Image "Pro Pit" by Aaron Webb is licensed under CC BY-NC-SA 2.0
“Never let an opportunity pass by, but always think twice before acting,” says a Japanese proverb with particular pertinence for East Asia today.
Plunging oil prices present a significant opportunity for most of the region’s developing countries to strengthen the competitiveness of their economies and take advantage of the ongoing global recovery.
The drop in oil prices — over 50% since mid-2014 — reflects several years of increasing oil supply, particularly in North America, along with decreased geopolitical risks to global production, OPEC’s efforts to maintain production levels and market share, and weaker-than-expected global growth last year. These factors are likely to persist, with oil prices expected to remain low through at least 2016.
Most countries in East Asia, including Japan, benefit from the price decline because they are oil importers. They can expect more rapid economic growth, lower inflation and improved current account balances.
Why are petroleum prices dropping so fast anyway? Have they reached rock bottom yet? Should we be worried if they continue to fall? These are questions that probably every finance minister in either oil-rich or oil importing nations is trying to answer.
Scientists declared this past year as the warmest year on Earth since record-keeping began in 1880, and a series of scientific reports found glaciers melting and extreme weather events intensifying. There can be no doubt that this year world leaders must commit to transforming their economies to combat climate change.
Despite their mixed record last year, Future Development's bloggers once again offer their predictions for 2015. Eight themes emerge.
1. Global growth and trade. The US economy will strengthen far above predictions. Together with lower oil prices and a better business climate in emerging markets, this will create substantial positive spill-overs, including to the smaller export-oriented Asian economies, boosting the growth of their manufactured exports well above recent trends. The US will look to open new free trade agreements in Asia—India may try to join—and seek opportunities to do the same in Africa. Meanwhile, Germany will face increasing resistance to the free-trade agreement with America (TTIP), just as Angela Merkel celebrates her 10th year in office.
- oil prices
- Public Sector and Governance
- Private Sector Development
- Labor and Social Protection
- Information and Communication Technologies
- Global Economy
- South Asia
- Middle East and North Africa
- Latin America & Caribbean
- Europe and Central Asia
- East Asia and Pacific
- Russian Federation
- United States
- Venezuela, Republica Bolivariana de
A decade of elevated oil prices brought prosperity to many developing countries. Incomes rose, poverty shrank, macroeconomic buffers were rebuilt. The fiscal space for investing more in education and infrastructure increased, resulting in better sharing of prosperity. At the same time, higher commodity prices and surging global demand resulted in much more concentrated exports in all developing oil-rich countries. "Diversifying exports" became a priority for policy makers and development economists around the world. Historical experience and evidence to the contrary from successful resource rich countries notwithstanding, many widely believe that a more diversified export structure should be an important national goal and may well be a synonym for development, a goal that government can target and achieve. And a more diversified export structure typically meant a smaller share of commodity exports in total shipments abroad or a reduced concentration – as measured by the Herfindahl-Hirschmann index – of exports.
Notes from Russia and Kazakhstan
Oil prices tumbled dramatically since July when they reached US$115 per barrel to below US$65 per barrel in recent days. Despite the sharp price decline, OPEC signaled no intention to cut production. The oil market remains well-supplied and there is demand-driven pressure on oil prices, following weak economic data from the Euro zone and a number of emerging economies, including Turkey, Brazil, Russia, and China which means that the oil price could fall even further and remain low for longer.
The economic prospects of many resource abundant economies are tied to oil prices. Russia and Kazakhstan are two extreme cases. Such dependency translates into volatility of export receipts and government revenues and, depending on the exchange regime, to a decline in the national currency. For Russia, oil and gas provide about 70 percent of its exports and 50 percent of its federal budget. In Kazakhstan, oil revenues constitute about half of government’s total revenues and 45 percent of foreign exchange earnings.
The recent, precipitous decline in oil prices (35 percent so far this year) has revived the question of how oil-exporting countries should manage their budgets. These countries’ governments rely on oil revenues for 60-90 percent of their spending. In light of the price drop, should governments cut expenditures, including growth-promoting investment expenditures? Or should they dip into the money they saved when oil prices were high, and keep expenditures on an even keel? Since oil prices fluctuate up and down, governments are looking for rules that guide expenditure decisions, rather than leaving it to the politicians in power at the time to decide whenever there is a price shock. The successful experience of Norway and Chile, which used strict fiscal rules to make sure that resource windfalls are saved and not subject to the irresistible temptation to spend, is often contrasted with countries such as Nigeria and Cameroon, which didn’t.
A cup of coffee in Caracas costs almost 200 times a liter of gasoline. Households in Turkey paid 74 times more than their Egyptian counterparts for bottled cooking gas in early 2013. The price differences across countries for gasoline and diesel are even larger, as much as 250-fold for diesel.
Is Russia’s economy just about to shift a gear downwards?
In the decade before the global financial crisis, Russia’s growth averaged 7 percent, thanks to rising oil prices, rapid credit expansion and policy reform. Then, after the economy took a nosedive in 2009, Russia rebounded to growth above 4 percent even though the global economy was sluggish and the euro area soon went back into a recession.
But now, as we begin the final three months of 2012, Russia’s economy is settling onto a lower growth trajectory. In our new Russian Economic Report, we project that Russia will grow only 3.5 percent this year. Excluding the crisis years of 1998 and 2009, this would be the lowest rate in a decade and a half.