by Richard Gowan | Nov 30, 2011 | Cooperation and coherence, Economics and development, Europe and Central Asia
A new report from ECFR on Russia makes startlingly depressing reading:
- The economic crisis has exposed a governance crisis inside Russia: even Putin now admits that as much as 80% of Kremlin orders have been ignored in the regions. Instead of modernising, Russia in 2010 was as corrupt as Papua New Guinea, had the property rights of Kenya and was as competitive as Sri Lanka.
- The crisis has also prompted a foreign policy rethink inside Russia: Russia is now aiming for a low cost sphere of influence in the post-Soviet space and is increasingly nervous about China.
The report claims that, having tried to project itself as an equal to Brazil, India and China, Russia is now entering a “post-BRIC” phase defined by deep pessimism about its future prospects. The report repays very close reading.
by Mark Weston | Nov 30, 2011 | Economics and development
Doug Saunders of Canada’s Globe and Mail has an interesting post on whether the economic boom that lasted from the early 1990s to the late 2000s was worth it. He concludes, on the basis of incomes, home ownership rates and household debt in the US, Canada and Europe, that ‘in the countries that kept a lid on consumer and mortgage lending, the economic boom was worth all the hype. Everywhere else, it was like a bad dream.’ By this analysis, only France, Canada and Germany have reaped sustainable rewards.
But what if we take a wider view? In a globalised world, it is not only recessions and financial crises that cross borders, but also goods, money, people and knowledge. As global trade, aid and migration have increased in the past two decades, at least some of the economic benefits of the boom are likely to have had impacts beyond the borders of North America and Europe.
So how are things looking on a global scale? Was the boom worth it for the world as a whole? Well, so far, emphatically yes. Take poverty for example. As David showed on here a few weeks ago, world poverty has plummeted – from over 40% of the population in 1990 to just over 20% today. Or look at life expectancy – another key aspect of quality of life and one which you would expect to improve as economic growth helps people and countries pay for health care and better diets. That too has improved, by a massive five years worldwide since 1990. And in education, increases in which will help countries to maintain in the long-term their advances in other areas, the number of children who are out of school worldwide has shrunk by a third in the past two decades.
Of course, it’s much too early to predict whether all or any of these improvements will survive the current crash (let alone the environmental damage that has gone hand in hand with growth), and it’s difficult to disentangle the effects of the boom from the effects of, say, better governance in poor countries. But it’s also too early to say the boom wasn’t worth it. The world is a much wealthier, healthier and more knowledgeable place today than it was before the boom started, and even if stagnation takes hold and there are no further improvements in the imminent future, many people will still be in a better place than they were 20 years ago. It seems unfashionable to be pleased about anything in today’s gloomy atmosphere, but taking a global perspective is a cause at least for temporary cheer.
by David Steven | Nov 29, 2011 | UK
“It is disappointing that the country cannot liberate itself from the desire to subsidise borrowing to finance house purchases,” complains Martin Wolf in his review of George Osborne’s autumn statement. “Why should the government subsidise people to speculate on property prices?”
Wolf fails to understand the logic of the new policy. It’s not the first time buyer who is really being subsidised by mortgages backed by the British government. They are simply entering an overpriced market, and taking on debt that will strangle some of them in what Wolf expects to be a ‘lost decade’.
Instead, it is those who are exiting the market who will benefit if the Chancellor’s largesse succeeds in propping up prices – that’s the elderly who are dying and passing on the proceeds from a house sale to their children (who tend to be in late middle age), or the baby boomers themselves as they downsize in preparation for retirement.
Any government policy that keeps house prices artificially high benefits the old not the young. Of course, banks will do quite nicely from government-backed 95% mortgages as well – they can relax lending standards and we all know where that leads.
by David Steven | Nov 29, 2011 | Economics and development, UK
I remember being astonished by the rose-tinted specs donned by the UK’s Office of Budget Responsibility (“independent and authoritative analysis of the UK’s public finances”) as as it was created in the run up to the 2010 budget:
We expect the economic recovery to strengthen in 2010 and beyond, as private sector demand continues to pick up. We estimate that trend output will grow at just over 2¼ per cent over the next three years…
From 2011 onwards, GDP is expected to grow at an above-trend rate as the economy rebalances away from consumption towards investment and net exports.
That worked out well, didn’t it? Here’s a graphic showing how badly the OBR got it wrong (Datablog has an interactive version).
Each of the OBR’s forecasts – including the one released today for George Osborne’s autumn statement – has been markedly less optimistic about the near term than its predecessor, while continuing to be sure things will look a lot better in just a few years’ time.
Initially, I put the OBR’s eagerness to please the government down to weak leadership and expected things to improve when the fearsome Robert Chote took charge of the new body. But, if anything, they have got worse. Here’s the OBR’s latest fan chart which shows how bad (good) things could be fir the UK economy, based on errors in previous Treasury forecasts. Looking at it and you’d conclude that – worst case – the UK might lose 2% of GDP next year (dreadful, but nothing like as bad as 2008):
The OBR also makes a big deal of how important it is to “recognise uncertainty” and to “stress test” its assumptions. One stress is (surprise, surprise) further turbulence in the eurozone:
Our central forecast is predicated on the euro area finding a way through its current difficulties, with the effect on confidence, credit conditions and economic activity taking some time to unwind, but with the financial sector returning to a stable position by the start of 2014. In this scenario we consider the implications of the financial sector taking longer to normalise (for reasons either to do with events in the euro area or with domestic factors).
The central prediction, then, is for a two-year quick fix for the euro, which seems highly implausible to me. What about the downside? All we get is a scenario that models “persistent tight credit conditions… for reasons either to do with events in the euro area or with domestic factors.” And that leads to… a blip. Growth is totally unaffected next year (GDP up 0.9%) and is only very slightly lower in the next two years (GDP up 1.6% and 2.3%). After that, life is back to normal.
At a time of maximum danger for the UK economy, we have a fiscal watchdog whose ‘stress’ tests are ludicrously unstressful, because anything harsher “is impossible to quantify in a meaningful way.” It’s like a doctor who suspects her patient is dying of cancer, but focuses on his ingrowing toenail because it’s “easier to see.”
George Osborne promised us a body that would reassure the public. Instead, the OBR has persistently failed to model the forces tearing the British economy apart. His new creation risks becoming a laughing stock if it doesn’t quickly mend its ways.
by Jules Evans | Nov 28, 2011 | Europe and Central Asia
I was dismayed to read the Telegraph’s account of the Foreign Office’s forward planning for the collapse of the eurozone. Apparently, ministers are telling embassies to expect riots on the continent, and a flood of British citizens heading home for Blighty, in tubs and dinghies and pedalos. There was cheeriness from the FT’s Wolfgang Munchau as well, who wrote on Monday, in an upbeat piece called ‘The Eurozone only has days to avoid a collapse’:
If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse. Even then, there is still a risk of a long recession, possibly a depression.
The Guardian’s political blog tells me the Treasury is already ‘hard at work’ on a contingency plan:
They are losing sleep over fears of a run on the banks in Italy and some of the other troubled eurozone members. This is what one Treasury source told me: “The five to midnight scenario will be a run on the banks in Greece, Italy and Portugal. Spain is fine. There is already a drawdown from banks. But we haven’t got to a run on the banks yet.” [Why is this official so confident that ‘Spain is fine’?]
So what will happen if the unthinkable occurs and the eurozone does collapse? I’d like YOU, the well-informed Global Dashboard community, to tell me, so I can prepare in my London bunker.
Here are my rash predictions:
1) The further rise of far-right nationalist political parties and xenophobia towards immigrants. You’re already seeing this happen in Greece.
2) The Russian government exploits the power vacuum. I’m not saying Russian tanks will be rolling down the Champs Elysees anytime soon. But one of the main ‘points’ of Europe, it seemed to me, was to act as a collective bargaining bloc with Russia, and as a collective buffer against Russia’s imperialist ambitions. What happens when that buffer disintegrates? Keep an eye on the EU’s eastern border next year, particularly Ukraine, Belarus and Georgia.
Any other predictions?
