All posts tagged Emerging Economies

South America: The dark side of commodities

Posted by Paula Sánchez de la Blanca / 17th March 2014 / Categories: Analysis / Tags: China, Commodities, Emerging Economies, South America / -

For many, 2013 has been the year of “The Great Deceleration“. Emerging economies worldwide are lowering their expectations. The reasons behind this slow down might be deeper than simply the international economic downturn. The role of raw materials in emerging economies, in combination with short-sighted policy making, made the current situation all but inevitable.

Let’s start with the most obvious example: China. The Middle Empire will be lucky enough if it is currently growing at its official target of 7.5%, which in itself is a far cry from the 10.4% of 2010, and still further away from the 14.2% of 2007. The same is happening to the other BRICS, India (around 5%), Brazil and Russia (around 2.5%) will grow hardly half of what they’ve become used to. Of course, these growth rates might sound miraculous compared to the slothful richer economies, but they represent the slowest speed of the emerging economies in a decade except for the period surrounding the international collapse in 2009. Gone are the days of record-breaking speed in growth rates, and emerging economies’ capacity to play catch-up with their richer counterparts will be limited.

How can this deceleration be explained? If the emerging economies were able to rapidly recover from the financial world crisis of 2009, how is one to understand this relapse? The answer lies precisely in their model of growth. To better understand the height and decline of their boom, it is necessary to consider the role of commodities in some of these economies.

At least, that is definitely the case of South America. According to the Economic Commission for Latin America (ECLAC), South-American economies enjoyed a period of continued rise of commodities prices from the beginning of the century, thanks to demand from other industrializing economies, such as China. These high prices boosted the growth of the region and gave even more incentives to specialize in the export of raw materials. International specialization in commodities can be highly damaging to local economies, both because of South America’s subsequent immersion in globalization, as well as the socio-economic development of these societies.

Starting with the dangers of the dependency on commodity exports, an obvious problem is their volatile price. As extraordinary as they rise, they can collapse just as easily, taking with them the income of the economy that exports them. This makes them a source of instability, reducing their resilience to international economic turbulence. As the demand of raw materials declined, the bubble of their prices bursts This has been the most obvious reason for the deceleration of most commodity-specialized economies.

However, there is more to it than collapsing prices. The focus on commodities endorses a type of structure of national and regional economies that is neither beneficial to their international competitiveness, nor to their internal development.

Firstly, it promotes a weak business chain, with big commodities-exporting companies not incorporating other transformative industries in the process. They do not enhance regional value chains, the key for a beneficial participation in globalization.

Secondly, such specialisation promotes a concentration of large enterprise, crowding-out small-scale companies. At the same time, raw materials business is a low labour-intensive sector compared to other sectors, such as manufacturing. In contrast to other sectors, they are a very limited source of employment. With labour being a key factor in any coherent strategy of economic development, this is a fundamental problem that goes beyond mere export numbers.
Thirdly, it tends to inflate the local currency’s exchange rate, thereby making exports other than the dominant commodities more expensive, and imports cheaper. This “Dutch disease”, as it is known, enhance the concentration on this kind of exports and so the country become finally completely dependent on their primary product exports.

In other words, a commodity-focused exporting economy is not necessarily favourable to socio-economic development. It does not promote significant employment, nor does it guarantee a solid competitive position within the international economy. As a result, it has creates significant weakness, and one that South-American and other emerging countries are suffering from right now.

The verdict would be even more damning if based on other than economic criteria: from a social perspective, commodity focused approaches hurt a wide range of issues such as education, gender equality, and quality of life. For instance, as it requires a qualified labour force, this model will not promote higher education of the workforce; neither high salaries nor good work conditions are encouraged by extractive industries.

It may seem odd, therefore, that political discourse -both from the left and the right- often focus, positively, on the sovereign use of commodities. A topical example is of course Venezuela, i.e. the country with the highest dependence on commodities income, followed by Chile. There are three broad explanations for such destructive political behaviour: short-term economic imperative, political usefulness, and systemic pressures.

Economically, commodities are easily accessible, typically not requiring a highly educated workforce or significant state investments, as financing nowadays can be easily found at an international level. They quickly produce short-term gains, unlike more sophisticated sources for economic growth.

This also explains their political attraction: the boosting of the primary sector often falls neatly into political cycles, offering quick results at the cost of long-term problems. Moreover, the idea of resource independence has historically been an important issue in most societies, and still explains a lot of economically dubious choices governments all over the world make. Natural resources are an easy source of income, especially attractive for “developing” countries. Indeed, they might not require difficult structural adjustments, or large constant investment. Hence, they are often seen as a low cost rapid development.

“Systemic pressures” combines a series of issues related to the allocation of political and economic resources work in practice. These systemic dynamics constitute another dimension of the problem that should not be ignored in the analysis of the actors involved. This includes issues such as corruption –commodities are relatively easily accessed through bribing officials– as well as international network pressures to play the globalisation game.

These factors have allowed the resource curse to be repeated over and over again, especially because of exacerbating conditions around the globe. In the specific case of South America, the role of the emerging China has been such a condition.

In the context of “shifting wealth” to Asia, an important part of the industrial production has moved to this region, especially to China. From there, increased demand for raw material emerged and as a result has been one of the main reasons behind the rising prices of commodities in South America. Exports from Latin America to China tripled from 2000 to 2007, simultaneously to China’s direct investment multiplication in the region. Quite representative of this optimistic trade attitude was the forum “Going to Latin America” that was held last month in Guangdong.

Furthermore, business with China has been enhanced by the desire of emancipation from the Western influence. Whether this desire materializes through direct anti-United States discourse (such as the case of Bolivia), or whether this emancipation happens through a pragmatic attitude of diversification of allies, there is a powerful pull away from dependence on Europe and the United States. The result has been the growing presence of China and its commodities demands in South America.

For both left and right oriented governments, China is seen as a pragmatic actor, mainly relevant because of its economic weight. Besides some isolated complaints of interference, South Americans do not tend to see it as a threat. South American governments seem not worried about its global ambitions, and from a political perspective China has indeed treaded lightly thus far.

The main concern in Latin American capitals has been the deceleration of the Chinese economy during this past year, and its direct effects on local economies. However, the real problems lie deeper. China’s role in South American economies commodity dependence has a dark, destructive edge, and should be recognised as such. Treating development as a short term strategy will only have damaging long term consequences.

Emerging Economies: Finding a Balance Locally as well as Globally

Posted by Ricardo Lenoir-Grand Pons / 18th November 2013 / Categories: Opinion / Tags: BRIC, Emerging Economies, IMF, World Bank / -

Economic growth of so-called emerging countries has not always brought about the desirable and necessary development and strengthening of social and civil rights, nor the consolidation of their democratic systems. Alongside this, the reluctance of some Western countries in view of the increasing number of competing economic high-performers in the international arena has hindered their efforts in the path of human development. High economic growth of emerging countries has been achieved by a combination of cheap labor with easy access to credit, resulting in lower production costs, a dramatic increase in foreign demand for their industrial products and commodities and the expansion of their domestic markets. The other side of the coin is the challenges that are still pending: a proper separation of powers, the protection of minorities, a greater respect for social rights and a better distribution of wealth. The wealth of a country goes far beyond economic growth.

Emerging countries have been labeled in a number of ways, ranging from BRIC and CIVETS to EAGLES. Within the first group there is China, the indisputable leader of all charts, a giant whose power has become a model for many, not only economically but also politically. It also contains Brazil, an dynamic and quickly growing economy still marred by significant social and economic inequalities. The second group, lagging far behind the first, is a heterogeneous and troubled group that includes Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Within this framework we find some strengths and weaknesses related to economic and social development: since the new round of peace talks in Colombia, the “narco” wars seen to have subsided; Indonesia and Vietnam keep growing in the shadow of China, well integrated into global production chains; and yet the military coup in Egypt or the tense climate of social conflict in southeastern Turkey remind us that economic indexes seldom reflect the wealth and well-being of a country.

The social inequality that can be found in these countries has an interesting parallel with the inequality among nations at an international level. Unequal power sharing between rich and poor is also on full display when it comes to global arrangements. Regardless of the relative power of each of those countries, all of the emerging economies have high hopes of increasing their presence in international decision-making bodies such as the G-20. And this is precisely where a controversy has arisen after the US refused to accept the new rules to ensure a balance between Western and emerging countries, which has forced the International Monetary Fund President Christine Lagarde to urge “countries to fulfill their commitment to expeditiously implement this reform.”

This reform adopted and approved by the G -20 directly affects the composition and functioning of the Bretton Woods institutions. In the case of the IMF, new financial lines have been created and its resources have increased, but with greater supervisory powers. But most importantly, the reform introduces changes in the IMF’s governance, aiming to increase the legitimacy of the institution by adapting the voting system, taking into account the actual economic weight of each country, which benefits the emerging economies that have grown considerably in recent years. As for the World Bank, the changes were inspired by the “Zedillo Report” and are generally in line with the IMF’s: more resources and new financing and an important economic governance reform with greater representation for the Emerging Countries and Least Developed Countries. Overall, developing countries have increased by 50% their basic votes in this institution. Another sign of change is that the Executive Board has reserved a seat for the first time in history for a sub-Saharan African country. However, other urgent measures have not even been pinpointed yet, such as improving and strengthening the monitoring mechanisms to forecast financial crisis, or appointing citizens of countries other than European ones (IMF) or the US (World Bank; Jim Yong Kim is Korean-born American after all) for the top positions of these institutions. Consequently, while on paper the recent support measures have been applauded by the emerging powers, in practice there is still a long way to go in recognizing their political legitimacy.

Two news items found on 22nd October in the media serve to illustrate the situation. The first, published by financial newspaper Expansion CNN, reads that “despite the rapid growth of developing economies in the last decade, advanced economies still dominate the lists of the largest corporations in the world, representing 75% of companies of the Fortune Global 500 this year, and totaling 91% if we exclude state-owned enterprises”. Meanwhile, on that same day Russian Prime Minister Dmitry Medvedev declared in Beijing –as to add extra symbolism to his words- that: “If China, India, Brazil, South Africa and Russia cannot contribute to the stable development of the world economy, nothing will “.

Emerging countries are close to completing the conversion of their economic systems, but have yet to take a final step to solve domestic problems of capital importance such as the full recognition of basic rights and a fairer distribution of wealth. Meanwhile, the West provides them with the tools to participate in international trade, complying with the norms of liberal trade theory, but hypocritically keeps impeding- if not denying their right- to access decision-making positions that match their economic size. This is why further reforms undertaken in the G -20 should take the first step to fulfill two objectives: promoting structural reforms within emerging economies and finding a better balance between their economic weight and their political representation at an international level. Only this will ensure sustainable growth among both local populations and the global community.