Defer the celebrations just a while

Judging by what is dished out by the English-language media here, Mongolian political leaders and policy makers do not much believe in taking the masses into confidence. The paternalistic norms of the ancien regime still hold sway: the people have no right, or business, to know about any problem in the economy, no matter how threatening they are. Ignorance is the best way to popular contentment, if not bliss. On their part, the people, too, are happy to repose responsibility in these leaders, unconcerned that complacency is no guarantee against disappointment and disaster.

Thus it was quite a change to read in Prime Minister S.Batbold’s address to Parliament  early in October (published in summary elsewhere in this issue) that he sees a global economic crisis looming, and one that may be more vicious than what has come before. That warning is laced with reassurances that Mongolia has the wherewithal to keep its head above the water, only if the Government is allowed to pursue its plans without let or hindrance. It may very well be able to do so, but apart from the fact that he was speaking just months before an election, we have to remember that at the moment there are too many imponderables in the global scene and while Mongolia can do everything right under its control, its economic health depends on what others do, or do not or cannot do.

All the recent good news -- rise in revenue, joining the band of middle-income countries, surge in GDP, burgeoning FDI, and more – can be traced to the commodity price boom. New export markets are very much in the future and all the money is coming from actual or anticipated sales to China. That country is everybody’s knight on a charger but does it have the capacity to stave off the recession that stalks the benighted developed economies?   A new study says Beijing could invest up to $1,000 billion abroad between now and 2020, but projections have a habit of losing their way. It is vital not to forget that the world economy is not on a stable path. On the contrary, to adopt a phrase often applied by the Chinese premier Wen Jiabao to his country, the world economy is “unsteady, unbalanced, unco-ordinated and unsustainable”. The US fiscal position is just one of a number of risks – and far from the gest.
The global pattern of divergent growth, with advanced countries remaining in the doldrums and emerging and developing economies leading the expected recovery, may be world-transforming, but the reality is that it is also a time of great uncertainty. While recovery in the advanced countries is expected to be anaemic, if at all, several emerging economies are suffering from excessive credit expansion and overheating. See how inflation is rising in Mongolia and now the Mongol Bank has raised interest rates. A real estate boom has often before ended in a bust.

The emergence of a commodity price boom exemplifies the complex and disturbing interaction between the two sides of our divided world economy. Behind the surge lies strong demand in (Mongolia’s case) China and occasional adverse supply conditions. Rapidly rising commodity prices help cause high inflation in emerging economies and stagflation in advanced countries. The result is pressure for monetary tightening. Instead, Mongolian wages are to get a whopping raise. That wins votes as long as nobody notices that higher prices have actually made wages fall.

It is easy to forget that policymakers, global and national, always confront a host of complex and interlocking challenges. Nothing that is now happening suggests any of these will be managed competently, let alone smoothly. In short, those who think we are now looking at the sunlit uplands are fooling themselves. Much disruption lies ahead.    

As we wait and see how things work out in and for Mongolia, it has been interesting to read how the surge in commodity prices over the past decade has revived an old debate. Will our insatiable demands exhaust the earth’s resources, inevitably finite? Or, will innovation and ingenuity lead to more efficient use of existing raw materials and to access to new sources of supply?    

The commodity boom in the 1970s coincided with the rise and universal spread of the ecological movement, with many interpreting the rise in prices as signifying that growth in the developed world, in its long accepted form, was unsustainable. Two opposite camps emerged in 1980. One was led by the ecologist Paul Ehrlich, known for his book “The Population Bomb”, and the other by Julian Simon, a free market economist. Their debates and polemics soon led to the dubbing of the two camps as the Malthusians, after the British economist Robert Malthus (1766-1834) who forecast that population would outstrip food supply, and the Cornucopians, who were certain of endless abundance.     

A challenge from Simon led Ehrlich to select five metals—copper, chromium, nickel, tin and tungsten—whose prices, he said, would, over the following ten years, rise in real terms. On his part, Simon bet that prices would fall. As it happened, Simon easily won the bet, but in retrospect, it is clear that Ehrlich suffered from bad timing, with the late 1970s witnessing a cyclical zenith for commodity prices. Simon was also favoured by history, as real commodity prices fell steadily throughout the 20th century. The economic boom of the 1980s and 1990s also rubbished Ehrlich’s somewhat wild claims—that a billion people would starve to death and that America would be trapped in an “age of scarcity” by 1985.    

But what might have been if the ecologist had taken up the economist’s 1990 offer to go “double or quits” for any future date? All five have risen in price since the rematch was proposed. More to the point, Ehrlich would have won the original bet were it recalculated today. (He is still alive; while Simon died in 1998.) An equally weighted portfolio of the same five commodities is now higher in real terms than the average of their prices back in 1980. The Cornucopians might very well argue that today’s metals prices are the result of buoyancy of demand and not of any cataclysmic shortages in supply. The likely retort of the Malthusians would be that humankind’s vaunted ingenuity has not stopped prices from rising in real terms over an extended period.

Just as a footnote, I remain convinced that Malthus was a first class thinker. He was wrong to say that the world would face mass starvation, but his logic was impeccable. Indeed it was his observations that very likely gave the inspiration to both Darwin and Wallace in forming the theory of evolution through natural selection. Right now, most of our manufacturing and consumption is based on the incorrect concept of limitless resources, and one fears that cultural conditioning is leading more and more people to mindlessly waste vast amounts of everything. In the short term, Mongolia would benefit as commodity prices rise, but its future, along with that of the rest of the world, would be bleak unless there is a reconfiguration of industrial design and end-to-end (cradle to grave) materials management. The good news for Mongolia is that, as yet, prices are insufficiently high to drive this change.