Lower Oil Reliance Insulates World From 1970s-Style Crude Shock
The war in Ukraine and sanctions on Russia are causing substantial economic spillovers, notably for energy.
Oil prices have climbed, but increases have largely been contained thanks to spare production capacity in some countries and strategic petroleum reserves in others.
Brent crude, the global oil benchmark, rose to a 7-year high around $100 before the invasion sent it surging to more than $130.
It has since pared gains amid pandemic lockdowns in China, the biggest oil importer, that may weigh on economic growth there.
For some, rising oil prices may echo the 1970s, when geopolitical tensions also caused fossil fuel prices to spike.
Memories of the high inflation and slow growth that followed—known as stagflation—have fueled concerns about a possible repeat.
Importantly, though, times have changed.
As the chart illustrates, the world relies less on oil, easing any potential shocks.
Economists track oil intensity by comparing how many barrels are needed to produce $1 million in GDP, and this measure was about 3.5 times higher than current levels when crude prices almost tripled between August 1973 and January 1974.
Another factor is today’s generally lower prevalence of wage-setting mechanisms that automatically adjust worker pay based on inflation.
This reduces upward pressure on prices.
Central banks, too, have changed since the 1970s.
More are independent today, and the credibility of monetary policy has broadly strengthened over the intervening decades.
The IMF expects global growth to be close to the pre-pandemic average of 3.5%, even after the April World Economic Outlook lowered growth projections, but it still could slow more than forecast, and inflation could turn out higher than expected.
This may be most salient for parts of Europe, given their relatively higher reliance on Russian energy imports.
This article first appeared here.
What are the most produced cash crops in Africa?
Agriculture makes up nearly 20% of Sub-Saharan Africa’s economy – a higher percentage than any other region worldwide.
From Nigeria to the fertile land across the East African Rift Valley, the continent is home to 60% of the world’s uncultivated arable land.
Given the massive role of agriculture across the region, this infographic from Zainab Ayodimeji shows the most produced cash crops in Africa and their share of total global production.
The Top 20 Cash Crops in Africa
Cash crops, such as coffee or rice, are crops that are produced for a salable market.
With data from the Food and Agriculture Organization Corporate Statistical Database (FAOSTAT), here are the most produced cash crops in Africa:
Cassava, also referred to as yuca, is the most produced cash crop by a wide margin.
With nearly 200 million tonnes of it produced annually, Africa’s production of cassava makes up a majority (63%) of the global total.
While cassavas are not well known in the Western world, they feed 800 million people globally.
Cassavas are an essential root vegetable that has similar uses to potatoes.
Sugar cane, maize, and yams are also significant cash crops.
Notably, Africa’s yam production is 97% of the global total.
West Africa is known as the “yam belt,” covering Nigeria, Ghana, Benin, and Côte d’Ivoire.
With over 60 million people across the yam belt directly or indirectly involved in its production, yam cultivation is an important component of the region’s economic vitality.
This article first appeared here.
Russia’s invasion of Ukraine could upend fiscal and monetary policy in advanced economies
Russia’s invasion of Ukraine is an unmitigated catastrophe for global peace and particularly for peace in Europe. But the war also greatly compounds a number of preexisting adverse global economic trends, including rising inflation, extreme poverty, increasing food insecurity, deglobalization, and worsening environmental degradation. In addition, with an apparent end to the peace dividend that has long helped finance higher social expenditures, rebalancing fiscal priorities could prove quite challenging even in advanced economies.
To begin by stating the obvious, war-torn Ukraine is in a state of severe economic distress. In addition to the destruction of physical capital, millions have fled the country, and countless thousands have been killed or maimed. This comes on top of a generalized rise in economic distress around the world as a result of the COVID-19 pandemic. According to the World Bank, the number of people living in extreme poverty rose by roughly 100 million to nearly 700 million; a significant share live in conflict regions.
For the global economy, fuel and food shortages caused by the war are exacerbating post-pandemic inflation that had already reached multi-decade highs in most of the world. To say that the causes are well known would be an exaggeration given that the ultralow inflation of the 2010s still puzzles academic macroeconomists. But the main drivers are apparent. First, governments and central banks were slow to unwind unprecedented peacetime macroeconomic stimulus. Certainly, record early stimulus greatly helped cushion the first stage of the pandemic, but in some cases, it persisted too long and proved excessive after the unexpectedly sharp rebound in advanced economies and some emerging markets. In the United States, in particular, the combination of a $900 billion fiscal stimulus at the end of 2020 followed by a $1.7 trillion package in March 2021 proved too much, too late.
Supply chain disruptions have also been a major contributing factor to inflation, although some of the strain on supply should really be traced to the sudden surge in demand. Across advanced economies, more than half (including the United States and the euro area) had inflation rates of over 5% even before hostilities, so that the war made an already difficult situation worse. Prior to the conflict, Russia and Ukraine combined accounted for a quarter of global wheat exports, and Russia is a major supplier of fossil fuels, especially to Europe. Disruptions to supplies of these commodities are driving up prices.
Rising rates
How much central banks will ultimately have to raise interest rates, and how long they will stay up, is a major question. The central prediction of Federal Reserve officials is that they will take the federal funds rate up to 2.75%, from near zero in January. The first hike of 0.25% already came in March, and the Fed also expects a fast-paced reduction in the size of its massive balance sheet. Markets seem to have great confidence that the combined effects of these actions will be enough, and that there will be a smooth landing for the overheated economy. Notably, as of the first week of April, five-year forward inflation expectations stood at just under 2.4%, no higher than in early February 2018 and almost half a percentage point lower than a decade earlier. Moreover, market expectations are that the interest rate hikes will be distinctly transitory, with the Treasury yield curve “inverting,” so that short rates are higher than long rates.
But this sanguine view understates the significant risk that prolonged high inflation will be destabilizing. True, for the moment, wage increases trail inflation in many countries, even in tight labour markets, suggesting that central bank credibility remains strong, even outside financial markets. But as high inflation persists, there is an acute risk that central bank credibility will erode, and it could prove difficult to put the inflation genie back in the bottle.
Central bankers are keenly aware of the risk of losing their inflation anchor, but they also need to worry about causing a major recession. Another challenge is that public and private debt levels are vastly higher today than they were during the last advanced economy tightening cycle in the 1980s, and a sharp monetary tightening could destabilize debt dynamics, which have otherwise been usually benign for the past decade.
For fiscal policy, the short-term implications of the Ukraine war for advanced economies are quite modest compared with those of pandemic-era stimulus programs. However, the cumulative long-term effects of a fading peace dividend could prove larger than most governments have so far acknowledged. Europe, for example, could easily end up raising defense spending by 1% of GDP annually, if not more. If that happens, the resulting costs will likely exceed even the ambitious, €807 billion NextGenerationEU stimulus during the pandemic. And that does not count Europe’s eventual contribution to rebuilding Ukraine, which could amount to €100 billion or more.
Since the fall of the Berlin Wall in 1989, the United States has been able to shrink its military budget by 3% of GDP, more than enough to cover all of today’s government spending on nondefense consumption and investment. The Biden administration’s original goal of further shifting military spending to social programs is already on hold, and it is a fair guess that over the next few years, the United States will end up raising military spending by a similar amount to Europe. Meanwhile, the chaotic US retreat from Afghanistan and the horrific spectacle of war in Ukraine have many other countries reevaluating their defense needs.
Deglobalization risk
Risks of deglobalization have also risen markedly since the invasion of Ukraine. Already after the start of the pandemic, there was much discussion of making supply chains more resilient and trying to rely less on imports for public health necessities such as vaccine and antibiotic production, not to mention the semiconductors that are the foundation of the digital economy. The exit from Asia’s zero-COVID policies is still increasing supply disruptions, providing a glimpse of what temporary deglobalization could look like.
Russia, of course, looks set to be isolated for an extended period, but the real hit to globalization will happen if trade between advanced economies and China also drops, which is unfortunately possible in some scenarios. A major realignment of the global economy can hardly be good for geopolitical stability. Since Montesquieu, political economists have argued that countries that trade with each other are less likely to go to war, with the main modern nuance being that indirect trade through common partners and networks also helps.
In the near term, deglobalization would surely be a huge negative shock for the world economy. Whether long-term effects could be as severe is less well understood. The substantial trade literature on this topic yields surprisingly (to me) small estimates. Canonical quantitative trade models yield an estimate of about 2–3% lower GDP for the United States and perhaps 3–4% for China. The baseline numbers are similarly modest for financial globalization.
Importantly, these rough guesses depend on myriad assumptions, including how easily countries can substitute domestic for imported goods or trade with other partners. Moreover, to the extent that trade deglobalization leads to higher markups by local monopoly suppliers, and less “creative destruction” in the economy, the costs can be significantly higher. And globalization may have dynamic effects that existing models do not take into account, not to mention positive effects on a country’s institutional development. Also, just as there can be big losers from globalization even if the winners gain much more, the effects of deglobalization are likely to hit some sectors much harder than others, which can in turn amplify the aggregate effects.
Returning to inflation, there is a strong case to be made that globalization is the secret sauce that made the job of bringing down inflation immensely easier in the 1990s and 2000s, so that deglobalization could easily exacerbate upward inflation pressures for an extended period. Recently, Charles Goodhart and Manoj Pradhan forcefully argued that adverse demographics in east Asia and eastern Europe will persistently increase global price pressures, just as the rise of China has been a disinflationary force. I made a similar argument in my 2003 Jackson Hole conference paper, “Globalization and Global Disinflation,” saying that while the advent of central bank independence helped, it cannot be given all the credit for the decline in inflation in the 1980s and 1990s.
Perhaps the most important macroeconomic lesson today is that in crafting responses to the latest major macroeconomic shock, whether it be the financial crisis, the pandemic, or now war in Europe, policymakers (not to mention academic economists) must remember that although things usually get better after a catastrophic shock, they can also get much worse. Thus monetary and fiscal policy need to incorporate resilience, and not just the maximalism that has become fashionable of late.
This article first appeared here. https://www.imf.org/en/Publications/fandd/issues/2022/03/the-long-lasting-economic-shock-of-war
The economic spillovers of the Russo-Ukrainian war
The war in Ukraine and sanctions on Russia are causing substantial economic spillovers, notably for energy.
Oil prices have climbed, but increases have largely been contained thanks to spare production capacity in some countries and strategic petroleum reserves in others.
Brent crude, the global oil benchmark, rose to a 7-year high around $100 before the invasion sent it surging to more than $130. It has since pared gains amid pandemic lockdowns in China, the biggest oil importer, that may weigh on China’s economic growth.
For some, rising oil prices may echo the 1970s, when geopolitical tensions also caused fossil fuel prices to spike.
Memories of the high inflation and slow growth that followed – known as stagflation – have fuelled concerns about a possible repeat. Importantly, though, times have changed.
As the chart illustrates, the world relies less on oil, easing any potential shocks.
If you track oil intensity by comparing how many barrels are needed to produce $1 million in GDP, this measure was about 3.5x higher between in 1973 – 1974 (when crude prices almost tripled) than current levels.
Another factor is today’s generally lower prevalence of wage-setting mechanisms that automatically adjust worker pay based on inflation. This reduces upward pressure on prices.
Central banks, too, have changed since the 1970s. More are independent today, and the credibility of monetary policy has broadly strengthened over the intervening decades.
The IMF expect global growth to be close to the pre-pandemic average of 3.5%, even after they lowered global projections, subsequent to the Ukraine war, but it still could slow more than forecast, and inflation could turn out higher than expected.
This may be most salient for parts of Europe, given their relatively higher reliance on Russian energy imports.
Invitation | AGOA webinar | No more AGOA after 2025?
You are invited to a webinar on AGOA (African Growth and Opportunity Act).
The 3rd in our series of webinars with Access Bank South Africa is taking place next week.
My colleague and global trade expert, Donald MacKay, will discuss AGOA, and the risk of South Africa losing our preferential trade access to the USA market.
Join us next week Tuesday, 17 May 2022 at 10:00.
To register, click here:
https://bit.ly/XA_NoMoreAGOAWebinar
This will be the 3rd webinar in the series.
- A recording of the 1st webinar (Trade in Services in Africa) can be viewed here:
youtube.com/watch?v=8EHYmaeWtZM
- A recording of the 2nd webinar (Impact of the War in Ukraine on Trade in Africa) can be viewed here:
youtube.com/watch?v=7yQXvcR2eF4