Resource nationalism again becomes an issue as world economy recovers
This month’s issue of EFIC’s newsletter, World Risk Developments, discusses two main subjects – world economic recovery and resource nationalism.
Gathering signs of stabilisation and recovery are rapidly damping earlier fears that the current ‘Great Recession’ could track the Great Depression. ‘World GDP looks to have bottomed in the June quarter, about 12 months after its peak’, notes EFIC’s chief economist, Roger Donnelly. ‘By contrast, output in the 1930s continued to slump for another 2 1/2 years from its peak.’ Thanks to the June quarter stabilisation – followed by what looks to be quite reasonable growth in the current, September quarter – key economic forecasting agencies like the OECD and IMF are having to revise up their guesstimates for world economic growth in 2009 and 2010, though they continue to forecast an output contraction in 2009 and below-trend growth for 2010.
While a consensus has emerged that the world economy has stopped sliding, opinion differs about the growth path from here. Donnelly cautions that ‘we need to be on the lookout for three downside risks: premature withdrawal of fiscal and monetary stimulus, renewed slowdown in China as current mammoth bank lending and infrastructure spending inevitably fades, and another financial shock’.
What form could a financial shock take? The newsletter pinpoints US commercial property where mark-to-market losses on US$3.3 trillion of mortgages and construction loans could be another setback for bank balance sheets.
'Resource nationalism’ – the new term for attempts by resource-rich countries to siphon into state coffers greater revenue from mining and petroleum projects through increased tax and royalty rates and state ownership levels – is supposed to be something that waxes and wanes with the global business and commodity price cycles, coming into vogue when prices are rallying and going out when prices fall.
The newsletter shows that it's a little more complicated than this. It looks at three countries: Mongolia, Guinea and Libya. Only in Mongolia have demands on miners eased, the newsletter notes. As a result, Mongolia could be set to become a considerable supplier of copper, gold, coal and uranium to China.
‘Meanwhile’, according to Donnelly, ‘governments in Guinea and Libya seem to be taking a gamble that, with commodity prices rallying again and still well above their pre-crisis long-term average, there is scope to gain some further revenue. In Tripoli, they are aware that push too far and you kill the goose that lays the golden eggs. In Guinea, an inexperienced military junta seems less conscious of this danger.’
‘Why discuss countries like Mongolia and Guinea?’, Donnelly asks. ‘After all, they rank well down the list of Australia's major trade and investment partners.’ The answer, he says, is that they are growing rapidly in importance, if from a low base. ‘They are the world's new resource frontiers – countries that Australia's internationally competitive resource and engineering companies are gravitating towards to drive their own growth.’
In the final story, the newsletter looks at the escalating international pressure on Fiji because of the government's procrastination over restoring democracy. It notes that any move by the UN and Britain to ban employment of Fijian soldiers would be a big economic shock to an already weak economy, as remittances from soldiers are the No 3 foreign exchange earner.