This post is part of a blogging series by economics students at the Presidio Graduate School’s MBA program. You can follow along here.
By Peter Blanchard
According to an estimate from the International Monetary Fund (IMF), in the last year, commodity prices have shot up 20-30%. The head of the IMF explains that this increase in prices is felt most acutely by “low-income countries and vulnerable people” (Alderman, 2011). With a history of high unemployment, and a “paucity of economic opportunity” (Alderman, 2011), North Africa and the Middle East fit this bill. As Alderman explains, one key driving force behind this run in commodity prices is the manipulation of the commodities markets by speculators. Secretary Geithner acknowledged these potential negative consequences and pledged U.S. “support measures to limit the potential for the manipulation of commodity prices through greater transparency and oversight of the commodity and derivative markets.” (See nytimes).
The larger issue is the role of developing nations and their economic policies, especially China, in contributing to this run-up of commodity prices. In an effort to “stoke a breakneck pace of growth in China” (Alderman 2011), the Chinese government has been able to keep the value of its currency (RMB) artificially low. One key way in which the Chinese accomplish this is to sell its currency on the open markets, while at the same time accumulating large reserves in USD used to buy U.S. Treasuries. These policies create an increase in supply of the RMB, keeping its value low. With an undervalued currency, increased foreign demand for cheap Chinese exports has helped lead to increases in Chinese GDP and a growing trade surplus. The concern of many of the members of the G-20 is that the “fast growth in China and other emerging markets would stoke inflation and trade imbalances that could destabilize a recovery, even as advanced countries struggle to overcome lagging growth and high unemployment in the wake of a recession.” These concerns are amplified in the countries of the Middle East and North Africa who have struggled far longer and far more severely than their western counterparts.
In an attempt toward a solution, one of the key goals of the recent G-20 meeting in Seoul was to agree on a set of guidelines to identify when economic and financial developments in some countries would create problems for the rest of the world. However, in the views of many, including Secretary Timothy Geithner, the concessions made by the Chinese are not enough to address the issues of the valuation of the RMB and the trade imbalance. Are we headed for a “currency war?” This notion, raised by Financial Times columnist Alan Beattie, reveals that other emerging economies–like Brazil and South Korea–have employed similar tactics to those of the Chinese in devaluing their currency and running a strong trade surplus. These countries are therefore less likely to support any sort of multilateral effort to put pressure on the Chinese to alter its fiscal and monetary policies, which could lead to a “competitive” cycle of devaluations. This, in turn, “could provoke sharp and destabilising movements in currencies”.
In another camp, there is the idea of the Chinese trying to marginalize savings in an attempt to create the world’s next great consumer society. This development would not only create an opportunity for a significant increase in the standard of living for hundreds of millions of Chinese, it could also present the opportunity for massive growth in western countries that are trying to satisfy growing levels of Chinese consumer demand. It could also help mitigate the potentially painful process of the U.S. moving away from its current profligate spending habits and starting to pay off its mountain of debt.
Whatever the outcome, it is clear that the current path of the world economy is not economically sustainable. Soaring commodity prices are helping to lead to political instability in North Africa and the Middle East, which in turn has helped lead to an increase in oil prices. This increase has been detrimental to the not only the developed economies of the U.S. and Europe, but also to developing nations, especially China, as all of these nations struggle to recover from the 2008 financial crisis. The increasingly inter-connected nature of the current world economic climate and geo-political environment calls for a creative solution that will ensure a sustainable future for everyone.