Climate Change in Peru

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Glacier melt hasn't caused a national crisis in Peru, yet. But high in the Andes, rising temperatures and changes in water supply over the last 40 years have decimated crops, killed fish stocks and forced villages to question how they will survive for another generation.

Without international help to build reservoirs and dams and improve irrigation, the South American nation could become a case study in how climate change can destabilize a strategically important region, according to Peruvian, U.S. and other officials.

[..] Peru is home to 70 percent of the world's tropical glaciers, which are also found in Bolivia, Ecuador and Chile. Peru's 18 mountain glaciers, including the world's largest tropical ice mass, are critical to the region's water sources for drinking, irrigation and electricity.

Glaciers in the South American Andes are melting faster than many scientists predicted; some climate change experts estimate entire glaciers across the Andes will disappear in 10 years due to rising global temperatures, creating instability across the globe as they melt.

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More here

What is causing food price volatility?

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Changing petroleum prices, crop yields, food stock levels, and exchange rates are the main culprits, but trade policies and a lack of reliable, up-to-date data are also driving the volatility.

In what is potentially an even more worrying trend, implied volatility—which represents the market’s expectations of how much the price is likely to move in the future and can only be inferred from the prices of derivative contracts such as options—has been increasing steadily since the mid-1990s. The implied volatilities of three key staple foods—soybeans, maize, and wheat—show a clear upward trend, indicating a steady increase in uncertainty.

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So argues Hafez Ghanem, Assistant Director-General of the Food and Agriculture Organization. Specifically, volatility in four variables—petroleum prices, crop yields, food stock levels, and exchange rates— significantly increases food price fluctuations.

Causes:

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First, petroleum price volatility—which tends to be high—translates to food price volatility through transportation costs and fertilizer prices. The link has become even stronger with the advent of biofuels, which require food crops as inputs and can therefore change food prices.

Second, because the demand for food is inelastic, small changes in supply can lead to big changes in prices, meaning that even limited crop yield volatility can have large effects on food price fluctuations. The role of crop yield variability is only expected to rise as extreme weather events become more common.

Third, food price volatility is inversely related to the level of food stocks—as stocks fall, price volatility rises. Both public and private actors have lowered stocks in recent years. This trend may be reversing itself, however, as countries are revising their reserves policies in response to recent bouts of volatility.

Finally, changes in exchange rates, especially of major exporting countries, translate to changes in international food prices. Thus, as macroeconomic factors lead to more volatile exchange rates, food price volatility also rises.

[…]an additional cause of price volatility: the lack of reliable, up-to-date information on crop supply and demand, stocks, and export availability.

[…]it is possible to argue that increased speculation contributed to higher food price volatility.

[…]real factors such as production shortfalls in key exporting countries—and not speculation—triggered the two recent bouts of volatility (in 2007–2008 and 2010).

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Solutions:

• Yield-enhancing investments (R&D in infrastructure that promote irrigation as well as drought-resilient crops and their hybrids)
• Trade policies (completion of the Doha Round of negotiations so that trade distorting subsidies can be reduced, and perhaps include tighter rules on export restrictions)
• Improving market transparency (information about both the real market and related financial transactions)
• Reforming policies for grain-based biofuels (introducing call options for biofuels—a market-compatible instrument—would guarantee that producers shift grain from producing biofuels to providing food during crises—a mutually beneficial outcome)
• Review stock policies (adequate emergency food stocks, or strategic reserves, must be maintained at the national, regional and global levels)
• Financing instruments (institutions need to act ex ante and provide import-financing or -guarantees to alleviate credit and foreign exchange constraints)
• Commodity exchanges (regulatory frameworks governing commodity exchanges must also be reviewed to reduce speculative behavior and thus limit volatility)

Chinua Achebe on Africa’s hope

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AFRICA has endured a tortured history of political instability and religious, racial and ethnic strife. In order to understand this bewildering, beautiful continent — and to grasp the complexity that is my home country, Nigeria, Africa’s most populous nation — I think it is absolutely important that we examine the story of African people.

In my mind, there are two parts to the story of the African peoples ... the rain beating us obviously goes back at least half a millennium. And what is happening in Africa today is a result of what has been going on for 400 or 500 years, from the “discovery” of Africa by Europe, through the period of darkness that engulfed the continent during the trans-Atlantic slave trade and through the Berlin Conference of 1885. That controversial gathering of the leading European powers, which precipitated the “scramble for Africa,” we all know took place without African consultation or representation. It created new boundaries in ancient kingdoms, and nation-states resulting in disjointed, inexplicable, tension-prone countries today.

During the colonial period, struggles were fought, exhaustingly, on so many fronts — for equality, for justice, for freedom — by politicians, intellectuals and common folk alike. At the end of the day, when the liberty was won, we found that we had not sufficiently reckoned with one incredibly important fact: If you take someone who has not really been in charge of himself for 300 years and tell him, “O.K., you are now free,” he will not know where to begin.

This is how I see the chaos in Africa today and the absence of logic in what we’re doing. Africa’s postcolonial disposition is the result of a people who have lost the habit of ruling themselves, forgotten their traditional way of thinking, embracing and engaging the world without sufficient preparation. We have also had difficulty running the systems foisted upon us at the dawn of independence by our colonial masters. We are like the man in the Igbo proverb who does not know where the rain began to beat him and so cannot say where he dried his body.

People don’t like this particular analysis, because it looks as if we want to place the blame on someone else. Let me be clear, because I have inadvertently developed a reputation (some of my friends say one I relish) as a provocateur: because the West has had a long but uneven engagement with Africa, it is imperative that it also play an important role in forging solutions to Africa’s myriad problems. This will require good will and concerted effort on the part of all those who share the weight of Africa’s historical albatross.

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More by Chinua Achebe here. He is the author of an awesome book Things Fall Apart.

Nepal, South Asia, and Developing Countries Compared

Nepal’s real GDP growth is expected to be 3.7% and 4% in 2011 and 2012, respectively. Exports growth will initially decline to 5.6% and then rise to 7.3% in 2012. Meanwhile, imports growth will decline to 6.3% and then increase to 6.9% in 2012. Both exports and imports (as a share of GDP) are expected to decline in 2012. Exports are expected to be 11% of GDP and 9.9% of GDP in 2011 and 2012, respectively. The figures for imports for the same period are 26.1% and 23.7%.

That said, how does Nepal’s existing economic performance and forecasts compare with the South Asian region, neighboring countries, and developing countries. Below are some of the comparative charts. All data are sourced on 2010-01-14 from Global Economic Prospects 2011 website. The data for 2011 and 2012 are projections. Nepal’s standing among the web of bars is indicated by an arrow (just ensuring that you don’t get lost looking for Nepal!). SA, DEV, WLD, PAK, NPL, LKA, BGD, CHN, IND stand for South Asia, Developing Countries, World, Pakistan, Nepal, Sri Lanka, Bangladesh, China, and India, respectively. All of these are bar charts. I was too lazy to come up with something simpler to understand the data! :-)

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First, Nepal’s real GDP growth rate is the second lowest in the region and is expected will remain that way in 2012, well below the level reached in 2008. Blame the political impasse, power outages, supply bottlenecks, high and sticky inflation, labor disputes, and low business and consumer sentiment, among others. South Asia’s growth will be robust, thanks largely to the bustling economic activities in India (and to some extent Bangladesh). As a whole, developing countries will have higher growth rate than the world average (which has a negative real growth rate in 2009).

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Second, Nepal’s exports (share of GDP) will continue to decline, while that of developing countries, China, and India will continue to grow or at least remain steady. Pakistan has one of the lowest exports (share of GDP) in the South Asian region. Blame the political impasse, uncompetitive export-oriented sector, power outages, supply bottlenecks, high and sticky inflation, labor disputes, and low business and consumer sentiment, among others

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Third, Nepal’s imports (share of GDP) are expected to be higher than exports, but will slightly decrease.Still, Nepal’s imports (share of GDP) are higher higher than most all the countries in the region (except for China’s, which is expected to increase imports in 2012). The world and developing countries average of imports are higher than that of Nepal. In 2009, imports was the highest in Nepal than in all the countries and regions looked in this post. Thanks to remittances, declining domestic production, and a slight appreciation of Nepali currency vis-à-vis dollar (due to high inflation rate).

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Fourth, total investment (share of GDP) in Nepal is higher than in world average, Pakistan, Sri Lanka, and Bangladesh. But, why is GDP growth rate and industrial production low? It might be because Nepal has a greater change in stocks (share of GDP) than others countries that have low total investment than Nepal’s [Note: Fixed investment + Change in stocks = Total investment]. But, the high total investment and low growth and industrial production indicate low productivity and uncompetitive economic structure. Total investment in India, China, developing countries average, and South Asia is higher than in Nepal.

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Fifth, Nepal’s GDP per capita (current US$) is the lowest and will be the lowest in 2012 among the regions and countries compared in this blog post. Real GDP per capita was US$ 431.1 in 2009 and is expected to reach US$ 581.9 and US$ 661.1 in 2011 and 2012, respectively. This is a growth of 1.8% and 2.1% in 2011 and 2012, respectively. In 2012, the average real GDP per capita of South Asia average, world average, developing countries average  is expected to be US$ 1,754.4,  US$ 10,143, and US$ 4,145.9, respectively. Meanwhile, in 2012, real GDP per capita of India, Bangladesh, Pakistan, Sri Lanka and China is expected to be US$ 1,980.8, US$ 773, US$ 1,163.9, US$ 3,167.7, and US$ 5,231.6, respectively. Nepal has a long way to go to catch up with these countries and regions.

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Nepal’s growth prospects in 2012

According to the latest Global Economic Prospects 2011,in 2012, Nepal is expected to have a nominal GDP of US$ 21.6 billion (2005 current prices), population of 31 million, GDP per capita of US$ 697.3, and real per capita GDP growth of 2.1%. Here is an earlier blog post about GEP 2011.

Real GDP growth is expected to be 3.7% and 4% in 2011 and 2012. Exports growth will initially decline to 5.6% and then rise to 7.3% in 2012. Meanwhile, imports growth will decline to 6.3% and then increase to 6.9% in 2012.

Private consumption is expected to contribute 3.3% to GDP growth in 2012, but government consumption is expected to contribute just 0.6%. Fixed investment and net exports are expected to contribute 1.2% of GDP growth and 1.3% of GDP growth in 2012.

As a share of GDP, private consumption is expected to be 75.3% and 74.4% in 2011 and 2012, respectively. Similarly, government consumption as a share of GDP is expected to be 11.1% in 2012; fixed investment 20.6%; change in stocks 7.2%; and total investment 27.9%.

Both exports and imports (as a share of GDP) are expected to decline in 2012. Exports are expected to be 11% of GDP and 9.9% of GDP in 2011 and 2012, respectively. The figures for imports for the same period are 26.1% and 23.7%. It means that trade deficit is expected to increase further. Exchange rate is expected to appreciate, probably due to weak dollar.

Nepali Macroeconomic Forecasts, 2008-2012
Indicator	2008	2009	2010	2011	2012
Real Expenditure Growth
GDP at market prices	5.3	4.7	3.3	3.7	4
Private consumption	4.9	4.5	3.8	4	4.1
Government consumption	6.8	19.3	5.5	5.8	6
Fixed investment	6	5.9	4	5	5.5
Exports, GNFS	-3.4	38.4	6.4	5.6	7.3
Imports, GNFS	7.5	20.2	6.8	6.3	6.9
Contribution to GDP Growth
Private consumption	3.9	3.6	3	3.2	3.3
Government consumption	0.6	1.7	0.6	0.6	0.6
Fixed investment	1.3	1.3	0.9	1.1	1.2
Net exports	-0.5	4.8	1	0.9	1.3
Price Deflators
GDP at market prices	-6.7	8.2	18.7	25.1	3.3
Private consumption	-8.9	11.3	14.5	22.2	2
Exports, GNFS	-5.8	6.4	-5	4	-9.4
Imports, GNFS	-4.6	7.9	-5.4	3.5	-8.9
Share of GDP
Private consumption	77.1	79.2	76.8	75.3	74.4
Government consumption	10	11.1	11.1	11	11.1
Fixed investment	21.1	21.2	20.8	20.6	20.6
Change in stocks	12.1	8.4	7.9	7.4	7.2
Total investment	33.2	29.6	28.7	28	27.9
Exports, GNFS	12.1	15.7	12.9	11	9.9
Imports, GNFS	32.7	37.4	30.8	26.1	23.7
Overall
Nominal GDP (USD billions)	11.2	12.6	15.5	20.1	21.6
Population (millions)	28.8	29.3	29.9	30.4	31
GDP per capita, current USD	388.1	431.1	518.9	661.1	697.3
Real per capita GDP growth	3.3	2.7	1.4	1.8	2.1
USD Fx rate	73.3	76	73.6	65	67.6

Source: Global Economic Prospects 2011; 2011 and 2012 are forecasts

Developing countries leading global recovery

According to the latest Global Economic Prospects 2011, global GDP (measured at 2005 market prices and exchange rates), which expanded by 3.9% in 2010, will slow to 3.3% in 2011, before it reaches 3.6% in 2012. Developing countries are expected to grow 7% in 2010, 6% in 2011 and 6.1% in 2012. They will continue to outstrip growth in high-income countries, which is projected at 2.8% in 2010, 2.4% in 2011 and 2.7% in 2012. The report notes that strong developing country domestic demand is leading the world economy but persistent financial sector problems in some high-income countries might threaten growth.

It notes that foreign direct investment (FDI) to developing countries  rose a more modest  16% in 2010, reaching  $410 billion after falling 40% in 2009. An important part of the rebound is due to rising South-South investments, particularly originating in Asia.

In many economies, dollar depreciation, improved local conditions, and rising prices for goods and services means that the real price of food has not risen as much as the U.S. dollar price of internationally traded food commodities. But, the report cautions that double-digit price increases of key staples in the past few months are pressuring households in  countries with an already-existing high burden of poverty and malnutrition. And, if global food prices rise further along with other key commodities, a repeat of the conditions in 2008 cannot be excluded.

The main short-term risks to the global economy include:

• the possibility of further market turmoil and contagion in Euro area sovereign debt markets;
• the possibility that very low interest rates in high-income countries induce a second boom-bust cycle among one or more developing countries; and
• the possibility that rising commodity prices threaten the recovery and or poverty reduction in developing countries.

About South Asia’s growth prospects, the report notes:

“The South Asia region is projected to post GDP growth of 7.9% on average over the 2011-2012 fiscal years, buoyed by vibrant growth in India. This compares with estimated growth of 8.7% in fiscal year 2010. The region benefited from aggressive demand stimulus measures, a revival in investor and consumer sentiment, and a resumption of capital inflows. A recent move toward tighter policy will likely need to be pursued further, given the region‟s high fiscal deficits (the largest among developing regions), high inflation and deteriorating current accounts.”

South Asia’s real GDP growth accelerated to an estimated 8.7 percent in FY2010-11 from 7.0 percent in FY2009-10, buoyed by very strong growth in India, which represents 80 percent of regional GDP. Excluding India, regional GDP growth (on a fiscal year basis) firmed, but to a more modest 5.1 percent from 4.3 percent the year before. On a calendar year basis, GDP for the region as a whole is estimated to have expanded 8.4 percent in 2010 after 5.3 percent in 2009, and to 4.8 percent in 2010 from 3.8 percent in 2009 if India is excluded.

In 2012, India, Pakistan and Bangladesh are  expected to grow at 8.7%, 3.8%, and 6.3%, respectively. Nepal is expected to grow at 4% in 2012.

Forecast summary, 2010-2012
Indicator	2010	2011	2012
South Asia
Real GDP	8.7	7.7	8.1
Real GDP (PPP)	8.7	7.7	8.1
Exports	7.4	8.8	10.3
Imports	6.2	9.4	10.3
Current account (%GDP)	-3.4	-2.9	-2.9
Developing Countries
Real GDP	7	6	6.1
Real GDP (PPP)	7.1	6.2	6.4
Exports	19.9	9.1	10.6
Imports	22	9.3	10
Current account (%GDP)	1.3	1	0.9
Nepal
Real GDP	3.3	3.7	4
Exports	6.4	5.6	7.3
Imports	6.8	6.3	6.9
Annual percentage change, unless indicated otherwise; 2011 and 2012 are estimates; table sourced on 2011-01-14

Rising food prices—update

After reaching peak in 2008, food prices were coming down due to good harvests for most basic food items. But, severe weather in some of the world’s biggest food exporting countries damaged harvests and led to another spike in December 2010. Flooding in Pakistan, Australia, and Canada, and drought and fires in Russia have affected crops in 2010 and even in 2011. Wheat production is going to come down this year. It will push prices even higher. Speculators are also helping to jack up prices.

Wheat Production and Consumption
Year	Global Production	Global Consumption	Stockpiles (end of period)
MILLIONS OF TONNES SOURCE: US DEPARTMENT OF AGRICULTURE
2006-07	596	616	131
2007-08	611	617	125
2008-09	683	643	166
2009-10	680	652	187
2010-11	646	665	175

However, prices of some crops are falling, especially if they do not depend on disaster hit countries for supplies. Countries like Mexico, Kenya and Uganda are seeing drop in prices of major crops. Meanwhile, others like India, Thailand, and El Salvador are seeing rising prices.