This post is a unique combination of 3 different articles (sources included below) which highlights some possible linkages and ideas between what I call the ''Financial Curse'' -in my opinion, a situation in which world advanced markets are stuck in a vicious cycle of debt and relative GDP stagnation- and the ''Resource Curse''-which is basically a situation in which world emerging markets suffer from poverty in the midst of plenty. I have selected 3 articles in the following order; the first deals with an analysis of Nouriel Roubini's sense of adeptness with the causes and symptoms of the world's financial conundrum- starting from 2006 when he predicted the 2007/8 financial crash. The next article takes a closer look at the contemporary situation in world markets by focusing on some current positions which Dr. Doom - as he is commonly referred to- has adopted; of course, the prognosis is not good. I also introduce some ideas shared by Gobind Nankani and Paul Collier with the UK Department for International Development on investing natural resource revenues in their source markets. The general idea is to set the tone for a simplistic but thought-evoking commentary what it would take to end both ''Curses''.
ANTECEDENTS
Nouriel Roubini has been proven right once again.At this most difficult of times it is not surprising that we are getting deluged with opinions. Some people are telling us to buy, some are telling us to sell, and some are telling us to sit tight -- they can't all be right.
Dr Doom:
In the search for the best answer, wouldn't it make sense to listen to someone who has a track record of getting these calls right? But what if this person's views are negative, so negative in fact that he is typically derided as a 'doom-monger'? Should you reject his views as too extreme, or should you take a deep breath, suspend your disbelief, and listen? Well, the person I am talking about is Nouriel Roubini. Of Turkish origin, he is not short of intellect, being a professor of economics at New York Stern with a doctorate from Harvard. His bearish tendencies have gained him the nickname 'Dr Doom'. During his long academic career, Roubini spent a considerable amount of time studying the emerging market crises in Asia and Latin America. In particular, he worked at the IMF in 2001 as it battled the financial meltdown in Argentina. These experiences were crucial in his calling the credit crunch. "I've been studying emerging markets for 20 years, and saw the same signs in the US that I saw then, which was that we were in a massive credit bubble," he said.
Calling the crunch
On 7 September 2006 Roubini stood before an audience of economists at the IMF and announced that a crisis was brewing. He warned that, in the coming months and years, the United States would suffer a massive housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of pounds worth of mortgage-backed securities unravelling worldwide and the global financial system shuddering to a halt. These developments would cripple or destroy hedge funds, investment banks and other major financial institutions. After his presentation people were dismissive -- the moderator of the event even joked, "I think perhaps we will need a stiff drink after that." Two years later, I don't think anyone was laughing. You don't need me to tell you Roubini was shown to be on the money in spectacular fashion. Roubini's success in predicting the credit crunch turned him from an obscure academic to a major figure in the debate about the world economy. He had become a prophet: a prophet of doom.
Predicting the crisis of 2011
So fast forward to 2010. Despite recovering economies and stock markets, Roubini said that the crisis was not over: "We are just at the next stage. This is where we move from a private to a public debt problem... We socialised part of the private losses by bailing out financial institutions and providing fiscal stimulus to avoid the great recession from turning into a depression. But rising public debt is never a free lunch, eventually you have to pay for it." Then, in May 2010, the first Greek debt crisis hit. Here was Roubini's take on the situation: "We have to start to worry about the solvency of governments. What is happening today in Greece is the tip of the iceberg of rising sovereign debt problems in the eurozone, in the UK, in Japan and in the US. This... is going to be the next issue in the global financial crisis." Roubini had called the financial crisis, the second leg of the Credit Crunch, that is just emerging at the moment.
So, what next?
So, you may be interested in hearing what Nouriel Roubini is predicting right now. Firstly, is the US and Europe's economic slowdown just a 'soft patch', or is it something worse? Roubini is clear -- we are likely to enter a second recession. "The first half of 2011 showed a slowdown of growth -- if not outright contraction -- in most advanced economies. Optimists said this was a temporary soft patch. This delusion has been dashed. Even before last week's panic, the US and other advanced economies were odds-on for a second severe recession." What about the European debt crisis? "...the eurozone periphery is now contracting, or barely growing at best. The risk that Italy or Spain -- and perhaps both -- will lose access to debt markets is now very high. Unlike Greece, Portugal and Ireland these two countries are too big to be bailed out." So what can we do? Well Roubini recommends short-term fiscal stimulus, rather than the fiscal tightening that is occurring in most countries, followed by medium-term fiscal austerity. He also recommends further quantitative easing and the European Central Bank cutting interest rates to zero. Perhaps most revealingly, he says: "Another recession may not be preventable. But policy can stop a second depression. That is reason enough for swift and targeted action." Now, everyone is fallible, and Roubini has got some of his calls wrong in the past, but I am minded to agree with his view that things are going to get worse before they get better. I don't know about you, but I am battening down the hatches.
FINANCIAL MARKETS TURMOILThe economy expert nicknamed 'Dr Doom' said Western financial leaders have tried everything from quantitative easing to lowering interest rates to kick-start the global economy but that 'We have run out of rabbits to pull out of hats.' Nouriel Roubini, a crisis economics specialist who predicted the 2008 world financial meltdown, called for medium-term fiscal austerity measures across the eurozone and in the U.S., where he also called for mortgage debt reduction. 'Dr Doom': Economics specialist Nouriel Roubini predicted 2008 crash. He told the Financial Times: 'Another recession may not be preventable, but policy can stop a second depression.'That is reason enough for swift and targeted action.'
Roubini has remained persistently downbeat in recent years, warning investors that the rally in shares during 2009 and early 2010 would go into reverse. This morning the FTSE 100 index has shot up and down like a yo-yo in response to the ECB's plans to stabilise the eurozone crisis and following Standard & Poor's historic decision to strip the U.S. government of its prized AAA credit rating on Friday. Shares are currently nearly 90 points down at 5,157. The continued market turmoil is further bad news for millions of savers who will have seen their pension funds hit dramatically. In Asia overnight, Japan's Nikkei index fell 2.4 per cent, South Korea's Kospi lost 5 per cent, Hong Kong's Hang Seng was down 4 per cent. Last week saw huge turbulence for global markets, with the Dax losing about 13 per cent of its value and the FTSE 100 dropping 10 per cent. And it is feared the Dow Jones will be among other global markets to react negatively to credit agency Standard & Poor's shock decision. The U.S. is now rated as an AA+ economy, but politicians in Washington were warned another downgrade was possible if further attempts to cut America's deficit were not instigated. John Chambers, managing director of S&P's, told ABC News: 'If the fiscal position of the United States deteriorates further, or if the political gridlock becomes more entrenched, then that could lead to a downgrade.'
GOBIN NANKANI AND PAUL COLLIER AT DFIDGobind Nankani and Paul Collier addressed staff at the UK Department for International Development (DFID), June 15, in a seminar chaired by the new Secretary of State, Andrew Mitchell.Professor Collier, who is on the Steering Group of the IGC, spoke about his new book The Plundered Planet, which tackles issues surrounding the management and mismanagement of natural assets. Collier said the book was his “most important so far”, an attempt to find an “intellectually robust common ground” between environmentalists and economists, and to focus on the opportunities to harness the upside of natural resources. Collier pointed out that much natural resource exploration remains to be carried out in Africa. “Zambia still uses geological surveys from the 1950s, and no natural resources have been discovered more than 10 miles from a trunk road” he said. High commodity prices will further fuel exploration, and natural resource investment will dwarf other financial flows into Africa.
What will it take to harness natural resources for African development? Professor Collier argued that success entails a long decision chain, in which all of the links have to hold together.The first link is the discovery of natural assets. Obtaining publicly available information about the geology of the country is key, and Collier said aid could play a productive role in assisting the process of information gathering and dissemination.The second is the capturing of social value, especially by improving tax collection. Collier stressed that Zambia's exports of copper total $3 billion per year, but only $100 million ends up as revenue for the country's government. Managing environmental risks is key, and Collier stressed that all African countries must seek to avoid repeating the situation in the Niger Delta.The third link is striking the right balance between consumption, and savings and investment. Collier critiqued the IMF advice of consolidating all revenues, arguing that natural resource revenues need to be identified separately because the revenue stream is distinct from sustainable inflows. Such a fiscal distinction is in place in the likes of Norway and Kuwait, but lacking in many countries.The final link is to invest natural resource revenues in the country, rather than seeking to invest abroad. The IMF frequently suggests the latter, because of the lack of absorptive capacity in the domestic economy, but Collier said it does not make sense for low income countries like Ghana and Sierra Leone to build up foreign financial assets when the countries are so capital-poor.Instead, governments should invest ‘in investing’ i.e. in improving the absorptive capacity of the domestic economy.Collier cautioned that finding natural resources in large quantities places great strain on governments.
Ghana, widely considered a fiscally responsible government, has seen its fiscal deficit rise from 3% to 15% following the discovery of oil in 2006.Collier concluded by saying that natural resources are a first order issue for the next decade, and there was a need to build a critical mass of informed opinion, society by society, in order to ensure that developing countries harness the upside of the opportunity.Gobind Nankani offered some concluding remarks. He pointed out that the IGC is active in a number of Africa's resource-rich countries, such as Zambia and Sierra Leone, and has also contributed rapid response advice to new oil producers Ghana and Uganda. The IGC has assisted the development of an appropriate oil revenue policy in Ghana, and advocates for the use of natural resource revenue for public investment rather than future funds, where appropriate.Nankani concluded by saying that the IGC is strongly engaged with its DFID colleagues and that client governments were especially appreciative of the IGC’s independence.
Growth in Africa: The Magic Sword
President Obama and his team, David Cameron, Angela Merkel and so many leaders of the world's advanced economies are having sleepless nights trying to sort out their financial markets; trying to cut their budget deficits, create jobs, stimulate economic growth in their economies and so on. South African President Jacob Zuma, Nigerian President Jonathan Goodluck, Ghana President John Attah Mills and other African, emerging economy leaders are having a different kind of challenge; ensuring that their nations escape the paradox of plenty- a situation in which their nations are blessed with vast amounts of natural resources but significant levels of poverty that suggest an uneven distribution of such benefits- if any get to the populace at all. The world is used to having one half doing so well (advanced economies) while the other isn't (emerging/ underdeveloped economies).
Now it seems much of the whole world is on the same page; struggling with the financial curse (it seems) of huge budget deficits and weak economic fundamental and struggling with the resource curse at the same time. One solution exists; it is akin to the tale of a kingdom (advanced economies) being held hostage by a dreaded dragon (the financial curse). But in order to save this kingdom from eternal doom, its knights must proceed to a desolate kingdom (Africa ravaged with the resource curse) to find a magic sword (growth of the African economy). However, to obtain this magic sword the knights must kill or severely incapacitate a witch (the resource curse); then it is assured that this magic sword will kill the dreaded dragon. My inspiration for this 'wierd' story comes from the economics and ideas presented by Nouriel Roubini and Paul Collier.
Roubini suggests that there is the likelihood of severe recession headed the way of the world's integrated and advanced financial markets; this can be attributed to the situation in which the very ''solvency'' of Governments is being tested and stretched to uncharted territories- case in point the recent s&p downgrade of the USA. Economies such as Spain and Italy may all of a sudden be too big to 'bail out'; the UK economy is facing skyrocketing deficit which it is struggling to halt. No more rabbits in the hat-according to him; in fact, Roubini has suggested that ''POLICY'', the right policy will cushion the effect of what is inevitable- protracted stagnation or the big ''R'', a recession. I reckon that Roubini's ideas stop where Paul Collier's ideas begin. Collier suggest that emerging markets- particular those of Africa are some of the world's most ignored and untapped markets. While majority of Europe's markets are doing the lower single-digits of GDP growth (Eg. the UK just revised its GDP growth estimates for 2011 to about 1.4%) we find some emerging economies in Africa doing the higher single and double-digits of growth; and these markets have not even been tapped to their full potential.
Simple demand and supply analysis suggests that the assumption of market equilibrium must hold. As such, if we analyse the world markets wholisticaly we may start to understand that ''world resources'' (aka investments) are over-saturating some localized markets while those same resources would create more value if they were employed else where. Paul Collier suggests that revenue from natural resources must be plowed back into these economies from where these resources are obtained- rather than being repatriated to the world's top financial markets (which are currently stretched and saturated). Returns on Investments are higher in a lot of countries in Africa; the political risks are there but there is potential. Unfortunately, I have previously treated the topic of investing in investing so I cannot go into full detail. However I have attempted to link Nouriel Roubini and Paul Collier's ideas together by suggesting that there is one solution that is SUSTAINABLE.
This solution is for mainstream policy in the world's advanced economies to realize that the magic sword that can kill its dragon is in Africa and other world emerging economies. Africa represents the most sustainable medium to long term hope to escape the Financial curse; investments on a large scale in Africa will drive industry (assuming capacity to absorb investments is achieved in the first instance); this multiplier effect will drive GDP levels to boost international trade, enterprise and economic integration. Budget deficits will fall on a sustainable basis when financial resources are directed to markets where they add a real multiplier effect to the economy; incomes go up (which can fun higher taxes), purchasing power goes up; Aggregate demand then rises and the cycle continues slowly and consistently till the world economy recovers. To break the Financial Curse on a sustainable basis, we need to think Roubini and then Collier. African and emerging market development is the link. My thoughts. Time to put on your Africa tee's.
Sources: ANTECEDENTS:
http://www.fool.co.uk/news/investing/2011/08/09/the-man-who-predicted-this-crash.aspx
FINANCIAL MARKETS TURMOIL:
No comments:
Post a Comment