The dangers of saying goodbye to globalisation

On the other side of the Atlantic, President Trump is keen to “put America first” and move manufacturing back to the United States and he has already had dealings with US companies thinking of moving production overseas. He has also talked of moving away from free trade has about re-writing NAFTA (the trade agreement with Canada and Mexico).

However it is worth reflecting  about the Argentinian experience. Cristina Kirchner was elected President of Argentina in 2007 and announced that Argentina needed to manufacture far more of the goods it consumed, rather than importing. In order to achieve this, she imposed  import tariffs of between 30% – 40% and banned the import of certain goods, in the hope that foreign companies would move production to Argentina. In 2011 one such banned good was the cell phone. Apple refused to produce in Argentina but Blackberry agreed. (It is worth noting that at this time Blackberry was the most popular and fashionable mobile phone in the country with sales of over $100m). The Blackberrys previously imported into Argentina had components from Asia and were assembled in either Mexico or Uruguay.

The Argentinian Government specified the place where the factory was to be built and selected Tierra del Fuego, a remote small island with poor roads and few flights at the southern tip of Argentina. In fact the main streets of Tierra del Fuego look more like  the set of a spaghetti western, with sheep grazing in the fields and tumbleweed (almost) blowing down the street, than a major manufacturing area. The establishment of the factory and recruitment of workers, who had to be paid three times the normal wage to persuade them to move down, took two years and there was much celebration in 2013 when the first Blackberry rolled off the production line.

Unfortunately, as a warning to anti-free-traders, because it took so long to bring the factory into production that the phones produced were two year old models and, because of high labour costs, the phones sold for almost twice as much as later models on sale elsewhere in the world. A new industry – the smuggling of Blackberries into Argentina from the USA – quickly grew and demand for the Argentinian-made phones fell, leading to redundancies in Tierra del Fuego. Those in favour of free trade cite the principle of comparative advantage and suggest that Argentina should have put more resources into the sector sit is best at, such as wine and beef.

 

UN’s ban on child labour is a ‘damaging mistake’ | World news | The Guardian

Academics say policy ignores benefits and reflects western prejudice

Source: UN’s ban on child labour is a ‘damaging mistake’ | World news | The Guardian

Interesting piece ‘criticising’ a ban on child labour. It is somewhat difficult to immediately think of the merits of children missing school to work, but this article does produce a cogent argument. One benefit sees employers setting up schools for child employees who may otherwise not been able to pay school fees. Worth a read, if nothing but to provide an alternative perspective to a moral dilemma.

Nigeria’s dollar crunch adds to fuel crisis — FT.com

 

Refinery woes, currency controls and militant attacks combine to prolong acute shortage

Source: Nigeria’s dollar crunch adds to fuel crisis — FT.com

Inadequate infrastructure means that, despite being Africa’s top oil exporter, Nigeria has to import fuel putting downward pressure on the value of it’s currency, the Naira (see Chart 2 below). Value-added increases when oil is refined to become something more useful, in this case fuel, so the $’s received for each barrel of oil Nigeria exports is worth less than the $’s Nigeria has to pay for the same volume of refined oil, leading to a reduction in foreign exchange reserves (see Chart 1 below).

It is difficult to see how this cycle will end. If the value of the Naira continues to fall, the price of refined oil in Naira terms will continue to rise, further depleting foreign exchange reserves and accelerating the Naira’s depreciation.

There are several solutions, central bank intervention to revalue the Naira, but they need, already dwindling, foreign exchange reserves in order to manipulate the market price for the Naira. Investment in infrastructure, a fiscal supply-side policy, to reduce the reliance on refined oil imports is an alternative, but oil accounts for 90% of Nigeria’s export revenue and, subsequently, a significant proportion of government revenue. The price of oil has collapsed and with it government revenue, a classic example of the dangers of over-reliance on a primary commodity, prone to price volatility. The fall in foreign exchange reserves, the value of the Naira and an increasing budget deficit will make lenders nervous and will lead to an increase in the yield on government borrowing, put simply, the interest rate on government bonds will have to rise to offset the greater risk, increasing government expenditure on debt repayments.

Clearly, these options are not presently viable, but the second should have been enacted when the oil price was high and export earnings plentiful, however, corruption, some $16bn in government oil receipts is unaccounted for in the last year alone, has meant that infrastructure remains undeveloped.

A further consequence of the falling value of the Naira is that despite global oil prices falling, Nigerians have to pay more for petrol at the pump. To combat rising petrol prices the Nigerian government have imposed price controls, however, this has resulted in several-hour long queues and a rise in hidden market activity. Subsequently, Nigerians either face having to pay extortionate prices or waste valuable time queueing. Ultimately, output is lost and Nigeria’s economy suffers.

Nigeria’s relatively new president has a tough task on his hands.

Chart 1

Chart 2

India 1 China 0?

Does the economic rise of India make it the country to watch instead of China?

There has been much talk of the BRICs [Brizil, Russia, India and China] and then the  MINTs [Mexico, Indonesia, Nigeria and Turkey] –  newly-industrialised countries which were going to be instrumental in driving the world economy. Of these, Russia and Brazil have suffered from slow growth and falling commodity prices and the MINTs also seem to have faded from the economic horizon and so only China and India remain.

Last month China’s growth fell and India’s GDP growth rate overtook it. Previously China had consistently outpaced India so that China’s average income per head which was approximately equal to India’s in the 1970s is now four times as high. Although the change in relative growth rates is currently more to do with a slowdown in China than an increase in India’s growth, the future is bright for the latter country. China is currently facing up to the need to look after a rapidly aging population while India has a much younger population and so will not face the burden of dealing with an aging population for some time.

Oman announces plans to increase corporation tax, cut spending, subsidies | Gulf Business

The sultanate is expected to post a budget deficit equivalent to 17.7 per cent of GDP in 2015

Source: Oman announces plans to increase corporation tax, cut spending, subsidies | Gulf Business

Something of George Osborne’s nightmares, a budget deficit of 17.7%, thanks, in part, to the collapse in the price of oil. Shows the risks of primary commodity over-dependence. One positive though, could be the removal of the superfluous subsidy of petrol.

Thanks to Dominic R.