Are emerging markets about to experience a credit crunch? Slowing growth in China and other emerging market economies (EMEs) does not bode well. Nor does the prospect of rising interest rates in the USA and the resulting increase in the costs of servicing the high levels of dollar-denominated debt in many such countries.
According to the Bank for International Settlements (BIS) (see also), the stock of dollar-denominated debt in emerging market economies has doubled since 2009 and this makes them vulnerable to tighter US monetary policy.
Weaker financial market conditions combined with an increased sensitivity to US rates may heighten the risk of negative spillovers to EMEs when US policy is normalised. …
Despite low interest rates, rising debt levels have pushed debt service ratios for households and firms above their long-run averages, particularly since 2013, signalling increased risks of financial crises in EMEs.
But there is another perspective. Many emerging economies are pursuing looser monetary policy and this, combined with tighter US monetary policy, is causing their exchange rates against the dollar to depreciate, thereby increasing their export competitiveness. At the same time, more rapid growth in the USA and some EU countries, should also help to stimulate demand for their exports.
Also, in recent years there has been a large growth in trade between emerging economies – so-called ‘South–South trade’. Exports from developing countries to other developing countries has grown from 38% of developing countries’ exports in 1995 to over 52% in 2015. With technological catch-up taking place in many of these economies and with lower labour and land costs, their prospects look bright for economic growth over the longer term.
These two different perspectives are taken in the following two articles from the Telegraph. The first looks at the BIS’s analysis of growing debt and the possibility of a credit crunch. The second, while acknowledging the current weakness of many emerging economies, looks at the prospects for improving growth over the coming years.
Articles
‘Uneasy’ market calm masks debt timebomb, BIS warns The Telegraph, Szu Ping Chan (6/12/15)
Why emerging markets will rise from gloom to boom The Telegraph, Liam Halligan (5/12/15)
Questions
- How does an improving US economy impact on emerging market economies?
- Will the impact of US monetary policy on exchange rates be adverse or advantageous for emerging market economies?
- What forms does dollar-denominated debt take in emerging economies?
- Why has south–south trade grown in recent years? Is it consistent with the law of comparative advantage?
- Why is growth likely to be higher in emerging economies than in developed economies in the coming years?
Oil prices will remain below $60 per barrel for the foreseeable future. At least this is what is being assumed by most oil producing companies. In the more distant future, prices may rise as investment in fracking, tar sands and new wells dries up. In meantime, however, marginal costs are sufficiently low as to make it economically viable to continue extracting oil from most sources at current prices.
The low prices are partly the result of increases in supply from large-scale investment in new sources of oil over the past few years and increased output by OPEC. They are also partly the result of falling demand from China.
But are low prices all bad news for the oil industry? It depends on the sector of the industry. Extraction and exploration may be having a hard time; but downstream, the refining, petrochemicals, distribution and retail sectors are benefiting from the lower costs of crude oil. For the big integrated oil companies, such as BP, the overall effect may not be as detrimental as the profits from oil production suggest.
Articles
BP – low oil price isn’t all bad new BBC News, Kamal Ahmed (27/10/15)
Want to See Who’s Happy About Low Oil Prices? Look at Refiners Bloomberg, Dan Murtaugh (31/10/15)
Low prices are crushing Canada’s oil sands industry. Shell’s the latest casualty. Vox, Brad Plumer (28/10/15)
Data
Brent spot crude oil prices US Energy Information Administration
BP Quarterly results and webcast BP
Questions
- Why have oil prices fallen?
- What is likely to happen to the supply of oil (a) over the next three years; (b) in the longer term?
- Draw a diagram with average and marginal costs and revenue to show why it may be profitable to continue producing oil in the short run at $50 per barrel. Why may it not be profitable to invest in new sources of supply if the price remains at current levels?
- Find out in what downstream sectors BP is involved and what has happened to its profits in these sectors.
- Draw a diagram with average and marginal costs and revenue to show why profits may be increasing from the wholesaling of petrol and diesel to filling stations.
- How is price elasticity of demand relevant to the profitablity of downstream sectors in the context of falling costs?
The UK’s balance on trade continues to be sharply in deficit. At the same time, both manufacturing and overall production are still well below their pre-crisis levels. What is more, with a sterling exchange rate that has appreciated substantially over recent months, UK exports are at an increasing price disadvantage. The hoped-for re-balancing of the economy from debt-financed consumption to investment and exports has not occurred. Investment in the UK remains low relative to that in other major economies (see).
But other developments in the global economy are working in the UK’s favour.
Manufacturing globally is becoming more capital intensive, which reduces the comparative advantage of developing countries with low labour costs.
At the same time, the dividing line between manufacturing and services is becoming more blurred. Manufacturers in developing countries may still produce parts, such as chips or engines, but the design, marketing and sales of the products may take place in developed countries, such as the UK. Indeed, as products become more sophisticated, an increasing amount of value added may occur in developed countries.
The UK may be particularly well-placed in this regard. It can provide many high-end services in IT, business support and financial services to international manufacturers. It may have a comparative advantage in idea-intensive production.
Finally with a higher exchange rate, the UK’s terms of trade have been improving. The downside is that it makes UK exports more expensive in foreign currency terms, but it also makes commodity prices cheaper, which have already fallen in dollar terms, and also the prices of imported component parts. This helps offset the effect of the appreciation of the exchange rate on exports.
The following article by Jeremy Warner considers whether, despite its poor performance in traditional manufacturing, the UK might have hit an economic ‘sweet spot’ in its trade position.
Article
Unbalanced but lucky, Britain hits an economic sweet spot The Telegraph, Jeremy Warner (8/9/15)
Data
UK Trade (Excel file) ONS (9/9/15)
(See, for example, Worksheet 1. You can search for longer series using Google advanced search, putting www.ons.gov.uk in the ‘site or domaine’ box and searching for a particular series, using the series identifier found at the top of each column in the Excel file, such as BOKI for balance on trade in goods.)
Exchange rate data Bank of England Statistical Interactive Database
Questions
- Explain the difference between the balance on trade, the balance on trade in goods and the balance of payments on current account.
- Why has the UK not experienced a re-balancing of the economy as hope for by the Chancellor of the Exchequer, amongst others?
- What is meant by the ‘terms of trade’?
- What would cause an ‘improvement’ in the terms of trade?
- Are the UK’s terms of trade likely to move in the UK’s favour in the coming months? Explain.
- What current factors are mitigating against a recovery of UK manufacturing exports?
- Is de-industrialisation necessarily a ‘bad thing’?
- Does the development of new capital-intensive technologies in manufacturing mean that the UK could become a net exporter of manufactures? Explain why or why not.
The period from the end of the Second World War until the financial crisis of 2007–8 was one of increasing globalisation. World trade rose considerably faster than world GDP. The average annual growth in world GDP from 1950 to 2007 was 4.2%; the average annual growth in world merchandise exports was 6.7%.
And there were other ways in which the world was becoming increasingly interconnected. Cross-border financial flows grew strongly, especially in the 1990s and up to 2007. In the early 1990s, global cross-border capital flows were around 4% of world annual GDP; by 2007, they had risen to over 20%. The increasing spread of multinational corporations, improvements in transport, greater international movement of labour and improved communications were all factors that contributed to a deepening of globalisation.
But have things begun to change? Have we entered into an era of ‘deglobalisation’? Certainly some indicators would suggest this. In the three years 2012–14, world exports grew more slowly than world GDP. Global cross-border financial flows remain at about one-third of their 2007 peak. Increased banking regulations are making it harder for financial institutions to engage in international speculative activities.
What is more, with political turmoil in many countries, multinational corporations are more cautious about investing in such markets. Many countries are seeking to contain immigration. Fears of global instability are encouraging many firms to look inwards. After more than 13 years, settlement of the Doha round of international trade negotiations still seems a long way off. Protectionist measures abound, often amount to giving favourable treatment to domestic firms.
The Observer article considers whether the process of increased globalisation is now dead. Or will better banking regulations ultimately encourage capital flows to grow again; and will the inexorable march of technological progress give international trade and investment a renewed boost? Will lower energy and commodity prices help to reboot the global economy? Will the ‘Great Recession’ have resulted in what turns out to be merely a blip in the continued integration of the global economy? Is it, as the Huffington Post article states, that ‘globalization has a gravitational pull that is hard to resist’? See what the articles and speech have to say and what they conclude.
Articles
Borders are closing and banks are in retreat. Is globalisation dead? The Observer, Heather Stewart (23/5/15)
Is Globalization Finally Dead? Huffington Post, Peter Hall (6/5/14)
Speech
Financial “deglobalization”?: capital flows, banks, and the Beatles Bank of England, Kristin Forbes (18/11/14)
Questions
- Define globalisation.
- How does globalisation affect the distribution of income (a) between countries; (b) within countries?
- Why has the Doha round of trade negotiations stalled?
- Examine the factors that might be leading to deglobalisation.
- What are the implications of banking deglobalisation for the UK?
- Are protectionist measures always undesirable in terms of increasing global GDP?
- What forces of globalisation are hard to resist?
The World Economic Forum has been holding its annual meeting in the up-market Swiss ski resort of Davos. Many of the world’s richest and most powerful people attend these meetings, including political leaders, business leaders and representatives of various interest groups.
This year, one of the major topics has been the growth in inequality across the globe and how to reverse it. According to a report by Oxfam, Wealth: Having it all and wanting more:
The richest 1 per cent have seen their share of global wealth increase from 44 per cent in 2009 to 48 per cent in 2014 and at this rate will be more than 50 per cent in 2016. Members of this global elite had an average wealth of $2.7m per adult in 2014.
Of the remaining 52 per cent of global wealth, almost all (46 per cent) is owned by the rest of the richest fifth of the world’s population. The other 80 per cent share just 5.5 per cent and had an average wealth of $3851 per adult – that’s 1/700th of the average wealth of the 1 per cent.
Currently, the richest 85 people in the world have the same amount of wealth as the poorest 50% of the world’s population. It might seem odd that those with the wealth are talking about the problem of inequality. 
Indeed, some of those 85 richest people were at the conference: a conference that boasts extremely luxurious conditions. What is more, many delegates flew into the conference in private jets (at least 850 jets) to discuss not just poverty but also climate change!
Yet if the problem of global inequality is to be tackled, much of the power to do so lies in the hands of these rich and powerful people. They are largely the ones who will have to implement policies that will help to raise living standards of the poor.
But why should they want to? Part of the reason is a genuine concern to address the issues of increasingly divided societies. But part is the growing evidence that greater inequality reduces economic growth by reducing the development of skills of the lower income groups and reducing social mobility. We discussed this topic in the blog, Inequality and economic growth.
So what policies could be adopted to tackle the problem. Oxfam identifies a seven-point plan:
|
|
| • |
Clamp down on tax dodging by corporations and rich individuals; |
| • |
Invest in universal, free public services such as health and education; |
| • |
Share the tax burden fairly, shifting taxation from labour and consumption towards capital and wealth; |
| • |
Introduce minimum wages and move towards a living wage for all workers; |
| • |
Ensure adequate safety-nets for the poorest, including a minimum income guarantee; |
| • |
Introduce equal pay legislation and promote economic policies to give women a fair deal; |
| • |
Agree a global goal to tackle inequality. |
But how realistic are these policies? Is it really in the interests of governments to reduce inequality? Indeed, some of the policies that have been adopted since 2008, such as bailing out the banks and quantitative easing, have had the effect of worsening inequality. QE drives up asset prices, particularly bond, share and property prices. This has provided a windfall to the rich: the more of such assets you own, the greater the absolute gain.
The following videos and articles look at the problem of growing inequality and how realistic it is to expect leaders to do anything significant about it.
Videos and podcasts
Income inequality is ‘brake on growth’, Oxfam chief warns Davos France 24, Winnie Byanyima (22/1/15)
Davos dilemma: Can the 1% cure income inequality? Yahoo Finance, Lizzie O’Leary and Shawna Ohm (21/1/15)
Richest 1% ‘Will Own Half The World’s Wealth By 2016’ ITN on YouTube, Sarah Kerr (19/1/15)
The Price of Inequality BBC Radio 4, Robert Peston (3/2/15 and 10/2/15)
Articles
Richest 1% will own more than all the rest by 2016 Oxfam blogs, Jon Slater (19/1/15)
Global tax system can cut inequality The Scotsman, Jamie Livingstone (23/1/15)
A new framework for a new age Financial Times, Tony Elumelu (23/1/15)
The global elite in Davos must give the world a pay rise New Statesman, Frances O’Grady (22/1/15)
New Oxfam report says half of global wealth held by the 1% The Guardian, Larry Elliott and Ed Pilkington (19/1/15)
Davos is starting to get it – inequality is the root cause of stagnation The Guardian, Larry Elliott (25/1/15)
Inequality isn’t inevitable, it’s engineered. That’s how the 1% have taken over The Guardian, Suzanne Moore (19/1/15)
Why extreme inequality hurts the rich BBC News, Robert Peston (19/1/15)
Eurozone stimulus ‘reinforces inequality’, warns Soros BBC News, Joe Miller (22/1/15)
Hot topic for the 1 percent at Davos: Inequality CNBC, Lawrence Delevingne (21/1/15)
Global inequality: The wrong yardstick The Economist (24/1/15)
A Richer World (a compendium of articles) BBC News (27/1/15)
Data
OECD Income Distribution Database: Gini, poverty, income, Methods and Concepts OECD
The effects of taxes and benefits on household income ONS
Questions
- Why has inequality increased in most countries in recent years?
- For what reasons might it be difficult to measure the distribution of wealth?
- Which gives a better indication of differences in living standards: the distribution of wealth or the distribution of income?
- Discuss the benefits and costs of using the tax system to redistribute (a) income and (b) wealth from rich to poor
- Go through each of the seven policies advocated by Oxfam and consider how practical they are and what possible objections to them might be raised by political leaders.
- Why is tax avoidance/tax evasion by multinational companies difficult to tackle?
- Does universal access to education provide the key to reducing income inequality within and between countries?
