by Alex Evans | Jun 2, 2008 | Climate and resource scarcity, Economics and development, Global system
Here’s a question I’ve been wondering about for a while now. Just how much of an impact are soaring oil costs having on international trade through making it more expensive to ship freight? And if oil costs keep rising – to $200 and beyond, say, as some analysts reckon could happen by the end of the year – is there a risk that transport costs could in effect start to roll back globalisation’s relentless advance over the last few decades?
Last week, courtesy of John Robb, I found the first serious attempt I’ve yet come across to answer that question, from Jeff Rubin and Benjamin Tal (both at CIBC, an investment bank) – see pdf here (scroll down to page 4). And it’s pretty powerful stuff, right from the first sentence, which says bluntly: “Globalisation is reversible.”
The authors say that every one dollar rise in world oil prices translates into a one per cent rise in transport costs. And as freight costs rise steadily upwards, they argue, what’s in effect happening is a de facto reversal of the tariff reductions that have been painstakingly negotiated in international trade rounds.
Back when oil prices were $20 a barrel, they explain, transport costs were the equivalent of a 3% US tariff rate. But at $150 a barrel – just $15 or so higher than oil today – the equivalent tariff rate goes up to 11% – “going back to the average tariff rates of the 1970s”. And $200? “We are back at ‘tariff’ rates not seen since prior to the Kennedy Round GATT negotiations of the mid-1960s.” So with this kind of economic impact, the authors continue, markets will seek shorter, and hence less expensive supply lines – which is “precisely what we have witnessed in response to past OPEC oil shocks”.
Now think about what this means for economies that – like China and India – have emerged by exploiting their cheaper labout (albeit that wage costs have more recently been rising sharply in both countries). China’s steel exports to the US, they say, are now falling by 20% on a year-on-year basis – and they think that’s not only because of the slowing US economy, but also because cheaper Chinese labour is starting to be offset by the sheer cost of transporting the steel across the Pacific. Bottom line:
“In a world of triple-digit oil prices, distance costs money. And while trade liberalisation and technology may have flattened the world, rising transport costs will once again make it rounder.”
Although Rubin and Tal don’t get into the effect on food prices specifically, the drivers they discuss are profoundly relevant for the longer term food outlook. More on that in a future post.
by Alex Evans | May 30, 2008 | Climate and resource scarcity, Conflict and security, Economics and development
Next week, the UN is holding a major summit on food security in Rome – I’ll be there throughout (and blogging regularly on what goes on). Ahead of the kick-off, I’ve updated the Global Dashboard page on where to get briefed on food prices, and put out a scene-setter press release through Chatham House that sets out a few thoughts on what the summit needs to achieve.
This week’s already seen a couple of new items on food prices that are worth a look, starting with a new annual FAO / OECD outlook report – which this year looks all the way out to 2017. It finds that although prices will come down in the short term (which you already knew, since you read it here on Global Dashboard on March 18th), nominal prices over the medium term will remain “substantially above” levels over the last ten years. In other words, it’s not just a blip.
Also worth a look is World Bank President Bob Zoellick’s ten point plan for food prices, published in the FT this morning. His article confirms that he’s well ahead of the curve on understanding the need for an integrated approach to scarcity issues:he says collective action is needed on “the interconnected challenges of energy, food and water [which will be] drivers of the world economy and security”. (I’ll be publishing a paper on how the multilateral system needs to be reformed to cope better with scarcity issues just before the G8 in early July.)
What will actually happen at the summit is currently anyone’s guess. It’s fair to say that FAO haven’t been very proactive in briefing the media on likely outcomes or what they’re hoping for, which puts them in the rather hazardous position of allowing high expectations to emerge without really managing them. Another risk is that a major spat over biofuels could erupt: Ahmadinejad and Chavez will both be at the food summit, and would like nothing better to embarrass the US over its support for ethanol – and while US subsidies for corn-based ethanol are certainly problematic, it’s hard to see these particular interlocutors opening up much political space on Capitol Hill as legislators contemplate the Farm Bill.
But on the upside, great progress has been made on financing the immediate humanitarian needs (after Saudi Arabia stunned everyone by coming up with half a billion dollars last week – a coup for WFP head Josette Sheeran and for UN Emergency Relief Coordinator Sir John Holmes, who’s invested much time encouraging Gulf countries to contribute). This, together with the prospect of some short term relief on prices, gives policymakers a chance to look ahead towards the longer term challenges as well as short term crisis management.
It’s also hard to remember a time when the UN system and the international financial institutions have worked together as closely or as effectively as they seem to have been doing on the UN’s food task force – a great story, given how fragmented the international system usually is, but one that’s gone largely unreported. Even so, the real work in pulling together the longer term agenda is still in front of us…
by Alex Evans | May 29, 2008 | Climate and resource scarcity, North America
You’ve heard of greenwash. Now: cornwash! A firm called Abengoa Bioenergy has a full page advertisement in today’s FT, which begins thus:
Manipulation: Bioethanol is the main cause of increased food prices.
Evidence: The main factors of the staggering cost of food are a shift in the Asian diet … and the current price for oil…. In fact, it is estimated that the impact of biofuels on cereal prices will only be in the range of 3% to 6% as compared to 2006 prices.
Where to start? Well, maybe with the point that their advert rests on attacking a straw man. Hardly anyone would disagree that high income growth, leading to changing diet patterns, is the single largest driver of rising prices.
What the advert doesn’t say is that most analysts would also put biofuels as the second largest. Opinion varies as to how much of the food price rise over the last three years is down to biofuels; FAO reckon 15-20%, while IFPRI reckon it’s more like 30%. (I know of at least two experts in the World Bank who’d argue privately that the figure is somewhere between 50% and 70%.) Here‘s one of the authors of FAO’s latest World Food Outlook report:
Biofuels are the largest new source of demand for agriculture and are causing higher prices. We are very worried particularly about biofuel policy. US government incentives for ethanol producers are distorting the market.
True, not all biofuels are problematic. Second generation biofuels like cellulose are great, though not commercially viable yet. Jatropha looks promising. Ethanol from sugar may yet prove sustainable.
But as the 5th largest producer of bioethanol in the US, Abengoa’s one of the prime beneficiaries of subsidies for corn-based ethanol – which, despite being on track to hoover up a whole third of the US corn crop this year, is nonetheless one of the biofuels that from a food security or climate viewpoint alike just makes no sense: for the amount of corn it takes to fill up an SUV with ethanol, you could feed a person for a year.
by Alex Evans | May 28, 2008 | Climate and resource scarcity, Economics and development
A couple of weeks ago, I wrote a post noting that the global food prices debate was hallmarked by three competing schools of thought on trade contesting food as a key battleground. One schools thinks liberalisation is the answer (think World Bank). A second reckons self-sufficiency is the way forward (think 1970s import substitution). A third likes long-term bilateral contracts (think of China’s approach to securing energy food supplies). But as I wrote at the time, it seemed to me that the none of these three approaches really offered a complete answer.
Talking to friends at NGOs recently, it seems they think so too. But that’s not to say that they’ve got a fully worked-up narrative yet either.
Back in 2005, during the heyday of Make Poverty History and the One Campaign, the mainstay of development NGOs’ policy agenda on trade was something called “policy space“. In a nutshell, policy space was an argument that developing countries should have the freedom to set their own trade rules rather than have liberalisation, or any other standardised approach, forced upon them: they should have the ‘space’ to determine their own policy in other words.
Fast forward to today, though, and the policy space narrative is starting to look in need of renewal – for three reasons.
The first is that arguments about policy space are fighting the last war. NGO activists love to saddle up to fight the evil Washington Consensus, with its dark plans of forcing privatisation, liberalisation and other ills on hapless low income countries. Just one problem: the Washington Consensus ended 15 years ago. Today, the idea that NGOs did so much to champion back then – that there are no one-size-fits-all answers in development – has gone mainstream.
Secondly, the policy space argument is silent about the trade issue that is at the top of developing country governments’ in-tray: security of supply. On food, energy and other commodities, the big worry this year is about scarcity of strategic resources – and as the Philippines discovered this year when its rice supply chains sputtered, all the policy space in the world is no use if the goods you need aren’t for sale.
Finally, arguments in favour of policy space rest on the problematic assumption that if only developing countries were free to take their own decisions, everything would be fine. But what about when developing countries use their policy space to take decisions that are extremely problematic for other poor countries – for instance when Argentina, Kazakhstan, Vietnam or India decide to reduce or suspend exports, leaving other countries (like the Philippines) in the lurch? Policy space has lots to say about developing countries’ rights, in other words – but what about their responsibilities?
While there’s no shortage of specific ideas and policy proposals in the trade context that can help to move things forward on the food prices agenda, what’s still lacking is a narrative that set out the basic approach.
by Alex Evans | May 19, 2008 | Climate and resource scarcity, Economics and development, Global system
What can you do but shake your head in wonderment at the debacle over the UK government’s £800m Environmental Transformation Fund? As John Vidal reported in the Guardian on Saturday, the initial idea seemed such a good one:
The UK environmental transformation fund was announced by the prime minister to international acclaim in November 2007, and was widely expected to be made in direct grants to countries experiencing extreme droughts, storms and sea level rise associated with climate change
But now, a small detail has emerge: the Fund’s cash is in fact loans rather than aid – so they’ll have to be repaid with interest by developing countries. Odd, then, that Gordon Brown forgot to say so when trumpeting the Fund in his climate speech last year, and that International Development Secretary Douglas Alexander also overlooked it when he came to CIC to speak on climate change last month.
As the Guardian reports, it seems the problem lies not with DFID or Defra, but with the Treasury, which overruled both departments. This makes it astonishing that Chancellor of the Exchequer Alistair Darling should have co-authored an FT comment piece on the Fund with US Treasury Secretary Hank Paulson back in February – which said nothing whatsoever about loans, instead giving a clear impression that the money would be given as grant aid.
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