Markets and the Power Shift to the Emerging Economies

The weight of economic activity is shifting from the US & Europe to Asia & Iberoamérica

Energy squeeze – higher prices

The longer-term energy story is complex. The developed world is now barely increasing its use of energy and energy demand is projected to remain stable for the forseeable future, at least for the next couple of decades. Energy use in the emerging world, by contrast, continues to grow relentlessly every year.

The emerging world now uses more energy than the old developed world. This is what you would expect to happen, for as the weight of economic activity shifts from the US and Europe to Asia and Iberoamérica, so too will demand for energy. But it means the price paid by the developed world will be increasingly determined by the emerging world. The so called “West” (the US and Europe) has never been in this position since industrialisation. There is a weak parallel with the rise of Opec in the 1970s when the oil producers cut supply and quadrupled the price. At that time, the US and Europe found other sources of oil and reduced their dependence on Opec. But this time the squeeze comes from the demand side, not the supply, and there is not much the US and Europe can do about it.

And what next for the commodities markets 

The Chart below provides an overview contrasting developed countries with emerging economies' share of GDP and their world share of some of the most important commodity markets and other indicators:

Source: The Economist Daily Charts

Many analysts believe that the long-running boom in commodity prices (for some of the world's most important raw materials) has been driven up by financial speculation as much as physical need. Hence the commodities market may be heading for a massive crash on the scale of sub-prime. The commodity boom has not reached the excess so evident in the subprime era but it is pretty big nevertheless. Recently, some analysts have speculated that the gigantic merger between the mining company Xstrata and the commodity trading house Glencore is a signal of the prospect of a looming crash in the commodities markets. Just before the subprime crash, many massive subprime acquisitions came at the end of a massive boom in the securities markets and those doing the deals appeared to have sensed that the party was coming to an end and that they had to do something spectacular to be able to reap the super profits to be had in the final stages of the blowout. The Geo-Trade Blog believes it is possible that this deal may be the signal that the commodity markets are today where debt markets were on the eve of the credit crunch.

Printing Money and Bubbles in Markets

In the immediate aftermath of the subprime crash, printing money or quantitative easing (QE) as it is also known helped a wide variety of financial institutions to avoid facing up to their losses, covertly recapitalising US and European banks that were, to all intents and purposes, insolvent. Over the last few years protests from countries including Thailand, Australia, South Africa and China have been heard complaining that the US' unprecedented monetary expansion was responsible for causing dangerous bubbles in commodity markets going way beyond US equities. The US government also knows, although it denies it, that the more money it prints, the more speculative pressures push up global food prices. 

While the causes behind the Arab Spring unrest in 2011 are complex, it must be noted that it was surging food price that provided the spark. Hence the large emerging economies view "quantitative easing" as a developed country policy aberration, dressed up as a "legitimate technical solution" that they do not agree with at all. Brazil's finance minister has described it as "throwing dollars out of a helicopter and the Russian PM has described it as "economic hooliganism". The emerging economies clearly perceive the current trials and tribulations of the developed countries very differently to the conventional wisdom that underpins the policy decisions and assumptions that justify QE in the developed world. Emerging Economies are aghast that the US is now shouldering declared federal liabilities of $9,100bn - making it by a long way the world's largest debtor. Furthermore US Government debt is set to reach 42pc of GDP by 2015 according to official estimates. And more and more interest is being shown in the fact that the US' total sovereign liabilities including off-balance sheet items such as Medicare and Mediaid amount to $75,000bn - no less than five times annual GDP.

 

The InterOceanic Highway between Brazil and Perú connecting the Atlantic and Pacific Oceans

InterOceanic Highway between Perú and Brazil that connects the Atlantic
and Pacific Oceans



The InterOceanic Highway (Carretera Interoceánica is the official Spanish name and Estrada do Pacífico is the Brasilian name) will have a total distance by road of 5440kms from the Atlantic to the Pacific.

The road is one of the biggest construction projects ever undertaken in América Latina. The highest point is 4850m or 42m higher than Mont Blanc, Europe's highest mountain. Twenty two bridges are being built including a spectacular new bridge of 722m across the Madre de Dios River at Puerto Maldonado in Perú.



 The InterOceanic Highway got off the ground due to the support from three Presidents Lula da Silva (Brazil), Alan García (Perú) and Evo Morales (Bolivia). All were key supporters of the project through which they sought the further integration and development of the three countries: Brazil – the giant of América Latina with its huge area of the Amazon, Perú with its Pacific coast and also with more than half its land area in the Amazon and the land-locked Bolivia with massive energy resources in need of infrastructure to transport them to the sea ports.

Over 4650km are complete and fully asphalt covered. Work is progressing on the final section 736kms from the Amazon basin and over the Andes mountains. The cost has been budgeted at 1.3 billion dollars.

The InterOceanic Highway will open up the Pacific Ocean to Brazil and Bolivia. It will connect América Latina's biggest mega-city São Paulo with Perú's three ports on the Pacific Coast; San Juan, Mataraní and Ilo. América Latina has benefited from the boom in the world price for mineral resources. Perú is the world’s largest silver producer, second largest producer in copper and zinc and sixth in gold.

Peru has advanced considerably over the last five years. Since 2006 growth has accelerated, averaging 7% despite the world recession. The share of Peruvians living in poverty has fallen from 49% in 2004 to 35% in 2009. Social indicators have improved immensely - between 2005 and 2010 Perú climbed 24 places in the United Nations Human Development Report.

Much of the Pacific coast, where farmers export asparagus, grapes and other products enjoys almost full employment in 2011. Though many parts of the Andean highlands remain poor, the arrival of the InterOceanic Highway has cut journey times meaning that many farmers there too have joined the export boom. Much of this succes is due to the vision of outgoing Peruvian President Alan García and his predecessor Alejandro Toledo. Both pursued policies of price stability, fiscal rigour, foreign investment, open trade and investment in major civil works infrastructure.

Perhaps Alan García's vision for Perú and América Latina is best summed up in his own words:

"We will be a first-world country soon, but we need to keep the goal in sight, and the goal is work, effort, execution of public works. We don’t live on words, we don’t live on promises, we live on concrete works.”

Unfortunately Alan García was not able to choose a sucessor in the same way that Brazil’s Luiz Inácio Lula da Silva and Colombia’s Álvaro Uribe had managed to do in 2010. His party, did not even have a candiate in the first round of presidential elections held in April 2011. None of the three centrist moderate candidates made it to the second round of voting on 5 June 2011. Instead the Peruvian electorate was presented with Ollanta Humala, an ex-army officer with affiliatons with Hugo Chavéz and Keiko Fujimori, the daughter of the former president now serving a 25 year prison term for human rights abuses. Ollanta Humala, prevailed by a narrow 3% margen with a manifesto programme that looks unlikely to deliver the growth rates needed to continue to lift peruvians out of poverty and at best reads like a recipe of missed opportunities for the next five years.

Mongolia – a new concept for "buffer states" in the 21st Century

Map of Mongolia, geographically located between China and Russia, 
the 21st century regional powers in the former "buffer states" of Central Asia



Qing (Manchu) Dynasty

The 清朝Qing (Manchu) Dynasty (1644-1911) was China's last dynasty. The Manchus were Mongol-like horsemen turned merchants from Manchuria. They were of mixed Mongolian, Korean, Chinese and Jurchen stock. The Manchus sucessfully expanded the Chinese Qing empire far into Central and Southeast Asia and managed to bring Tibet and Mongolia under Chinese control through a system of buffer states. The Manchu success was attributed to their ability to marry Mongol military technique with Chinese administrative government.

Buffer states and Chinese territorial control up until 19^th century

For around 18 centuries, China's geographical position was protected in all directions by a system of buffer states. The aim was to carefully administer and rule a “China territorial core” (which roughly hadn't changed territorially since China's first unification under the Qin emperor in 221 BC) and then surround this with a group of buffer states or territories, ruled through different forms of agreements. This system granted security, trade and served to expand Chinese imperial virtue to the outside world.

In the 17th century the 清朝Qing dynasty conquered China, taking over the Ming Dynasty. At the same time Russian encroachment started into the once deserted and loosely controlled Siberia. The Russians started thinking of Siberia in terms of the European state, that is they wanted clear, limited frontier positions, not loosely ruled, buffer zones. This led to a series of treaties and wars marking the borders between Qing China and Russia for over two centuries, by which Russia took large parts of Siberia's frozen desert.

In the 19th and 20th centuries, the buffer states were increasingly encroached upon from all sides. While the Russians were coming from the north, the British were coming from the sea and from the south. The first opium war came in 1839-42, which led China to accept different rules of trade and administration of foreign merchants working in China, and in 1939-42 the first British-Afghan war saw British forces reaching the south west frontier of one territory which was loosely under China control - Tibet. In the same period the French conquered Indochina, a buffer state of the Qing dynasty, and the Japanese rejected Chinese patronage and conquered Korea, also a part of the Qing empire. The Qing dynasty eventually collapsed in 1911. But encroachment by foreign powers on all the sides of the Chinese border changed China's perception of its own territory and of the use of buffer states.

Mongolia today in 21^st century

Today the concept of buffer states for security and trade with Central Asia and other surrounding countries is no longer relevant. Instead Mongolia and other former buffer states in Central Asia are now the subject of intense commercial interest due to their immense mineral resouces and proximity to China. Mongolia has some of the largest coal mineral resources in the world as well as immense reserves of copper, gold and uranium.

China's national energy strategy is currently focused on securing increasingly scarce resources while diversifying away from the western world. Hence China is investing heavily in mineral resources from Mongolia. Since 2003, it has invested around $500m in FDI in Mongolia. This is because much of Mongolia's coal is the high-quality “coking” variety vital to steel production and it is located only 145km from the Chinese border. Interestingly, China now produces 50pc of the world's steel. Hence Mongolian coal is set to become a cornerstone of Chinese energy policy that will fuel Chinese economic growth in the 21^st century. 

Mongolia and other Central Asian States have long been intertwined with Chinese history and its system of "buffer state" territorial control. But today, China's investment in this former buffer zone, where a third of Mongolians are still nomadic or semi-nomadic in the 21st century, is beginning to open it up to the outside world. A further development is the beginning of a new wave of commercial relations between China and Russia that the US is unable to compete with.

So far, it appears, in the 21^st century, that neither China nor Russia sees Central Asia as its exclusive domain. In Mongolia, both Russia and China are treading carefully. Russia's influence in Central Asia combined with Chinese investment cash, together, is working to transform what were fragile buffer states into a transit corridor based on trade in energy and minerals. The Geo-Trade Blog believes that it is highly possible that this could give rise to trade in a whole range of goods and services in a flourishing new trading corridor through the former Central Asian buffer states which the European bloc countries could also tap into due to their geographical proximity. It is here where economic power is being exerted and the shape of the world in the 21st century is beginning to emerge.