Who knows where the cold wind blows?

A volcano erupts in Iceland and thousands of Kenyan farm workers lose their jobs. An oil rig sinks in the Gulf of Mexico, and retirees in Britain could see their pensions cut. Globalisation and interdependence aren’t just slogans.

The Kenyans were working for companies that export flowers to Europe using airfreight. The 500 tonnes of flowers exported daily brought in 71 billion shillings last year (around $900 million) making horticulture the country’s main foreign exchange earner, ahead of tourism at just over 50 billion shillings.

Kenya is only one of many countries pushing non-traditional agricultural exports. The idea is to integrate the global economy by exploiting improved communications and marketing networks and the large numbers of customers for out of season and exotic products in developed countries.

One way of looking at this is that everybody wins – one partner gets income and development opportunities, the other gets cheap luxuries. When things go wrong though, the risks are very unevenly shared. It’s one thing to go without fresh flowers or pineapples, another to have no job.

Exporters rely on cheap transport, and that in turn needs oil. The IEA chief economist has repeatedly warned that “we need to leave oil before it leaves us”. In the meantime though, the search is intensifying for new sources and ways to squeeze the last drop from existing ones. That’s why US President Obama lifted the ban on drilling in certain parts of the Gulf and elsewhere, and why companies like BP that exploit the resource are among the world’s richest firms.

Oil prices and the profits of oil companies fluctuate, but in the long run, they’re seen as a sound investment, making them attractive to pensions funds. Funds based in the UK invest heavily in BP (and earlier this month backed BP management against a campaign by NGOs concerning oil sands developments in Canada ).

Around $24 billion has been wiped off BP’s market capitalisation (over $170 billion before the accident), and the estimates of $2 to $3 billion for cleanup are huge, but not crippling for a company that size. BP will probably recover long before the Gulf coastline does if history is anything to go by. Exxon shares outperformed the market as a whole and the oil industry following the Exxon Valdez disaster in 1989.

We’ll look in more detail about a number of the issues raised here in forthcoming Insights books. Global agriculture is discussed in “Feeding 9 Billion People”, while From Crisis to Recovery will have a chapter on pensions and financial markets.

While Stocks Last has a chapter on fishing and the environment, describing the impact of oil pollution and other hazards on marine habitats. The Gulf provides examples of many of the issues raised. It already has a dead zone where run-off from agricultural chemicals washed down the Mississippi has caused an algal bloom that starves everything else of oxygen. Atlantic bluefin tuna are due to start spawning in the Gulf around now. And commercial and recreational fisheries could be devastated by the pollution.

China: Shock-absorber for the developing world?

Coinciding with the China Development Forum in Beijing, the Insights blog is focusing on China this week. In this posting, Andrew Mold of the OECD Development Centre looks at how China’s booming economy has eased the impact of the global recession on developing countries.


Number One, actually. Photo courtesy of Jacques Bron

Over the past decade China has attracted an enormous amount of attention principally because of the sheer resilience of its economic ascent. This has come to the fore during the financial crisis, as Chinese growth has continued to soar (at around 8%) while OECD countries have languished in the most serious economic recession since the 1930s. Harvard professor Niall Ferguson talks about the symbiosis of Chimerica, alluding to the deep mutual economic dependence that has evolved between the United States and China over the last decade. Put simply, to a large extent the macroeconomic stability of the global economy hinges on the way in which the imbalances between these two economic giants play out.

As fascinating and crucial these as issues are, they hide the truly remarkable impact of China on the developing world. By its economic resilience, China is having a tremendously positive effect, cushioning many developing countries from the worst of the fallout from the financial crisis. And its growth engine has become exceedingly important for many low-income countries through its trade and investment links. Calculations by the OECD Development Centre suggest that every percentage point of growth in China helps lift 16 million people in the developing world out of poverty.

The trading links are revealing. In early 2010, China bypassed Germany as the world’s No. 1 trading nation. What was less commented upon was the fact that over the last year China has also become the No. 1 trading partner of India, South Africa and Brazil. A full 56% of China’s exports now go not to United States but rather other developing countries.

To be sure, some of these exports put industries in other developing countries under severe competitive pressures. Textiles is a case in point: Competition from low-cost Chinese operators has led to job losses in a number of African and Asian countries. But this is not the whole story. With its enormous productive capacity, China has been driving down the prices of consumer goods, which benefits many poor people in developing countries who would not otherwise be able to afford even simple items like radios and televisions. Also – and this is less widely acknowledged – China has been driving down the cost of capital goods, which allows low-income countries to benefit through cheaper infrastructure and equipment for their productive sectors.

At the same time, China draws in raw materials and intermediate inputs from developing (and other high income countries) countries and transforms these into finished goods for the United States and other OECD markets. In effect China has become a funnel for inputs from other Asian countries, including low-income ones like Vietnam, Cambodia, and Bangladesh.

But it is not just developing countries in Asia that are benefiting. For instance, Chinese imports of oil, soy beans and copper were about 30 times higher in 2008 than they were in 1995. As a consequence, Latin American commodity exporters have been riding China’s coat-tails to unprecedented trade surpluses. Africa, too, has reaped benefits. For example, while many Western companies suspended or delayed investments due to the uncertainty created by the financial crisis Chinese investments continued to surge ahead.

There is, of course, a million dollar question: Is all this is sustainable? Only time will tell, but for now one thing is certain: As long as the Chinese growth “engine” does not stall, the prospects for the rest of the developing world will be rosier than might otherwise have been the case.

Useful links

China at the OECD Development Centre

OECD work on China

OECD Insights: From Crisis to Recovery

网站(中文) The OECD’s Chinese-language site

Jacques Bron’s photos

A billion dollars and 7000 jobs

Foreigners just can’t seem to get it right. When they’re not “coming over here and taking our jobs”, they’re staying over there and taking our jobs. Brian Keeley deals with the first prejudice in the Insights on International Migration, pointing out, among other things, that immigrants do work locals are unwilling to do, the so-called “3D jobs” – dirty, dangerous and difficult.

The second accusation is that outsourcing, offshoring and the other manifestations of globalisation and trade have a negative impact on employment in OECD countries.

That’s not the view of C. Fred Bergsten, director of the Peterson Institute for International Economics. Writing in the Washington Post, Bergsten argues that trade creates jobs. The $1.5 trillion worth of goods and services the US sells to the rest of the world each year creates about 10 million high-paying jobs, and “every $1 billion of additional exports would create about 7000 ‘very good jobs'”.

OECD analyses of trade and employment support Bergsten.

The crisis has caused both employment and trade to shrink, but the longer-term trend shows that the rise in trade over the past decade has generally been accompanied by increased prosperity and employment in countries that have liberalised. History also suggests that open economies end up better off than closed ones, as the two Koreas show.

Trade doesn’t seem to have damaged job stability either. The share of workers with less than one year of job tenure and average tenure, two commonly used indicators of labour turnover and job stability, did not change much in the decade before the crisis.

As for wages, a study of trade among 63 countries showed that a rise of one percentage point in the ratio of trade to GDP (for example when the share of trade in GDP rises from 10% to 11%) is associated with an increase in per-capita income of 0.5 to 2%.

Useful links

Bergsten provides a version of his article with links to supporting material here

The Insights on International Trade has a chapter on trade and employment

The OECD Trade Directorate discusses trade and employment here

New product hits the market, old one hits the dumpster

iPad, I'm your father

A company that makes computers, phones and mp3 players brought out a new product yesterday. After months of feverish speculation in the world’s media that the new product might be a kind of computer, the company unveiled the product — a kind of computer — to the surprise and delight of a few thousand of its closest friends at a press conference in North America.

A company spokesman explained that the device, which we’ll call the iPaid, was bigger than a big phone but smaller than a small computer. He also pointed out that although you couldn’t phone with it, it could do many computer-type things like keeping you amused, and it was magical and revolutionary.

The questions not on everybody’s lips include how can they make these things so cheaply, and are they good for the planet? (more…)