tag:theconversation.com,2011:/us/topics/commodity-prices-27342/articlesCommodity prices – The Conversation2023-10-20T12:26:48Ztag:theconversation.com,2011:article/2159302023-10-20T12:26:48Z2023-10-20T12:26:48ZHow the Israel-Hamas war could affect the world economy and worsen global trade tensions<figure><img src="https://images.theconversation.com/files/554774/original/file-20231019-19-w3dpvj.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3335%2C2070&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/stock-exchange-market-trading-concepts-227858692">Rawpixel.com/Shutterstock</a></span></figcaption></figure><p>Global geopolitical tensions often play a pivotal role in shaping people’s perceptions of economic growth. <a href="https://www.matteoiacoviello.com/gpr_files/GPR_PAPER.pdf">Research shows</a> concern about such issues can cause people and businesses to become more cautious about spending and investing, which can ultimately lead to economic recession.</p>
<p>The recent escalation of the <a href="https://www.bbc.co.uk/news/world-middle-east-67039975">Israel-Palestine conflict</a> is no different. Investors around the world are worried about the repercussions of this war – particularly in light of an already <a href="https://www.oecd-ilibrary.org/sites/1f628002-en/index.html?itemId=/content/publication/1f628002-en">bleak picture for global economic growth</a>. </p>
<p>Hamas’s <a href="https://apnews.com/article/israel-palestinians-gaza-hamas-rockets-airstrikes-tel-aviv-11fb98655c256d54ecb5329284fc37d2">October 7 attack</a> on southern Israel is the latest chapter of a cycle of violence that has been going on in this region for decades and, sadly, seems to have no end in sight. While the reasons behind these events are complex, the conflict’s potential immediate and long-term economic ramifications are easier to grasp. </p>
<p>After all, if the Russia-Ukraine war has taught us one thing, it’s that we should be mindful of the intricate interdependencies that shape the global economic and geopolitical landscape.</p>
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<a href="https://theconversation.com/ukraine-and-the-financial-markets-the-winners-and-losers-so-far-179015">Ukraine and the financial markets: the winners and losers so far</a>
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<h2>How conflicts can affect the economy</h2>
<p>Internal and inter-state conflicts often have <a href="https://www.jstor.org/stable/20798955#:%7E:text=The%20results%20suggest%20that%2C%20on,is%20higher%20for%20international%20conflicts.">a significant effect</a> on stock market indices, exchange rates, and commodity prices – sometimes even sending prices higher in the lead-up to hostilities. The longer-term economic impact is typically more complicated to assess, however. The lasting effects of even seemingly dramatic events on investor behaviour can be hard to predict. </p>
<p>Conflicts in the Middle East tend to lead to <a href="https://www.sciencedirect.com/science/article/abs/pii/S0140988319303184#preview-section-snippets">spikes in oil prices</a> – think of the <a href="https://www.federalreservehistory.org/essays/oil-shock-of-1973-74">OPEC oil embargo</a> of 1973-1974, the <a href="https://www.brookings.edu/articles/what-irans-1979-revolution-meant-for-us-and-global-oil-markets/#:%7E:text=barrel%20in%20mid%2D-,1980,-.">Iranian revolution</a> of 1978-1979, the <a href="http://news.bbc.co.uk/1/hi/business/7431805.stm#:%7E:text=crude%20oil%20prices%20to%20more%20than%20double">Iran-Iraq War</a> initiated in 1980, and the first <a href="https://www.jstor.org/stable/41322669">Persian Gulf War</a> in 1990-91. Since the region accounts for <a href="https://www.statista.com/statistics/269076/distribution-of-global-oil-production-since-2009/">nearly a third of global oil supply</a>, any instability can create market uncertainty based on <a href="https://www.eia.gov/energyexplained/oil-and-petroleum-products/prices-and-outlook.php">concerns about interruptions</a> to global oil supply.</p>
<p>This uncertainty <a href="https://www.sciencedirect.com/science/article/abs/pii/S0165188921000130">is reflected in the risk premium</a> in oil markets. This is the price paid for oil traded ahead of time in the futures markets versus the real-time price of oil. It reflects the profits that speculators expect to receive from buying and selling oil during a time of conflict, as well as the hedging needs of businesses that produce and consume oil and their concerns about supply and demand. </p>
<p>And so, the effect of the latest Israel-Hamas conflict on global financial markets will depend on the involvement of other major regional powers. If the conflict remains between Israel and Hamas, the effect will probably be limited and arguably exclusive to countries with direct trade exposure to Israel or Palestine. </p>
<p>But if the conflict spreads to major oil-producing nations in the region such as Iran, the global economy could face severe repercussions as energy costs for businesses and households could spike if supply is interrupted.</p>
<p>Higher energy prices would hamper central banks’ efforts to tame inflation pressures in most advanced and emerging economies. If this leads to a “higher for longer” monetary policy that keeps interest rates elevated, it would push up the cost of borrowing and refinancing by governments, companies and people.</p>
<p>History can offer some insights into how the impact on the global economy could unfold under these different scenarios. For instance, the 50-day war between Israel and Hamas in 2014, <a href="https://www.independent.co.uk/news/world/middle-east/israelgaza-conflict-50day-war-by-numbers-9693310.html">which killed 2,200 people</a>, mostly civilians, had <a href="https://www.sciencedirect.com/science/article/pii/S1059056017308201">no significant effect</a> on the global economy or financial markets. </p>
<p>Yet, when Israel and Hezbollah clashed in Lebanon in 2006, oil prices <a href="https://www.nytimes.com/2006/07/25/world/middleeast/25oil.html">surged globally</a> due to fears of a broader conflict in the Middle East.</p>
<h2>What to expect this time</h2>
<p>Unfortunately, there is another factor to consider at the moment. The escalation of the Israel-Palestine conflict has happened alongside the realignment of various <a href="https://www.cnbc.com/2023/09/18/biden-backs-economic-corridor-as-geopolitical-alliances-fragment-globe.html">global alliances</a>. This slow creep of “deglobalisation” can be seen in a <a href="https://www.nber.org/papers/w31115">shift in trade policies</a> in recent years. </p>
<p>Countries such as the US and UK are relocating economic activity including sourcing or manufacturing products from different countries out of concern about relying on suppliers in potentially hostile regions, as well as the impact of imports from low-wage countries on struggling local labour markets</p>
<p>At the moment, these shifts can also be seen in the reactions to the Hamas attack on Israel. A <a href="https://www.un.org/unispal/history/#:%7E:text=After%20looking%20at%20alternatives%2C%20the,(II)%20of%201947">two-state solution</a>) to the Israel/Palestine conflict was initially laid out by the United Nations in 1947 and reaffirmed in 1974, with almost unanimous support around the world. </p>
<p>But there has been <a href="https://www.washingtoninstitute.org/policy-analysis/international-reactions-hamas-attack-israel">some nuance</a> in the international reactions to the attack. With most western countries quickly voicing support for Israel’s right to defend itself, while countries like China and Russia <a href="https://edition.cnn.com/2023/10/19/china/china-xi-israel-hamas-ceasefire-comment-intl-hnk/index.html#:%7E:text=China%20and%20Russia%20have%20both,US%20and%20leaders%20across%20Europe">called for a ceasefire</a> without taking a stance on Hamas. </p>
<p>This suggests that the issue of Israel-Palestine could tie in with the broader trend towards the new geopolitical divisions that were already starting to emerge before Hamas’s attack. </p>
<p>A prolonged conflict between Israel and Palestine, especially with the involvement of major regional powers, could further accelerate this <a href="https://www.nber.org/papers/w31661">global realignment</a> and have detrimental consequences for global economic growth. </p>
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Read more:
<a href="https://theconversation.com/china-us-tensions-how-global-trade-began-splitting-into-two-blocs-188380">China-US tensions: how global trade began splitting into two blocs</a>
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<img alt="Gold bars on top of dollar bills and a printed chart." src="https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Investors often invest in gold as a</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/gold-bullion-ingot-stack-on-america-1064227718">eamesBot/Shutterstock</a></span>
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<p>Under these circumstances, investors are already bracing for increased financial volatility across the board – from stocks and government bonds to commodity markets. So-called safe-haven assets like gold are <a href="https://econpapers.repec.org/article/wlyeconjl/v_3a128_3ay_3a2018_3ai_3a616_3ap_3a3266-3284.htm">typically used as protection</a> against overwhelming economic uncertainty. The <a href="https://nz.finance.yahoo.com/news/gold-climbs-four-week-high-015019215.html">price of gold</a> has shot up following the latest escalation in the Israel-Palestine conflict.</p>
<p>Financial markets will continue to monitor the conflict between Israel and Hamas for signs of escalation. Anything that pushes oil prices up further will reignite fears of higher inflation. </p>
<p>Unfortunately, this is happening just as many countries were starting to see inflation slow again after two years of <a href="https://ycharts.com/indicators/us_consumer_price_index_yoy#:%7E:text=Basic%20Info,long%20term%20average%20of%203.28%25.">persistently high consumer prices</a>.</p><img src="https://counter.theconversation.com/content/215930/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniele Bianchi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>History shows how conflicts can create uncertainty that can rattle financial markets. This could feed into consumer price inflation, keeping it higher for longer.Daniele Bianchi, Associate Professor of Finance, Queen Mary University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2100462023-07-19T21:00:43Z2023-07-19T21:00:43ZWhy Russia pulled out of its grain deal with Ukraine – and what that means for the global food system<figure><img src="https://images.theconversation.com/files/538379/original/file-20230719-17-8xsgid.jpg?ixlib=rb-1.1.0&rect=400%2C142%2C8226%2C5600&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The grain deal allowed Ukrainian corn and other products to reach ports in Lebanon and elsewhere. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/LebanonUkraine/5b16bfc620ab4ba69daf4ff40e7d24e5/photo?Query=ukraine%20grain%20black%20sea%20odesa&mediaType=photo&sortBy=&dateRange=Anytime&totalCount=12&currentItemNo=2&vs=true">AP Photo/Hassan Ammar</a></span></figcaption></figure><p><em>The Russia-Ukraine grain deal that <a href="https://www.bloomberg.com/news/articles/2023-07-19/wheat-rises-9-as-russia-warns-on-safety-of-ships-to-ukraine?srnd=markets-vp&sref=Hjm5biAW">has been critical to keeping global food prices stable</a> and preventing famine is currently in tatters. On July 17, 2023, Russia <a href="https://www.cnn.com/2023/07/17/europe/russia-ukraine-grain-deal-intl/index.html">said it was pulling out</a> of the year-old deal, which allowed shipments of grains and other foodstuffs to travel past the Russian naval blockade in the Black Sea. And to make matters worse, over the next two days Russia <a href="https://apnews.com/article/russia-ukraine-war-odesa-crimea-1676e6e746c888c8c8c1f0e4493be6fa">bombed the Ukrainian grain port of Odesa</a>, destroying over 60,000 tons of grain.</em></p>
<p><em><a href="https://www.cnbc.com/2023/07/17/russia-ukraine-grain-deal-what-does-it-mean-for-global-food-prices.html">As a result, food prices have surged</a>, with the cost of wheat, corn and soybeans in Europe, the Middle East and elsewhere all skyrocketing.</em> </p>
<p><em>So, what is the grain deal, and why is it so important to the global food supply chain?</em> </p>
<p><em><a href="https://scholar.google.com/citations?hl=en&user=ecFsBp0AAAAJ">Anna Nagurney</a> is an expert on supply chains, including those involving perishable products like food, and is co-chair of the board of directors overseeing the Kyiv School of Economics in Ukraine. She explains how important Ukrainian grain is to feeding the world – and why the Black Sea is a vital route to getting it to people who need it.</em></p>
<h2>What makes Ukraine such an important part of the global food supply chain?</h2>
<p>Ukraine <a href="https://www.farminglife.com/country-and-farming/why-is-ukraine-known-as-the-breadbasket-of-europe-heres-what-it-produces-and-exports-3584361#">has been called the breadbasket</a> of Europe and is a major supplier of wheat, barley, sunflower products and corn to Europe as well as to developing countries such as in the Middle East, <a href="https://theconversation.com/in-egypt-where-a-meal-isnt-complete-without-bread-war-in-ukraine-is-threatening-the-wheat-supply-and-access-to-this-staple-food-179361">Northern Africa</a> and China. </p>
<p>More than <a href="https://www.wsj.com/articles/black-sea-grain-initiative-vladimir-putin-russia-ukraine-volodymyr-zelensky-f17649e0">400 million people relied on foodstuffs from Ukraine</a> before Russia invaded Ukraine in February 2022.</p>
<p>One key reason for that is Ukraine has approximately <a href="https://www.cesifo.org/DocDL/econpol-forum-2023-2-cramon-taubadel-nivievskyi-agricultural-perspective.pdf#:%7E:text=Agriculture%20is%20a%20key%20sector%20of%20the%20Ukrainian,Ukrainian%20GDP%20amounts%20to%20roughly%2020%20per-%20cent.">one-third of the world’s most fertile soil</a>, which is known as chernozem, or black soil. And before the war, Ukraine was able to rely on its year-round access to ice-free harbors in the Black Sea to ship grains to nearby markets in the Middle East and Africa.</p>
<h2>What happened when war broke out?</h2>
<p>Even before the war, <a href="https://theconversation.com/war-in-ukraine-is-pushing-global-acute-hunger-to-the-highest-level-in-this-century-181414">famine was increasing</a> across the globe. Russia’s invasion made it a lot worse. </p>
<p>From 2019 to 2022, <a href="https://www.who.int/news/item/12-07-2023-122-million-more-people-pushed-into-hunger-since-2019-due-to-multiple-crises--reveals-un-report">more than 122 million people were driven into hunger</a> by a combination of the impacts of climate change, the COVID-19 pandemic and the war in Ukraine, the United Nations said in a recent report. <a href="https://theconversation.com/war-in-ukraine-is-pushing-global-acute-hunger-to-the-highest-level-in-this-century-181414">Other researchers have suggested</a> global hunger is the highest it’s been since at least the early 2000s.</p>
<p>From February to June 2022, at least <a href="https://www.nytimes.com/2022/06/01/world/europe/ukraine-grain-shortages.html#:%7E:text=The%20war%20has%20halted%20those%20shipments%2C%20leaving%20around,is%20expected%20to%20be%20harvested%20in%20coming%20months.">25 million tons of Ukrainian grain</a> intended for global markets got trapped in Ukraine because of Russia’s naval blockade, causing food prices to jump.</p>
<h2>How did the grain deal come about?</h2>
<p>The U.N. and Turkey <a href="https://unctad.org/news/black-sea-grain-initiative-extended">brokered what is officially known as the Black Sea Grain Deal</a> with Ukraine and Russia on July 22, 2022.</p>
<p>The agreement allowed for the secure passage of agricultural products from Ukraine from three ports on the Black Sea, including its largest port, Odesa. While the original agreement <a href="https://unctad.org/news/black-sea-grain-initiative-what-it-and-why-its-important-world">was to last 120 days</a>, <a href="https://www.un.org/en/black-sea-grain-initiative/updates">it has been extended several times</a> since. </p>
<p>Ukraine <a href="https://www.usatoday.com/in-depth/graphics/2023/07/17/russia-ends-agreement-on-ukraine-exports/70419389007/">has exported more than 32 million tons of food products</a> through the Black Sea since August 2022. The <a href="https://www.wfp.org/">World Food Program</a>, the world’s largest humanitarian agency,
<a href="https://www.wsj.com/articles/russia-says-it-is-pulling-out-of-ukraine-grain-deal-68190d1">purchased 80% of its wheat from Ukraine</a>. Ethiopia, Yemen, Afghanistan and Turkey have been <a href="https://www.wsj.com/articles/russia-says-it-is-pulling-out-of-ukraine-grain-deal-68190d1">the biggest recipients</a> of humanitarian shipments.</p>
<p>The U.N. has estimated that <a href="https://www.wsj.com/articles/black-sea-grain-initiative-vladimir-putin-russia-ukraine-volodymyr-zelensky-f17649e0">the grain deal has reduced food prices</a> by more than 23% since March 2022.</p>
<p>The amount of grain shipped per month had already been falling before the deal fell apart in July 2023, <a href="https://apnews.com/article/russia-ukraine-war-grain-food-security-ba7f9146b745337a1948a964cb30331c">from a peak of 4.2 million metric tons in October</a> to about 2 million tons in June. This is primarily because of <a href="https://www.wsj.com/articles/russia-says-it-is-pulling-out-of-ukraine-grain-deal-68190d1">slowdowns in the number of inspections</a> Russians had been conducting before ships could exit the Black Sea. </p>
<p>Another problem generally is falling production. Ukraine <a href="https://www.ifpri.org/blog/regional-war-global-consequences-mounting-damages-ukraines-agriculture-and-growing-challenges">is expected to produce</a> 31% less wheat, barley, corn and other crops during the current season that it did before the war. And this estimate came before <a href="https://www.bloomberg.com/news/newsletters/2023-06-09/supply-chain-latest-food-production-to-suffer-after-ukraine-dam-disaster">the destruction of a key Ukrainian dam</a> flooded fields.</p>
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<img alt="a man in military gear stands near the water and a big black ship docked" src="https://images.theconversation.com/files/538374/original/file-20230719-19-zxwe2l.jpg?ixlib=rb-1.1.0&rect=44%2C80%2C5946%2C3907&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/538374/original/file-20230719-19-zxwe2l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/538374/original/file-20230719-19-zxwe2l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/538374/original/file-20230719-19-zxwe2l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/538374/original/file-20230719-19-zxwe2l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/538374/original/file-20230719-19-zxwe2l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/538374/original/file-20230719-19-zxwe2l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Odesa, which the Russians have attacked in recent days, is Ukraine’s largest port.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/RussiaUkraine/6e6b9c8ae7514f5185192ac3be91bff6/photo?Query=ukraine%20grain%20black%20sea%20odesa&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=16&currentItemNo=2">AP Photo/David Goldman</a></span>
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<h2>Why is the Black Sea so important for Ukrainian exports?</h2>
<p>Colleagues at UMass Amherst and the Kyiv School of Economics and I published a study in May 2023 that <a href="https://doi.org/10.1007/s10898-023-01292-x">showed just how vital</a> the Black Sea ports are to ensuring Ukrainian grain gets out to the world. Before the war, <a href="https://www.reuters.com/article/ukraine-crisis-grain-deal-farmer-idAFKBN2YZ0N3">90% of Ukraine’s agricultural exports</a> were transported on the Black Sea.</p>
<p>While Ukraine also ships its grain and other food over land through Europe, doing so costs a lot more and takes more time than sea exports. And transportation costs over land were rising because of the war as a result of mines, the destruction of agricultural infrastructure and other challenges. </p>
<h2>Why did Russia say it’s pulling out of the deal?</h2>
<p>Russia has threatened to exit the deal before, but each time it has chosen to stay in. </p>
<p>But on July 17, 2023, it said it’s <a href="https://www.pbs.org/newshour/world/russia-suspends-deal-allowing-ukraine-to-export-grain-destabilizing-global-food-markets">unwilling to stay in the deal</a> unless its demands are met to ship more of its own food and fertilizer. Over the following two days, it attacked Odesa with drones and missiles in one of the largest sustained assaults on the port. Russia also said it would deem any ship in the Black Sea bound for a Ukrainian port to be <a href="https://www.nytimes.com/live/2023/07/19/world/russia-ukraine-news">a legitimate military target</a>. </p>
<p>This caused the <a href="https://www.bloomberg.com/news/articles/2023-07-19/wheat-rises-9-as-russia-warns-on-safety-of-ships-to-ukraine?srnd=markets-vp&sref=Hjm5biAW">price of critical commodities</a> such as wheat and corn to soar and created vast uncertainty and global concern around hunger. Chicago wheat futures, a global benchmark, <a href="https://finance.yahoo.com/quote/ZW=F/">are up about 17%</a> since Russia left the deal.</p>
<p>While Russia has extended the deal after previous threats, this time may be different. Russian strikes caused extensive damage to Odesa, which may severely limit Ukraine’s ability to export through the port in the future – deal or no deal. </p>
<p>I believe Russian leader Vladimir Putin <a href="https://theconversation.com/starving-civilians-is-an-ancient-military-tactic-but-today-its-a-war-crime-in-ukraine-yemen-tigray-and-elsewhere-184297">is weaponizing food</a> at a time of growing hunger. I only hope goodwill prevails and somehow Ukraine’s vital exports are allowed to continue.</p><img src="https://counter.theconversation.com/content/210046/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anna Nagurney does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Russia’s move, which it followed by bombing the key port city of Odesa and threatening to attack any ship sailing for Ukraine, sent global food prices skyrocketing.Anna Nagurney, Professor and Eugene M. Isenberg Chair in Integrative Studies, UMass AmherstLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2054232023-07-12T14:36:57Z2023-07-12T14:36:57ZTanzania’s gas boom that never was – when local hopes are dashed by global realities<figure><img src="https://images.theconversation.com/files/536600/original/file-20230710-29-u1sjf4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A flashy new administrative office opened in Mtwara in 2013 to serve vocational training centres throughout southern Tanzania.
</span> <span class="attribution"><span class="source">Grahamcole</span></span></figcaption></figure><p>Rising international commodity prices <a href="https://www.sciencedirect.com/science/article/pii/S0016718522002421">can shape or reshape</a> the fortunes of places. When large mining and oil and gas prospectors suddenly show an interest, a remote area can become a <a href="https://www.oxfordreference.com/display/10.1093/acref/9780199599868.001.0001/acref-9780199599868-e-1576?rskey=4lpGE6">resource frontier</a> – a place that’s far from the socioeconomic centre of a country but important to its economy. </p>
<p>High commodity prices <a href="https://rgs-ibg.onlinelibrary.wiley.com/doi/full/10.1111/area.12723">throughout the late 2000s and early 2010s</a> resulted in new regions of the world being explored for hydrocarbons. One of these areas was <a href="https://www.reuters.com/article/ozabs-tanzania-gas-20110923-idAFJOE78M04S20110923">off the shore</a> of southern Tanzania, in Mtwara. </p>
<p>Between 2010 and 2015, Mtwara went from a backward periphery to the forefront of Tanzania’s gas sector. </p>
<p>Mtwara is a region in the far south of Tanzania, on the border with Mozambique. Historically, it has been geographically isolated through poor infrastructure from the rest of Tanzania. The local population has felt overlooked by both colonial and postcolonial governments, with the southern regions historically performing more poorly than their northern counterparts. </p>
<p>My <a href="https://www.sciencedirect.com/science/article/pii/S0016718522002421">research</a> in Mtwara explored people’s expectations in response to the extraction of natural gas, and how factors like commodity price cycles and mining life cycles influenced the political economy of development – in short, the way that politics and economics interact and affect each other. </p>
<p>It became clear during my research that the gas industry was expected to speed up development in Mtwara. The imagined future of Mtwara changed from moderate expectations to one of increased wealth and prosperity. </p>
<p>In effect, the creation of a resource frontier changed expectations of what development would bring for people on the frontier, and how quickly it would happen. </p>
<p>These expectations were not met. Natural gas prices fell from US$16 per million metric British thermal unit (MMBtu) in <a href="https://www.worldbank.org/en/research/commodity-markets#3">2009 to US$4 MMBtu in 2017</a>. Oil and gas companies mostly lost interest in Mtwara and related sectors collapsed.</p>
<p>Remnants of the expected boom, such as half-built hotels, higher food prices and a more reliable electricity supply, remain. But many of the jobs have gone. </p>
<p>This research adds to an understanding of how natural resources interact with development. In Mtwara, it was less the resources themselves that caused the boom, but rather the <em>anticipation</em> of a future gas boom. When it failed to materialise, the area suffered a very real bust. This possibility is something that resource-based development strategies need to take into account before major extraction even takes place. </p>
<h2>The anticipation</h2>
<p>In Mtwara in 2018, I interviewed a variety of people, ranging from local business leaders, politicians and community leaders to villagers and people who used to work in the supply sector to the gas industry, about how development had been influenced by the gas sector. Be it discussions around the <a href="https://www.tandfonline.com/doi/abs/10.1080/03057070.2022.2028486">2013/14 pipeline protests</a> (against the construction of a pipeline transporting gas from Mtwara to Dar es Salaam) or electricity infrastructure being built, it quickly became obvious that everybody, in one way or another, had a story to tell in relation to gas. </p>
<p>But the interviews made it obvious that two communities in particular were affected by the gas sector: local businesses, and people living closest to the onshore extraction sites, in an area called Mnazi Bay. </p>
<p>I found that people expected natural gas to cause an economic uplift, and it was this that prompted considerable investment in the region. </p>
<p>Investment focused on supply sectors. Mtwara lacked any internationally certified hotels, catering companies or other amenities for oil and gas staff. Real estate and construction also rode this wave of investment. </p>
<p>Politics also influenced this. The ruling party in Tanzania, CCM, <a href="https://www.tandfonline.com/doi/abs/10.1080/03057070.2022.2028486">harped on this promise</a> during the 2010 general election. The party’s campaign slogan – “Mtwara will be the new Dubai!” – was repeated to me throughout my time in Mtwara. </p>
<p>Mtwara became a frontier for international and domestic capital. A future fuelled by hydrocarbon wealth seemed assured. </p>
<p>Alongside political promises, the communities of Mnazi Bay had the impression that the gas industry was already having a positive economic impact. Roads were being improved, electricity infrastructure was becoming more reliable and expanded, and people were getting jobs in supply sectors for natural gas. They expected this to continue, and to obtain compensation for land being used by the gas sector. </p>
<p>Within just a few years, Mtwara’s economic prospects and imagined future had been dramatically entwined with international gas prices. </p>
<h2>The reality</h2>
<p>But by 2015, the gas prices that had made Mtwara a resource frontier in the early 2010s had reversed. The sectors that had done well during the presumed boom were hit the hardest. </p>
<p>Hotels that were constructed to accommodate high paying oil and gas employees now had to change their business model and cater to lower-paid locals and seasonal cashew traders. Cashews were the bedrock of the local economy before the discovery of natural gas. A number of half-built hotels remain across the city, particularly along the coastline. </p>
<p>In my interviews, villagers close to the onshore extraction tended to discuss development going at a slower pace than during the “boom”. Sacrifices, such as giving land to gas infrastructure, did not result in increased development, and many jobs turned out to be temporary construction work that disappeared with the bust. </p>
<p>What’s more, the industry left environmental effects such as pollution and destruction of cash crops.</p>
<p>An unwritten social contract had been broken. </p>
<p>Perceptions of what gas could bring in the future changed. Gone was the belief that gas would accelerate development. The pace of development was seen to have returned to “normal”, meaning the pace before the discovery of gas. </p>
<p>The economic potential is still there, but the low global prices of the late 2010s ensured that the sector would not play a role in economic growth.</p>
<h2>The changing energy landscape</h2>
<p>Historically, Mtwara had been at the margins of the global economy, acting as a supplier of raw cashew nuts. With the discovery of natural gas, the region suddenly changed into an “energy frontier”, opening it to considerable investment from both domestic and international capital. Rapid changes in the energy landscape can create and recreate frontiers quickly, and change the lives of those who live in such frontier regions. </p>
<p>Since this research has taken place, there has been considerable change in the energy landscape. Russia’s invasion of Ukraine has pushed up gas prices, and European leaders have begun to see <a href="https://www.dw.com/en/africa-gas-europe-cop27/a-63719525">Africa as a potential source of natural gas</a>. There is once again the “potential” to create Mtwara into a true resource frontier. But it remains to be seen if such rising prices recreate excitement on the ground.</p><img src="https://counter.theconversation.com/content/205423/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Aidan Barlow receives research funding from ESRC and the Leverhulme Trust. </span></em></p>Falling gas prices led to declining interest and investment by oil and gas companies, squeezing out the supply sectors in the process.Aidan Barlow, Lecturer, Department of Social & Policy Sciences Centre for Development Studies, University of BathLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1893802022-09-05T01:51:42Z2022-09-05T01:51:42ZPlanning a renovation or new build? Here’s the outlook for skyrocketing steel and timber prices<p>It’s a tough time to build or renovate a house in Australia. Prices are up, well above inflation. Finding materials and getting them on time is a challenge. Builders are grappling with too much work and stress (with some folding as costs rise too fast). Customers are being confronted with eye-watering price quotes.</p>
<p>And as any would-be home builder or renovator knows, the price of timber or steel is crucial. </p>
<p>So what exactly is happening here, and what’s the outlook?</p>
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Read more:
<a href="https://theconversation.com/homebuilder-might-be-the-most-complex-least-equitable-construction-jobs-program-ever-devised-140162">HomeBuilder might be the most-complex least-equitable construction jobs program ever devised</a>
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<h2>Timber: huge demand, not enough supply</h2>
<p>According a 2021 Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) <a href="https://daff.ent.sirsidynix.net.au/client/en_AU/search/asset/1032742/0">report</a>: </p>
<blockquote>
<p>average annual hardwood log availability is forecast to be 1 million cubic metres (9%) lower over 2020-24 than 2015-19 […] softwood sawlog availability is projected to be 10% lower in the period of 2020-24 than was projected in 2015.</p>
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<p>The same <a href="https://daff.ent.sirsidynix.net.au/client/en_AU/search/asset/1032742/0">report</a> shows minimal new plantations were established in recent years.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/482425/original/file-20220902-23-4yd8b.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/482425/original/file-20220902-23-4yd8b.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/482425/original/file-20220902-23-4yd8b.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=332&fit=crop&dpr=1 600w, https://images.theconversation.com/files/482425/original/file-20220902-23-4yd8b.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=332&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/482425/original/file-20220902-23-4yd8b.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=332&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/482425/original/file-20220902-23-4yd8b.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=417&fit=crop&dpr=1 754w, https://images.theconversation.com/files/482425/original/file-20220902-23-4yd8b.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=417&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/482425/original/file-20220902-23-4yd8b.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=417&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">New plantation establishment–the majority of Australia’s new plantations since 1998-99 have been hardwood species, with minimal new establishment since 2012.</span>
<span class="attribution"><a class="source" href="https://daff.ent.sirsidynix.net.au/client/en_AU/search/asset/1032742/0">ABARES</a></span>
</figcaption>
</figure>
<p>In the 2019-20 bushfires, 130,000 hectares of plantation forest were <a href="https://daff.ent.sirsidynix.net.au/client/en_AU/search/asset/1030501/1">burned</a>. Recent floods didn’t help.</p>
<p>Native forest harvesting is also falling; it will be <a href="https://www.theguardian.com/australia-news/2021/sep/08/western-australia-to-ban-native-forest-logging-from-2024-in-move-that-blindsides-industry">banned</a> in Western Australia by 2024. Victoria will phase out the <a href="https://www.smh.com.au/politics/nsw/20m-loss-native-forest-logging-last-year-cost-nsw-taxpayers-441-per-hectare-20220314-p5a4g1.html">industry</a> by 2030.</p>
<p>A timber shortage was expected as early as 2020 but the start of the COVID pandemic – when the housing market momentarily froze – brought some respite, with house construction and timber prices initially going down.</p>
<p>Then came <a href="https://treasury.gov.au/coronavirus/homebuilder">HomeBuilder</a>, which encouraged consumers to proceed with purchases or renovations to reignite the house construction market.</p>
<p>The number of dwelling units commenced <a href="https://www.abs.gov.au/statistics/industry/building-and-construction/building-activity-australia/latest-release">shot up</a> by more than 60%, from about 41,000 by September 2019 to 67,000 by June 2021.</p>
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<p>The stock of dwellings under construction went from about 180,000 in 2020 to more than 240,000 today.</p>
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<p>If you are building many more houses, you need more construction materials. A mild deficit projected for 2020 has now turned into a black hole.</p>
<p>With less timber available, industry <a href="https://www.timberindustrynews.com/lumber-shortages-australia-threaten-construction-industry/">sees</a> a deficit of at least 250,000 wooden house frames in the next 15 years. Scarcity is the new normal.</p>
<p>The result is a growth in <a href="https://www.ibisworld.com/au/bed/domestic-price-of-timber/5120/">domestic prices</a> as timber processors struggle to meet contract obligations. </p>
<p>Logs cannot be manufactured. They grow, and this takes about 20 years. The only way to go through current shortages is by importing or replacing timber. </p>
<p>Importing timber isn’t cheap. Australia has very low <a href="https://link.springer.com/article/10.1007/s40725-021-00156-5">costs</a> to grow and harvest, less than half of major global exporters. Adding to that, international <a href="https://www.bloomberg.com/news/articles/2022-08-02/maersk-raises-profit-forecast-as-congestions-boost-freight-rates">shipping rates have surged</a> in the past two years. </p>
<p>These act as barriers to imports, which <a href="https://www.agriculture.gov.au/abares/research-topics/forests/forest-economics/forest-wood-products-statistics">fell</a> considerably in the past decade.</p>
<h2>Steel: supply chain woes and war on Ukraine</h2>
<p>Steel is the typical replacement for timber. But builders and renovators will not find good news there either. Steel prices also <a href="https://propertyupdate.com.au/how-much-on-average-does-it-cost-to-build-a-house/">skyrocketed</a> by more than 42% in the year ending March 2022, according to the Australian Bureau of Statistics.</p>
<p>Troubled supply chains have reduced <a href="https://www.mitre10.com.au/insite/australia-braces-for-lengthy-steel-shortage">supply</a> at a time of unexpectedly high demand, and investment has been scarce in recent years.</p>
<p>When a recovery was on the horizon, <a href="https://www.bloomberg.com/news/articles/2022-04-01/war-means-surging-steel-prices-and-unfinished-infrastructure">war</a> hit shipments of key stock from Ukraine and Russia.</p>
<p>With few players left, home builders in Australia <a href="https://www.smartcompany.com.au/opinion/john-durie-steel-price-rises-tradies-bluescope-monopoly/">assert</a> they’re at the mercy of a de facto monopoly by BlueScope Steel in the light gauge steel framing market.</p>
<p>Earlier this year, BlueScope customers had to <a href="https://www.smartcompany.com.au/business-advice/competition/bluescope-customers-pay-more-for-steel/">contend</a> with a 38% price increase on steel fabrication products.</p>
<p>A 2021 federal government <a href="https://www.globaltradealert.org/intervention/103764/anti-dumping/australia-definitive-anti-dumping-and-countervailing-duties-on-imports-of-certain-aluminium-zinc-coated-steel-600mm-from-the-republic-of-korea-and-vietnam-termination-of-part-of-the-investigation-on-imports-from-chinese-taipei-and-vietnam">decision</a> to impose dumping duties of up to 20.9% on steel imports from Korea and Vietnam did not exactly help bring prices down.</p>
<p>In February 2022, BlueScope <a href="https://www.illawarramercury.com.au/story/7629367/pandemic-trends-here-to-stay-for-steel-bluescope-ceo/">posted</a> its largest half-year profit ever.</p>
<p>According to its chief executive, Mark Vassella, current trends are here to stay. The company intends to make the most of current market conditions and expand its capacity, with plans to reignite a blast furnace deactivated in 2011.</p>
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<h2>What happens next?</h2>
<p>The price outlook is grim. </p>
<p>Master Builders Queensland chief executive Paul Bidwell reckons material price rises may not yet have <a href="https://www.abc.net.au/news/2022-08-27/housing-construction-industry-braces-for-more-uncertainty/101378080?utm_source=abc_news_web&utm_medium=content_shared&utm_campaign=abc_news_web">peaked</a>.</p>
<p>There is no indication timber prices will go down again, as they did in 2020. As for steel, 2013 was the last time there was a significant price reduction.</p>
<p>The Australia Bureau of Statistics (ABS/HIA) <a href="https://www.abc.net.au/news/2022-08-23/greed-construction-loss-making-boom-sees-builders-collapse/101334170">recorded</a> in June this year an increase of about 40% in prices for reinforced steel, structural timber and steel beams. </p>
<p>Thanks to the housing construction boom, building projects now face <a href="https://sustainableforestmanagement.com.au/australian-timber-shortage/">delays</a>, which further drives up construction <a href="https://www.fwpa.com.au/statistics-count-newsletter/1710-is-steel-growing-its-share-new-report-for-fwpa.html">costs</a>.</p>
<p>Several builders have gone <a href="https://www.afr.com/property/commercial/i-bet-more-builders-go-broke-20220804-p5b79q">broke</a>. Those under a fixed-price contract who factored low material <a href="https://www.fwpa.com.au/news/newsletters/statisticscount-newsletter/2333-structural-timber-prices-up-26-0-in-september-quarter.html">prices</a> into their quotes are now facing the hard truth of working for little or no profit, or even at a loss.</p>
<p>Will construction prices come down? One can only hope – but it’s unlikely to happen anytime soon.</p>
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Read more:
<a href="https://theconversation.com/whats-causing-australias-egg-shortage-a-shift-to-free-range-and-short-winter-days-188433">What's causing Australia's egg shortage? A shift to free-range and short winter days</a>
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<p class="fine-print"><em><span>Flavio Macau is affiliated with the Australasian Supply Chain Institute (ASCI) </span></em></p>If you’re holding off on renovating until next year expecting prices to calm down, odds are you will be disappointed.Flavio Macau, Associate Dean - School of Business and Law, Edith Cowan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1816452022-04-22T13:17:14Z2022-04-22T13:17:14ZSri Lanka’s economic crisis is a chance to reinvent international bailouts so that citizens don’t take most of the pain<iframe id="noa-web-audio-player" style="border: none" src="https://embed-player.newsoveraudio.com/v4?key=x84olp&id=https://theconversation.com/sri-lankas-economic-crisis-is-a-chance-to-reinvent-international-bailouts-so-that-citizens-dont-take-most-of-the-pain-181645&bgColor=F5F5F5&color=D8352A&playColor=D8352A" width="100%" height="110px"></iframe>
<p><em>You can listen to more articles from The Conversation, narrated by Noa, <a href="https://theconversation.com/uk/topics/audio-narrated-99682">here</a>.</em></p>
<p>Sri Lanka recorded the <a href="https://www.news9live.com/world/sri-lanka/sri-lanka-1-dead-24-injured-as-police-open-fire-on-anti-govt-protesters-8-policemen-among-wounded-165549">first casualties</a> from its spiralling economic crisis several days ago, with one protester dead and 24 more injured. This was from police firing gunshots into a crowd who were demanding the removal of a government they hold responsible for the country’s predicament. At present:</p>
<ul>
<li><p>Citizens cannot access essentials such as fuel, medicines and food, with <a href="https://economynext.com/two-more-die-in-sri-lanka-fuel-queues-amid-shortage-92903/">some even dying</a> while queuing for fuel.</p></li>
<li><p>Protesters of all classes are taking to the streets – members of the middle class face a potentially irreversible decline in living standards, while the masses are being pushed into absolute poverty. </p></li>
<li><p>Sri Lanka has formally (apparently temporarily) <a href="https://www.hindustantimes.com/world-news/sri-lanka-crisis-sri-lanka-to-default-on-all-external-debt-report-101649745741281.html">defaulted on its debts</a>. India and China, jostling for influence and power, are providing emergency funding and the IMF is considering a bailout under its <a href="https://www.imf.org/en/About/Factsheets/Sheets/2016/08/02/19/55/Rapid-Financing-Instrument">Rapid Financing Initiative</a>.</p></li>
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<p>An apologist could put much of Sri Lanka’s problems down to bad luck: the pandemic and the conflict between Russia and Ukraine are partly to blame, and neither could have been anticipated. On the other hand, poor policy choices by a corrupt, authoritarian governing elite have made Sri Lanka uniquely vulnerable. This has been a disaster in slow motion, entirely predictable, a textbook case of how a government can cause a debt crisis.</p>
<p>Before 2019, Sri Lanka was self-sufficient in food. The government elected that year banned pesticides so that only organic farming was allowed, resulting in the shutting of tea plantations (a source of export revenue) and shrinking the country’s ability to feed itself (Sri Lanka now imports grains). Together with the <a href="https://www.businesstoday.in/latest/world/story/sri-lanka-tourism-industry-impacted-on-rising-fuel-prices-power-cuts-328801-2022-04-06">damage to tourism</a> from the COVID pandemic and rising global commodity prices, this has reduced tax revenues and put more pressure on the Sri Lankan rupee.</p>
<p>The public finances have been further damaged by unsustainable subsidies and unaffordable tax cuts. Equally, there have been <a href="https://economynext.com/sri-lanka-spends-us736mn-to-defend-200-to-dollar-peg-as-reserves-for-imports-intensify-90404/">futile attempts</a> to maintain an unviable currency peg to the US dollar and bad decisions around debt management. Public debt has <a href="https://fortune.com/2022/04/09/sri-lanka-debt-crisis-inflation-rajapaksa-protest-imf-ukraine/">near-tripled</a> as a percentage of GDP to 104% in three years, while the rupee has jumped from about 200 to the US dollar in early March to almost 330 today. </p>
<h2>Deja vu</h2>
<p>Sri Lanka’s governing elites are not alone in making these kinds of poor policy choices. For example, in the run up to <a href="https://inews.co.uk/news/world/lebanons-swift-devastating-financial-crisis-leaves-residents-feeling-no-future-1448753">the crisis</a> that engulfed Lebanon in <a href="https://www.reuters.com/markets/rates-bonds/lebanons-financial-crisis-how-it-happened-2022-01-23/">late 2019</a>, the central bank swapped debt held in Lebanese pounds into debt in euros and US dollars while maintaining an unviable currency peg. </p>
<p>The fees from these activities generated huge profits for major banks but made the country vulnerable to negative external shocks, such as nervous foreign investors dumping government bonds. This helped to drive down the value of the currency and made debts priced in foreign currency harder to pay back. Just like Sri Lanka, there were protesters on the streets, governing elites waxing eloquently about the need to maintain national unity, and a middle class facing the prospect of being wiped out while millions were pushed into poverty. </p>
<p>The financial crisis <a href="https://theconversation.com/uk/topics/eurozone-crisis-11464">in the eurozone</a> in the 2010s was the result of a similar mix of bad policy choices and bad luck, as was the 1990s <a href="https://corporatefinanceinstitute.com/resources/knowledge/finance/asian-financial-crisis/">Asian financial crisis</a> before it, and the <a href="https://www.federalreservehistory.org/essays/latin-american-debt-crisis">Latin American crisis</a> in the 1980s – <a href="https://english.elpais.com/usa/2021-03-05/argentinas-perpetual-crisis.html">not to mention Argentina’s</a> protracted debt crisis and restructuring in the recent past.</p>
<p>What can be done to prevent these situations? One common thread is international bailouts from the IMF and other bodies, in which the money is conditional on reining in the state through severe cuts to public spending, privatisations and so on. After a gap of a few years, provided the state meets these conditions, borrowing in international capital markets is permitted to resume and the whole cycle can repeat. These interventions teach elites elsewhere that reckless policies will be bailed out, making it inevitable that similar debt crises will occur in apparently different circumstances in other countries. </p>
<h2>Fairer bailouts</h2>
<p>Perhaps it is time to consider a different approach, which puts the needs of citizens first and ensures that political elites aren’t rewarded for poor policy choices. <a href="https://www.jstor.org/stable/10.7312/guzm17926">Various academics</a> make <a href="https://scholarship.law.duke.edu/lcp/vol70/iss4/4/">a distinction</a> between two types of creditors in these situations: “formal creditors”, such as a western European pension fund buying sovereign bonds, and “informal creditors” within the state itself, such as pensioners who have contributed to the state social security fund, or workers who have paid into the public insurance system. </p>
<p>There’s a <a href="https://www.jstor.org/stable/10.7312/guzm17926">social contract</a> that these informal creditors will benefit from the money they pay in, yet in a bailout situation, they bear the brunt of austerity, including cuts to social security programmes. Meanwhile, foreign creditors get their money back – albeit with a “haircut” where they lose a proportion (though this risk is usually already reflected in the interest rate at which their money is lent in the first place). </p>
<p>We argue in an upcoming paper that when informal creditors have an explicit say in how a debt crisis is resolved, <a href="https://www.reuters.com/article/us-iceland-idUSTRE61P21D20100307">as in Iceland</a> in the early 2010s, both austerity and the power of governing elites will be limited. Instead, policy choices are tailored to ensuring that the economy recovers faster and a future debt crisis becomes less likely. </p>
<p>The UN Conference on Trade and Development (UNCTAD) published a <a href="http://unctad.org/en/PublicationsLibrary/gdsddf2015misc1_en.pdf">debt workout guide</a> in 2015 that offers a road map for such a process. It proposes referendums at key points in the lead-up to a bailout to ensure that the public see the options and get a chance to vote on them. </p>
<p>Sri Lanka presents an ideal opportunity to put this into practice. The suffering of ordinary citizens, pensioners, students and the impact on future generations is neither inevitable nor bad luck. Citizens’ views must be taken into account in determining how the crisis is resolved.</p>
<p>This would be a blueprint for future economic crises – and these could well be looming in view of slow post-COVID recovery, the strong US dollar and high commodity prices. In south Asia alone, Pakistan is similarly vulnerable to not having adequate foreign exchange reserves to service its sovereign debts, and despite strenuous official denials, so is Nepal. </p>
<p>The political elites in these countries may already have made the poor financial decisions that have created these vulnerabilities. But there is a good opportunity to send a message that the consequences will be different when politicians and bankers take similar decisions in future.</p><img src="https://counter.theconversation.com/content/181645/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sayantan Ghosal receives funding from UKRI. </span></em></p><p class="fine-print"><em><span>Dania Thomas does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The island nation is the latest economy to implode through mismanagement – for which the citizens will pay more than foreign creditors.Sayantan Ghosal, Professor of Economics, University of GlasgowDania Thomas, Lecturer in Business Law, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1786932022-03-14T17:40:20Z2022-03-14T17:40:20ZHow the war in Ukraine will affect food prices<figure><img src="https://images.theconversation.com/files/451892/original/file-20220314-99009-7nxaca.jpg?ixlib=rb-1.1.0&rect=23%2C42%2C3128%2C1951&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The war in Ukraine will continue to push up food prices as the supply from the 'Breadbasket of Europe' is cut in the short term and, possibly, the long term. </span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>Even before the Russian army crossed into Ukraine, food prices had been on the rise for the past year. But the world has seen large jumps in the cost of food over the the last two months. </p>
<p>Globally, <a href="https://www.fao.org/worldfoodsituation/foodpricesindex/en/">food is 20 per cent more expensive</a> now than it was a year ago, with prices rising four per cent since January this year. In Canada, the <a href="https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000403">annual food inflation</a> rate hit 6.5 per cent in January, the highest in more than a decade. </p>
<p>A variety of factors have caused these price increases, including rising <a href="https://www.bloomberg.com/news/newsletters/2022-02-16/supply-chain-latest-u-s-freight-cost-surge-means-little-inflation-relief">transportation costs</a>, <a href="https://globalnews.ca/news/8670501/supply-chain-issues-canada-manufacturers/">supply chain disruptions</a> and <a href="https://www.fooddive.com/news/food-commodity-prices-soar-as-russia-invades-ukraine/619400/">rising commodity prices</a>, such as corn and wheat.</p>
<p>The war in Ukraine will continue to push up food prices as the supply from the “Breadbasket of Europe” is cut in the short term and, possibly, the long term depending on how the conflict plays out. </p>
<h2>War and wheat prices</h2>
<p>Ukraine and Russia represent around 10 per cent and 20 per cent, respectively, of global wheat production, and nearly 30 per cent of all wheat exports come from <a href="https://www.fao.org/3/cb9013en/cb9013en.pdf">these two countries</a>. Most of this wheat is imported by countries in the Middle East and North Africa. </p>
<p>For example, Lebanon and Tunisia, two countries with vulnerable economies, import more than half of their <a href="https://datawrapper.dwcdn.net/LX3Bg/3/">wheat from Ukraine</a>. Consequently, production from Ukraine, or lack thereof, influences global food security. While Ukraine has been a consistent supplier in the past, we’ve seen global <a href="https://ageconsearch.umn.edu/record/46503/">shortages impact food security before</a>.</p>
<figure class="align-center ">
<img alt="A map of the world showing that some countries, like Turkey, import more than half their calories from Ukraine and Russia." src="https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=412&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=412&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=412&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=518&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=518&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=518&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Proportion of calories from food that are imported from Russia and Ukraine.</span>
<span class="attribution"><a class="source" href="https://datawrapper.dwcdn.net/LX3Bg/3/">(David Laborde)</a></span>
</figcaption>
</figure>
<p>The wheat export supply chains from Ukraine have been disrupted by the conflict. Port facilities in Ukraine have <a href="https://www.reuters.com/world/europe/russia-halts-vessel-movement-azov-sea-black-sea-open-2022-02-24/">suspended commercial operations</a>, preventing the outflow of the wheat crop harvested in 2021. </p>
<p>While the 2022 wheat crop was planted last fall, other crops need to be planted soon. Final production for all crops in Ukraine depends on <a href="https://www.reuters.com/world/ukraines-farmers-stalled-fueling-fears-global-food-shortages-2022-03-11/">farmers being in their fields</a>, not fighting a war, to fertilize, harvest and move the crop, if the supply chain is sturdy enough. </p>
<p>Since Russia invaded the Ukraine, concerns about supply disruptions have pushed up <a href="https://www.cmegroup.com/markets/agriculture/grains/wheat.quotes.html">wheat prices on the Chicago Board of Trade</a> by over 50 per cent to nearly US$13 per bushel. Prices rose by the maximum possible allowed by the board for the first five trading days of March — an unprecedented increase.</p>
<h2>Domestic and international impacts</h2>
<p>Higher wheat prices will translate into higher food prices for all. But the impact will depend on the farmer share of their food dollar, and the percentage of an individual’s income spent on food. </p>
<p>A significant increase in the price of wheat won’t mean an equally large increase in the price of bread in Canada and the United States. This is because the average <a href="https://www.ers.usda.gov/data-products/price-spreads-from-farm-to-consumer/">farmer’s share for every dollar spent on a loaf of bread is four cents</a> (four per cent). For flour, which is less processed than bread, the farmer’s share is 19 cents (19 per cent). </p>
<p>Overall, the <a href="https://www.ers.usda.gov/data-products/food-dollar-series/documentation.aspx">farmer share of the food dollar</a> in the U.S. is approximately 15 per cent, and it’s <a href="https://doi.org/10.1093/aepp/ppu034">slightly higher in Canada</a>. The greater degree of value added to the product beyond the farm gate, the lower the farm share. </p>
<p>In contrast, there is a strong correlation between wheat price and bread price in <a href="https://doi.org/10.1038/s43016-021-00279-9">developing countries, where the farmer share</a> of the food dollar can be close to 50 per cent. Wheat price increases will have a significant impact on the price paid for wheat-based products.</p>
<h2>Income matters too</h2>
<p>The relative effect of any food price increase will also depend on the share of income spent on food. This share declines with the wealth of the nation or consumer, as summarized by <a href="https://corporatefinanceinstitute.com/resources/knowledge/economics/engels-law/">Engel’s Law</a>. </p>
<p>The average Canadian household spends <a href="https://www.weforum.org/agenda/2016/12/this-map-shows-how-much-each-country-spends-on-food/">less that 10 per cent of its income on food</a>. An increase in the cost of food can be absorbed, although it will lower the amount of disposable income for other goods and services. Food price increases take away income for things like leisure activities.</p>
<p>In less-developed countries — and for poorer households domestically — the share of income spent on food can be above 40 per cent. For example, Lebanon and Yemen will need to import wheat at a higher cost than what they were paying for wheat from Ukraine, in a tight market. The large price increase will force a corresponding large increase in the price of bread, given the higher farmer share of the food dollar. </p>
<figure class="align-center ">
<img alt="Round flatbreads cool on a rack in a bakery." src="https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Egyptian traditional ‘baladi’ flatbread, at a bakery, in el-Sharabia, Shubra district, Cairo. The war in Ukraine has stopped shipments of wheat and other staples to North Africa and elsewhere.</span>
<span class="attribution"><span class="source">(AP Photo/Nariman El-Mofty)</span></span>
</figcaption>
</figure>
<p>The financial consequences for those consumers will be large given the relatively high percentage of income spent on food, and bread in particular. With less room to divert income from other expenditures, food security may be compromised. Low-income Canadians who are also facing rent increases will be similarly squeezed.</p>
<p>Another factor influencing the distributional impact of an increase in wheat price is whether the household or region is a wheat producer or consumer. Developing countries with a large share of poor households in urban areas are especially vulnerable to the financial hit of an increase in wheat price. </p>
<p>A decade ago, when <a href="https://ideas.repec.org/p/ags/uguewp/46503.html">crop prices last rose significantly</a>, <a href="https://doi.org/10.1093/ajae/aau038">food riots broke out</a> in countries with a high concentration of poor consumers in urban areas, including Egypt, Mexico and Pakistan. In contrast, other developing countries with a high proportion of small farms can sell some of their crop into the market. These farmers benefit from a commodity price increase and the benefits also accrue to the broader economy as these small farmers have a bit more money to spend. </p>
<h2>The compounding factor of energy prices</h2>
<p>The Russian invasion of Ukraine has also shocked energy markets. Russia produces <a href="https://yearbook.enerdata.net/natural-gas/world-natural-gas-production-statistics.html">23 per cent of the world’s natural gas</a>, and about 40 per cent of the European Union’s natural gas comes from Russia. Russia is also a <a href="https://www.iea.org/reports/russian-supplies-to-global-energy-markets/oil-market-and-russian-supply-2">major exporter of oil</a>.</p>
<p><a href="https://www.nytimes.com/2022/03/08/business/economy/russian-oil-ban-economy.html">Sanctions</a> have helped pushed up Brent crude oil prices by more than 60 per cent since the beginning of the year, although they are not the only reason the price of oil is high. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-gasoline-prices-have-soared-to-record-highs-178707">Why gasoline prices have soared to record highs</a>
</strong>
</em>
</p>
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<p>In developed countries, including Canada, the increase in energy prices is the major driver of food inflation. The food supply chain from the production at the farm level to the transportation, processing, storing and eventually selling at retail, relies heavily on energy. In developing countries, the increase in energy prices does not have the same relative impact but it will further exacerbate the increase in food prices.</p>
<h2>The impacts felt most by the most vulnerable</h2>
<p>The Russian invasion of Ukraine has set off a series of direct and indirect supply shocks to commodity markets. The impacts of these shocks will vary with the degree of reliance on wheat and energy from these countries. </p>
<p>The most vulnerable are net importing food countries that are dependent on Ukraine. The <a href="https://www.ifpri.org/blog/how-will-russias-invasion-ukraine-affect-global-food-security">risk to global food security</a> in these regions can be mitigated to a degree by allowing food trade to continue. One means is to avoid sanctioning Russian food exports, and the other as advocated by <a href="https://www.fas.usda.gov/sites/default/files/2022-03/g7-extraordinary-meeting-statement.pdf">G7 agricultural ministers</a>, is for other countries to not use export bans that would restrict movement of food out of their country.</p>
<p>However, the only way to ultimately reduce the impact is stop the conflict in Ukraine and get wheat flowing again.</p><img src="https://counter.theconversation.com/content/178693/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alfons Weersink receives funding from the Ontario Ministry of Agriculture, Food and Rural Affairs, and the Canada First Research Excellence Fund Program. </span></em></p><p class="fine-print"><em><span>Michael von Massow receives funding from a variety of organizations including the Ontario Ministry of Agriculture and Food, Genome Canada, and Protein Industries Canada.</span></em></p>The Russian invasion of Ukraine will have global impacts far beyond the region directly involved in the fighting. Food prices will increase, and the effects will be felt by the most vulnerable.Alfons Weersink, Professor, Dept of Food, Agricultural and Resource Economics, University of GuelphMichael von Massow, Associate Professor, Food Economics, University of GuelphLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1778432022-02-24T14:25:46Z2022-02-24T14:25:46ZHow Russia-Ukraine conflict could influence Africa’s food supplies<figure><img src="https://images.theconversation.com/files/448322/original/file-20220224-34050-17yiqqw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Winter wheat being harvested in the fields of the Tersky Konny Zavod collective farm in the North Caucuses. </span> <span class="attribution"><span class="source">Photo by Anton Podgaiko\TASS via Getty Images</span></span></figcaption></figure><blockquote>
<p>No man qualifies as a statesman who is entirely ignorant of the problems of wheat.</p>
</blockquote>
<p>The words of the ancient Greek philosopher, <a href="https://minimalistquotes.com/socrates-quote-25287/">Socrates</a>. </p>
<p>Wheat and other grains are back at the heart of geopolitics following Russia’s <a href="https://www.theguardian.com/world/2022/feb/24/russia-attacks-ukraine-news-vladimir-putin-zelenskiy-russian-invasion">invasion</a> of Ukraine. Both countries play a major role in the global agricultural market. African leaders must pay attention.</p>
<p>There is significant agricultural trade between countries on the continent and Russia and Ukraine. African countries imported agricultural products worth <a href="https://www.trademap.org/Index.aspx?nvpm=1%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c">US$4 billion from Russia in 2020</a>. About 90% of this was wheat, and 6% was sunflower oil. Major importing countries were Egypt, which accounted for nearly half of the imports, followed by Sudan, Nigeria, Tanzania, Algeria, Kenya and South Africa.</p>
<p>Similarly, Ukraine exported US$2.9 billion worth of agricultural products to the African continent in 2020. About 48% of this was wheat, 31% maize, and the rest included sunflower oil, barley, and soybeans. </p>
<p>Russia and Ukraine are substantial players in the global commodities market. Russia produces about <a href="https://www.igc.int/en/default.aspx">10% of global wheat while Ukraine accounts for 4%</a>. Combined, this is nearly the size of the European Union’s total wheat production. The wheat is for domestic consumption and well as export markets. Together the two countries account for a quarter of global wheat exports. In 2020 <a href="https://www.trademap.org/Bilateral_TS.aspx?nvpm=1%7c643%7c%7c%7c7%7c%7c75088%7c%7c2%7c1%7c1%7c1%7c2%7c1%7c1%7c1%7c1%7c1">Russia accounted</a> for 18%, and Ukraine 8%. </p>
<p>Both countries are also notable players in maize, responsible for a combined maize production of 4%. However, Ukraine and Russia’s contribution is even more significant in exports, <a href="https://www.trademap.org/Index.aspx?nvpm=1%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c">accounting for 14% of global maize exports in 2020</a>. Both countries are also among the <a href="https://apps.fas.usda.gov/psdonline/circulars/oilseeds.pdf">leading producers and exporters of sunflower oil</a>. In 2020, Ukraine’s sunflower oil exports accounted for 40% of global exports, with Russia accounting for 18% of global sunflower oil exports.</p>
<p>Russia’s military action has <a href="https://foreignpolicy.com/2022/01/22/russia-ukraine-war-grain-exports-africa-asia/">caused panic</a> among some analysts. The fear is that intensifying conflict could disrupt trade with significant consequences for global food stability. </p>
<p>I share these concerns, particularly the consequences of big rises in the price of global grains and oilseed. They have been <a href="https://www.fao.org/worldfoodsituation/foodpricesindex/en/">among the key drivers of global food price rises</a> since 2020. This has been primarily because of dry weather conditions in South America and Indonesia that resulted in poor harvests combined with rising demand in China and India. </p>
<p>Disruption in trade, because of the invasion, in the significant producing region of the Black Sea would add to elevated global agricultural commodity prices – with potential knock on effects for global food prices. A <a href="https://businesstech.co.za/news/finance/561384/food-and-petrol-prices-to-increase-amid-ukraine-crisis/">rise in commodities prices</a> was already evident just days into the conflict.</p>
<p>This is a concern for the African continent, which is a net importer of wheat and sunflower oil. On top of this there are <a href="https://reliefweb.int/report/ethiopia/analysis-impacts-ongoing-drought-across-eastern-horn-africa-2020-2022-period">worries about drought</a> in some regions of the continent. Disruption to shipments of commodities would add to the general worries of food price inflation in a region that’s an <a href="https://gro-intelligence.com/insights/north-africa-wheat-imports-could-jump-as-region-battles-drought">importer of wheat</a>.</p>
<h2>What to expect</h2>
<p>The scale of the potential upswing in the global grains and oilseed prices will depend on the magnitude of disruption and the length of time that trade will be affected. </p>
<p>For now, this can be viewed as an upside risk to global agricultural commodity prices, which are already elevated. In January 2022, the <a href="https://www.fao.org/worldfoodsituation/foodpricesindex/en/">FAO Food Price Index</a> averaged 136 points up by 1% from December 2021 – its highest since April 2011.</p>
<p>Vegetable oils and dairy products mainly underpinned the increases.</p>
<p>In the days ahead of Russia’s move, there was <a href="https://www.grainsa.co.za/report-documents?cat=2">a spike</a> in the international prices of a number of commodities. These included maize (21%), wheat (35%), soybeans (20%), and sunflower oil (11%) compared to the corresponding period a year ago. This is noteworthy as 2021 prices were <a href="https://www.fao.org/worldfoodsituation/foodpricesindex/en/">already elevated</a>.</p>
<p>From an African agriculture perspective, the impact of the war will be felt in the near term through the global agriculture commodity prices channel. </p>
<p>A rise in prices will be beneficial for farmers. For grain and oilseed farmers, the surge in prices presents an opportunity for financial gains. This will be particularly welcome given <a href="https://www.fb.org/market-intel/too-many-to-count-factors-driving-fertilizer-prices-higher-and-higher">higher fertiliser</a> costs which have strained farmers’ finances. </p>
<p>The Russia-Ukraine conflict also comes at a time when the <a href="https://www.fao.org/worldfoodsituation/foodpricesindex/en/">drought in South America and rising demand for grains and oilseeds in India and China</a> has put pressure on prices.</p>
<p>But rising commodity prices are bad news for consumers who have already experienced food price rises over the past two years. </p>
<p>The Russia-Ukraine conflict means that pressure on prices will persist. The two countries are major contributors to global grain supplies. The impact on prices from developments affecting their output cannot be understated. </p>
<p>Some countries on the continent, such as South Africa, <a href="https://www.trademap.org/Index.aspx?nvpm=1%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c%7c">benefit</a> from exporting fruit to Russia. In 2020 Russia accounted for 7% of South Africa’s citrus exports in value terms. And it accounted for 12% of South Africa’s apples and pears exports in the same year – the country’s second largest market. </p>
<p>But from Africa’s perspective, Russia and Ukraine’s agricultural imports from the continent are marginal – <a href="https://www.trademap.org/Bilateral_TS.aspx?nvpm=1%7c643%7c%7c%7c7%7c%7c75088%7c%7c2%7c1%7c1%7c1%7c2%7c1%7c1%7c1%7c1%7c1">averaging only US$1,6 billion</a> in the past three years. The dominant products are fruits, tobacco, coffee, and beverages in both countries.</p>
<h2>Ripple effects</h2>
<p>Every agricultural role-player is keeping an eye on the developments in the Black Sea region. The impact will be felt in other regions, such as the Middle East and Asia, which also import a substantial volume of grains and oilseeds from Ukraine and Russia. They too will be directly affected by the disruption in trade.</p>
<p>There is still a lot that’s not known about the geopolitical challenges that lie ahead. But for African countries there are reasons to be worried given their dependency for grains imports. In the near term, countries are likely see the impact through a surge in prices, rather than an actual shortage of the commodities. Other wheat exporting countries such as Canada, Australia and the US stand to benefit from any potential near term surge in demand. </p>
<p>Ultimately, the goal should be to deescalate the conflict. Russia and Ukraine are deeply embedded in the world’s agricultural and food markets. This is not only through supplies but also through agricultural inputs such as oil and <a href="https://www.statista.com/statistics/1278057/export-value-fertilizers-worldwide-by-country/">fertiliser</a>.</p><img src="https://counter.theconversation.com/content/177843/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Wandile Sihlobo is the Chief Economist of the Agricultural Business Chamber of South Africa (Agbiz) and a member of the Presidential Economic Advisory Council (PEAC).</span></em></p>Every agricultural role-player is keeping an eye on the developments in the Black Sea region.Wandile Sihlobo, Senior Fellow, Department of Agricultural Economics, Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1430122020-08-26T15:00:40Z2020-08-26T15:00:40ZAfrica has a growing food security problem: why it can’t be fixed without proper data<figure><img src="https://images.theconversation.com/files/352957/original/file-20200814-24-uvizur.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Data on food prices are crucial for political and economic stability but are not easily accessible.</span> <span class="attribution"><span class="source">Woman working in field</span></span></figcaption></figure><p>The COVID-19 pandemic and consequent lockdown measures have had a huge negative impact on producers and consumers. Food production has been disrupted, and incomes have been lost. But a far more devastating welfare consequence of the pandemic could be <a href="https://www.imf.org/%7E/media/Files/Publications/covid19-special-notes/en-special-series-on-covid-19-food-markets-during-covid-19.ashx?la=en">reduced access to food</a>.</p>
<p>A potential rise in food insecurity is a <a href="https://www.worldbank.org/en/topic/agriculture/brief/food-security-and-covid-19">key policy point</a> for many countries. The <a href="https://www.weforum.org/agenda/2020/04/africa-coronavirus-covid19-imports-exports-food-supply-chains">World Economic Forum</a> has stated this pandemic is set to “radically exacerbate food insecurity in Africa”. This, and other supplier shocks, such as locust swarms in East Africa, have made many African economies more dependent on externally sourced food. </p>
<p>As the pandemic continues to spread, the continued functioning of regional and national <a href="https://www.ilo.org/sector/Resources/publications/WCMS_742023/lang--en/index.htm">food supply chains</a> is vital to avoid a food security crisis in countries dependent on agriculture. This is true in terms of both nutrition and livelihoods. Many countries in Southern and East African economies are in this situation. </p>
<p>The integration of regional economies is one vehicle for alleviating pervasive food security issues. But regional integration can’t be achieved without the appropriate support for investment in production, infrastructure and capabilities. </p>
<p>And, crucially, there must be more accurate and timely information about food markets. Data on <a href="https://agra.org/wp-content/uploads/2017/09/Final-AASR-2017-Aug-28.pdf">food prices</a> are crucial for political and economic stability. Yet they are not easily accessible. </p>
<p>A <a href="https://static1.squarespace.com/static/52246331e4b0a46e5f1b8ce5/t/5f43657bf186f763e265c86b/1598252427643/CCRED+WP+2_2020+Southern+African+Market+Observatory.pdf">study</a> by the <a href="https://www.competition.org.za/">Centre for Competition, Regulation and Economic Development</a> highlights how poor and inconsistent pricing data severely affects the quality of any assessment of agricultural markets in the Southern and East African region.</p>
<h2>What’s missing</h2>
<p>There have been attempts to collate and disseminate agricultural prices internationally. National commodity exchanges have also been created in some countries to facilitate wholesale agricultural trade and the collection of market and price information in Africa. These include the <a href="https://ratin.net/">Regional Agricultural Trade Intelligence Network</a>, the Food and Agricultural Organization’s <a href="http://www.fao.org/statistics/en/">Corporate Statistical Database</a> and the World Food Programme’s <a href="https://dataviz.vam.wfp.org/">Vulnerability Analysis and Mapping database</a>. </p>
<p>But the overall effectiveness of commodity exchanges has been limited in countries in Southern and East Africa. With some exceptions, they have not been widely used, meaning that small producers have not had good access to reliable pricing information.</p>
<p>The patchy data that is available at the producer level indicates very large price differentials across Southern and East Africa. These differentials are far in excess of reasonable transport and related costs. They speak to the lack of integration of markets. They also point to the potential that local market power is being exploited. An example would be the power of large buyers over small producers who face high transport costs to individually transport goods to faraway markets.</p>
<p>Having up-to-date information on food prices – along with other market information relating to production and market structures – is necessary to understand agricultural food systems in the region. This is crucial to track events ranging from the effects of this pandemic to the weather as well as locust swarms. </p>
<p>Without close to realtime data, it is not possible to rapidly plan appropriate responses.</p>
<p>In addition, the lack of readily available market data restricts our understanding of the impact of changing supply and demand conditions in local markets, and regional value chains more broadly. The climate crisis – and other supply shocks like the pandemic – imply much greater volatility in production and food prices. The effects will become ever more dire for farmers, vulnerable consumers and downstream industries.</p>
<h2>Hit the reset button</h2>
<p>Máximo Torero, chief economist of the Food and Agriculture Organization, has <a href="https://www.nature.com/articles/d41586-020-01181-3?proof=trueMay%2525252F">observed</a> that this pandemic is an opportunity to hit the reset button on policies to alleviate food security problems. It has emphasised the fragility of overdependence on a globalised agricultural system. What is needed to achieve a more integrated and regionalised agricultural system is coordinated public policy responses to support agribusiness. These responses must also ensure small and medium-sized farmers are included. </p>
<p>The <a href="https://www.worldbank.org/en/topic/agriculture/brief/food-security-and-covid-19">World Bank</a> is working closely with many governments to track domestic food and agricultural supply chains. The goal is to ensure that food systems continue to function despite the challenges wrought by COVID-19. In addition, the <a href="http://www.fao.org/news/story/en/item/1268059/icode/">Food and Agriculture Organization</a> has mapped a way to potentially avoid a looming food crisis in Africa. These short-term measures are welcomed. </p>
<p>Action can be taken at a regional level too. For example, an effective market observatory would assist in the promulgation of wider, deeper and more competitive agricultural markets. Market observatories help market participants in reading market signals while also reducing market volatility. </p>
<p><a href="https://ec.europa.eu/info/food-farming-fisheries/farming/facts-and-figures/markets/overviews/market-observatories_en">Examples</a> of these can be found throughout the European Union covering a range of agricultural products. Developing this capability would also contribute to identifying key trends in the region in close to realtime. And it would help identify issues relating to market access, border and transport-related problems, and possible anticompetitive behaviour.</p>
<p>In the medium to long term, greater attention is needed on ensuring appropriate market shaping measures for more resilient and integrated regional agricultural systems in the Southern and East African region. Such measures depend on having accurate and timely information on market participants, food production and prices.</p><img src="https://counter.theconversation.com/content/143012/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Simon Roberts is affiliated with the Centre for Competition, Regulation and Economic Development (CCRED) at the University of Johannesburg. CCRED has received funding for related research from the University of the Western Cape’s Centre of Excellence in Food Security, and the University of Johannesburg’s University Research Council.</span></em></p><p class="fine-print"><em><span>Jason Bell is affiliated with the Centre for Competition, Regulation and Economic Development (CCRED). CCRED has received funding for this research from the University of the Western Cape’s Centre of Excellence in Food Security, and the University of Johannesburg’s University Research Council.</span></em></p>Poor and inconsistent pricing data makes it hard to assess agricultural markets.Simon Roberts, Professor of Economics and Lead Researcher, Centre for Competition, Regulation and Economic Development, UJ, University of JohannesburgJason Bell, Researcher at the Centre for Competition Regulation and Economic Development, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/977122018-06-10T08:54:41Z2018-06-10T08:54:41ZUgandan budget: Striking the balance between infrastructure and social sectors is key<figure><img src="https://images.theconversation.com/files/222029/original/file-20180606-137309-1b0ozxt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Constraints to growth and productivity remain notable, particularly in agriculture and manufacturing in Uganda.</span> <span class="attribution"><span class="source">EPA/Dai Kurokawa</span></span></figcaption></figure><p><em>Member countries of the <a href="https://www.eac.int/">East African Community</a> are preparing to simultaneously table the 2018-2019 Budgets in their respective parliaments. In Uganda, finance minister Matia Kasaija will present a <a href="https://www.newvision.co.ug/new_vision/news/1475255/ugandas-budget-reading-june">30.9 trillion Uganda shilling (USD$8 billion) budget</a>. Sarah Logan examines the economic context of Uganda’s annual budget and the associated challenges.</em></p>
<p><strong>What is the context in which this year’s budget is being tabled?</strong></p>
<p>The Ugandan government is facing pressure to deliver on many fronts. Economic growth <a href="http://databank.worldbank.org/data/home.aspx">slowed in recent years</a>, averaging 4.5% in the five years to 2016. That’s down from an average of 7.8% in the previous five year period. Curtailed growth was due to lower commodity prices. Uganda’s main commodity exports of coffee, cotton and copper all experienced diminished world prices. </p>
<p>Other contributing factors were an increased incidence of drought and the conflict in neighbouring South Sudan, Uganda’s main export trade partner. Relatively <a href="http://databank.worldbank.org/data/home.aspx">high population growth</a>, averaging 3.4% in the five years to 2016, eroded much of the gains from economic growth in recent years, resulting in declining GDP per capita and increased poverty.</p>
<p>Constraints to growth and productivity remain notable, particularly in agriculture and manufacturing. These sectors are hampered by infrastructure gaps, high interest rates that have made borrowing expensive, and difficulties accessing high quality inputs. These constraints have had a marked impact on micro, small, and medium enterprises, which constitute <a href="https://www.theigc.org/wp-content/uploads/2017/01/Sherpherd-et-al-2016-paper.pdf">93.5%</a> of Ugandan firms. Such limitations pose obstacles to achieving production at scale, which is needed for firm growth.</p>
<p>In recent budgets, the government has significantly <a href="http://www.monitor.co.ug/News/National/Works-lion-s-share-budget/688334-3896320-j9o2ypz/index.html">raised investment</a> in public infrastructure (notably in transport, works, and energy) to address these constraints. It’s also tried to cater for relatively rapid urbanisation. But long project timescales, poor project selection and execution, and absorptive capacity constraints mean that maximum gains from these investments have <a href="http://eprcug.org/blog/535-how-should-uganda-finance-infrastructure-develop">not been realised</a>.</p>
<p>These investments have also necessitated greater government spending in recent years, financed by increased borrowing from both domestic and external sources. As a result government <a href="https://tradingeconomics.com/uganda/government-debt-to-gdp">debt has grown</a> to 38.6% of GDP, up from 19.2% in 2009. But debt remains within the confines of what is considered sustainable.</p>
<p><strong>What are the most challenging factors heading into this budget?</strong></p>
<p>Working out the right balance between investing in infrastructure and social sectors is a key challenge. While more spending on infrastructure development is vital, it has necessitated <a href="http://csbag.org/wp-content/uploads/2018/01/National-Budget-Framework-Paper-FY-2018-19-FY-2022-23-13.pdf">budget cuts</a> to arguably already underfunded social sectors, including health and education. But the right balance cannot be judged on budget allocations alone: these figures don’t take into account off-budget financing, which is common in social sectors. </p>
<p>International targets (where they exist) are also of limited value in guiding allocations as spending needs vary across countries and over time.</p>
<p>Another key challenge is how to fund the budget. The National Budget Framework Paper envisions both external and domestic borrowing, as well as the use of domestic tax and non-tax revenues. Government’s domestic borrowing has contributed to raising interest rates, making borrowing more expensive. </p>
<p>Consequently, a growing portion of government spending now goes on servicing its debt obligations, estimated at <a href="http://csbag.org/wp-content/uploads/2018/01/National-Budget-Framework-Paper-FY-2018-19-FY-2022-23-13.pdf">12.3%</a> of total revenues for 2018/19. In time, this figure should be lowered, thus opening up funds for spending on development priorities. </p>
<p>Domestic tax and non-tax revenues are generally a preferred source of budget funding as they do not incur debt. The contribution from these sources is expected to rise to 53% through anticipated improvements to tax administration and compliance. This is a positive sign. </p>
<p><strong>What policy highlights would you want to see and why?</strong></p>
<p>Continued investment in energy and infrastructure should be pursued, but it is necessary to improve the efficiency of these public investments. For example, up to 60% of the works and transport budget <a href="https://www.independent.co.ug/surprises-2018-budget/">was reportedly not spent</a>. </p>
<p>The government has recognised in its National Budget Framework Paper that issues around under-execution of development projects need to be addressed and it is working on ways to better allocate funds based on absorptive capacity. The government is also cognisant of the need to provide funds to cover operations and maintenance costs in coming years to slow infrastructure deterioration.</p>
<p>The government has acknowledged the need to raise the country’s tax to GDP ratio, which at <a href="http://databank.worldbank.org/data/home.aspx">13.5%</a> is relatively low. The Uganda Revenue Authority is exploring <a href="https://www.theigc.org/project/information-fiscal-capacity-tax-enforcement-experimental-evaluation/">several avenues</a> to improve tax administration and compliance. </p>
<p>More could be done to expand the tax base and minimise distortions through, for example, greater focus on value added tax – one of the more progressive tax instruments – rather than import tariffs. Imports are vital as inputs for manufacturing, and restrictions on imports reduce firms’ productivity and competitiveness. </p>
<p>Rwanda’s experience with <a href="https://www.theigc.org/blog/the-incidence-and-impact-of-electronic-billing-machines-for-vat-in-rwanda/">raising value added tax</a> through mandatory usage of electronic billing machines is valuable in this regard.</p>
<p><strong>How are Uganda’s growth prospects looking?</strong></p>
<p>In coming years, GDP growth is set to accelerate as recent and ongoing public investments begin to yield returns.</p><img src="https://counter.theconversation.com/content/97712/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sarah Logan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In coming years, Uganda’s GDP growth is set to accelerate as recent and ongoing public investments begin to yield returns.Sarah Logan, Economist, International Growth CentreLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/880572017-11-24T13:44:33Z2017-11-24T13:44:33ZFour things Zimbabwe can do to recover from the Mugabe era<p>Long in coming but swift and relatively painless when it happened, <a href="https://theconversation.com/will-mnangagwa-usher-in-a-new-democracy-the-view-from-zimbabwe-88023">the downfall of Robert Mugabe</a> offers Zimbabwe a once-in-a-generation opportunity to recalibrate its hitherto dire trajectory. The transition comes with myriad challenges and opportunities, the handling of which will ultimately determine what direction the country takes. Here are four key ways that the new president, Emmerson Mnangagwa, can get it right.</p>
<h2>1. Strike a new political settlement</h2>
<p>The lesson of Zimbabwe’s past 20 years is that a toxic political environment is a severe impediment to the economic development. Political risks create uncertainty and keep sorely needed investment away. A key priority must therefore be the creation of a more inclusive political settlement. When the time came, Zimbabweans from all walks of life were ready to come out and clamour for a fresh start – their “ideals” clearly unified them and need to be harnessed to something concrete out of them.</p>
<p>Some of the provisions needed to do this are already in the constitution, and simply unimplemented. Others, however, need to be negotiated within and among all political actors. Equally, it’s important Zimbabwe doesn’t rush into new elections, but instead creates the conditions necessary for free, credible and fair ones in the future. Properly managed elections are not a magic wand, but they will go a long way in reducing the socio-economic costs of political risks associated with instability.</p>
<h2>2. Reduce poverty and promote inclusive growth</h2>
<p>Zimbabwe has never fully recovered from the <a href="https://www.csmonitor.com/World/Africa/2008/0325/p06s02-woaf.html">economic crisis</a> that peaked in 2008. <a href="https://www.gfmag.com/global-data/country-data/zimbabwe-gdp-country-report">GDP growth</a> rebounded to 11.9% in 2011, but declined to an estimated -2.5% by 2017. Formal sector jobs have shrunk significantly over the last two decades. A 2015 report showed that of the 6.3m people defined as employed, 94.5% were working in the informal economy, 4.16m of them as smallholder farmers. The formal sector, meanwhile, accounts for just 350,000 people. </p>
<p>This means a majority of Zimbabweans can be classified as “working poor”, doing precarious work with irregular incomes in agriculture and the informal sector. Poverty levels remain high: <a href="https://reliefweb.int/report/zimbabwe/zimbabwe-humanitarian-needs-overview-2016">around 72% of Zimbabweans now living in chronic poverty</a>. The challenge is to generate national and individual wealth, while also making sure a lot more people benefit from growth than have done over the past two decades. </p>
<p>Currently, the service sector contributes the most to GDP. While mining and the service sector have earned the country much-needed foreign currency and contributed significantly to GDP growth, they can only do so much alleviate poverty in a country where a majority of people still live off the land.</p>
<h2>3. Make agriculture work</h2>
<p>To start reducing poverty as soon as possible, the government needs to get the agricultural sector working again. </p>
<p>When agriculture does well in Zimbabwe, the <a href="https://www.theindependent.co.zw/2017/09/29/creating-100bn-economy-possible/">knock-on effect</a> is remarkable. It not only raises rural incomes (thereby reducing poverty) but also creates more manufacturing jobs in the cities and small towns as the “agriculture-induced” demand for goods and services rises. It also expands the tax base and enables Zimbabweans sitting on productive assets to contribute to building the economy.</p>
<p>The good news is that, while other sectors of the economy will take more time to develop, this is one area that can provide some quick returns. Productivity needs to keep rising and support must be provided for people who have access to farmland, but are currently too poor to use it effectively.</p>
<p>Getting agriculture to work ought to be a core priority. Given the nature of structural changes (particularly the emergence of opportunities through global value chains) a key starting point must be an agricultural review commission to investigate current conditions for smallholder agriculture and recommend new policies required to transform in the sector.</p>
<h2>4. Unlock investment</h2>
<p>With <a href="https://issafrica.org/country-file-zimbabwe/natural-resources-and-environment">abundant natural resources</a> and a <a href="https://africacheck.org/reports/is-zimbabwes-adult-literacy-rate-the-highest-in-africa/">relatively literate population</a>, Zimbabwe is well-placed to attract a large share of the investment being <a href="http://www.smesouthafrica.co.za/15400/Why-more-SA-companies-are-investing-in-the-rest-of-Africa/">funnelled through South Africa</a> into the rest of the continent. </p>
<p>The country’s mining industry, for one, has already proven its capacity to attract investment, provided global commodity prices <a href="http://www.worldbank.org/en/news/press-release/2017/10/26/commodity-prices-likely-to-rise-further-in-2018-world-bank">recover as expected</a>. But even then, that will depend upon cleaning up Zimbabwe’s toxic political environment and <a href="http://www.thezimbabwenewslive.com/business-15905-zimbabwe-trust-breaks.html">confused policymaking</a>, both of which increase costs for investors. </p>
<p>The country could also benefit from opportunities in the emerging digital economy, but again, this will mean prioritising and maintaining investment in bureaucracy and infrastructure.</p>
<p>All this will require huge sums of money, which the government may not have at the moment. Still, perhaps this new beginning is at least an opportunity for constructive dialogue with the donor community, something Zimbabwe struggled to manage while Mugabe was at the helm. If Zimbabwe gets the politics right, there is every reason to be optimistic that this promising country will flourish at last.</p><img src="https://counter.theconversation.com/content/88057/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Admos Chimhowu currently holds an ESRC Strategic Network Grant (grant number ES/P007406/1) looking at how countries are planning for sustainable development</span></em></p>Zimbabwe has two lost decades to move on from. Fortunately, there are many ways out.Admos Chimhowu, Senior Lecturer, Global Development Institute, University of ManchesterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/769162017-06-14T07:59:34Z2017-06-14T07:59:34ZFact Check: is China dumping steel?<blockquote>
<p>We are continuing to act, when necessary, against unfair trading conditions in the steel sector, and against foreign dumping.</p>
</blockquote>
<p><strong>European Union Trade Commissioner Cecilia Malmstroem speaks after the EU introduced new <a href="http://www.financialexpress.com/industry/eu-slaps-china-with-new-steel-anti-dumping-duties/710666/">duties on steel products from China</a> on Friday, June 9.</strong></p>
<p>China’s hold over the international steel market is pretty clear. It produces <a href="http://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7317">half the world’s steel</a> and in 2015, finished imports from China to the EU were <a href="http://www.eurofer.org/News%26Events/PublicationsLinksList/201605-AnnualReport.pdf">up 140% on 2013</a>. Imports now account for a quarter of the EU market, and at the same time, prices for a range of major EU <a href="http://www.eurofer.org/News%26Events/PublicationsLinksList/201605-AnnualReport.pdf">product classes have collapsed</a>. </p>
<p>This trend, <a href="https://www.wsj.com/articles/chinas-steel-exports-plunge-amid-new-tariffs-1481180615">replicated to differing degrees worldwide</a>, has <a href="http://fortune.com/2017/04/07/donald-trump-executive-order-steel-dumping-xi-jinping-china/">led to accusations</a> in the US and elsewhere that China is selling its steel at a loss, or more accurately in this case, keeping costs artificially low so that other producers cannot compete, in a practice widely known as “dumping”.</p>
<p>In the EU, tariffs have dented Chinese imports but it’s a bit like plugging one leak only to find another. Chinese imports are replaced by products from places like Iran, Russia and Ukraine. Imports from Iran have <a href="http://www.eurofer.org/News%26Events/Press%20releases/Press%20Release%20%20European%20trade%20defence%20ef.fhtml">increased almost tenfold since 2012</a>. The EU has numerous trade defence measures on other nations, and not just on a range of Chinese steel products.</p>
<p>In the UK, imports are also on the up. According to UK trade association UK Steel, imports accounted for 60% of UK demand in 2015, up from 57% in 2012. Chinese steel imports accounted for 11% of 2015 UK steel demand, up from 2% in 2011. UK imports from the EU remain twice as high <a href="https://www.eef.org.uk/uk-steel/news-blogs-and-publications/publications/2017/mar/key-statistics-2016">as from the rest of the world</a>, but no one can escape downward pricing pressure from such a huge player.</p>
<p>The World Trade Organisation defines dumping as state interference in the market: protection leading to subsidised exports at prices below real market costs. Specifically, dumping occurs when a country’s average export price over time is less than a reasonable price for the same product when sold at home. This <a href="https://www.wto.org/english/docs_e/legal_e/19-adp.pdf">characterisation of dumping</a> is based on market prices rather than production costs – UK Steel contends this is unrepresentative. </p>
<p>Why would China be dumping steel? Well, the European trade body, Eurofer, estimates that China’s excess production – what it makes beyond the level of domestic demand – is as much as double total EU demand. In short, it has a lot to sell. Eurofer also believes that China exports steel <a href="http://www.eurofer.org/News%26Events/PublicationsLinksList/201605-AnnualReport.pdf">at below production costs</a>. According to UK Steel, Chinese producers lose US$34 on every tonne produced. International steel trade associations <a href="http://www.eurofer.eu/Issues%26Positions/Trade/ws.res/Steel_Industry_Adjustment_Policy_Comments_Appendix.fhtml/Steel_Industry_Adjustment_Policy_Comments.pdf">also believe that China sells below</a> its normal domestic price and cost.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/168739/original/file-20170510-28095-dnerv0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/168739/original/file-20170510-28095-dnerv0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/168739/original/file-20170510-28095-dnerv0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/168739/original/file-20170510-28095-dnerv0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/168739/original/file-20170510-28095-dnerv0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/168739/original/file-20170510-28095-dnerv0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/168739/original/file-20170510-28095-dnerv0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/168739/original/file-20170510-28095-dnerv0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
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<span class="attribution"><a class="source" href="https://www.worldsteel.org/media-centre/press-releases/2017/march-2017-crude-steel-production.html">worldsteel.org</a></span>
</figcaption>
</figure>
<p>One consultant, <a href="http://www.thinkdesk.de/index.php?id=71">Think!Desk</a>, has argued that due largely to coke and labour costs, the production costs of a typical Chinese steel factory are marginally (€30 per tonne) less than those of European producers. As China, however, imports around half its iron ore, this advantage is outweighed by shipping costs. </p>
<p>The analysis concludes that compared to the EU, the cost base of Chinese steel benefits from preferential treatment on tax arrangements, bank loans, land use rights, environmental standards, import substitution subsidies and grants and unpaid dividends. </p>
<h2>Verdict</h2>
<p>In short, Chinese steel may not possess a “natural” cost advantage, but does operate at artificially depressed costs levels. In other words, <a href="http://www.eurofer.org/News%26Events/PublicationsLinksList/2015011901-ChinaSteelStudy.pdf">China is dumping steel</a>.</p>
<p>But the issue of dumping is not simply technical and legal; it is political and ideological. International trade associations argue that state intervention in China’s steel industry leads to massive oversupply and damages global market discipline. The demand is made that China relinquishes state ownership and control of its steel industry: a dramatic call, unlikely to be heeded. </p>
<p>And for all the protests in the UK, the irony is that British steel workers would likely support a form of Chinese-style intervention as part of an industrial strategy to reinvigorate the prospects for British steel.</p>
<h2>Review</h2>
<p><strong>Ray Hudson, Professor of Geography at Durham University</strong></p>
<p>The author is absolutely right that the issue of dumping is political and ideological, not simply technical and legal. At issue is the conceptualisation of dumping – does it relate to selling below production costs or below market prices? </p>
<p>In this article, the definition of dumping as <em>“keeping costs artificially low so that other producers cannot compete”</em> raises the thorny question of what a “natural” production cost would be and how it would be defined. The other option, to define dumping as <em>“when a country’s average export price over time is less than a reasonable price for the same product when sold at home”</em>, rests on the nebulous definition of “reasonable”.</p>
<p>Markets are always political constructions, so there is no natural market price to use as a reference point. Countries and companies always have strategies in mind for product pricing. So when this piece arrives at the conclusion that China is indeed dumping steel, we should consider whether Beijing (or Tehran, or Moscow…) is simply setting steel prices at a level which harries the competition and drives trade its way, much like major capitalist enterprises do the world over when they seek to compete and enhance market share.</p><img src="https://counter.theconversation.com/content/76916/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Politicians in Europe, the US and the UK have blamed steel industry woes on artificially cheap imports.Ian Greenwood, Associate Professor in Industrial Relations and Human Resource Management, University of LeedsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/737662017-03-03T00:44:38Z2017-03-03T00:44:38ZThree reasons businesses are paying higher dividends rather than investing<figure><img src="https://images.theconversation.com/files/158840/original/image-20170301-29906-5utgwp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">More than A$72 billion has been paid in dividends in 2016-17.</span> <span class="attribution"><span class="source">AAP/Dean Lewins</span></span></figcaption></figure><p>Typically, low interest rates, together with record profits, would create an environment in which businesses would be happy to invest in new projects – providing a boost to economic growth and jobs. Unfortunately, Australians do not appear to be living in “typical” times. Rather than lifting investment, businesses <a href="http://www.afr.com/markets/asx-200-dividend-count-heads-to-record-72bn-on-resources-comeback-20170224-gukd0j">have chosen</a> to return cash to shareholders in the form of <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/5676.0Main+Features1Dec%202016?OpenDocument">record dividends</a> and share buybacks.</p>
<p>There are many possible reasons – including political uncertainty – why businesses are seemingly ignoring the supportive economic environment and paying such large dividends (A$72 billion in 2016-17) instead of reinvesting in growth opportunities. </p>
<p>Three likely candidates are firm commitments to set dividend payouts, the sustainability of current commodity prices, and a perceived lack of investment opportunities.</p>
<p>This is not necessarily bad for the economy. Private investors will be happy to have more cash in their pocket, and at least some of the extra cash handed to shareholders will result in increased consumption, which may encourage businesses to invest in the future.</p>
<h2>Three key reasons</h2>
<p>Having come to the end of a major investment cycle, many resources companies are reluctant, for example, to build more mines and create more supply, as this creates downward pressure on prices. These companies have committed to a set dividend payout ratio. Mining giant <a href="http://www.afr.com/business/mining/bhp-billitons-bumper-profit-lifts-dividends-20170221-guhoeu">BHP Billiton</a>, for example, promises to pay its shareholders at least 50% of underlying profits.</p>
<p>The high level of dividends in the mining sector probably says something about the sustainability of current commodity prices. Despite extra supply from a number of additional mines (and increased production from existing mines) being available in 2016, the iron ore price <a href="https://thewest.com.au/business/fmg-rewards-investors-with-sharp-rise-in-profits-ng-b88394202z">has surged</a> to more than US$90 per tonne.</p>
<p>However, for mining companies to justify investing the billions of dollars required for a new mine, they need to have some comfort that such prices will persist. While the majority of forecasters have revised up their estimates, the consensus is still for the price to <a href="http://www.theaustralian.com.au/business/mining-energy/ord-minnett-lifts-2017-iron-ore-price-forecast/news-story/63a174477dda6339e5b876faaf9b57fb">fall below</a> US$60 per tonne by 2018. </p>
<p>The third reason is a perceived lack of investment opportunities. One explanation for this may be a reduction in infrastructure spending by state and federal governments owing to <a href="http://www.investordaily.com.au/markets/40402-lack-of-projects-stifling-infrastructure-investment">fiscal constraints</a>.</p>
<p>If businesses cannot identify a project that provides an adequate return on capital, then they are better off returning cash to shareholders. <a href="http://www.investopedia.com/articles/02/010902.asp">Corporate finance theory</a> would suggest this is good. </p>
<h2>What about political uncertainty?</h2>
<p>Perhaps the largest drag on investment results from the high level of uncertainty about the geopolitical environment. </p>
<p>Domestically, there appears to be little policy direction from a Coalition government wary of a rise in populism. </p>
<p>Regionally, Reserve Bank Governor <a href="http://www.rba.gov.au/speeches/2017/sp-gov-2017-02-24.html">Phillip Lowe</a> has identified possible risks in China owing to a continued build-up of debt. </p>
<p>And, globally, the Trump administration is perhaps the biggest cause of uncertainty. </p>
<p>In the months since Donald Trump’s victory in the US presidential election, global sharemarkets have rallied strongly. Australia’s market has been no different.</p>
<p>The All Ordinaries index has risen by 10% in the past quarter. However, the key to maintaining high prices is earnings growth. </p>
<p>The February earnings season did not disappoint in this respect. For the last quarter of 2016, Australian businesses reported the <a href="http://www.afr.com/news/economy/business-profits-shatter-expectations-inventories-hold-ground-20170227-gulzhg?login_token=1UZXumTn4h-43F5vZJ0QD2dus0wdSchPrpvvjWsnDgjG9IGS2VPlyecD1fUk0M1rk4tKscIDnUmbLueM_azPvg&expiry=1488313477&single_use_token=7HtqqeQ2AmYd_v3OsuJ90gZ7G1hInuTHy4c_lhDVCbveVTjHkRY7w3R4tdJkoMM0eNhgv_0IIRkWk3ChkuwBUQ">biggest earnings increase since 2001</a> – well ahead of market expectations.</p>
<iframe src="https://datawrapper.dwcdn.net/CKDFt/1/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="500"></iframe>
<p>The <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/5676.0Main+Features1Dec%202016?OpenDocument">strong results</a> have largely been driven by a 21% (A$4 billion) surge in mining industry profits. Thanks to a dramatic increase in commodity prices, tighter cost controls and increased efficiencies, the industry reported gross profits (trend estimate) of more than A$24 billion for the quarter. </p>
<p>Across the board, firm profitability has benefited from below-trend growth in wages.</p>
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<p>Deregulation, infrastructure investment and tax reform could boost global growth and encourage investment by Australian firms in the process. However, negatives resulting from the potential for trade war (or worse) owing to the redrawing of US foreign policy will clearly hold back investment.</p>
<p><a href="https://espace.curtin.edu.au/handle/20.500.11937/38374">My research</a> has shown that political uncertainty is ultimately a negative for sharemarkets. Frictions in the investment decision process act as one mechanism for this relationship. In the meantime, shareholders should enjoy the benefit of higher dividend payouts while they last.</p><img src="https://counter.theconversation.com/content/73766/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee Smales does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Rather than lifting investment, Australian businesses have chosen to return cash to shareholders in the form of record dividends and share buybacks.Lee Smales, Associate Professor, Finance, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/704462016-12-28T09:44:06Z2016-12-28T09:44:06ZPolitical turmoil in 2016 can be traced back to the 2008 financial crisis<figure><img src="https://images.theconversation.com/files/151007/original/image-20161220-26729-x2vm5i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Students protest outside the parliament in South Africa. The protest is seen as part of a bigger political crisis.</span> <span class="attribution"><span class="source">REUTERS/Sumaya Hisham</span></span></figcaption></figure><p><em>2016 was full of dramatic political and economic developments across the globe. The Conversation Africa business and economy editor Sibonelo Radebe asked Thanti Mthanti to highlight key events and look at future prospects.</em></p>
<p><strong>How would you rate and characterise 2016 in economic terms?</strong></p>
<p>It was obviously an extremely difficult year for many countries, including South Africa. </p>
<p>From a South African point of view, the challenges are clearly reflected in a number of key economic indicators. Economic <a href="http://mg.co.za/article/2016-09-06-south-african-economy-grows-by-33-in-second-quarter-of-2016">growth has slowed</a> significantly and is projected by the country’s Reserve Bank to be close to <a href="https://theconversation.com/south-africa-can-expect-zero-growth-its-problems-are-largely-homemade-62943">zero</a> for 2016. Unemployment <a href="http://ewn.co.za/2016/05/09/SA-unemployment-rate-rises">reached 27%</a>, the highest rate over the last decade. </p>
<p>South Africa’s economic challenges are largely a reflection of its inability to change in the light of <a href="http://www.globalresearch.ca/imf-warns-of-slow-growth-and-economic-shocks-in-2016/5498690">global shocks</a>. We have seen the persistence and evolution of the economic crisis emanating from the 2008 financial meltdown. South Africa’s policies have hardly changed to align with new global economic realities. </p>
<p>Fiscal, monetary, exchange rate policies and macro-prudential policies have essentially remained the same. This is due, in part, to the political strength of parasitic vested interests. </p>
<p>As a result, low economic growth, high unemployment and a strained fiscus have evolved to become a political crisis. This is partially reflected in the outcome of the 2016 local government <a href="https://theconversation.com/major-shift-in-south-african-politics-as-the-da-breaks-out-of-its-cape-enclave-63619">elections</a> and the increasing pressures around the country’s president, Jacob Zuma, and the governing African National Congress (ANC).</p>
<p>Globally the evolution of the economic crisis into political crises can be seen through the <a href="https://theconversation.com/south-africa-must-take-heed-ignoring-inequality-and-race-got-trump-elected-68621">rise of populists</a> like Donald Trump in the US and the Le Pen spectre in France. There is also general political instability in countries like <a href="https://theconversation.com/how-did-brazil-go-from-rising-bric-to-sinking-ship-57029">Brazil</a> and <a href="https://theconversation.com/has-the-economy-lost-its-influence-on-turkeys-foreign-policy-53203">Turkey</a>.</p>
<p>This simply confirms that, over time, economic pressures manifest as political crises. Leaders who fail to respond with effective economic strategies become the target as people express their anger politically. </p>
<p><strong>How is South Africa dealing with the prevailing crisis?</strong></p>
<p>South Africa is not doing very well. Unfortunately the country’s underlying economic structure has not changed for the last 40 to 50 years, largely surviving unscathed in the transition to democracy.</p>
<p>According to World Bank data South Africa has, on average, produced economic growth of zero percent on a GDP per capita basis in US dollar terms for over nearly half a century. The country has also performed badly, in relative terms, on industrial upgrading. And this goes to the heart of South Africa’s difficulty to navigate the prevailing economic conditions. </p>
<p>But there is hope. Increasingly a <a href="http://www.iol.co.za/news/politics/save-south-africa-from-zuma-pityana-2092744">certain strata</a> of the black elite is beginning to question the prevailing economic arrangements in the country. And there is a visible fracturing of the elite as the mainly white dominated economy struggles to accommodate the aspirations of the rising black elite.</p>
<p>We have seen that to a degree with the <a href="https://theconversation.com/quality-free-university-education-is-necessary-and-possible-53654">student protests</a>. The <a href="http://www.ujuh.co.za/what-about-the-missing-middle-in-the-university-access-issue/">aspiring middle class</a> are demanding to be accommodated in the economic arrangements of the country. African children are clearly no longer happy to be merely hewers of wood and drawers of water. </p>
<p>This brings hope that, over time, the prevailing economic arrangements will be forced to accommodate an increasingly militant section of the black elite. This may lead to positive change.</p>
<p><strong>What in your view were the highlights for the year?</strong></p>
<p>The continued, and seemingly, successful <a href="https://www.theguardian.com/business/economics-blog/2015/oct/19/chinese-economic-slowdown-or-slow-rebalancing">rebalancing</a> of China’s economy has been the highlight of 2016. </p>
<p>I’m of the view that China is set for a recovery that will surprise many over the next five years. And over the next decade the scope and scale of China’s economic recovery will see the Asian giant emerge as the dominant global economic and political power.</p>
<p>But China’s next growth trajectory will no longer be commodity intensive. This is because its cities and general infrastructure are pretty much built. The country is now focusing on moving up the economic value chain into advanced manufacturing, services, innovation and high technology activity.</p>
<p>Therein lies a lesson for countries like South Africa that suffer from the commodities curse and need growth to accommodate the aspirations of the emergent black elite. They must make every effort to diversify away from erratic commodity driven growth into value added manufacturing and innovation. This will help the country transition to inclusive, high growth.</p>
<p>Some significant shifts have brought the viability of the South African extractive state into question. Since the 1960s the country’s stock of natural resources per capita has dwindled significantly. The country has seen massive <a href="http://www.tradingeconomics.com/south-africa/population">population growth</a> from about 20 million people to about 57 million. Yet essentially all there is to serve them is a depleting stock of natural resources. No large country with a population above 50 million has reached developed status by relaying on extractive industries.</p>
<p>South Africa remains essentially an extractive economy. And despite a stagnant economy and protestations by the emergent black elite, fiscal, monetary, exchange rate and macro-prudential policies protect the vested interests of the white dominated parasitic elite. This contributes to economic <a href="https://theconversation.com/south-africa-must-tackle-dominant-firms-to-achieve-better-wealth-distribution-68759">growth and diversification</a> being frustrated.</p>
<p>But the world economy is becoming knowledge intensive. Strangely, the defenders of the status quo in South Africa wish to maintain, within a democratic framework, a growth path that emphasises resource extraction, for consumption by the racialist elite. It’s essentially asking the African majority to voluntarily consent to the exclusive consumption of their resources by the white dominated elite.</p>
<p>What this means is that the government must challenge the political and economic dominance of the unproductive racial economic hierarchy which relies on control of the banking and extractive industries for its dominance. The very survival of the modern South African state and the liberal framework requires no less.</p>
<p>Unless this happens, the dye is cast. My sense is that the increasingly assertive black elite will accept no less than a fundamental transformation of the prevailing economic arrangement.</p>
<p><strong>What do prospects look like in 2017?</strong></p>
<p>Unfortunately it is more of the same. </p>
<p>The underlying crisis is an economic one. Countries, like Germany and China, that have effectively allocated their surplus to upgrading their productive capabilities have come out of it a lot better than those that are consumer-driven and allowed their productive capabilities to decline. </p>
<p>Over the next five years the economic crises in a lot of countries will intensify. The populist upheaval that you are seeing throughout the world is likely to continue if inequality and slower growth are not tackled.</p><img src="https://counter.theconversation.com/content/70446/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thanti Mthanti does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s economic challenges of 2016 are largely a reflection of its inability to change in the light of global shocks.Thanti Mthanti, Senior Lecturer, Graduate School of Business Administration, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/591172016-06-03T01:02:13Z2016-06-03T01:02:13ZIs OPEC’s oil era over?<p>Just a couple months ago, <a href="http://www.thenation.com/article/did-opec-just-start-preparing-for-the-end-of-the-oil-era/">some were declaring the old oil order</a> dead after the Organization of the Petroleum Exporting Countries (OPEC) failed to agree on coordinated action at its April meeting in Doha.</p>
<p>That meeting was meant to bring about a production freeze to arrest the downward spiral of prices that began in July 2014. Instead, the Doha meeting was <a href="http://www.reuters.com/article/us-oil-meeting-draft-idUSKCN0XE02Y">over before it began</a>. Iran refused to slow production until it had regained its pre-sanctions position in the market, so Saudi Arabia canceled the freeze and continued to produce at peak levels. </p>
<p>This week, with oil <a href="http://www.wsj.com/public/page/news-oil-gold-commodities.html">trading</a> at six-month highs, <a href="http://www.bloomberg.com/news/articles/2016-06-01/saudis-said-to-seek-restoration-of-opec-unity-after-doha-failure-iowrk295?bcomANews=true">OPEC members once again had high hopes</a> to show that the organization remains relevant as they gathered in Vienna. Yet, once again, the <a href="http://www.bloomberg.com/news/articles/2016-06-02/opec-said-to-keep-status-quo-after-failing-to-agree-output-limit">meeting ended without agreement</a>, resulting in no change to the current policy of essentially unlimited production.</p>
<p>So does the verdict that OPEC is dead still stand, signaling the end of an era in which it supposedly ruthlessly controlled the price of oil? In fact, that era <a href="http://www.dundee.ac.uk/cepmlp/gateway/files.php?file=cepmlp_car17_65_711758044.pdf">barely existed</a> in the first place. The failed meetings confirm a longstanding truth: the <a href="http://www.theatlantic.com/business/archive/2009/05/is-opec-a-cartel/18420/">world’s most famous cartel</a> <a href="https://www.foreignaffairs.com/articles/persian-gulf/2015-12-03/how-opec-lost-its-bite">has never really been a cartel</a>. </p>
<p>Rather than the arbiter of global energy, OPEC is and has always been a dysfunctional, divided and discouraged organization. </p>
<p>My recent research has taken me through the <a href="http://www.e-ir.info/2016/01/19/the-oil-of-iran-past-and-present-in-perspective/">history of oil</a>, particularly the relationship between oil revenues, economic development and the geopolitical balance of power in the 1960s and 1970s. Oil’s history has been dominated by a struggle for balance, a contest between competing interests, both economic and political, and between the fundamental market forces of supply and demand. </p>
<p>OPEC has never been shielded from or been able to fully thwart these forces.</p>
<h2>Early days: divided and powerless</h2>
<p>When it was created in 1960, OPEC was meant to offer members a greater say in how their oil was produced and priced, addressing the disproportionate power wielded by private Western corporations. Its larger goal, to bring order to the chaotic world of global energy, has always been elusive. </p>
<p>OPEC was formed from frustration. In the 1950s, the <a href="https://sites.google.com/site/globaloilproduction12/1950-s-oil-production">world was awash in oil</a> as small nations in the Middle East and Latin America discovered enormous deposits, and Western oil companies sought to tap them to meet rising demand. </p>
<p>To gain access to those deposits, the major oil companies (known as the <a href="http://www.americanforeignrelations.com/O-W/Oil-The-seven-sisters.html">“Seven Sisters”</a>) signed concessionary agreements with local governments, allowing them to pump, refine, transport and market a nation’s oil in return for a royalty, typically 50 percent of profits. </p>
<p>This arrangement gave <a href="http://www.americanforeignrelations.com/O-W/Oil-Oil-and-world-power.html">the companies control over the oil</a> – they set production levels and prices – while governments simply collected a check and had little influence on anything else. </p>
<p>In February 1959, amid an oil glut, the Seven Sisters <a href="http://www.opec.org/opec_web/static_files_project/media/downloads/publications/GenInfo.pdf">decided</a> that a price correction was necessary. And so they unilaterally <a href="https://www.quandl.com/data/BP/CRUDE_OIL_PRICES-Crude-Oil-Prices-from-1861">began cutting the posted price</a>, from $2.08 to $1.80 by August 1960. (Back then, oil prices didn’t always follow market forces and were typically set by producers.) </p>
<p>The cuts meant a significant loss of revenue for the oil-producing states. In protest, the oil ministers of Iraq, Iran, Venezuela, Saudi Arabia and Kuwait <a href="https://mees.com/opec-history/1960/09/16/first-opec-meeting-held-in-baghdad">met in Baghdad</a> that September and formed <a href="http://www.opec.org/opec_web/en/about_us/24.htm">OPEC</a> to achieve a more equitable arrangement with the Sisters. </p>
<p>In reality, the oil-producing states could do little to coerce the companies into offering better terms. The Seven Sisters dominated global markets and were capable of shutting out individual producers. Oil was abundant, and nationalization seemed out of the question because the companies could successfully exclude an offending country from the market, as <a href="http://www.iranchamber.com/history/oil_nationalization/oil_nationalization.php">they did with Iran in 1951</a>.</p>
<p>In addition, the United States itself was the world’s top producer and immune from supply shocks thanks to <a href="https://knowledgeproblem.com/2013/08/28/politicized-implementation-of-u-s-oil-import-quotas-1959-1973/">import quotas.</a>. If OPEC threatened to take production offline in order to put pressure on the companies, the U.S. could increase its own to make up the difference, as it did during <a href="http://www.tandfonline.com/doi/abs/10.1080/13537121.2013.829611?journalCode=fisa20#.V1BXEfkrLX4">a partial Arab oil boycott in 1967</a>.</p>
<p>In the end, OPEC did not possess enough market share to make a meaningful impact.</p>
<h2>A new balance of power</h2>
<p>Besides being relatively impotent, OPEC couldn’t agree on a consistent policy among its members. Saudi Arabia wanted to keep production levels low and prices consistent, preserving the global economy and the political status quo. Iran and Iraq, with huge military and development budgets, wanted prices pushed as high as possible in order to maximize revenue. </p>
<p>According to scholar and oil consultant <a href="https://books.google.com/books?id=Jg80AAAAIAAJ&pg=PA266&lpg=PA266&dq=Ian+Skeet+OPEC&source=bl&ots=iu2WFOL73d&sig=-sbhad1ecMH4zM5cQRIXs8qYO-M&hl=en&sa=X&ved=0ahUKEwiIzrHAivPMAhVDwYMKHf49C7MQ6AEIOzAF#v=onepage&q=Ian%20Skeet%20OPEC&f=false">Ian Skeet</a>, an attempt to extract more favorable terms from the Sisters in 1963 was sabotaged by the shah of Iran, who sought a separate agreement. </p>
<p>During the 1960s, OPEC met, debated and released grandiose statements on their rights, yet failed to form a united front.</p>
<p>Nevertheless, significant changes were occurring at the time. <a href="https://sites.google.com/site/globaloilproduction12/1960-s-oil-production">Demand for oil</a> shot up, while production in the U.S. stagnated. The ability of the Seven Sisters to control the market was undermined by international competitors drilling new fields in North Africa, where <a href="http://www.history.com/this-day-in-history/qaddafi-leads-coup-in-libya">Libya’s Muammar Qaddafi threatened</a> to shut off supply if he didn’t get higher prices.</p>
<p>The companies were under <a href="http://www.ogj.com/articles/print/volume-103/issue-17/general-interest/the-1973-oil-embargo-its-history-motives-and-consequences.html">more and more pressure</a> to deliver satisfactory terms to the OPEC members. The price of oil, which had held steady at $1.80 a barrel for years, began ticking upwards. <a href="https://knowledgeproblem.com/2013/08/28/politicized-implementation-of-u-s-oil-import-quotas-1959-1973/">American import quotas ended</a>, leaving the U.S. more vulnerable to supply shocks as its production capacity steadily declined. </p>
<p>These conditions, while not the result of actions by OPEC, gave the organization an opportunity to influence the market and upset the balance of power. </p>
<h2>The oil price revolution</h2>
<p>This shift accelerated in the 1970s as <a href="http://acc.teachmideast.org/texts.php?module_id=4&reading_id=120&sequence=21">war broke out</a> between Israel and its Arab neighbors, creating an opportunity for OPEC to wrest control from the Western oil companies.</p>
<p>To punish the U.S. for supporting the Jewish state, Arab oil producers (<a href="http://www.ogj.com/articles/print/volume-103/issue-17/general-interest/the-1973-oil-embargo-its-history-motives-and-consequences.html">not OPEC, as popularly believed</a>) cut production and declared <a href="http://www.npr.org/sections/parallels/2013/10/15/234771573/the-1973-arab-oil-embargo-the-old-rules-no-longer-apply">an embargo</a>. Together with the war, this destabilized energy markets as demand outpaced supply.</p>
<p>Amid the fighting, OPEC met with the Seven Sisters in Geneva and demanded an increase in the posted oil price. After rejecting a small change, OPEC announced it would double the price to $5 and later doubled it again to $11.65. </p>
<p>This triggered a massive shift in economic power, what Stanford University professor <a href="http://www.amazon.com/Price-Revolution-Professor-Steven-Schneider/dp/0801827752">Steven Schneider</a> called “the greatest non-violent transfer of wealth in human history.” With the uptick in oil revenues, OPEC states spent lavishly on economic development, social programs and investments in Western industry and steadily nationalized their domestic industries, pushing out the Seven Sisters.</p>
<p>How did the balance of power seem to shift so suddenly? Among other reasons, the major oil companies could not agree among themselves on a new price and were actually tempted by the high profits that would result. In other words, OPEC had seized control of the oil market largely due to circumstances <a href="http://vm136.lib.berkeley.edu/BANC/ROHO/projects/debt/oilcrisis.html">beyond its control</a>. </p>
<h2>The oil crisis</h2>
<p>Despite its victory, OPEC had come no closer to resolving its internal divisions. This became evident when another energy crisis hit. </p>
<p>In January 1979, the shah of Iran fled amid revolution, and <a href="http://www.federalreservehistory.org/Events/DetailView/40">global oil markets panicked</a>. Prices soared, from $12.70 to over $30 by 1980. Iran’s 6 million barrels per day (bpd) disappeared, and other OPEC states eagerly seized the opportunity to sell oil at costly premiums, <a href="http://www.history.com/this-day-in-history/opec-states-raise-oil-prices">sending the price even higher</a>.</p>
<p>In the ensuing years, Saudi Arabia tried to impose <a href="http://www.theoildrum.com/node/7363">a quota system</a>, with overall production capped at 20 million bpd. Most members ignored their quotas or over-produced to gain greater revenue. </p>
<p>Meanwhile, the West worked to improve energy efficiency and invested heavily in non-OPEC oil sources, including Alaska, Canada and the North Sea. By 1985, OPEC’s market share <a href="http://www.nytimes.com/1989/12/30/business/worrying-anew-over-oil-imports.html?pagewanted=all">had fallen below 30 percent</a>. OPEC <a href="http://www.brookings.edu/%7E/media/Projects/BPEA/1986-2/1986b_bpea_gately_adelman_griffin.PDF">dropped its production quota</a> to 19 million bpd, then 17 million, to account for diminishing demand, but only the Saudis obeyed the rules, losing market share as other producers pumped above the quota level.</p>
<p>By 1986, the Saudis had had enough. Without warning, the Saudi oil minister announced that Saudi production would increase. Overnight, Saudi <a href="http://www.oilandgas360.com/oil-the-30-year-anniversary-of-the-1986-collapse/">production shot up more than 2 million bpd</a>, flooding the market and <a href="http://oilprice.com/Energy/Energy-General/Why-Todays-Oil-Bust-Pales-In-Comparison-To-The-80s.html">sending prices plunging below $10 a barrel</a>. Sick of watching other OPEC members cheat them out of profits, the Saudis chose to enforce <a href="http://ftalphaville.ft.com/2015/01/21/2095432/re-re-visiting-the-1986-oil-crash/">new discipline through an artificial market shock</a>. </p>
<p>Just as the kingdom did in 2014, this move indicated Saudi willingness to use its massive reserves to “correct” the market and push out high-cost producers, even at the cost of its OPEC allies.</p>
<h2>Feeling the pain</h2>
<p>OPEC’s fortunes have oscillated since the 1986 shock. Cooperation remained elusive. </p>
<p>A 2011 meeting, dubbed <a href="http://www.bloomberg.com/news/articles/2011-06-08/opec-members-are-unable-to-reach-consensus-on-output-quotas-el-badri-says">“the worst ever”</a> by recently-removed Saudi oil minister Ali al-Naimi, produced disagreements over production levels. Acrimony reigned as OPEC states ignored calls for economic diversification in favor of oil-fueled economic growth. </p>
<p>High prices during the early 2000s accounted for a huge boom in oil revenues for OPEC members. For <a href="http://www.cnbc.com/2015/12/03/oil-prices-and-budgetsthe-opec-countries-most-at-risk.html">Venezuela and Nigeria</a>, oil accounts for over 90 percent of all exports. Most OPEC states believed that high demand would last forever, that high prices could fund government programs and that the good times would never end.</p>
<p>Yet the good times appear to be over. OPEC has failed to control the downward spiral in prices, <a href="http://www.bbc.com/news/business-30223721">reportedly begun by Saudi Arabia</a> in November 2014 to flood the market with cheap crude to put new and old competitors – U.S. shale producers and Iran – out of business. Saudi Arabia pursued its political interests and existing market share, leaving other OPEC members to fend for themselves.</p>
<p>The <a href="http://oilprice.com/Energy/Crude-Oil/OPEC-Is-Dead-Whats-Next.html">death of OPEC</a> has been announced in some quarters, with its <a href="http://news.forexlive.com/!/the-question-on-everyones-lips-is-opec-dead-or-just-in-a-coma-20160523">long-term decline</a> seemingly assured as global energy enters a new era. </p>
<p>It is possible that Saudi Arabia may emerge from this current crisis unscathed, free to embark upon its recently announced Vision 2030 plan for an “oil-less” economy, <a href="http://www.ibtimes.com/saudi-arabias-vision-2030-economic-plan-break-its-oil-addiction-draws-cautious-praise-2359400">however dubious that plan might appear</a>. It’s possible that OPEC may succeed in concerted action in the future. But its recent failures suggest that political interest will be more likely to divide OPEC and prevent mutual self-interest from uniting its members.</p><img src="https://counter.theconversation.com/content/59117/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gregory Brew is affiliated with OilPrice.com, where he writes once per-week on current energy issues.</span></em></p>OPEC has been declared dead in recent months as the group of oil-exporters has been unable to agree on a plan to stabilize the market. But was it really ever alive in the first place?Gregory Brew, PhD Student in History, Energy and Foreign Relations, Georgetown UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/590892016-05-10T11:40:15Z2016-05-10T11:40:15ZTime for Africa to transition from extractive to learning economies<figure><img src="https://images.theconversation.com/files/121718/original/image-20160509-20605-1d7afo2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There is very little evidence that commodity producing countries diversify their economies by adding value to their raw materials</span> <span class="attribution"><span class="source">Reuters/Siegfried Modola</span></span></figcaption></figure><p>The current slump in world commodity prices is forcing Africa to rethink its traditional dependence on raw material exports. This is why the time for African nations to lay the foundations for transitioning from extractive to learning economies is now.</p>
<p>The jolts are real. The International Monetary Fund has <a href="http://www.imf.org/external/pubs/ft/survey/so/2016/CAR050316A.htm">projected</a> that the continent will grow by 3% in 2016. This is well below the 6% average growth over the past decade and the lowest rate in the past 15 years.</p>
<p>Some argue that Africa has already <a href="http://www.reuters.com/article/africa-economy-idUSL5N1103RD20150825">squandered</a> the commodity boom and wasted the opportunity to increase its manufactured exports. Others point to the fact that <a href="http://www.theguardian.com/global-development/2012/oct/25/africa-diversify-resource-curse-thinktank">extractive industries</a> crowd out manufacturing, making diversification more difficult.</p>
<p>International policy discourse on the issue is still dominated by the need to bring more transparency to extractive industries. The assumption here is that this will help control the operations of multinational corporations, which in turn will improve the use of revenue from exports. Noble as they are, the suggestions are still framed in the context of commodities and will add little to economic diversification.</p>
<h2>Why learning economies make better sense</h2>
<p>Extraction is not just an economic activity in Africa. It is a pervasive worldview that defines behaviour from business interactions to relations between the state and its citizens. This phenomenon is vividly captured in Tom Burgis’s <a href="http://www.nytimes.com/2015/03/22/books/review/the-looting-machine-by-tom-burgis.html?_r=0">book</a>, “The Looting Machine: Warlords, Oligarchs, Corporations, Smugglers, and the Theft of Africa’s Wealth”.</p>
<p>Lamentation is not enough. Neither is the magical thinking that the downturn in the commodity boom and consumer-driven growth will automatically lead to diversification. This can only be achieved through practical efforts to focus on creating learning economies driven by <a href="http://belfercenter.ksg.harvard.edu/publication/2098/innovation.html">technological innovation</a>.</p>
<p>The good news is that African policymakers are aware of what needs to be done. For example, in 2014 the African Union (AU) adopted a ten-year Science, Technology and Innovation Strategy to help reposition the continent as a collection of technology-driven economies. This strategy contributes to Africa’s 50-year <a href="http://agenda2063.au.int/en//vision">Agenda 2063</a>.</p>
<p>The challenge is how to do it. One example can be found in the decision by the AU and the New Partnership for Africa’s Development Agency to collaborate in building executive capacity among African ministers through the Technology, Innovation and Entrepreneurship <a href="http://belfercenter.ksg.harvard.edu/publication/25761/gift_from_the_schooner_foundation_will_support_executive_education_leaders_from_african_nations.html?">Programme</a>. This is funded by the <a href="https://www.ihrfg.org/funder-directory/schooner-foundation">Schooner Foundation</a>.</p>
<h2>Diversification isn’t a simple process</h2>
<p>Rhetorical statements about value-addition are not enough. For example, in 2015 Africa exported nearly US$2.5 billion worth of coffee. Germany’s re-export of coffee, on the other hand, was about $3.9 billion.</p>
<p>There is little evidence to support the view that commodity exporting countries diversify their economies by adding value to their raw materials. So, adding value to coffee in Africa is hardly the best response. To the contrary, nations add value to imported raw materials when they already possess the minimum technological competence. In effect, they do so because they are learning rather than extractive economies.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/121723/original/image-20160509-20616-1tf463y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/121723/original/image-20160509-20616-1tf463y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=384&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121723/original/image-20160509-20616-1tf463y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=384&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121723/original/image-20160509-20616-1tf463y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=384&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121723/original/image-20160509-20616-1tf463y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=483&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121723/original/image-20160509-20616-1tf463y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=483&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121723/original/image-20160509-20616-1tf463y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=483&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Nigeria’s former President Olusegun Obasanjo sees agriculture as more than the ‘new oil’.</span>
<span class="attribution"><span class="source">Reuters/Tiksa Negeri</span></span>
</figcaption>
</figure>
<p>So how do nations shift from extractive to learning economies? First, they do not do so by simply shifting to another sector and hoping that diversification will occur automatically. An example of this is the description of Nigeria’s emphasis on agriculture as the country’s “new oil.” As noted by former President Olusegun Obasanjo, <a href="http://www.forbes.com/sites/realspin/2014/05/14/in-nigeria-agriculture-is-the-new-oil/#4a998e0e4517">agriculture</a> can be more than the “new oil”:</p>
<blockquote>
<p>One day the oil will run out – but sub-Saharan Africa will always have its fertile land, its rivers, its youthful workforce and its huge domestic market. Investing now can turn that potential into prosperity.</p>
</blockquote>
<p>Agriculture is an important entry point for economic diversification not because of abundant land, but because it offers a foundation for building learning economies through <a href="http://belfercenter.ksg.harvard.edu/publication/25699/new_harvest.html">technological innovation</a>. Agriculture can serve as an effective source of technological lessons for the wider economy.</p>
<p>Shifting from extractive to learning economies therefore requires refocusing attention on continuous improvement, adaptation and diversification. The key starting point for Africa is not to retreat into the false safety of “African solutions for African problems.” It is to learn from other economies – not just copy them – and adapt the lesson to local needs.</p>
<h2>The benefit of being latecomers</h2>
<p>African nations have the benefit of being latecomers. The world is full of inspirational <a href="http://newafricanmagazine.com/diamonds-are-not-forever-knowledge-is-power/">examples</a> they can learn from. In fact, many of the countries that have recently transitioned to being learning economies started off with a lot less resources (finance and research facilities) than the majority of African countries have today.</p>
<p>Take the case of Taiwan. In the early 1960s, the country’s main export was mushrooms, of which it was a world leader. The prospects of industrial learning were quite limited when dealing with a high-volume, low-value and perishable export commodity. It transitioned to becoming a semiconductor powerhouse by redefining itself as a learning economy.</p>
<p>Taiwan’s premier <a href="http://www.inderscienceonline.com/doi/abs/10.1504/IJTG.2008.020332?journalCode=ijtg&">research centre</a>, the Industrial Technology Research Institute that spawned many of its leading semiconductor firms, was created by consolidating four dilapidated research centres left behind by Japanese occupiers. The institute was not created to add value to mushrooms but was part of the country’s policy reinvention as a learning economy.</p>
<p>The case of Taiwan illustrates the fact that economic diversification results from the initial use of existing technologies that can be readily combined to generate increasingly diverse products. Some technological capabilities generate more combinations that others. Semiconductor and chemical industries are examples of such a platform of generic technologies.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/121720/original/image-20160509-20584-11n2dhi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/121720/original/image-20160509-20584-11n2dhi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121720/original/image-20160509-20584-11n2dhi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121720/original/image-20160509-20584-11n2dhi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121720/original/image-20160509-20584-11n2dhi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=506&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121720/original/image-20160509-20584-11n2dhi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=506&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121720/original/image-20160509-20584-11n2dhi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=506&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Industrial growth proceeds like a game of Scrabble. Some letters have higher values, but they do not combine readily to form words.</span>
<span class="attribution"><span class="source">Reuters/Srdjan Zivulovic</span></span>
</figcaption>
</figure>
<p>As my colleague Professor Ricardo Hausmann <a href="https://www.youtube.com/watch?v=2FeugaLv5Bo">explains</a>, industrial growth proceeds like a game of Scrabble. Nations start off with minimum technological capabilities that they recombine to create more technologies in the same way letters are used to create new words in a Scrabble game. Not all letters are created equal. Some have higher values, but they do not combine readily to form words.</p>
<p>Raw materials, for example, are like the letters J, Q, X and Z, which appear to have high value but are hard to use in creating words. Players often have to substitute them with more versatile letters. This is like using revenue from raw materials to acquire technological capabilities that have higher recombinant value. As in Scrabble, industrial development involves considerable learning, not just about letters but also about vocabulary and strategies for thinking about creating new words.</p>
<p>Africa’s economic downturn is not itself a fatal development. Countries need not recoil into despair and leave their future to the fate of commodity price fluctuations. It is an opportunity to start building new futures that focus on enhancing human capabilities as the foundation of durable economic development.</p>
<p>Unlike its predecessors, Africa has access to a much <a href="http://belfercenter.ksg.harvard.edu/publication/26476/how_can_africa_master_the_digital_revolution.html">wider range of technologies</a> that can serve as platforms for industrial learning. They cover diverse fields such as digital technologies, genetics, synthetic biology and new materials. Harnessing them requires building among the youth a <a href="http://belfercenter.hks.harvard.edu/publication/3227/new_culture_of_innovation.html">culture of innovation </a>that is driven by learning and not extraction. </p>
<p><em>This article was originally published by <a href="http://www.technologyandpolicy.org/about/#.VzAvZPl97IU">Technology and Policy, Innovation at Work</a> and is based on the author’s draft book, “How Economies Succeed: Technology, Innovation and Entrepreneurship”.</em></p><img src="https://counter.theconversation.com/content/59089/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Calestous Juma receives funding from the Bill and Melinda Gates Foundation</span></em></p>The downturn in the commodity boom will not automatically lead to diversification of Africa’s economies. This can only be achieved through a focus on creating learning economies driven by innovation.Calestous Juma, Professor of the Practice of International Development, Harvard Kennedy SchoolLicensed as Creative Commons – attribution, no derivatives.