments »

Naïve questions about our OECD ranking

Tuesday, April 20th, 2010

Source: Ministry of Economic Development, Economic Development Indicators 2007, Figure 2.1, http://www.med.govt.nz/upload/53549/Indicators-Report-2007.pdf


I think I’m relatively well-versed in economic theory, but a lot of it is self-taught, or at least learnt outside of formal economic programmes.

I studied economics at high school and took 1st year Macro. But then I came back to it via politics: Jack Vowles taught me an appreciation of Keynes, David Neilson the insights that can be taken from Marxian economics, and Alan Simpson supervised my dissertation (and conference paper) on the international dissemination of economic ideas (Where do they get their ideas? Treasury, the Reserve Bank and the International Economics Community). I kept on reading from there, starting with Keynes’ General Theory and then Marx’s Capital (I only made it through Volume 1); economic books and papers have been part of my professional reading ever since.

But, even so, I’ve never really had economics textbooks drilled into me. So when I encounter a particular economic finding or phenomenon, my initial reactions tend to be those of a layperson. The standard economic explanation doesn’t necessarily spring straight to the forefront of my mind.

I’d want to argue that that can be an advantage. It doesn’t immediately ‘lock in’ an answer, and allows scope for different interpretations.

Which brings us back to the dreaded OECD ranking. As we saw last week, New Zealand’s per capita GDP has been declining compared to other OECD countries for at least the past sixty years, and is now 84% of the OECD average. We were once one of the richest, yet now rank 22nd out of 30 countries (between Greece and Korea).

Like many New Zealanders of my generation, I grew up hearing this sort of stuff. And yet when I thought about it, and particularly once I started travelling overseas, a couple of what I call “naïve questions” came to mind:

  • Are we really that unproductive?
  • And are we really that poor?

I’ll unpack each of these in turn. (Warning: the reasoning below has been deliberately simplified.)


Are we really that unproductive?
If our GDP per capita is lower than other countries, then in most cases that means that our workers are less productive. There are other possible reasons – we might have lower rates of labour force participation, or work shorter hours – but, as the Ministry of Economic Development graph at the top of this post shows, that’s not the case; quite the reverse, in fact.

So why are we unproductive? We have by all accounts a pretty good education system and our rate of participation in it is quite high. And anecdotally we know that Kiwi workers are well-regarded when they go to work in other countries like Australia and the UK. So I doubt our workforce is deficient.

Maybe it’s something to do with commodity prices. I realise I we are ‘price-takers’ when it comes to prices on commodities such as dairy, meat and wool, and that the cost of production is fundamentally set by Third World wages. But if we were able to earn First World prices through other goods and services but only Third World ones through commodities, wouldn’t the latter become pretty unprofitable and unattractive compared to the former?

Is it something to do with the exchange rate, then? Does it somehow set our wages and price levels in general based the prices of our commodities, since they are our main export earners? I can see how that might happen with the non-tradeable sector, i.e. those goods and services that aren’t (and often can’t be) traded internationally. So a New Zealand hairdresser might earn much less (in buying power terms) than one with the same skills, experience and talent in the UK, because the customer base they were trying to sell to has less money to spend.

But if this were the case, wouldn’t it make our other export industries very competitive, because they were producing their products more cheaply than other First World countries? And aren’t our manufacturers complaining about precisely the opposite?

Another possible explanation is underinvestment in productive capital. After all, labour productivity is often more a reflection of how well-equipped a worker is than anything about her personal skills or aptitudes (a fact that is often overlooked when this issue comes up in political discussion). Maybe with our small firms and low domestic savings rates, we just haven’t invested in our capital stock the way other countries have, and our workers are less productive (and therefore poorer) as a result?


Are we really that poor?
My second naïve question is about how our low per capita GDP manifests itself in our material standard of living.

In comments on my previous post, Achela, Nicholas and James have made the point that there’s a lot more to standard of living than just GDP per capita, such as life expectancy for instance. And, in another context, Rob has drawn our attention to the insights of happiness economics.

But even just in terms of our ability to afford market goods and services, how meaningful is what these GDP per capita figures are telling us?

Take two countries that most New Zealand are pretty familiar with: the United Kingdom and Australia. According to these figures, the British are 30% better off than we are and the Australians are 37% better off.

Does that feel right to you? I spent a couple of months in the UK last year, and I know people who live in Australia who I visit pretty often. The standard of living over there doesn’t seem particularly different to here. Can you think of things that people in those countries regularly afford that we can’t, for instance?

At the same time, the figures suggest that the difference between the Australians and us is the same as the difference between us and the Slovak Republic. Now, I don’t know much about the Slovak Republic but I imagine that if I went there I’d pretty quickly see signs of a rather more restricted lifestyle – somewhat more different from us than we are to the Australians. How can we explain that?


I’ve raised these questions with economists on occasion and been kindly assured that there is absolutely nothing interesting or insightful in them, and that these seeming paradoxes are easily explained.

And I’m not so rash as to hijack the entire Progressive Path to Prosperity topic — or even just the Identifying the Problem workstream — and make it about that.

Nevertheless I do hope to present my work in this area in a way that does offering a satisfying account of New Zealand’s situation to people who puzzle about the same sort of naïve questions as I do.

If you have had similar questions to me, or can offer some compelling answers, or even if you think this whole line of enquiry is misguided, I’m keen to hear from you – leave a comment below!

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Posted in Progressive Path to Prosperity | 5 Comments »