US$ 100 oil: Daunting prospect for small nations

Philip Fernando

Daunting prospects of a world economy at $100+ a barrel of oil are ominously troubling for smaller nations. The overall economic outlook for 2008 turned bleak as United Nations predicted a fall in the economic performance of many countries in 2008. Upward price spiral will destabilize everything else.

For example, Sri Lanka and many smaller countries are feeling the pinch immensely. Slowdown in consumption in the US, with it a further dollar depreciation, could create more uncertainty across global financial markets and push down growth projections to 1.6 per cent in 2008, big enough to wreak havoc in many economies of the of the world.

Efforts to stem the tide of economic stress are now emerging rather slowly. The rosy scenario of last three years disappeared as developing nations’ dependency on the developed countries took hold.

Amidst the upward economic trends in most places, an average of 7 per cent growth in many countries and a remarkable 6 per cent growth in Africa, the repercussions of a slower growth rate in the richer nations reversed the gains of the last three years.

The share of developing countries and economies in transition in world trade had risen to 40 per cent in 2007, up from 35 per cent in 2000.

Also last year, terms of trade for most exporters of primary commodities had improved for the fifth consecutive year and equity investments continued pouring in. Still, economic prosperity in the developing world was largely dependent on growth and trade in rich nations.

The risk of the US economy moving into recession and bringing down the rest of the world economy with it is real. Counter measures based on multilateral policy action must come fast. No single country can survive by itself. Neither can the United States economy avert major losses worldwide.

The central banks of the major economies have their work cut out trying to get to the root causes of the turmoil: the huge global imbalances, contagious slowdown in consumption, trends in international trade and capital flows that are being watched by most countries.

The United States dollar would most probably depreciate 5 per cent in 2008 and continue its downward slide in 2009. So far piece meal approaches have been tried, such as lowering interest rates and a realignment of currency exchange rates.

Depending on Japan and Western Europe seemed unproductive as both were already operating near production potential, were not in a position to pick up the slack.

In fact, export growth will slow in Japan, Europe and China, and also their demand for developing-world imports. Millennium Development Goals set for nations by UN are in jeopardy.

The ball is on the courts of those with large savings and current account surpluses, such as China, Japan, major oil exporters and several European nations. They have to stimulate the demand for goods and services.

Most observers believe that China could step up public investment and spending on health, education and social security, while Europe and Japan, where inflationary pressures remained low, could end monetary tightening and adopt moderate stimulus measures.

There is an urgent need for international financial regulation and international macroeconomic coordination. Tragically, International Monetary Fund (IMF) has not stepped up to the mark. It is still recovering from the governance short-fall that undermined its legitimacy. Neither have the Group of Eight and the related “Group of 20” come through in a big way for developing countries.

Oil prices are destined to remain very high as the demand is also steeply high. This will impact on the prices of all other goods in two ways.

Smaller nations food, medical supplies, construction and transportation costs will go up steeply, while for bigger economies, the impact will be opposite of that- a depressed price level for some goods caused by purchasing power decline with steep oil prices at the pump.

Consumer protection measures are badly needed in many parts of the world, unless oil prices eventually drop. Better regulation of financial markets and financial institutions would also be of assistance in helping the consumers.

The pre-election year in USA will offer some help as candidates are forces to debate the economy much more than they normally would want to do.

Asian Tribune