Rethinking the Macroeconomics of Resource Rich Countries

VoxEU has a new e-book out on the way forward for commodity producing economies (excerpt):

Rethinking the macroeconomics of resource-rich countries: A new eBook
Rabah Arezki, Raouf Boucekkine, Jeffrey Frankel, Mohammed Laksaci, Rick van der Ploeg 24 April 2018

After years of high commodity prices, a new era of lower ones, especially for oil, seems likely to persist. This will be challenging for resource-rich countries, which must cope with the decline in income that accompanies the lower prices and the potential widening of internal and external imbalances. This column presents a new VOXEU eBook in which leading economists from academia and the public and private sector examine the shifting landscape in commodity markets and look at the exchange rate, monetary, and fiscal options policymakers have, as well as the role of finance, including sovereign wealth funds, and diversification.

It’s a compilation of papers from a 2016 conference, and to be honest, doesn’t really present anything ground-shakingly new on the subject. However, it does provide a convenient entree for those not familiar with the conduct of macro-policy in commodity producing countries (i.e. most Malaysians).

The article itself provides a short precis of the e-book, which you can download here.

4Q17 GDP: Momentum Slowing

A quick note on yesterday’s GDP report. The date brought the growth numbers for 2017 to a gratifyingly satisfying conclusion (log annual change and annualised seasonally adjusted quarterly change; 2010 constant prices):

GDP expanded at a 5.8% clip (in log terms; 5.9% in percentage terms), just a little lower than the 6.1% log change seen in 3Q17. That brings full year growth to 5.7% (log) and 5.9% (percentage), the best performance since 2014.

Growth in Context

Just a quick note:

Growth forecasts for the Malaysian economy have been undergoing upward revisions, given the strong 1Q2017 GDP numbers and the continuing strength of trade growth and retail sales. For example, the IMF has just upgraded their 2017 forecast for Malaysian GDP growth from 4.5% to 4.8%. The official government forecast of 4.3%-4.8% will also likely follow suit in the next month or so, probably around the ballpark of 5%.

One common refrain I’m hearing in all this is: the man on the street and the businessman in his office aren’t feeling it.

Corruption, Crony Capitalism and Growth

This is slowly making the rounds (excerpt):

Where Crony Capitalism Rose and Prosperity Fell (and Vice Versa)
By Matthew A. Winkler

With populists emulating autocrats from Azerbaijan to Zimbabwe, free markets are being forced to confront crony capitalism.

One response is visible in the reversal of fortunes of Malaysia and Indonesia. The two nations still wrestle with the politics of ethnicity and religion at odds with the capitalism of market competition….

…But the historic advantage that Malaysia, with just 30 million people, has enjoyed over its Southeast Asian neighbor of 250 million is disappearing amid a barrage of corruption allegations challenging Prime Minister Najib Razak….

ICYMI: Growth and Ageing on BFM

I was on BFM this morning talking about growth in the long run:

ICYMI: Economic Growth Over The Very Long Run

I keep meaning to post on this topic, but what with work and all, it’s been on the back burner. In any case, I wrote an article published in the Star last week that covers the main points (excerpt):

Economic growth in an ageing world

MOST people take growth for granted. We expect living standards to increase over time and that our children will enjoy a better quality of life than us.

But growth is not a given and it is driven by economic processes that can and do change. There has been a gradual slowing in global growth over the past couple of decades, and some of this can be pinned on structural factors that form the very foundation of growth itself....

It’s partly secular stagnation, but more in the Hansen sense than in Summers new formulation, and over a larger scope than just what’s going on in developed economies.

Have a read and let me know what you think in the comments.

Dear God, I dearly hope I’m wrong on this.

Wages, Productivity and Growth

I’ve been meaning to write about this, but life and work kept getting in the way. Makes for a good story, except its almost totally wrong (excerpt):

High wages flash recession warnings in Singapore

...Indeed, while the city state's economy is expected to grow between 1-2 percent for the year, analysts say the wage-cost pressures are flashing warnings of a recession.

At roughly 43 percent of gross domestic product - though below the 55 percent world average - wage costs in Singapore are now at levels which historically had preceded recessions in 1985, 1997 and 2001.

The trouble is that the higher wages are raising business costs at a time when export-oriented Singapore has been hard hit by a cooling China, subdued domestic consumption, a downturn in commodities and global uncertainty due to Britain's vote to leave the European Union....

Borrowing GDP

First of all, Selamat Hari Raya, Maaf Zahir dan Batin to all. I’m back from my annual Ramadhan break, and fully determined to blog more regularly from now on.

An interesting data release yesterday has the economics profession completely bemused – Ireland has just restated their 2015 GDP growth to 26.3% (!) from an initial estimate of 7.8% (excerpt):

Ireland’s Economists Left Speechless by 26% Growth Figure

In three days, Jim Power is due in London to brief the British-Irish Trade Association on the state of the Irish economy. Now, he has no idea what he is going to say.

The economy grew 26 percent in 2015, officials from the Central Statistics Office told a stunned room full of economists and reporters in Dublin on Tuesday. Previously, they had estimated growth of 7.8 percent.

To GDP Or Not To GDP

Quick one, highlighting a few articles on whether GDP remains an appropriate measure for human welfare.

First from Sir Charles Bean (excerpt):

Measuring the Value of Free

...One particular challenge for economic measurement stems from the fact that an increasing share of consumption comprises digital products delivered at a zero price or funded through alternative means, such as advertising. While free virtual goods clearly have value to consumers, they are entirely excluded from GDP, in accordance with internationally accepted statistical standards. As a result, our measurements may not be capturing a growing share of economic activity....

The Natural Resource Curse is Alive and Well

From the latest round of IMF working papers (abstract):

Natural Resource Booms in the Modern Era : Is the curse still alive?
Andrew M. Warner

The global boom in hydrocarbon, metal and mineral prices since the year 2000 created huge economic rents - rents which, once invested, were widely expected to promote productivity growth in other parts of the booming economies, creating a lasting legacy of the boom years. This paper asks whether this has happened. To properly address this question the empirical strategy must look behind the veil of the booming sector because that, by definition, will boom in a boom. So the paper considers new data on GDP per person outside of the resource sector. Despite having vast sums to invest, GDP growth per-capita outside of the booming sectors appears on average to have been no faster during the boom years than before. The paper finds no country in which (non-resource) growth per-person has been statistically significantly higher during the boom years. In some Gulf states, oil rents have financed a migration-facilitated economic expansion with small or negative productivity gains. Overall, there is little evidence the booms have left behind the anticipated productivity transformation in the domestic economies. It appears that current policies are, overall, prooving [sic} insufficient to spur lasting development outside resource intensive sectors.

Poverty, Corruption and Economic Growth

One of the puzzling things I’ve found in the empirical data is that corruption doesn’t seem to have any impact on economic growth (I found instead that corruption primarily impacts the variance of growth, but not growth itself or the level of development). It appears to matter what type of corruption is involved, and the institutional framework that a country has.

Here’s Ricardo Hausmann on the same subject (exceprt):

Fighting Corruption Won’t End Poverty

CAMBRIDGE – Countries are poor because governments are corrupt. And, unless they ensure that public resources are not stolen, and that public power is not used for private gain, they will remain poor, right?

It certainly is tempting to believe so. Here, after all, is a narrative that neatly aligns the promise of prosperity with the struggle against injustice. As Pope Francis said on his recent trip to Latin America: “corruption is the moth, the gangrene of a people.” The corrupt deserve to be “tied to a rock and cast into the sea.”

Perhaps they do. But that won’t necessarily make their countries more prosperous.

4Q2014 National Accounts: Smokin’ Hot

From last week’s 4Q2014 GDP report, it looks like the IPI was more than just a harbinger, it was spot on (log annual and quarterly SAAR changes; 2005=100):

3Q2014 GDP: Momentum Slowing

I’m still torn. Last week’s GDP report was a little better than I thought, but might just be the best growth we’re going to see for a while (log annual and SAAR changes):

Note that while annual growth is holding up pretty well, quarterly growth in 3Q2014 is actually the weakest in nearly two years. There’s little in either the global or domestic economy to suggest that growth will get any better over the short term.

3Q2014 GDP Preview

I’m torn. Despite all the weak numbers over the past three months, all my forecasting models say real GDP growth will still be above 5%, and in most cases, above 6%, for 3Q2014 (log annual changes):

The IPI based forecast is probably the most bearish, and it still says we’ll be above 5% – my other models are far more bullish. The forecasts for 4Q2014 are weaker, but not unusually so. The generated forecasts for next year cluster a little above 5% growth, which is about right for the Malaysian economy.

Reinhart and Rogoff Were Wrong

I’ve always been somewhat leery of the notion that high public debt results in slower economic growth. Piketty’s “Capital in the Twenty-First Century” for example (which I’m in the process of reading), examines the historical record of the UK and France and generally finds this not to be true.

Here’s a more generalised result, using the very same data from the seminal Reinhart and Rogoff study that sparked off austerity-mania in the Western world (excerpt; emphasis added):

Determinants of the growth and sovereign debt correlation
Matthijs Lof, Tuomas Malinen

Since the outbreak of the financial crisis, the relationship between debt and growth has been an issue of heated debate among both academics and policymakers. Reinhart and Rogoff (2010a) showed a negative correlation between sovereign debt and economic growth, and argued that countries could be confronted with a considerable decline in their growth potential after the debt-to-GDP ratio exceeds 90%.

While the research by Reinhart and Rogoff had a substantial influence in policy circles, their results are controversial….

The REAL Impact of the ETP: The Recession That Never Was

Following on from the 2013 annual reports and quite apart from any benefits that might accrue over the next few years, this is what the ETP has done for Malaysia (RM millions and log annual changes; 2005 prices):

Natural Resources and the Terms of Trade

I stumbled on this while looking for something else – the Singer-Prebisch thesis. What Singer and Prebisch found (separately and concurrently) is that the terms of trade between primary commodities and manufactures was declining over time. If true, this empirical observation has profound implications for economic development.

Let me explain that in English.

The terms of trade, put simply, is the amount of imports you can “buy” with one unit of exports. In other words, it measures the purchasing power of exports.

If your terms of trade are declining over time, you have to keep producing more and more just to be able to afford the same quantity and value of imports. But commodity production is subject to inelastic supply – it’s extremely difficult to continually ramp up production.

Potential Growth In ASEAN

From the latest round of IMF working papers (abstract):

Potential Growth in Emerging Asia
Rahul Anand ; Kevin C. Cheng ; Sidra Rehman ; Longmei Zhang

Summary: Using three distinct approaches—statistical filtering, production function, and multivariate model— this paper estimates potential growth for China, India, and five ASEAN countries (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) during 1993–2013. The main findings include: (i) both China and India have recently exhibited a slowdown in potential growth, largely reflecting a decline of total factor productivity (TFP) growth; (ii) by contrast, trend growth for the five ASEAN countries has been rather stable and might even have increased marginally, with the notable exception of Vietnam;(iii) over the longer term, demographic factors will be much more supportive in India and some ASEAN economies than in China, where working-age population should start shrinking, with the overall dependency ratio climbing by the end of this decade. Improving or sustaining potential growth calls for broad structural reforms.

3Q2013 National Accounts

Well, it’s a week late, but better late than never.

GDP growth in 3Q2013 rose 5% on the year (log annual changes; 2005=100):

The Paradox Of Plenty

There’s this somewhat understandable idea that because Malaysia is rich in natural resources, we are…well, rich. Or at least we should be, if the government had handled things properly.

If only we could harness our reserves of oil and gas and minerals effectively and efficiently…

If only we had invested in and boosted the productivity of our agricultural sector…

If only we managed our forests and bio-diversity for sustainable development…

If only natural resource extraction wasn’t subject to leakages and corruption…

If only, if only…

But there’s a slight problem with this mindset – the empirical evidence suggests that natural resources alone do not beget wealth or prosperity, that focusing on developing such assets actually undermines the foundation of long term growth and prosperity. In fact, in development circles, it’s more common to speak of natural resources as a “curse”, not a blessing.