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.

Chinese demography: One child, many consequences

Photo courtesy of Jacques Bron

Coinciding with the China Development Forum in Beijing, the Insights blog is focusing on China this week

How many wedding dresses does it take to change the world economy? That’s right, lots. And how? High saving rates in certain countries, notably China, contributed to housing price bubbles and the global financial crisis. Shang-Jin Wei of Columbia Business School and Xiaobo Zhang of IFPRI have an intriguing explanation as to why China’s saving rate is so high (around 50% of GDP in 2007 just before the crisis started): blame it on the brides.

Or rather, blame it on “competitive saving”, one of the unintended consequences of the one-child policy, introduced in 1978 to slow population growth. The government claims that thanks to the policy, the population is three to four hundred million fewer than it would have been, but since families prefer boys, many of the missing millions are girls, including victims of female infanticide and sex-selective abortions.

The normal ratio of boys to girls is around 106:100, an evolutionary corrective for the fact that male babies are more likely to die. In China, however, the ratio is much higher. The exact figure is not known, but estimates range from 119:100 to over 130.

What is known though, is that there are now tens of millions more young men of marriageable age than women. So to improve their son’s chances, a family saves to be able to buy a nicer, better furnished house than rivals and give the young newly-weds a good start in life. According to Wei and Zhang, even families who don’t have a son to marry off have save as much, since prices are driven up. Families with sons save more than those with daughters, and savings rates are higher in regions with higher gender imbalances.

Another unintended consequence is the rapid ageing of the population. In 1975, just before the one-child policy started, there were six children for every person aged over 60. By 2035, there will be two over-60s for every child. Population ageing is happening all over the world, but it is happening much earlier in China’s economic development than in OECD countries.

As Richard Jackson and his colleagues at the Center for Strategic and International Studies point out, when the elderly share of the population was the same in the US as it is China today, per capita income was four times what China’s is at present. Some Chinese express the fear that the country will grow old before it grows rich.

China’s growth has depended on what some media like to call limitless supplies of cheap labour. But the working-age population will peak in 2015, and will shrink by almost a quarter by 2050, with an even sharper decline for people in their 20s and 30s. Total population will still grow, because people will live longer, and China will have an older population than the US in 2050.

Given that this elderly population will not be able to count on large numbers of children to support them, how will they live? The government’s goal is universal coverage for the basic pension system by 2020 and it has also taken a number of steps to encourage schemes to complement this.

Yet public pension coverage remains far from universal, and has large unfunded liabilities for early retirees from the state-owned sector. Moreover, benefits are not fully portable, so workers often have to choose between job mobility and retirement security, and the rate of return on personal pension plans is too low to replace a salary.

At the same time, the decline in the working-age population may allow employees to negotiate better pensions as part of their pay packages. Labour shortages have already been reported in some regions, partly because rural migrants who went home during the worst of the recession don’t want to come back. Last week, the Guangzhou Daily reported that the local authorities had raised the minimum wage from 860 yuan to 1030, a higher rate than Beijing even.

All this is leading to calls to abandon the one-child policy. Especially since China is now suffering from a phenomenon that has cursed every country that ever existed at every epoch in world history – kids today are not as nice as us. Or, as the People’s Daily complained last month: the one-child policy is breeding brats.

Useful links

China in the 2010s: Rebalancing growth and strengtheneing social safety nets

2010 年代的中国:经济增长再平衡和强化社会安全网 (Chinese version)

OECD work on China

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

China at the OECD Development Centre

Photos by Jacques Bron