Strategic thinking will recognize that the current resource-intensive growth model has run its course.
The interesting development during the week that ended was the release of crude oil and petroleum products from the Strategic Petroleum Reserves of the member countries of the International Energy Agency (IEA) for about a month. It was very smart tactics. But it conveys flawed strategic thinking or the absence of it.
It was a smart move because governments have taken a page from the books of success stories of currency intervention—intervene when the market technicals are in your favour, when fundamental trends, too, are moving in your direction and when the market is positioned heavily in the opposite direction. Crude oil satisfied all these three conditions. The intervention has worked so far. Crude oil prices are down. The New York light crude is well below $100 per barrel and the Brent crude is just a tad above that.
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Parenthetically, India has every reason to be grateful to IEA for this move. It is a short-term (even if temporary) bailout for the country. Oversold Indian stock markets celebrated the move lustily on Friday. On its part, the government should have used the opportunity to grant complete and unrestricted pricing autonomy to oil companies. Instead, the government engaged in another quarter-move on Friday with predictably shallow reaction from other political parties. The country’s energy security should transcend electoral considerations.
The oil-release move was an implicit acknowledgement of the costs of the existing loose monetary policy in the US and elsewhere in the developed world, not to mention the incremental costs of further asset purchases by the US Federal Reserve and other central banks. This is exactly the risk-management strategy that Raghuram Rajan had advocated in his latest blog post: “Risk management in policy making might suggest not going to extremes when policymakers are faced with high levels of uncertainty about policy effectiveness.”
If the Fed resorts to additional asset purchases, it risks weakening the US dollar, driving up commodity prices and creating potential conflicts with developing nations, consequently. Of course, if economic conditions deteriorate further in the US—something that cannot be ruled out—it will revert to its unilateral instincts.
Strategically, it is a mistake. One, it reveals that policymakers have run out of conventional tools. They have shown their empty hands. It would embolden speculators rather than dampen their enthusiasm. Second, by intervening in commodities markets, they have signalled that they are prepared to distort the normal functioning of the market, instead of taking measures to curb speculation, if they believed that speculative forces were holding up the price of oil. This is not a good augury. Third, the move to get commodity prices lower by releasing inventory is not a long-term solution. Any inventory that is depleted has to be eventually replenished and that means merely postponing the day of reckoning for higher prices.
Strategic thinking, on the other hand, will recognize that the current resource-intensive growth model has run its course and the world has to find alternative means of supporting high growth. Until then, it has to accept slower growth and lower standards of living. That is especially true of the West where standards are high enough that some downsizing would not hurt. There is a moral obligation on their part to support the catch-up growth of developing countries instead of pointing fingers at them for the rising consumption of hydrocarbons. This thinking is not yet commonplace in the West.
Olivier Blanchard, the director of Research at the International Monetary Fund (IMF) lead-authored a note in February 2010 (“Rethinking Macroeconomic Policy”) in the light of the financial crisis of 2008. The note dealt with the perils of adopting a low inflation rate target, with the role of counter-cyclical fiscal policy and with running fiscal surpluses in good times, etc. All of these are useful, but they miss the elephant in the room. Ultimately, both borrowing and repayment capacities depend on topline growth and for sovereigns, it means economic growth. That is going to be harder to achieve.
The crisis of 2008 was precipitated by the relentless rise in the prices of commodities as the global economy tried to clock several years of 5% plus growth. IMF simply extrapolated that growth experience into the future without warning either of the risks such growth poses or of its infeasibility. Post-crisis, it’s doing the same with its economic growth forecasts. The World Economic Outlook (June update) projects world gross domestic product growth of 4.3% and 4.5% this year and next.
To shrink debt burdens in this era of diminished growth possibilities, countries have to do a lot more than getting IMF to publish upbeat forecasts and scoring tactical victories over speculators and resource producers.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at email@example.com