Dan Koppel has this excellent NYT op-ed, tracing the growth of the Cavendish variety of banana as the primary staple fruit in America (and elsewhere) and the recent rise in banana prices, which touched $1 a pound.
The major reasons for this rise are the rising cost of oil, reduced supply caused by floods in Ecuador, the world’s biggest banana exporter, and the spread of a virulent strain of the fungal Panama disease.
Wednesday, June 18, 2008
Resource Curse and under-development
Orissa has been witness to vociferous and often violent protests in the recent months over the proposed setting up of a $12 bn steel plant by the South Korean Steel giant, POSCO. The investment, if it goes through, would easily be the largest FDI in Indian manufacturing.
It is alleged that the Steel Plant would result in displacement of large numbers of tribal communities. Opponents point to the examples of Jharkahand and Uttaranchal, which despite being rich in mineral resources, have not enjoyed the proportionate benefits of their resource ownership and continue to remain poor and deprived. The left-wing extremists too have taken up the cause of these tribals and are threatening to launch a violent agitation against the mining project.
Economists have a term to describe this phenomenon - "resource curse". It refers to the condition wherein natural resource rich regions not only do not get the benefits from the resources they own, but also suffers from violent conflicts, extreme poverty and under-development. Orissa may only be the latest example in the long line of resource rich countries or regions experiencing such conditions. The large numbers of resource-rich African countries are the commonest examples of nations afflicted by this "resource curse".
The latest edition of the State of India's Environment, "Rich Lands Poor People, is sustainable mining possible?", brought out annually by Centre for Science and Environment (CSE), says, "India’s richest lands — with minerals, forests, wildlife, water sources — are home to its poorest people. Mining in India has, contrary to government’s claims, done little for the development of the mineral-bearing regions of the country."
The report observes that of the 50 top mineral producing districts, 34 fell under the 150 most backwards districts. It concludes that the vast majority of the wealthiest districts in terms of natural resources were the poorest and the most under-developed districts. The report said that "the wealth of mining does not go back to the mining areas. Mining takes minerals, degrades land, water and forests, and does not provide local employment."
The report also observes, "Between 1950 and 1991, mining displaced about 2.6 million people — not even 25 per cent of these displaced have been rehabilitated. For every 1% that mining contributes to India’s GDP, it displaces 3-4 times more people than all the development projects put together."
Why do such resource rich regions appear to suffer from such extreme poverty and deprivation? Here are a few possible reasons
1. Mining belongs to that category of industries, in which the consumers benefit more than the producers. Invariably, the consumers live very far away from the production centers.
2. Mining causes significant environmental damages and pollution, which are rarely addressed fully. This in turn excerbates the health and environmental problems in the area. It is estimated that the mining of major minerals in India generated about 1.84 billion tonne of waste in 2006, most of which has not been disposed off properly.
3. Such areas are generally situated in inhospitable terrain and areas, thereby accentuating accessibility and development problems. As the report points out, "If India’s forests, mineral-bearing areas, regions of tribal habitation and watersheds are all mapped together, they will overlay one another on almost the same areas." The forest cover for the top 50 mineral bearing districts was one-third higher than natural average.
4. Mining is labor intensive and therefore mining cities have to support a large proportion of unskilled and semi-skilled population, who invariably are poor and have limited purchasing power.
5. In the absence of a critical mass of consumer base, mining areas cannot support many of the modern businesses, especially in the services sector. Good quality hospitals, schools and civic infrastructure requires a minimum number of consumers who are willing to pay for the delivery of these services.
It does not help that many of these areas are also originally some of the poorest districts, and thereby requiring consciously pro-active government policies. In conclusion, despite the presence of valuable natural resources, these areas have substantial legacy costs, which draws the region into a vicious cycle from where escape becomes a difficult challenge.
It is alleged that the Steel Plant would result in displacement of large numbers of tribal communities. Opponents point to the examples of Jharkahand and Uttaranchal, which despite being rich in mineral resources, have not enjoyed the proportionate benefits of their resource ownership and continue to remain poor and deprived. The left-wing extremists too have taken up the cause of these tribals and are threatening to launch a violent agitation against the mining project.
Economists have a term to describe this phenomenon - "resource curse". It refers to the condition wherein natural resource rich regions not only do not get the benefits from the resources they own, but also suffers from violent conflicts, extreme poverty and under-development. Orissa may only be the latest example in the long line of resource rich countries or regions experiencing such conditions. The large numbers of resource-rich African countries are the commonest examples of nations afflicted by this "resource curse".
The latest edition of the State of India's Environment, "Rich Lands Poor People, is sustainable mining possible?", brought out annually by Centre for Science and Environment (CSE), says, "India’s richest lands — with minerals, forests, wildlife, water sources — are home to its poorest people. Mining in India has, contrary to government’s claims, done little for the development of the mineral-bearing regions of the country."
The report observes that of the 50 top mineral producing districts, 34 fell under the 150 most backwards districts. It concludes that the vast majority of the wealthiest districts in terms of natural resources were the poorest and the most under-developed districts. The report said that "the wealth of mining does not go back to the mining areas. Mining takes minerals, degrades land, water and forests, and does not provide local employment."
The report also observes, "Between 1950 and 1991, mining displaced about 2.6 million people — not even 25 per cent of these displaced have been rehabilitated. For every 1% that mining contributes to India’s GDP, it displaces 3-4 times more people than all the development projects put together."
Why do such resource rich regions appear to suffer from such extreme poverty and deprivation? Here are a few possible reasons
1. Mining belongs to that category of industries, in which the consumers benefit more than the producers. Invariably, the consumers live very far away from the production centers.
2. Mining causes significant environmental damages and pollution, which are rarely addressed fully. This in turn excerbates the health and environmental problems in the area. It is estimated that the mining of major minerals in India generated about 1.84 billion tonne of waste in 2006, most of which has not been disposed off properly.
3. Such areas are generally situated in inhospitable terrain and areas, thereby accentuating accessibility and development problems. As the report points out, "If India’s forests, mineral-bearing areas, regions of tribal habitation and watersheds are all mapped together, they will overlay one another on almost the same areas." The forest cover for the top 50 mineral bearing districts was one-third higher than natural average.
4. Mining is labor intensive and therefore mining cities have to support a large proportion of unskilled and semi-skilled population, who invariably are poor and have limited purchasing power.
5. In the absence of a critical mass of consumer base, mining areas cannot support many of the modern businesses, especially in the services sector. Good quality hospitals, schools and civic infrastructure requires a minimum number of consumers who are willing to pay for the delivery of these services.
It does not help that many of these areas are also originally some of the poorest districts, and thereby requiring consciously pro-active government policies. In conclusion, despite the presence of valuable natural resources, these areas have substantial legacy costs, which draws the region into a vicious cycle from where escape becomes a difficult challenge.
Tuesday, June 17, 2008
Chavez's Bolivarian revolution
Celeberated writer Jon Lee Anderson has this excellent account of Hugo Chavez and Bolivarian ambitions in the New Yorker magazine.
Rising oil prices and air travel
With oil price rise showing no signs of letting up, and fuel accounting for over 40% of a carrier's costs, airlines have been responding by optimizing and minimizing their fuel consumption. In a few cases, this has involved cutting down on non-stop long haul flights.
The long hauls are going because they burn fuel simply to carry enough fuel to make the long runs. Short haul flights too are facing pressure, since the 37- and 50-seat regional jets bleed more fuel.
The long hauls are going because they burn fuel simply to carry enough fuel to make the long runs. Short haul flights too are facing pressure, since the 37- and 50-seat regional jets bleed more fuel.
Friday, June 13, 2008
"Panglossian" world financial system
Paul Krugman had compared the modern day investment manager, who sees only the silver lining in every dark cloud and ignores risk from rational considerations, to Voltaire's hero Pangloss.
Daniel Cohen feels that this Panglossian investment manager "realises that the downside is limited to being fired, but the upside is limitless. This asymmetry between profits and losses encourages audacity. Once a certain risk threshold is breached, the investment manager who places bets with other people’s money ignores danger. From a social point of view, the problem stems from the divergence of incentives. Even though the intermediary knows that he may suffer a severe personal loss, it will never be proportional to the losses inflicted on investors".
Daniel Cohen feels that this Panglossian investment manager "realises that the downside is limited to being fired, but the upside is limitless. This asymmetry between profits and losses encourages audacity. Once a certain risk threshold is breached, the investment manager who places bets with other people’s money ignores danger. From a social point of view, the problem stems from the divergence of incentives. Even though the intermediary knows that he may suffer a severe personal loss, it will never be proportional to the losses inflicted on investors".
Rating Municipal debt
Good news for the US Municipal Bond market - Moody's finally announces its decision to rate municipal bonds on the same scale it uses for corporate debt. It would be a significant change for the tradition-bound municipal bond market and could help to lower borrowing costs for some local governments during tougher economic times. It could also lead to less demand for bond insurance at a time when several big guarantors are faltering. (More on this here)
When are the rating agencies in India going to follow suit? If in the US, a uniform rating scale will help sustain a faltering Munis market, in India the same could break open its still-born Municipal debt market.
When are the rating agencies in India going to follow suit? If in the US, a uniform rating scale will help sustain a faltering Munis market, in India the same could break open its still-born Municipal debt market.
Thursday, June 12, 2008
Bernanke faces the ultimate test
Whatever decision Ben Bernanake takes over interest rates over the next couple of weeks and its consequences, may end up ultimately being the final verdict on his regime as Fed Chairman. For far too long, the Fed had put inflation fighting on the back-burner and has been fighting to stave off a recession. But now, inflation is becoming too real and immediate to ignore any longer, while growth is hanging precariously on the back of a temporary fiscal stimulus and the cheap interest rates.
The European Central Bank (ECB), faced with rising inflaiton, has already announced its intent to raise rates hikes and many others have already done so. According to the IMF's International Financial Statistics, global consumer price inflation is now running at an annual pace of nearly 5½ percent, compared with less than 4 percent in recent years. The acceleration in global commodity and energy prices shows no signs of easing off.
If the rates are hiked now and a process is initiated that will somehow help US avoid both inflation and recession, or a stagflation, then Greenspan will be forgotten and Bernanke will emerge out of the shadow of his predecessor and as a hero. If on the other hand, the hike in rates end up choking any remaining signs of growth, then Bernanke will be vilified and the Fed's reputation in the markets will take a hit.
The other remote possibility of keeping rates unchanged, may not be an option, especially given the rising oil prices and falling dollar. In the circumstances, the best that Bernanke can pray for, would be for a soft landing - one that would squeeze out the sub-prime and related financial market distortions and credit excesses, without stfling growth.
The cheap money policy (negative real interest rates) has contributed to many distortions in the global economy too. The cheap money policy, coupled with recessionary fears, have placed continuous downward pressure on the US Dollar, forcing it down to historic lows. With the major part of international trade in commodities, and especially oil, being priced in dollars, a depreciating dollar has had the effect of magnifying the rapidly rising commodity prices. Further, the cheap rates and the declining dollar was driving institutional investors into the emerging economy equity and debt markets, increasing their foreign exchange surpluses and their domestic money supply, thereby adding to the high commodity price driven inflationary pressures. In a way, the Federal Reserve was exporting inflation into the world economy!
As Tim Duy argues (from Mark Thoma), any hike in rates now could also have adverse consequences, especially with the housing mortgage crisis still on the balance. He writes, "Furthermore, higher rates threaten to intensify and lengthen the housing downturn; a 30-year conventional mortgage is already at 6.25%. Note also the Fed would be raising rates into what many believe will be the second wave of mortgage problems, the Alt-A and option adjustable mortgages that reset beginning in 2009. If the Fed starts raising rates meaningfully at this point, anticipate the yield curve to invert early next year, signaling a recession in 2010."
It will be interesting to see how the markets react to any US rate hike. The trade-off would be whether the markets perceive the rate hikes would contain inflation without choking growth, or not.
The European Central Bank (ECB), faced with rising inflaiton, has already announced its intent to raise rates hikes and many others have already done so. According to the IMF's International Financial Statistics, global consumer price inflation is now running at an annual pace of nearly 5½ percent, compared with less than 4 percent in recent years. The acceleration in global commodity and energy prices shows no signs of easing off.
If the rates are hiked now and a process is initiated that will somehow help US avoid both inflation and recession, or a stagflation, then Greenspan will be forgotten and Bernanke will emerge out of the shadow of his predecessor and as a hero. If on the other hand, the hike in rates end up choking any remaining signs of growth, then Bernanke will be vilified and the Fed's reputation in the markets will take a hit.
The other remote possibility of keeping rates unchanged, may not be an option, especially given the rising oil prices and falling dollar. In the circumstances, the best that Bernanke can pray for, would be for a soft landing - one that would squeeze out the sub-prime and related financial market distortions and credit excesses, without stfling growth.
The cheap money policy (negative real interest rates) has contributed to many distortions in the global economy too. The cheap money policy, coupled with recessionary fears, have placed continuous downward pressure on the US Dollar, forcing it down to historic lows. With the major part of international trade in commodities, and especially oil, being priced in dollars, a depreciating dollar has had the effect of magnifying the rapidly rising commodity prices. Further, the cheap rates and the declining dollar was driving institutional investors into the emerging economy equity and debt markets, increasing their foreign exchange surpluses and their domestic money supply, thereby adding to the high commodity price driven inflationary pressures. In a way, the Federal Reserve was exporting inflation into the world economy!
As Tim Duy argues (from Mark Thoma), any hike in rates now could also have adverse consequences, especially with the housing mortgage crisis still on the balance. He writes, "Furthermore, higher rates threaten to intensify and lengthen the housing downturn; a 30-year conventional mortgage is already at 6.25%. Note also the Fed would be raising rates into what many believe will be the second wave of mortgage problems, the Alt-A and option adjustable mortgages that reset beginning in 2009. If the Fed starts raising rates meaningfully at this point, anticipate the yield curve to invert early next year, signaling a recession in 2010."
It will be interesting to see how the markets react to any US rate hike. The trade-off would be whether the markets perceive the rate hikes would contain inflation without choking growth, or not.
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