Putin's war is damaging the developing world
Perspectives
Jayati Ghosh
13 Mar, 2022
Russia's invasion of Ukraine has caused increases in oil and food prices, harming developing countries struggling to recover from the pandemic. Multilateral organisations should provide financing to help these economies cope, writes Jayati Ghosh.
As oil and wheat prices soar as a result of the Russian invasion of Ukraine, disruptions to global supply are likely to hit developing nations, still struggling to economically recover from the pandemic, hardest [Getty]
It is difficult to see any winners in the ongoing war caused by Russia’s irrational and devastating invasion of Ukraine. But the losers extend far beyond the people of Ukraine, who are being attacked, and the people of Russia, who did not choose this war but now must endure an economy being dismantled by trade and financial sanctions.
The economic impact of the conflict will be felt around the world, including in many developing countries that are already struggling to recover from the COVID-19 pandemic.
One immediate concern is the effect of rising oil prices. The price of benchmark Brent crude recently jumped by 20% to more than $139 per barrel, its highest level since 2008 – probably in response to news that the United States and its European allies were discussing a possible ban on imports of Russian oil, which had so far been exempt from Western sanctions. (On March 8, the US announced a ban on imports of Russian energy products, while the United Kingdom pledged to phase out imports of Russian oil and oil products by the end of 2022.)
"This latest oil-price spike is a blow they can ill afford, as it is likely to generate balance-of-payments problems and domestic inflationary pressures that will be tough to combat in the current uncertain context"
But global energy prices had already been soaring, following a period of dramatic volatility during the pandemic. The price of Brent crude, which had fallen to as low as $9 per barrel in April 2020 at the height of the pandemic’s first wave, rose above $90 per barrel in January 2022. Since then, the Ukraine war has put further upward pressure on oil and gas prices.
Western media have focused on the impact of rising energy prices in Europe, which relies heavily on natural gas imports from Russia. But most of the world’s oil and gas importers are much poorer. Many of these countries were unable to mount fiscal responses to the pandemic on the scale of those in the US and other advanced economies, and have since experienced much weaker recoveries in output and employment.
This latest oil-price spike is a blow they can ill afford, as it is likely to generate balance-of-payments problems and domestic inflationary pressures that will be tough to combat in the current uncertain context.
Of course, the additional inflationary pressures from the Ukraine war are also complicating the challenge that policymakers in rich Western economies face in tackling rising prices without causing a hard economic landing. Oil is a universal intermediary good, which influences the costs of commodities and services, as well as transport costs, in multiple ways.
Oil-price increases can thus be a significant driver of cost-push inflation even at the best of times. But inflation in rich countries was already at levels they had almost forgotten. Policymakers also appear to consider only the most simplistic weapons against inflation, like raising interest rates and tightening liquidity, which do little to address cost-push pressure and could cause a real economic downturn.
But the challenges are greater still in the developing world, leaving policymakers with even less wiggle room. The dramatic recent increase in oil prices obviously affects oil-importing countries directly, and will feed into all other prices through rising input and transport costs.
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The invasion of Ukraine and MENA's looming bread crisis
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James Snell
The tragedy playing out in Ukraine is also increasing global food prices, creating even more pain in developing countries where hunger had already increased dramatically during the pandemic. Before the war, Ukraine was the world’s fifth-largest wheat exporter, and also a major exporter of barley, corn, rapeseed, and sunflower oil. The prices of these commodities in global trade have risen significantly, adding to recent increases in crop prices generally.
Now there is a further danger: Financial investors who had been betting on speculative asset markets will need to find other places to park their money, and food futures could emerge as a favoured destination. In the first five days of March, the price of wheat futures at the Chicago Board of Trade increased by 40%, putting it on track for its largest weekly increase since 1959.
Crop production in developing countries could also be hit by fertiliser shortages. Russia, the world’s largest wheat exporter, is also a major fertiliser producer, and disruptions to these exports will push global food prices even higher.
We previously saw parts of this movie in otherwise peaceful times, just before the global financial crisis, and it was a dark and depressing story even then. The food crisis that resulted from financial-market speculation in 2007-08 led to massive increases in hunger and devastated the lives of hundreds of millions of people in developing countries.
"Without such efforts, Russia’s war against Ukraine will wreak much more damage on the global economy – and poorer countries will be among the hardest hit"
That crisis occurred even though global supply and demand of food items did not change much. But now, with real reductions in global food supply almost inevitable, the price rises could be greater and longer-lasting. If speculative pressure increases, already fragile economies will be damaged even more.
It may not be surprising that the G7 (whose recent track record as a self-appointed leader of the global economy is hardly distinguished) is not expressing much concern about these real and pressing dangers. But multilateral organisations surely need to step up in this time of crisis, at the very least by providing compensatory financing to help the developing world cope with multiple price shocks, and suggesting and enabling regulations to prevent speculation in essential markets.
Without such efforts, Russia’s war against Ukraine will wreak much more damage on the global economy – and poorer countries will be among the hardest hit.
Jayati Ghosh, Executive Secretary of International Development Economics Associates, is Professor of Economics at the University of Massachusetts Amherst and a member of the Independent Commission for the Reform of International Corporate Taxation.
This article originally appeared on Project Syndicate.
Perspectives
Jayati Ghosh
13 Mar, 2022
Russia's invasion of Ukraine has caused increases in oil and food prices, harming developing countries struggling to recover from the pandemic. Multilateral organisations should provide financing to help these economies cope, writes Jayati Ghosh.
As oil and wheat prices soar as a result of the Russian invasion of Ukraine, disruptions to global supply are likely to hit developing nations, still struggling to economically recover from the pandemic, hardest [Getty]
It is difficult to see any winners in the ongoing war caused by Russia’s irrational and devastating invasion of Ukraine. But the losers extend far beyond the people of Ukraine, who are being attacked, and the people of Russia, who did not choose this war but now must endure an economy being dismantled by trade and financial sanctions.
The economic impact of the conflict will be felt around the world, including in many developing countries that are already struggling to recover from the COVID-19 pandemic.
One immediate concern is the effect of rising oil prices. The price of benchmark Brent crude recently jumped by 20% to more than $139 per barrel, its highest level since 2008 – probably in response to news that the United States and its European allies were discussing a possible ban on imports of Russian oil, which had so far been exempt from Western sanctions. (On March 8, the US announced a ban on imports of Russian energy products, while the United Kingdom pledged to phase out imports of Russian oil and oil products by the end of 2022.)
"This latest oil-price spike is a blow they can ill afford, as it is likely to generate balance-of-payments problems and domestic inflationary pressures that will be tough to combat in the current uncertain context"
But global energy prices had already been soaring, following a period of dramatic volatility during the pandemic. The price of Brent crude, which had fallen to as low as $9 per barrel in April 2020 at the height of the pandemic’s first wave, rose above $90 per barrel in January 2022. Since then, the Ukraine war has put further upward pressure on oil and gas prices.
Western media have focused on the impact of rising energy prices in Europe, which relies heavily on natural gas imports from Russia. But most of the world’s oil and gas importers are much poorer. Many of these countries were unable to mount fiscal responses to the pandemic on the scale of those in the US and other advanced economies, and have since experienced much weaker recoveries in output and employment.
This latest oil-price spike is a blow they can ill afford, as it is likely to generate balance-of-payments problems and domestic inflationary pressures that will be tough to combat in the current uncertain context.
Of course, the additional inflationary pressures from the Ukraine war are also complicating the challenge that policymakers in rich Western economies face in tackling rising prices without causing a hard economic landing. Oil is a universal intermediary good, which influences the costs of commodities and services, as well as transport costs, in multiple ways.
Oil-price increases can thus be a significant driver of cost-push inflation even at the best of times. But inflation in rich countries was already at levels they had almost forgotten. Policymakers also appear to consider only the most simplistic weapons against inflation, like raising interest rates and tightening liquidity, which do little to address cost-push pressure and could cause a real economic downturn.
But the challenges are greater still in the developing world, leaving policymakers with even less wiggle room. The dramatic recent increase in oil prices obviously affects oil-importing countries directly, and will feed into all other prices through rising input and transport costs.
RELATED
The invasion of Ukraine and MENA's looming bread crisis
In-depth
James Snell
The tragedy playing out in Ukraine is also increasing global food prices, creating even more pain in developing countries where hunger had already increased dramatically during the pandemic. Before the war, Ukraine was the world’s fifth-largest wheat exporter, and also a major exporter of barley, corn, rapeseed, and sunflower oil. The prices of these commodities in global trade have risen significantly, adding to recent increases in crop prices generally.
Now there is a further danger: Financial investors who had been betting on speculative asset markets will need to find other places to park their money, and food futures could emerge as a favoured destination. In the first five days of March, the price of wheat futures at the Chicago Board of Trade increased by 40%, putting it on track for its largest weekly increase since 1959.
Crop production in developing countries could also be hit by fertiliser shortages. Russia, the world’s largest wheat exporter, is also a major fertiliser producer, and disruptions to these exports will push global food prices even higher.
We previously saw parts of this movie in otherwise peaceful times, just before the global financial crisis, and it was a dark and depressing story even then. The food crisis that resulted from financial-market speculation in 2007-08 led to massive increases in hunger and devastated the lives of hundreds of millions of people in developing countries.
"Without such efforts, Russia’s war against Ukraine will wreak much more damage on the global economy – and poorer countries will be among the hardest hit"
That crisis occurred even though global supply and demand of food items did not change much. But now, with real reductions in global food supply almost inevitable, the price rises could be greater and longer-lasting. If speculative pressure increases, already fragile economies will be damaged even more.
It may not be surprising that the G7 (whose recent track record as a self-appointed leader of the global economy is hardly distinguished) is not expressing much concern about these real and pressing dangers. But multilateral organisations surely need to step up in this time of crisis, at the very least by providing compensatory financing to help the developing world cope with multiple price shocks, and suggesting and enabling regulations to prevent speculation in essential markets.
Without such efforts, Russia’s war against Ukraine will wreak much more damage on the global economy – and poorer countries will be among the hardest hit.
Jayati Ghosh, Executive Secretary of International Development Economics Associates, is Professor of Economics at the University of Massachusetts Amherst and a member of the Independent Commission for the Reform of International Corporate Taxation.
This article originally appeared on Project Syndicate.
Ukraine crisis feeds fears of another food
crisis
Author: Peter Timmer, Harvard University
The Russian invasion of Ukraine and the widespread devastation of the country raise the spectre of another world food crisis. Asia suffered badly during the last food crisis in 2007–08, mostly because of panicked behaviour in the region’s rice markets.
It is too soon to know the full impact on Ukrainian grain supplies and infrastructure from the Russian onslaught, on the prospects for a reasonably normal winter wheat harvest, and then spring planting of wheat, corn, sunflowers and other commodity staples for which Ukraine is a significant exporter. The country is known as ‘the breadbasket of Europe’ for a reason.
But what is clear is that the world food economy is on the verge of another major crisis, perhaps as disruptive as the one in 2007–08. Important lessons were learned from the last food crisis, and avoiding those mistakes will be critical to keeping the region’s food economies reasonably stable this time. How the developing countries of Asia will fare as food supplies tighten is a special interest to Australia.
World grain markets are seeking direction. Africa is already suffering from losing access to Ukrainian wheat. Maize and barley exports to China have been disrupted. An already tight oilseeds market is now threatened by the loss of Ukrainian sunflower seed oil. India has asked Indonesia to ease its restrictions on palm oil exports.
Prices for wheat on futures markets had risen in anticipation of the Russian invasion of Ukraine, and prices were already high because of supply chain disruptions caused by COVID-19. But there has been no sustained spike since the war started on 24 February 2022. Prices are high and volatile, with wheat futures prices trading both up and down the daily limits since the war erupted.
If a crisis actually materialises, there will be serious short and long-term repercussions in developing Asia Pacific countries.
Some of the short-term consequences are already in play. Modern agriculture is heavily dependent on energy inputs, both directly as fuel for farm equipment, and also to power the supply chains for farm inputs and output. Just as important is the dependence of high-yield cereal production on synthetic nitrogen fertilisers — natural gas plus electricity plus capital-intensive machinery equals urea. Vaclav Smil calculates that a third of the world’s population depends directly on the cereals produced with this urea and other synthetic nitrogen fertilisers.
High energy prices mean high fertiliser prices, lower applications and yields, and higher grain prices. In the short-term that means more hunger in poor countries. Even if rice prices from Asian exporters remain at their current elevated levels, there will be more hunger in Timor Leste, Laos, Cambodia, Myanmar and possibly Indonesia. Papua New Guinea and most Pacific island nations will be hit the hardest because they are highly dependent on food imports.
The longer-term consequences are possibly more troubling, but are much harder to analyse with the war still in its early stages. Historically, structural transformation in developing economies leads agriculture to decline in relative importance as the modern industrial and service sectors, mainly in urban areas, grow much faster. It has been the only sustainable pathway out of poverty. Any forces that slow this process, or even bring it to a halt, also slow or halt the reduction of poverty and hunger. These forces can be internal, such as hostile political environments, or external shocks, such as wars and food crises.
The sharply higher rural–urban terms of trade brought about by food crises significantly slow structural transformation. More agricultural workers remain on the farm, with fewer moving to more productive jobs off the farm or in urban areas. Rural poverty increases, agricultural productivity stagnates, and the country remains mired in poverty. Much of sub-Saharan Africa is caught in this trap, and a number of Asia Pacific countries remain vulnerable if the food crisis drags on.
Can anything be done now to prevent this dismal scenario from playing out? If there is anything the Western allies, or China, can do to prevent Russia from pursuing a ‘scorched earth’ campaign in Ukraine, they should try.
The most important thing is not to panic. There is enough wheat, rice and other foodstuffs in warehouses around the world or awaiting harvest in the northern hemisphere to ensure that no one need starve. But ‘don’t panic’ implies a level of trust in world grain markets to deliver the needed supplies in a timely manner. Such trust will depend on some degree of cooperation among participants in world rice and wheat markets.
The rice crisis in 2007–08 was caused by panicked importers, exporters and hoarding by small-scale participants along the rice supply chain. Prices spiked. Once the reality of adequate supplies was made apparent after Japan announced that two million tons of US long grain rice would be available for re-export from Japanese storage silos on 2 June 2008, rice prices fell very quickly. The world rice market stabilised in a matter of weeks, remaining fairly stable ever since. Trust in the world rice market has been re-established, at least among most Asian participants. ASEAN has played a surprising role in establishing and maintaining this trust.
Full and detailed accounting of current grain supplies by major exporters would go a long way toward preventing a repeat of the 2007–08 price panic. A pledge from these exporters to allocate supplies to customers most in need would eliminate importers’ fears, build trust, and stabilise the world grain economy. If the Ukraine war ends reasonably soon without destroying its farms and grain marketing infrastructure, a world food crisis can be avoided.
Dr Peter Timmer is Thomas D. Cabot Emeritus Professor of Development Studies at Harvard University.
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