The Unassuming Economist

The latest IMF’s Commodity Review was presented at the MENA Industrial Gas Conference 2013. On my presentation, Rob Cockerill tweeted:

• “The message here is firstly that the advanced economies in the west, particularly the US and Europe, have to be very nimble in their policy making. Secondly, if countries who have benefited from China’s growth in the past fail to diversify, they will be vulnerable.”

• “Thirdly, don’t get carried away by the shale gale – the numbers do not translate into huge income gains in the US and therefore won’t have huge impact elsewhere. It might have huge impact for companies, but not countries.”

• “US incomes go up, by just a little over 1% after 12-13 years, there is very little additional employment generated from this, and domestic demand goes up by about 1.5% – we’re not talking about big changes in the US. Which means, we are not talking about big changes in the rest of the world either.”
• “We revise our forecast every three months, and what you can see here is that we have revised down our global forecast slightly, and we have also revised this down for 2014.”
• “This is due to some revisions within our outlook of developing and emerging economies. If you break down within the emerging markets, we’ve really marked down Russia, India and China, a little bit. The BRICs are areas where we are seeing softness, more than we did three months ago.”

THE Prebisch-Singer hypothesis (PSH) was a staple of leftist economics during the second half of the 20th century. Raúl Prebisch and Hans Singer, working independently, showed that the “terms of trade” between primary products and manufactured goods tended to decline over time. In other words, producers of crops and raw materials gradually became poorer relative to producers of cars and household appliances. If true, the theory would have important implications for world trade; it would suggest that commodity-focused economies must diversify into other sectors or risk falling ever further behind richer countries.

A new paper* by the International Monetary Fund discusses the PSH. The authors examine 25 commodities, from sugar to silver, with some data going back to 1650. Since 1900, around 50% of the commodities show clear downward relative price slopes. About 25% show a clear upward slope. You will have to forgive the confusing labelling of the graphs, but you get the idea:

These graphs show prices relative to manufactured goods; in dollar terms many commodity prices have trended upward over the past century. So countries that produce high levels of primary products have, over time, done worse than economies which rely on manufactured goods. The authors cautiously conclude that “in the majority of cases the PSH is not rejected”.

What can primary producers do about this? In a recent conference at the IMF in Washington, one of the authors, Kaddour Hadri, suggested that commodity-dependent economies should take advantage of short periods of price spikes to invest in alternative industries. But many commodity-dependent economies fail to do this. William Sawyer, of Texas Christian University, argues that South America has failed to take advantage of high commodity prices over the past decade. As a result, their economies are not well-equipped to deal with the current price declines.

But according to Javier Blas, a journalist for the Financial Times who spoke at the IMF conference, commodity producers have been fighting against the Prebisch-Singer hypothesis for the last century. Many have shifted production away from commodities which do relatively badly against manufactured goods. The development of the soybean market, as well as shifts towards farming of chicken and pork, are some examples of this. None of these commodities appears in the IMF paper, so it does not tell a complete story. Still, and oddly enough, the IMF seems to have turned up some evidence support a bit of Marxist economic theory.

*Rabah Arezki, Kaddour Hadri, Prakash Loungani and Yao Rao (2013) ‘Testing the Prebisch-Singer Hypothesis since 1650: Evidence from Panel Techniques that Allow for Multiple Breaks’ Working Paper No. 13/180

My presentation at the Bank of America/Merrill Lynch conference in Tokyo is available here.

From the FT:

Which countries will be worst affected by the sharp rise in global grains prices?

The International Monetary Fund, which has an interest in the question because it is usually a source of loans for countries that have run out of money, has studied the vulnerability of different regions to the jump in food prices due to the US drought.

In one section of its World Economic Outlook published on Monday, the fund analyses the effects of the “food supply crunch”.

While commodities traders – who are awaiting the US Department of Agriculture’s monthly forecasts on Thursday – may have already moved on from the US drought, higher prices are still a reality for consumers of wheat, corn and soyabeans. Despite a recent correction, prices for the three staples are still up 20-40 per cent year on year.

The IMF breaks down the issue into three sub-questions: which countries have low food inventories; which countries are most dependent on the global markets for their food supply; and which countries’ populations spend the largest proportion of their income on food.

The countries and regions at the most vulnerable end of the range for each of the categories are the most likely to suffer problems, the fund explains.

While China is a large importer of some foodstuffs (especially oilseeds), it would be able to withstand higher prices better than others because of its large stockpiles. At the other end of the scale, inventories of food commodities in the US have fallen well below historical norms, but food is a relatively small proportion of US consumer expenditure, therefore the country is less exposed.

It may not come as a complete surprise to learn which countries are most at risk. They are: the Caribbean and Central America, which are heavily reliant on corn imports and whose stocks are lower than during the 2007-08 food crisis; the Middle East and sub-Saharan Africa, which have relatively high import reliance and low inventories of wheat; and north Africa, where food accounts for about 40 per cent of final consumption.

Indeed, Morocco, which is forecast to import a record 4.5m tonnes of wheat this year, has already sought a $6.2bn precautionary loan from the IMF.

But the IMF says that the current situation is less severe than in 2007-08 as rice prices remain subdued, oil prices are not so high, and so far, there have not been widespread export restrictions.

Nonetheless, the fund concludes: “Countries should expect rising inflation and balance of payments pressures.”