Global Crisis

The Next Economic Crisis

Posted on Monday, February 14, 2011

Mumbai, India -- Like stock indexes around the world, India's Sensex plunged with the news of the unrest in Egypt, largely over fear about oil prices. But unlike other exchanges, the Sensex has not bounded back. It fell for four straight days, rebounded for one, and then on Friday fell by 2.9 percent. But in India oil is not the only commodity whose price can have a devastating economic impact.
Indeed, higher oil prices hit India's economy primarily indirectly -- through their impact on food prices, which are up 17 percent. The Nielson Global Consumer Confidence index says Indians are leading the world in worries about food inflation. The moment oil broke the $100/barrel, major domestic banks here announced higher interest rates. And India is not the only country facing a crisis over commodity prices. The Sensex is simply the early warming system that a looming combination of higher oil prices and food inflation threatens to engulf the world this quarter.
Ironically, it's good news that's partly responsible for this threat. Manufacturing levels all over the world, even in the U.S., have begun to recover from the Great Recession. This puts economic output on a collision course with an underlying shortage of commodities like oil, steel, cement, chemicals, and food. It's the same pattern that drove up food prices in 2008 and helped tilt the world into recession a year later.
In The Wall Street Journal, Simon Nixon argues that the turmoil in Egypt, Tunisia, and Jordan was triggered not so much by local political mismanagement, as by "the vast global economic imbalances that have built over the past decade ... Reflected in the form of high and rising food prices across the world."
Egypt, Nixon points out, is one of the nations most vulnerable to inflation in the price of food, because 40 percent of total consumer spending goes for food. (Algeria, Morocco, and Tunisia have the same vulnerability.) In the U.S. the comparable figure is 7.2 percent, and even in Japan, with its enormous protective barriers for rice producers, the figure is only 14.3 percent. But the food dependence problem is much bigger. Look at the percentage of food in consumer spending in the four "BRIC" countries:
Brazil: 25 percent
Russia: 38 percent
India: 45 percent
China: 35 percent
Nixon attributes part of the inflation to demand driven by growth in emerging economies like the BRIC foursome, and in part to excess global liquidity driven by the need to combat the Great Recession in the advanced industrial nations. But the 2008 food price surge derived from supply shortages, not from speculative demand.
And the pattern this year is very worrisome -- world food prices hit an all-time record last month.
And it's not just food. Paul Krugman points out in the Times that "Food and energy prices -- and commodities in general -- have been rising lately. Corn and wheat prices rose around 50% last year; copper, cotton and rubber prices have been setting new records."
Commodity supplies cannot be ramped up easily or quickly. Indeed, the other big news story in India this week is grassroots protests at multiple sites against proposed new coal (Vedanta Resources) and iron ore (Posco) mines. Indian Environment Minister Jairam Ramesh is in the hot seat because he has turned down some of these projects -- even though he reluctantly approved Posco. An unusual coalition of advocates for local forest communities and environmentalists has joined up to oppose the issuance of mining permits in forested areas.
China has thousands of violent protests against the displacement of local populations from their farms to make way for mining or other development projects. The world's remaining unexploited natural resources, in places like India and China, can only be extracted by displacing the livelihoods and homes of millions of people. There's a disturbing overlay between the regions in India, where natural resource extraction is concentrated, and the areas dominated by a deadly "Maoist" insurgency that has cost the Indian state effective control of much of its territory -- in states like Jharkhand, Chhattisgarh, Orissa, and Madhya Pradesh.
That's one of the flaws in the argument that somehow India and China can and will "develop" using the same carbon- and resource-intensive pathway blazed by the U.S., Europe, and Japan. All of these societies became rich in an era when there were underexploited biological commons -- North America for the U.S., their colonies for Europe, and the ocean's fisheries for Japan -- to feed their growth.
It may not be fair, but India, China, and Africa will need to find a more energy- and resource-efficient growth trajectory -- the resources simply aren't there for anything else. Coal dependence, we have been told, will be hard to avoid, because coal is "cheap and abundant." Not so. It's already about twice as expensive in Asia as in the U.S., and companies like Peabody are racing to turn Powder River Basin coal into an Asian export commodity to take advantage of the escalating price and short supplies.
The real motivation for the controversial proposal to build new pipelines in the U.S. to handle Canadian tar sands oil is to enable that oil, which has historically been marketed in the U.S. Midwest, to be exported to Latin America. Canada and the U.S. will be playing a role previously assigned to colonized nations, as the source of fuel that will be used by others. These pipelines mean higher gas prices in the Midwest, more environmental destruction in Canada, and ore carbon in the global atmosphere. But it won't matter a damn in the coming commodities crunch.
Efficient low-carbon and low-resource development is the only way for the 21st century. The resource shortages that worried Theodore Roosevelt are finally here. The American and global economies just can't afford the waste we have lived off for so long. But how many economic crises will it take for us to learn our lesson?
THE HUFFINGTON POST Carl Pope, Chairman, Sierra Club

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