Thursday, June 19, 2008

Another realistic individual tells it like it is!

A world of worries to chew on
Ross Gittins
June 18, 2008
Among all the problems besetting us at present, which is the most pressing and most important: the soaring price of oil, the global food crisis, the rise of China and India, or global warming?
Sorry, it was a trick question. When you delve into them you find that three of those problems - rising oil prices, the food crisis and global warming - have the fourth, the rapid industrialisation of China and India, as their most fundamental cause.
It was Marx who famously observed that everything is connected to everything else. If we want to make sense of all the good and bad things the world is doing to us, it helps to see how those connections run. Let me see if I can sketch them for you.
At its most elemental, the world price of oil is rising because demand for the stuff is outstripping supply. Temporary disruptions to supply add to the price from time to time and speculative investment in oil futures contracts by pension funds may be adding to demand - though I wouldn't hold my breath waiting for that price "bubble" to burst.
Existing reserves of oil are running down and not many new reserves are being discovered. But the biggest factor putting upward pressure on the price is the huge growth in demand from China, India and other developing countries. These countries consume half the world's energy and accounted for 80 per cent of the growth in the demand for oil in the first half of this decade.
That growth is almost certain to continue and keep prices rising over the years to come. Martin Wolf, of The Financial Times, summarises the outlook for oil with three facts: it's a finite resource, it drives the global transport system, and if emerging economies consumed as much oil as Europeans do, consumption would jump by 150 per cent.
Next, the global food crisis. Across the world, the basic cost of food has risen by more than half in the past year, with grain prices the worst affected. Rioting over food prices has occurred in more than 30 developing countries.
The most fundamental explanation is that rapid economic growth in China and other emerging economies has raised consumers' purchasing power, generating rising demand for food and shifting food demand away from traditional staples towards higher-value foods such as meat and milk. This dietary shift is leading to increased demand for grains to feed animals.
But this is now a long-term trend and doesn't adequately explain the recent price surge. It's more convincingly explained by the effect of the United States' and other countries' diversion of grains towards the production of ethanol and other bio-fuels, and by the loss of wheat production caused by adverse weather conditions in key production areas, particularly the drought in Australia.

So, China not responsible for the food crisis after all? Sorry, not that simple. Why are the Americans subsidising their farmers to shift into growing maize for ethanol? Because they're reacting to the high price of oil - which would be higher than it is had they not done such a (dubious) thing. Then, of course, we've got the high price of oil adding to the costs of farm production, via transport costs, the cost of mechanical cultivation, and the cost of fertilisers and pesticides. Some dirt-poor farmers have had to give up planting crops.
As for adverse weather conditions, while we can't prove our exceptionally long drought is a product of global warming, there's a fair chance it is.
Quite apart from its effect on oil and food prices, the rapid industrialisation of China and India - the two most populous countries, accounting for almost 40 per cent of the world's population - is an event of huge consequence for all the economies of the world.
When Britain and the United States were industrialising in the 19th century, it took them about 50 years to double their real income per person. China keeps doubling every nine years and India is only a bit slower.
This is shifting the centre of global economic gravity from the developed economies towards the developing economies, which now account for more than half the world's annual production of goods and services.
China's emergence as a major exporter of manufactures has been exerting downward pressure on the world prices of computers, cars, clothing and many other manufactured goods. India is doing something similar for computer-related services.
The export-oriented growth of the emerging economies is adding about 1.5 billion people to the global labour force, doubling its size. This is forcing a lot of painful change in the structure of the developed economies.
As a country that exports mainly primary commodities and imports mainly manufactures, Australia has benefited mightily from China's emergence, in marked contrast to most other developed economies. This year China will overtake Japan as our major trading partner. Even so, our economy is also undergoing painful restructuring.
China's pivotal role in global warming needs to be explained carefully. Greenhouse gases have been building up in the atmosphere for several centuries, taking the stock of gases close to the point of causing irreversible warming. Clearly, the economic activity of the rich countries has contributed the great bulk of this stock, with the contribution of the poor countries being minor.
But when we look at the annual addition to this stock - an addition that's growing faster than we expected just a few years ago - the lion's share is coming from China, not the rich countries. That's because China is so big, its economic growth is much more energy-intensive and its energy use more emissions-intensive.
At the very least, the rise of China and India will continue creating serious adjustment problems for the rest of the world, including us.
At worst, this (eminently fair) attempt to have 40 per cent of the world's population, formerly among the poorest, rapidly approach the material living standards long enjoyed by the richest 15 per cent will bring us to the limit of the environment's ability to absorb economic growth. Doesn't sound like fun.

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