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Who's dependent now?
From the Project Syndicate's series on the Unbound Economy, Kenneth Rogoff is Professor of Economics at Harvard University and a former chief economist of the IMF.
By Kenneth Rogoff
If the late great Argentine economist Raul Prebisch were alive today, he no doubt would wonder whether the world had turned upside down. His hugely influential "dependency" theory argued that if poor countries relied too much on commodity exports, they would never achieve the industrial depth needed to sustain rapid growth. Instead, they would become mired in a cycle of declining global commodity prices and ever-dwindling income shares.
Prebisch's preferred policy response, protectionism, proved disastrous for the many Latin American and African countries that heeded him. But the fact is that for many years, Prebisch seemed to have made the right call on long-term commodity price trends. Relentless efficiency gains in agriculture and resource extraction pushed down prices for commodities, especially during the 1980's and 1990's. With few exceptions, countries that focused on commodity exports performed dismally, whereas many resource-poor Asian countries raced ahead.
Today, however, with Asia's giants, India and China, joining the global economy, prices for oil, gold, wheat, and virtually every other commodity are exploding. While there will always be cycles - oil prices, for example, will probably fall before they start rising again - the long-run trend for many commodities will clearly remain upward for some time to come.
What many trade negotiators and other policymakers do not seem to have recognized yet, though Prebisch would have realized it instantly, is that this dramatic turn of events carries huge implications for the global balance of power. Indeed, perhaps no other aspect of economic globalization will pose greater challenges to world leaders over the coming decades.
The questions are many. Are today's rich countries prepared for an era of co-dependency, in which they are just as desperate for commodities as developing countries are for industrial imports and technology? Are they prepared for the inevitable flow of power and influence to commodity producers as they become much wealthier? How will the world's two superpowers, China and the United States, come to terms with the fact that important commodity-exporting regions from Africa to the Middle East to Central Asia are littered with ill-formed nation states?
Some self-anointed seers portray the problem as being one of finite natural resources, with the world running out of critical commodities at an alarming rate. Nowadays, there are many adherents of the "Huppert's peak" theory of oil production, which holds that we have reached the upper limits of output capacity, the wells are running dry, and it is all downhill from here.
However, as leading oil historian Dan Yergin points out, prophets of doom have declared that the world is running out of oil at least four times already. Each time, radical improvements in technology made the threat evaporate. In the late 1800's, oil extraction involved dredging with a mule. Today, no one thinks anything of drilling 3,000 meters beneath the ocean floor. There have been similar improvements across the board in metals mining and agriculture.
No, the world is not about to run out of commodities. Instead, what is happening is that the integration of 2.5 billion people (China and India alone) into the global economy is producing a demand shift that is likely to put far more upward pressure on commodity prices than any technology gains are likely to offset. So, for at least the next 50 to 75 years, and perhaps until humans start mining on Mars sometime in the coming centuries, prices for many natural resources are headed up.
Will the rebalancing of global economic power that results from this destabilize world politics? World War I, of course, was partly set off by Germany's concern that the other colonial powers had locked up too large a share of world oil and commodity supplies. Similarly, in World War II, Japan feared for the stability of its foreign supplies of oil and other natural resources. Will similar tensions arise between resource-challenged China (where even water scarcity is a problem) and the West?
Fortunately, this does not seem likely for the moment, especially given the Chinese leadership's sober and pragmatic approach to its resource problems. The Chinese are looking to regions like Africa, hoping to find stable trading partners. They do not share the political evangelism of the Americans, who don't just want to trade with commodity exporters, but to convert them as well.
Then there are those American leaders who still speak of making the US self-sufficient in energy supplies. But this is basically a joke: self-indulgent, maybe, but self-sufficient, never. Much of the Arab world understandably views the invasion of Iraq as the cornerstone of the real US strategy for securing stable energy supplies. If they are right, one can only hope that America has a plan B.
Meanwhile, commodity prices will continue to rise, with oil exporters now constituting the largest contributors to America's gaping trade deficit. Maybe the real US strategy is to try to owe the commodity-exporting countries so much money that they will feel dependent on making America happy! That is one twist that Prebisch would never have anticipated.
© Project Syndicate
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re: Who's dependent now?
Human beings must realize that natural resources are not unlimited. Our planet is finite and so are the resources that nature can provide for our needs. The consumerist philosophy of life, which prevails in our time, seems to ignore this truth.
We encourage growth and consumption by making 'necessary' things which previous generations could easily live without. We need to reconsider our concept of quality of life. Quality does not need quantity in order to exist.
A restriction in our use of natural resources can lead to a life that is happier than the endless competition of spending and acquiring more and more. Qualitative growth must replace the prevailing conception of economic development which is dominated by quantitative statistics.
Asceticism must cease to be a notion referring to a class of religious eccentrics and become synonymous with qualitative - instead of quantitative - progress in human societies.
re: Who's dependent now?
Gareth Eastwood, thanks for the link to the article about Ford and hydrogen. The article mentions the “paradox” of hydrogen, ie it has to be converted from either gas or water using energy. A lot of the hydrogen economy planning focuses on using gas, which is still a fossil fuel and still emits significant CO2 - and cheap gas is disappearing along with cheap oil.
I guess hydrogen made from water using wind or solar power could have an important role, though again not sure it could meet the current escalating energy demand. The scale of what’s happening and what’s needed is what staggers me and, in the absence of cold fusion, most options look stretched.
I am curious as to what are the other combustible hydrocarbons you are referring to – that aren’t fossil fuels and aren’t biofuels?
I am not an expert either in the sense of a chemical engineer, but my research includes energy and resources in the global growth economy and the crisis of supply in the context of rocketing demand. From the US still, but increasingly from India and China – and presumably any other “less developed” country that successfully pursues wealth through economic growth on the industrial model of the West over the past 100-odd years.
This demand appears to be an inevitable effect of the growth strategy which has been adopted worldwide as the panacea for dealing with poverty, hunger and all the other “development” inequalities.
I also share David Eastwood’s concern that the greenhouse gas implications of the demand explosion are disturbing. The sheer scale of the demand really is scary, from both depletion and impact angles. Another example on the impact side is the scale of Brazil’s agricultural commodity production (soy, timber and pulp) for export to China - and the destruction this entails in the Amazon.
I am not of course suggesting that Brazil, China, India and the rest of the less developed world should not pursue a better material life for their people. But the whole growth project seems to me to raise immense questions and to be the great challenge of the 21st century.
re: Who's dependent now?
Kerryn Higgs, ethanol and bio-fuels are just two examples of the many combustible hydrocarbons, maybe they will just be a temporary fuel source to extend the life of our oil supply.
Maybe Hydrogen will end up being our next fuel of choice, there is certainly a ton of money being pumped into it. Ford thinks it might be next, see here. However I can’t predict the future, especially in a field that I am definitely not an expert.
re: Who's dependent now?
Gareth, I don't think biofuels will do much of the job, apart from a small contribution from wastes such as used cooking oils, crop residues and creative uses for algae perhaps. See Monbiot here and here.
It's always worth remembering that the fossil fuels on which modern industrial productivity has been based are just that - fossils, distilled from standing forests over millions of years. Our rate of use far exceeds any capacity to grow the same stuff on the timescale available.
There is also the question of how much energy is needed to produce this bio-energy under current agricultural practices and how much the diversion of land to energy production will impact on food availability.
re: Who's dependent now?
I think we need to differentiate between “commodity” exporting nations. Only those producing energy and mineral resources are doing very well out of “commodities”.
I think the point on technology is fair as well. Michael Coleman, I think you are probably correct when it comes to oil that is pumped out of the ground. However, there are other ways technology could supply us with oil or a similar alternative. Think ethanol, I am no chemist, but ultimately our fuel is just one of many combustible hydrocarbons which could be utilised to either create/replace petrol.
re: Who's dependent now?
Lovely comment, Craig...but, sad to say, many/most here are (still) fighting defunct battles, rather than truly attempting to find any new way forward to egalitalian capitalist democracy - clearly the MOST viable model on both economic & social fronts...
Policy/market design for same, well...I guess we'll have to do the homework ourselves, since it's (so) clearly evident that neither "major" party will do it for us.
Which is why, aside from mine personal inclinations, I'm so happy that we have some chance to keep building upon what Margo established...
all the best!
re: Who's dependent now?
Craig...that's one reason why the (genuine) centrists here so value your input! Me, I rely (mainly) on Asia Times Online/The Economist/Webdiary for a (disturbingly) balanced news intake...but, am truly puzzled why the extreme left/right so rarely appear to access either/both of the former sources.
Having grown-up on the late-70s version of The Age, however, I'm nigh-on addicted to multiple viewpoints re the forces that shape our world...as (perhaps) we all should be?
all the best
Craig R: Cheers JHC. Funny thing happened when I was at the newsagency buying that copy of The Economist. The newsagency is down the road from Costello's old electorate office. I was asking the newsagent when the December edition of The Monthly is due in. His assistant asked me what The Monthly was like, was it a "good read"? I said yes, mentioning it is only about six months old and that I'd discovered it when looking for something to read by the pool when on holiday up north back in September. I added that it was a cover pic of Cornelia Rau that caused me to notice it. He said, "It's on the left then?" and I pointed to their magazine rack and said "Well from here Quadrant seems to be on the left, mate and The Monthly is there in the middle, you got one wrong and if you read 'em you'll know which one." Be interesting to see if they rearrange things now.
re: Who's dependent now?
James Squires, I think you will find that the USA produces about 5 million barrels per day and consumes about 21mbpd. They import more oil than any other nation by a hefty margin.
re: Who's dependent now?
The Greenhouse implications of all this are scary - as power shifts and the resultant distorted behaviour marginalise any bigger emissions agenda gathering momentum.
On the other hand, a saving grace could be that a shift to renewables alongside technologically-driven improvements in energy efficiency could allow many more countries to get closer to energy self-sufficiency, and dodge the power shift but that's a long, long way off!
re: Who's dependent now?
A bit of serendipity with this article for me. I happened to be reading up on Sudan for a piece to be published on Webdiary shortly and only yesterday had read the December issue of The Economist which contains a special report on Sudan. In it the oil interests of both the Chinese and Indians is discussed:
And they could have added that, unlike the Americans, the Chinese aren't there to proselytise.
re: Who's dependent now?
With respect, I don't think Professor Rogoff has put any real effort into his analysis of energy supplies and oil in particular.
For starters, spelling Hubbert's name wrong doesn't inspire confidence.
The view that technical advances will continually increase the rate of oil production does not survive serious scrutiny. If it were so, US domestic oil production would have increased since 1970 due to these same technical advances.
In reality, (and I know economists don't like to go there) US domestic oil production has declined steadily for at least three decades.
Peak oil is not about the end of oil supplies anyway, it is about the end of cheap oil and the economic effects this will have. Demand from China and India will demonstrate the problem in spades if US$60 barrel hasn't got your attention yet.
re: Who's dependent now?
So good news for Australia then? Its not just the USA, however that should be worried, as I was under the impression (could be wrong) that they produced 80% of their own oil. Wouldn't this scenario be far worse for countries with no oil reserves at all? Such as China, India, Japan, Mainland Europe?