Ekonomix
Turkish Economy

the oil will run out. but the gulf isn’t norway. its oil isn’t going to run out all that quickly — which in theory creates more space to spend now.

note that the only fail safe strategy to protect against dutch disease is to save the entire oil windfall abroad (basically, the i-bankers get more of the money via fees on the investment than the population of the oil exporting state in the first instance). this has been close to the approach norway adopted (in the context of a floating rate). it was able to do so b/c of:

a) a strong social consensus that the oil wasn’t something to spend just on the current generation
b) norway was developed and wealthy before it found the north sea oil …

I don’t think either condition exists in the Gulf — especially when it is clear that the princes are quite happy to spend the oil on their generation/ their social class.

2fish — I think you understate the role the exchange rate can play even in states with little domestic production capacity/ a one-industry export sector that pays for the govenrment and finances imports.

Suppose you peg to the dollar. And suppose you don’t increase nominal spending even as nominal oil revenue goes up.

A one industry, most consumer goods are imported country would have seen the real value of existing wages fall — as the dollar fell against the currencies that the country buys goods from. Higher import prices and the same salary would imply falling real wages. And less consumption all around — as consumers cut back on other goods as they have to pay more for imports.

Basically, the state has reduced its expenditures by making payments in a depreciating currency even as its real revenues have increased — the state (read the ruling family) has captured the entire windfall.

Now suppose the currency appreciates along with the real price of the country’s exports. in local currency terms, the size of the export windfall falls — in euro terms, oil hasn’t gone up as much as in $ terms …

However, real value of existing nominal salaries has been increased, so the real purchasing power of the country’s residents has increased. the price of imported goods has fallen, allowing more private savings or more spending on other goods. Basically, more of the windfall is automaticaly distributed to the population via higher real salaries as the external purchasing power of existing salaries rises.

the residents are better off, the state’s windfall is smaller ….

so why is this regime in the interest of the state/ the ruling family? well, oil prices go up as well as down, and the same mechanism also helps with adjustment on the downside.

there are no magic bullets for managing natural resource wealth, especially resources with lots of price volatility. but i am pretty confident the existing regime is suboptimal.

Seems that the Dutch Disease discourse will gain prominence. What I know about that subject gives me the feeling that if you replicate the conditions, you will find out that under those conditions there is hardly any policy space. The Dutch conditions were: (1) sudden, unexpected inflow of government revenue from abroad (2) country hardly recovered from WWII devastation and with a legacy of low cost-low tech labor intensive industry (shipbuilding, textiles, heavy machinery) next to world class electronics, chemicals and a strong service industry and an aircraft industry with a proud tradition but basically at the hobby scale (3) social democratic government not at all afraid of a growing employment ratio of Income-GDP, facing an electorate with lower consumption levels than neighbouring countries, due to financial income constraints caused by, principally, a low participation rate.

There were three effects, not all malignant: (1) rapid wage rises due to over-employment caused by, i.a. high government spending, i.a. on public housing. Maintaining parity with the DM was a policy goal which disabled interest rate based monetary policy, which in turn led to a private housing boom (negative real after tax interest rates) (2) rapid rise in the standard of living to German levels (if corrected for the lower participation rate -which incidentally did not respond quickly to labor scarcity) (3) the most contested one at the time: the disappearance of all those labor intensive industries, or their conversion to efficient/value adding ones. The interesting thing is that these industries disappeared all over Europe or adopted focus strategies, after the failed attempt to keep costs down by importing migrant workers, and later moving factories abroad.
So in essence, the Dutch disease was not all that bad, it cleaned out the dead wood and taught the public a lesson that social democrats cannot ignore markets, hence cannot improve their lot more than ordinary democrats would, and the public in Holland became thoroughly postmodern. Conservatives would say that the period facilitated the radical swing from austerity to hedonism, but that has no proven connection to ecpnomic policy, either forward or backward, as far as I know.

What would have happened in Holland if it had “floated”, i.e. cut the link with the DM (there were some minor revluations later on)? Interest rates would have had to rise enormously, the government would have spent much more on debt service (in real terms), vulnerable industries would have died as well, and imports would have become cheaper, posibly shifting household expenditure away from non-tradables (housing, leisure) towards tradables. I might have mentioned another factor applying to Holland (and even more to the GCC) : extreme openness – cars, consumer durables, a little later furniture and clothing, tended to be imported. Any kind of currency regime other that maintaining parity with principal trading partners would have caused enormous turbulence. The methods ultimately used by the Duth gvt were increasingly strict fiscal dsicipline, taking the enormous stock of public housing off budget, quantitative credit controls (enforcable because of a de facto banking cartel and entry barriers to foreign competition) plus the simple forces of nature: the population began to age, married women wanted work and the labor market and its regulators responded with innovations, posr war investments in human capital (university education no longer for the happy few from the late 1950s) started to bear fruit, etc.

I would say, there is little in the story of the Dutch economy from 1970 through the late 1980s that helps the GCCs; they are too different and too heterogenous. Currency policy would be fairly low on my list and basically impossible for some: Singapore and Malaysia (a bit like Dubai and Abu Dhabi) are in a situation where each can have its own approach to macro-economic policy, although they need to synchronize from time to time
. Oneimportant facilitating condition for that is that they have separate currencies. As far as I can see, it does not matter a lot what currency Kuwait and Qatar use, as long as they keep the oil revenue out of their domestic economy, or outsource that economy to transients whose inputs and outputs could be priced in anything, as long as it was consisten (it is a bit like pricing in an MNC) and attracted sufficient labor. I think that the problem is that Dubai and Abu Dhabi, with totally different economies, (a Spore/Mal combination almost) have the same currency. Then in addition to that, Bahrain, without the “customer base” of Dubai, cannot move too far away from its much more developed neighbour. I guess this one is a little too difficult.

Finally, I rarely hear arguments about optimal exchange rate policies for resource countries based on market power arguments. Virtually all oil exporters are price-takers for all their imports and have very little in the way of alternative exports, and even if they do those tend to be price-taking as well. All that a domestic curreny does in those circumstances, is to price the production and consumption of non-tradables,with private demand competing with the government sector for a scarce production capacity (if not made flexible by an effcient labor import regime) . It may be easier -given also that these countries have typically large transfers from the government to the private sector instead of the reverse as in normal economies- to develop credible fiscal policy than maintain an independent currency. This is entirely beside the point of if and to what extent the government should invst excess revenue in offshore markets, or leave the il in the ground.

I agree it won’t happen. There is one fundamental economic difference between China and the U.S. What Americans do differently is they don’t save any money with a zero percent or negative national savings rate. The savings rate in China is almost 40%.

Writes the London Times on the global economic downturn impact in China,
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/03/ccchina103.xml&page=3

“People in Wenzhou are too innovative to allow their companies to go bust. The companies here have £44bn of cash, apart from their fixed assets, which they made during the good years. That money will help them to survive now,” he said.

On a national level, $1.8 trillion of foreign exchanges reserves are a similarly healthy cushion.

The music is going to stop in at most twenty years when the Gulf oil reserve start running dry. But I’m not too worried, the Gulf states didn’t do too badly in the 1980’s when oil prices crashed. One reason is that because they have relatively low populations, they don’t get themselves into a situation were they were funding liabilities they couldn’t afford.

Sam: You will really understand the downside when 50% of Dubai is uninhabited and Chinese banks implode under hundreds of billions of debt from zombie manufacturers.

The problem isn’t spending money on stupid things. Suppose you are a Gulf sheik that makes a huge amount of money and then builds a building that sits half empty. No problem. You may have just lost $500 million, but if you have $2.5 billion, that’s not a problem.

Now if you *borrow* money to build the building then you have a big problem, and so does the person you borrowed the money from.

Sam: Chinese banks implode under hundreds of billions of debt from zombie manufacturers.

Don’t think that is going to happen. There will be a crash in the real estate market, just like there is currently a crash in the stock market, but the different pieces are separate from each other so that I don’t think it is going to affect the banks.