Wednesday, April 30, 2008

Fertility, Employment and Inflation in Thailand and Vietnam

"Thailand has even gone the extra mile to explore additional land for rice production," James Adams, World Bank Vice President for East Asia Pacific

The above quote is a reference (of course), to the current global shortage of rice for international trading purposes and to the sudden spike in rice prices (see a much fuller explanation of the whole issue in this companion post). James Adams is simply highlighting one possible step that can be taken, if not towards a complete solution, then at least along the road to an amelioration of what is likely to become - in some of the world's poorer regions - a very acute crisis indeed. But the issue of rice prices (and indeed of the whole structural rise in food and energy prices) is a complex one, and a lot of seperate factors come into play. Land use is simply one of these.

In Thailand’s Than-En village, Phantipa Chongrak, 38 sold her last four-tonne, unprocessed harvest in January for $235 per tonne, half what rice is selling for now in her area. But Ms Phantipa, who owns 1.9 hectares of land, has now bet big on higher rice prices – renting an additional 5.6 hectares to cultivate an unusual out-of-season rice crop, an investment of about Bt150,000 ($4,730, €3,020, £2,380).

Hoping to profit from the soaring price levels, plenty of other Thai farmers have done the same, with Thai agricultural officials predicting an extra 1.6m tonne harvest in June. But that has left Ms Phantipa anxious about her expensive gamble. “I’m thinking and worried that in the next two months the price will be down,” she says.

Obviously the decision procedure facing farmers like Phantipa Chongrak is a complex one. To some extent they need to bet that the rise in prices is going to be more or less permanent (which it may well be) but they will almost certainly be doing this on the basis of very "imperfect information" since they do not have their disposal the sophistocated models and information which international economists can resort to (and god knows, we have a significant enough tendency to get things wrong).

It has been estimated that the price increases may lead Thai farmers to cultivate up to 16,000 hectares (39,520 acres) of previously idle land this year, and , in addition, many growers plan to plant an extra crop.

Rice growers and their families constitute a third of Thailand's 65 million population, and those who own their own land earn an average of 12,837 baht ($404) a month, compared with 33,088 for a Bangkok family, according to data from the National Statistics Office. Thai rice exports were up 36 percent from a year earlier in the first four months of this year, and the country may supply 45 percent of world exports in 2008, compared with 31 percent last year, according to the Commerce Ministry.

Before the shortage, Thailand estimated it would produce about 20 million metric tons of milled rice this year and export about 9.5 million metric tons. The additional cultivation that is now envisaged may increase output by 660,000 metric tons - enough, for example, to supply Mexico's annual imports.

But there are problems. Apart from the unpredicatability of future short term movements in prices, water is also an issue. Thai farmers normally plant in two crops: the main one around mid-year and the second near year's end. Now, they're planting at least three times, which means dipping into water typically saved for the dry season that starts in November. The Royal Irrigation Department said in April that reservoirs were at 64 percent of capacity, down from 71 percent a year earlier. It also warned against planting a third crop in two northern provinces, citing limited water reserves. Paddies have been guzzling 20 percent more water than normal so far this year, according to Theera Wongsamut, director general of the irrigation department.

And there is also growing indebtedness among Thai rice farmers. The state Bank for Agriculture and Agricultural Cooperatives expects lending to rise 25 percent to 250 billion baht this year on increased demand from rice planters, according to bank President Thiraphong Tangthirasunan. Farmers are borrowing the money to buy equipment like water pumps since they are planting more while the water supply is limited. They are also busily buying fertilizer, seed and pesticides, and trading-in buffaloes for mechanized plows.

So James Adams is right, many in Thailand are preparing to go that extra mile (and let's just hope for there sake that they don't need to "erect one bridge too many" to cover it).

Structural Issues in the Global Agricultural Labour Market

As I say the totality of issues which are being raised by the recent rise in food and energy costs constitute a very complex problem indeed, and in these posts I do not pretend to be able to address all of them. Indeed the question I am raising here is really a very simple one: there is no doubt that globally we have the land surface available to increase agricultural output substantially - even if we should be aware that presently unused land is unlikely to be of the same quality as the land which is being currently put to use (otherwise it is hard to see why it is not currently producing). We also have the technological resources to increase agricultural productivity in a way which enables us not only to feed the additional global population we are facing, but even to meet the needs presented by the rapid rise in living standards which is also taking place in the emerging economies.

We have both of these things (land, technology), but do we have the people we need to put them to work? Or better put - since obviously with those extra billions who are about to come on line across the planet we could hardly be said to be short of people - do we have the right people in the right places? That is to say, do we have the people where we want them, and with the levels of skill and education (you know, to use the technology effectively) that we need? Since if we don't we have what economists have traditionally called a "bottleneck problem", but this time we have it on an unprecedented (global) scale, a scale where the traditional economic remedies (labour market mobility and flexibility) tend to meet with a very high level of cultural resistance.

To take the most simple example, when we start talking about recovering currently unused agricultural land (that extra mile, remember), we might like to stop to think why it stopped being used in the first place. One obvious reason is that it wasn't sufficiently productive at the then prevailing prices, and this will often be true. But another reason would be that growing urbanisation and declining rural populations have simply meant that some land became fallow for demographic reasons (namely that there were not sufficient people willing to stay and work it, at least at the wages which were then being offered), which brings us straight back to my principal point - where and how are we going to find and persuade the people who could work the land to do so. Even the best designed plans - which always look ever so easy and attracive on paper - all too often come to founder on harsh and complex "on the ground" (no pun intended) realities. And if the solution here passes through raising rural wages and rural living standards, then remember that those of us who live in highly urbanised and developed societies may well notice this, in the form of higher prices, continuing inflation in food and energy, and indeed very possibly in a sustained period of what economists like to call "stagfaltion". That is, what we are talking about here isn't exactly small beer.

Migrant Dependence in Thailand

Turning now to a specific example, in the Thai case this whole "where does the labour come from" question is no idle one since fertility - including rural fertility - is now well below replacement level and still falling, and every year less and less young Thais are available to enter the labour market. So basically if the Thais want to work extra land they will need to find the human resources with which to do it.

One option, evidently, is immigration, and the tragic death by suffocation of 54 migrant workers from Myanmar who were being transported into Southern Thailand in an enclosed container truck earlier this month certainly drew the attention of the world's press to existence of this phenomenon in Thailand and to the level of dependence which the current expansion in the Thai economy now has on imported migrant labour. So it isn't only capital which is flowing strongly into Thailand at this point (the astute reader will recall that in fact the Thaksin government actually fell shortly after taking the decision to try to stop too much capital entering the country), labour is also streaming in to allow it to be effectively put to work.

The migrants who died were following a route that tens of thousands of others from Myanmar had taken before them. They are drawn to Thailand to work in jobs described by locals as "dirty and dangerous" - the fisheries industry, construction sector and on rubber and palm oil plantations.

In fact migrant Myanmar labour has long formed a significant part of the workforce who make possible the construction of all those hotels and holiday complexes that now dot the beaches of Phang-nga and Phuket, the mainstays of Thailand's vibrant tourist industry. In the fisheries sector, the men are employed on the boats that go out to sea, while the women work in factories to process the catch.

True, the numbers are not at this point large by Western European and US standards, but they are strategically deployed across the economy. In 2007, Thai labor officials and NGOs estimated that there were some 2 million migrant workers in Thailand, 75% of whom came from Myanmar, while the rest came from Cambodia and Laos. Only 500,000 of these however were registered with the Thai Labor Department.

According to a recent report "The Contribution of Migrant Workers to Thailand" (Main finings online here) prepared for the International Labour Organization by Philip Martin of the University of California (Davis) total migrants in Thailand rose from about 700,000 in 1995 to 850,000 in 2000 and to 1,773,349 in 2005. They constituted 2.2 per cent of the labour force in 1995, 2.5 per cent in 2000, and 5 per cent in 2005.

In 1995 some 42 per cent of the migrants were registered. In 2000 this was up to 67 per cent, but by 2006 it had fallen back again to 26 per cent, with these large fluctuations in the ratios undoubtedly reflecting ambivalence on the part of the Thai authorities to the whole situation. They need the workers, but they don't really want them. How resonant this is of so many situations in so many other countries. Perhaps those who imagine that land can simply be rolled online as we need it (right along a nice simple neo classical production function) might like to think a little more deeply about these kind of issues.

In terms of activities involved, the ILO found that in 2005 the migrants they were able to identify were distributed roughly as follows : 720,000 in agriculture, 720,000 in industry, and 360,000 in services.

Philip Martin calculated - making the assumption that the migrants were as productive as their fellow Thai workers in each of the sectors where they work - that the total migrant contribution to output would be in the order of $11 billion (or about 6.2 per cent of Thailand’s GDP). Assuming they were somewhat less productive (say only 75% of Thai worker output) then their contribution would still be in the order of $8 billion (or 5 per cent of GDP). So we could estimate that migrants in Thailand now contribute anywhere from 7 to 10 per cent of the value added in industry, and 4 to 5 per cent of the value added in agriculture.

Really the picture we are seeing in one country after another across the globe is strikingly similar from this point of view. As countries fall below replacement fertility they increasingly come to depend on migrant labour to work in areas like agriculture, construction, low skilled industry and domestic work. Yet in Thailand, as in many equivalent western countries the new and much needed workers are often far from popular.

Thailand returned to civilian rule in January 2008, with Samak Sundaravej of the People Power Party replacing deposed prime minister Thaksin Shinawatra. The PPP campaigned on a populist platform aimed at reducing rural poverty, and said it would use its first six months in office to revive the economy before tackling controversial issues, including migration.

The military government that ruled between September 2006 and January 2007 had taken a hard line against migrants from neighboring countries, supporting five southern governors who banned migrants from talking on cell phones, riding motorbikes, or leaving their Thai housing between 8pm and 6am. However, faced with the inevitable it did prove to be just as flexible as governments elswhere at the end of the day and finally approved a plan to allow migrants who failed to re-register in 2007 to pay a fine (3,800 baht, $120) and register for two-year work and identity cards during January-February 2008.

As I have said most migrants in Thailand are employed in low paid unskilled jobs in construction, manufacturing, agriculture, fisheries and domestic service in northwestern and southern provinces. Relatively few jobs held by migrants are attractive to Thais and few migrants work in the areas of highest unemployment in Thailand's northeast. The apparent magnitude of migrants' contribution to Thai GDP and their sectoral concentration suggests that they will continue to contribute substantially to the country's economic development for the foreseeable future.

The Vietnamese Case

But turning now from a country which is below replacement fertility and importing migrants, to one which is below replacement and exporting them, let's examine the case of another of the world's leading rice exporters - Vietnam - which is in fact the third exporter globally after Thailand and India. As can been seen in the chart below, Vietnam has enjoyed very rapid economic growth in recent years, especially when measured in US dollar terms, and this economic growth has both raised living standards and expectations, and reduced productive land available for rice cultivation.

As I have been trying to argue, the issue of rice prices (and indeed of the whole structural rise in food and energy prices) is a complex one, and a lot of seperate factors come into play. Land use is simply one of these: Vietnam’s total paddy acreage has dropped from 4.3m hectares to 4m hectares in recent years, and part of the reason for this has been increasing pressure on land use from other areas like industrial development and housing. Of course, raising output is not incompatible with using less land, providing productivity rises fast enough, but this (as we will see later) is not always as easy as it sounds on paper. A second factor which is also important is inflation - and again as we will see, Vietnam is now suffering from a fierce bout of inflation - since rapid rises in the prices of some basic commodities can lead to hoarding in the expectation of future price increases, and the only way to halt this is to convince people that prices will stabilise, something which in the present climate is very hard to do indeed. Basically a combination of rapidly rising living standards and an increase in inventories for "hoarding" purposes can provide us with a large part of the explanation for why it is that despite the fact that Vietnam has now ceased to export rice the queues to be found in Ho Chi Minh city are currently longer than anything which has been seen since the height of the communist era.

But things are not, as we have been seeing (in, for example, this accompanying post on the roots of the problem) as simple as we - or classical economic theory - might like them to be, since many things are interconnected here, and in fact far from being able to simply breeze that extra mile that James Adams is rooting so hard for, Vietnamese farmers are currently losing thousands of dollars every year as a result of manpower and machinery shortages when it comes to harvesting the rice they would evidently like to grow.

Provinces in the Mekong Delta region continue to face a lack of workers to harvest crops.

At least this is the situation described in a recent survey carried out by Can Tho University, and the problem has now started to become an acute one since - owing to Vietnam's spectacular recent growth (see above chart) - potential young farmerworkers are leaving in droves for urban centres, industrial parks, export processing zones or points farther afield (external migration), in search of jobs which offer better pay, and given the collapse in Vietnamese fertility which has taken place since the late 1980s, there are now, in a fashion which is eerily similar to the pattern we have already been noting in China, fewer and fewer young workers about to enter the Vietnamese rural labour market, creating a potentially huge long term labour gap in areas like the Cuu Long (Mekong) Delta (Viet Nam’s biggest breadbasket).

For Vietnamese farmers, the sharp rise in rice prices comes amid rapid change in the rural landscape. Vietnamese rice farmers today are far more productive, and prosperous, than they were during the ill-fated, and long abandoned, drive to collectivise agriculture. But in the new drive for nationalisation, much prime paddy land is being converted to factories and housing.

According to Hanoi’s Institute of Policy and Strategy for Agriculture and Rural Development, Vietnam’s total paddy acreage has dropped from 4.3m hectares to 4m hectares in recent years, which has raised concerns about the country’s long-term food security. “We are warning against diverting [rice] paddy land to other uses,” says Duong Ngoc Thi, a senior official at the institute.

Of course increased investment in improved technology would help - a combine harvester operated by three people has the manpower equivalent of 100 farmers - but apart from finding the money to make this work, the techno-fix is not that simple since Vietnamese paddy fields are wet and muddy compared with the waterless fields which serve for other crops, and this makes it much harder for foreign-made, modern machines to work well in them.

Nonetheless an increase in investment would undoubtedly help the Vietnamese rice industry avoid so much of its potential crop each year, according to Nguyen Van Chien, an official from the Vietnamese Ministry of Agriculture, and agricultural mechanisation could help enhance the quality as well as the quantity of Vietnamese rice, boosting the country’s competitiveness for rice exports with its chief rival, Thailand. At present, Vietnamese rice sells for around $20 less per tonne than Thai rice.

Of course, it is important to bear in mind that despite the dramatic drop in fertility Vietnam's population is still rising fast. This is the so-called "momentum problem", since the last cohorts from the high fertility era are very numerous, and thus when they reach childbearing age will tend to produce a large number of children, even if the number each individual woman has is a lot less than previously. In addition we need to add-in the impact of increased life expectancy as rising living standards improve the general health of the population. So Vietnam's population is both increasing, and ageing rapidly, and this latter issue will undoubtedly have significant consequences later on.

It isn't only in rural Vietnam, however, that labour shortages are now appearing. The Ho Chi Minh City Construction Association has forecast that this year the city will face a labour shortage in the construction industry since the number of building projects awaiting execution has doubled. In a recent report they noted that the shortage problem got significantly worse in the post-Tet holiday period, since (and in an example which follows a pattern we have already seen in China) many young workers did not return to their jobs after the holiday. Most construction companies have been busily raising wages in an attempt to entice more people yet the shortage persists. Nguyen Huu Quang, deputy director of the NBH Building Service Ltd. Co, is quoted as saying that construction companies in HCM City were in danger of losing a significant part of their human resources.

As I mentioned, this failure of people to return after the Tet holiday is surprisingly reminiscent of the situation as reported in China after the end of the recent winter holdiday. The Economist - in an article entitled Where is Everybody - reported that the vast annual migration of around 20m people that has been fuelling the manufacturing boom in southern China over the past two decades is now rapidly diminishing.

The Guangdong Labour Ministry is reporting that 11% of the workers did not return after the January holiday period, and independent estimates put the number as high as 30%. Whatever the exact details, many factories are reeling. Wages were already rising (according to government figures by around 20% y-o-y) now they will surely go up further. Meanwhile, revenues are falling due to slowing demand from America and a reduction, following pressure from other countries, in China's complex system of export subsidies.

According to HCM association’s figures, construction companies in HCM City currently can supply more than 42,000 skilled masons, a number which is far below the real demand for workers, which is thought to be somewhere in the region of 100,000. In a trend which has been evident in other countries (like Eastern Europe) skilled construction worers have either transferred to other provinces (or gone abroad) or returned to their hometowns where better infrastructure now exists and a rapid rise in the construction of industrial parks and export processing zones is producing plenty of work.

And what is the result of these growing labour shortages? As we have been seeing elsewhere (and again the East European comparison is instructive) the outcome is virtually inevitable: rapidly rising wages and accelerating inflation. Vietnamese consumer prices rose 21.4 percent in April, the fastest pace since at least 1992 and the IMF are now forecasting annual inflation of 16% for the whole of 2008 in Vietnam.

These growing labour shortages, which can to some extent be anticipated in any economy which is growing rapidly, are exacerbated in Vietnam by the fact that many potential workers - in a way which is similar to the situation which is to be found in Poland or Romania - now work abroad, whether as temporary or permanent migrant labour. There is, however, one important difference between Vietnam and Eastern Europe in this regard in that Vietnam has an active policy of encouraging what they call "labour Export", indeed the Ministry of Labour has a whole department which is dedicated to the topic. The reason that this policy is persued is not hard to imagine. It is summed up in one single word: remittances. For 2006 the World Bank estimates that migrant workers sent home to Vietnam roughly $4.8 billion, or 7.5% of GDP. Of course such a sizeable flow of money has an impact in its own right on the Viet Nam economy, creating in its wake more consumer demand, and with this more demand for construction, and with this more demand for construction workers who, as a result of one of those many anomalous circularities we are able to identify here, happen all to be often to be working out of the country and are doubtless to be found among those actively sending money home. When you stop and think about it it isn't hard to see where all that inflation comes from here.

As I say, it is not simply a question that people from Viet Nam want to go to work abroad, the Vienamese government is actively encouraging the process. As a result the number of foreign destinations has been expanding significantly. There are now more than 40 countries to which Viet Nam "exports" labour, compared with 15 in 1995. The Vietnamese labour market generated about 1.68 million new jobs in 2007 according to the Ministry of Labour, Invalids and Social Affairs. About 1.6 million of these new jobs were generated inside Viet Nam, but about 85,000 were jobs abroad, and these brought the total number of Vietnamese guest workers and experts officially working abroad to over 400,000 in 2007. And the Labour Ministry is working on further expanding the business, since it has plans to raise the rate of "exported labour" at an annual additional rate of 40,000 to 50,000 (to around 130,000 annually) by the time we get to 2010, an increase of 65 five per cent over a five-year period.

Job seekers at a recent employment exhibition held in Ha Noi. Obviously given the wage differentials which exist people are eager to leave, but should the Viet Nam government be actively promoting the process? In the short term it eases pressure on the labour market, but at what price in the longer term?

One destination which is proving increasingly popular is South Korea, and the Vietnamese Ministry of Labour recently proudly announced that Korean companies would like to recruit 15,000 Vietnamese guest workers in 2008, 27 per cent more than last year. In addition the Korean Government has decided to allow 1,000 migrant Vietnamese labourers who had originally registered for agriculture work to transfer to construction, which is itself suffering from a shortage of workers, according Vu Minh Xuyen, vice director of the External Labor Center of the Vietnamese Ministry of Labour.

Xuyen said the workers will have to take an exam testing their understanding of the Korean language. The exam can be taken in May or October. Those living in remote areas and poor rural areas will be given priority.

Workers seeking South Korea employment learn Korean at a job service centre in the Central Highlands in Gia Lai Province. Korean company demand for Vietnamese guest workers this year is 27 per cent up against last year.

Of course South Korea is facing its own low fertility driven labour market issues. According to U.N. statistics, the fertility rate per women has fallen from 5.4 in 1995 to 1.5 in 2005 with the estimate for 2050 being 2.1. The population in the age group of 15-59 it is estimated to fall from 68.2 percent in 2000 to 50.4 percent in 2050, whereas the share of 60 plus population is to rise from 11 percent in 2000 to 33.4 percent in the same time span.

Recent statistics show that South Korea's birth rate fell to its lowest (in 2005). The projected (Health-Welfare Ministry forecast) fall in population from the present level of 48 million to 40 million will occur over next 45 years. The ageing index (U.N. statistics) is projected to grow from 52.7 in 2000 to 150.7 in 2025.

In a recent Korea National Statistical Office report, this index is forecast to reach 100.7 in 2016, almost doubling from 55.1 in July 2007, further projected to as high as 213.8 by 2030. This will put a tremendous financial burden on the working-age population (those aged 15 to 64), to support those elderly citizens, while the ratio of the working-age population to senior citizens is predicted to drop to as low as 2.7 per one elderly by 2030, as compared to the present level of 7.3 to 1.

So naturally Korea is going to increasingly need to import labour, and my only question is: does it make sense to import this labour from a country like Vietnam which itself is also going to be having problems over a fairly limited time horizon?

The point is economic growth of the kind Vietnam would like to have is very employment intensive. At the end of 2007, there were more than 45.6 million Vietnamese employed nationwide, an increase of 2.31 per cent over 2006, and the Ministry of Labour plans to generate a further eight million new jobs by 2010. This objective was recently announced by Dam Huu Dac, deputy minister in the department, who said it was part of a National Target Programme on Job Generation. "Each year, 1.5 to 1.6 million new jobs are being generated and a total of 49.5 million workers are expected to be employed by 2010." he said. And this is just it, right now Vietnam has a massive problem of job creation quite simply because the number of people of working age has been expanding rapidly, but soon, following that sudden turn downwards in the 15 to 19 age group curve, the problem will be inverted, and having constructed an economiy which needs and extra 1.6 million workers a year to keep moving the issue will be one of just where those workers are going to come from?

About 1.6 million seek to enter the Vietnamese labour market every year. Meanwhile, the nation’s population is growing by more than a million annually.

The question I am asking is really one about our whole perception of the ongoing demographic transition. Does it really make sense for a country with such low fertility as Viet Nam now has, and where labour shortages in rural areas and key sectors like construction are already being observed, to be so enthusiastically exporting - in a way which is very reminiscent of Eastern Europe - its future labour force? As I say, the issue here is as much one of changing how we see the situation as anything else, and getting it across to those responsible for making economic policy that "cutting your nose of to spite your face" may work in the short term, but in the longer term we are only building up problems, and big ones.

The Czech Connection

The story I am telling here is one of a web with many loose threads. And I wouldn't want to give the impression that I am arguing against labour mobility, far from it. I think that immigration from high fertility countries to lower fertility ones makes a lot of sense. What I am questioning is the movement of population from low fertility societies to higher fertility ones (from Poland and Latvia for example to the UK and Ireland, or from Ukraine to virtually anywere), and I am also questioning the advisability of countries which are attempting to grow rapidly while having falling and below replacement fertility actively encouraging and stimulating out-migration. At best this is simply moving the deckchairs round, and at worst it is robbing Peter to pay Paul when Peter is already out of money.

The strangeness and lack of apparent rationality in all of this is perhaps nowhere better illustrated by the close and growing connection between the Czech and the Vietnamese labour markets. The Czech Republic's economy is growing rapidly - around 6% to 7% per annum -and unemployment is amongst the lowest in the European Union. As a result the Czech Republic is now itself growing very short of labour (only 3 years after watching a stream of its own young people leave for work in the UK and elsewhere), since after 20 years of very low fertility (1.2-1.3 TFR range) there are now fewer and fewer young people coming forward into the labour market, and so, of course, the Czech Republic is busy out and about looking for migrants to fill the gap.

Initially they turned to their immediate neighbours, and indeed the largest group of foreign migrants with rights to work in the Czech Republic comes from Slovakia. At the end of last year, there were 101,233 Slovakians legally working in the country. Ukranians are the second most numerous group with 61,592 working in the Czech Republic as of last year. But there are problems here since both of these countries (and indeed all the other ones in the region) have very low fertility too, so they soon notice any drain on their labour resources, and this is then simply displaces a problem from one place to another and is not a long term solution.

As a result the Czech government is now looking further afield - much further in fact - since the number of Mongolian and Vietnamese workers working in the Czech Republic has been increasing rapidly. In 2007 there were 6,897 Mongolians working legally in the CR (up from 2814 in 2006) and 5,4425 Vietnamese (up from 692 in 2006). The numbers of Vietnamese present in the country is undoubtedly much larger, and according to the Czech police, there are almost 51,000 Vietnamese holding long-term or permanent residence permits for the CR, many of these associated with temporary student visas. Demand from people inside Vietnam is also way up, and the Czech embassy in Hanoi had to close its doors to visa applicants temporarily in March to reorganise itself in order to cope with the influx.

So you plug one gap to create another, and where I ask, is the method in all our madness here?

In this post I have not presented solutions, rather I have attempted to identify problems, problems which need to be addressed. But in order to adequately start to address the problem we need first to recognise that it exits. Basically I feel that far too many people - and especially at the institutional level - are still effectively in denial that the problem exists, and is important. What I would like to ask is when is someone (someone with some clout I mean) finally going to start taking seriously the idea that emerging economy countries like Vietnam need to try and do something about their fertility situation (and that something will undoubtedly involve dedicating resources to the issue) before they get stuck - like South Korea, Singapore, Taiwan and Hong Kong before them - down on that very bottom rung?

Thursday, April 24, 2008

Food Prices, Farmland, Global Rebalancing and Rural Labour Shortages

Ukrainian President Viktor Yushchenko said last week that he had agreed to let Libya grow wheat on 100,000 hectares of land in the Ukraine. In exchange, Libya promised to include the former Soviet republic in construction and gas deals.

For the first time, it's been clear that we are consuming more rice than we are producing globally," said Robert Zeigler, head of the Philippines-based International Rice Research Institute, blaming population and economic growth."That is eventually unsustainable....People felt the global food crisis was solved," Zeigler recalled, referring to technology breakthroughs that boosted yields in the 1970s and 1980s, "and it really fell off the agenda of funding agencies."

With so many interesting debates going on the Demography Matters blog at the present time I find it hard to pull myself away, but I couldn't help getting drawn into the implications of the points raised by this article in the Financial Times about how the global pressure on food supplies and the rapid increase in prices is now leading to an equally rapid increase in the price of farmland in one country after another. And then, thinking about a country like Ukraine - with a declining population, rapidly falling unemployment, and growing labour shortages - I couldn't help scratching my head and asking myself, but just where are they going to get the labour force from to work all this extra land they want to cultivate?

But lets get back to land prices for a moment. According to the Financial Times with prices of commercial and residential property now falling in many developed economies, investors are begining to find themselves faced by a rather tricky problem set: they can either stick all those millions (or billions) which they no longer feel happy to place in first world property into a novel value store like food (and start for example hoarding rice, or buying soy futures) or they can turn their attention towards a more traditional and well established asset: farmland. Long seen as a declining sector, agriculture has just received an enormous fillip as global demand for food has skyrocketed. As a result, the value of agricultural holdings across the European Union has been rising to record levels.

In the UK prices for farmland have risen by 40 per cent over the last year alone, and there is apparently plenty of room for prices rises across the entire European continent. In Lithuania - to take just one example - a hectare of agricultural land was estimated to cost €734 ($1,167) in 2006 compared to €164,340 in Luxembourg (which was Europe's most expensive country at the time). In Poland average prices for farmland are estimated to have risen by 60 per cent between 2003 and 2006. In neighbouring Ukraine – not an EU member – prices for the best land are forecast to double this year from the 2007 value of $3,500 per hectare as one investment fund after another piles in (you know, all those pensions people will be looking to receive later). Even Serbia, another non-EU country, has seen a steep increase. Real estate analysts estimate arable land prices in Serbia’s agriculturally rich northern region, Vojvodina, at roughly €7,000-€8,000 per hectare this year, up sharply from €5,000 last year.

Even in distant Afghanistan the rise in the value of conventional farming is being noted, since opium crop is forecast to shrink by as much as half this year after 2007’s record harvest, according to counter-narcotics officials in Kabul, as evidence grows that poppy farmers are switching to legal crops, attracted by the rising food prices.

All of this raises a number of very interesting questions, not least of them being why it is all happening now (number one), and where many of these countries who have surplus land to offer- but have had congenitally low fertility for longer than I now care to remember, and have been busying temselves over the last few tears exporting what scarce labour resources they have to Western Europe or Russia (Latvia, Lithuania, Ukraine, Poland, Slovakia, Romania, Bulgaria etc) - are going to find the labour force they would need to work the extra land (number two).

Why The Price Rise Now?

Well on the first point, I really can't do better than direct your attention to another very interesting article in the Financial Times, this time one from Martin Wolf, entitled "A turning point in managing the world’s economy". Wolfe's main point for our present purposes is this one:

"As the latest World Economic Outlook from the International Monetary Fund remarks, “the world economy has entered new and precarious territory”. What are perhaps most remarkable are the contrasts between booming commodity prices and credit-market collapses and between buoyant growth in emerging economies and incipient recession in the US. So where are we? How did we get here? And what should we be doing?"
The point to notice here is that it is not just investment funds who are busy adapting their behaviour since we all have a rather novel problem set on our hands, as the credit crunch wends it way forward and property markets drift (at best) into stagnation in one OECD economy after another, commodity prices are rocketing, and the best bet at this point is that the developed world is heading towards a protracted bout of stagflation (where central banks are constrained to operate a tight monetary policy, keep credit on a tight rein and basically restrain growth to contain inflation), while emerging market economy after emerging market economy (of course it is not quite as simple as this) seems to be revving up on the development ramp prior to launching into "we got lift-off" mode.

The April 2008 IMF World Economic Outlook estimates that the US economy may shrink by 0.7 per cent between the fourth quarter of 2007 and the fourth quarter of 2008, and eurozone growth is expected to fall to some 0.9 per cent or so this year, yet while the most important high-income economies stumble (even where they do not actually fall), the picture in the majority of emerging economies is for only modestly diminished growth, with rates of 7.5 per cent being anticipated for emerging Asia ( with China on 9.3 per cent and India on 7.9 per cent); 6.3 per cent for Africa; and 4.4 per cent in the western hemisphere. These latter are certainly not growth rates to be sneezed at.

But what we have going on here is not only a growth rate differential, it is also a massive currency re-alignment. The consequential rapid and dramatic rise in dollar GDP values (produced by the combination of strong growth and the declining dollar) means that convergence in global living standards - at least in the cases of those economies who are experiencing the strongest acceleartion - is now happening much more quickly than anyone could have - even in their wildest moments - dreamed back in the 1990s. All of this is very well illustrated by the case of Turkey, as can be seen in the chart below.

According to Wolf:

Emerging economies have been the engines of growth over the past five years: China accounted for a quarter; Brazil, India and Russia for almost another quarter; and all emerging and developing countries together for about two-thirds (measured at PPP exchange rates) of world growth. Furthermore, notes the WEO, these economies “account for more than 90 per cent of the rise in consumption of oil products and metals and 80 per cent of the rise in consumption of grains since 2002” (with scandalously wasteful biofuels programmes contributing most of the remainder).

This situation can be observed quite clearly in the two charts which follow, which are based on calculations I made last autumn from data available in the IMF October 2007 World Economic Outlook database. Now, as can be seen in the first chart the weight of the US economy in the entire global economy has been declining since 2001 (and that of Japan since the early 1990s). At the same time - and again particularly since 2001 - the weight of the so- called BRIC economies (Brazil, Russia, China and India) has been rising steadily.

This is just one example - and a very basic one at that - of why Claus Vistesen and I consider that demographics is so important, since it is precisely the population volume of the BRIC (and other similar) countries and the fact that they start their development process from such a very low base ( ie there is such huge "catch-up" potential since they were allowed to become so comparatively poor, for whatever reason) that makes this transformation so significant.

Again, if we come to look at shares in world GDP growth we can see the steadily rising importance of these BRIC economies in recent years and the significantly weaker role of "home grown" US growth. In 1999 the US economy represented 30.91% of world GDP, and in 2007 this percentage will be down to 22.4% (on my calculations based on the forceast made by the IMF in October 2007). In 200 the US economy accounted for a staggering 40.71% of global growth, and by 2007 this share is expected to be down to 6.43%.

But most of the data I present above predate the financial market turmoil of August 2007. In fact what has been happening post August 2007 is really fascinating and actually quite unique, since following the breakdown we have seen in some of the world's leading wholesale money markets - and in particular in the securitised-mortgage-paper based ones - the credit system in all the G6 economies is steadily slowing - and all the world's major developed economies are gradually entering recession. All the major developed economies, but not, of course, the newly developing ones, as I am indicating.

This state of affairs may well now become a relatively drawn-out affair since the structural rise in food, energy and commodity prices that is being produced by such a dramatic rise in living standards in the world's most populous countries means that we are likely to have continuing high structurally driven inflation. Some illustration of the problem can be seen in the chart below, which compares the relative price movements of diesel oil, Thai raice and urea. Urea is widely used as a nitrogen-release fertilizer, and over 90% of global urea production is destined for use as a fertilizer. Urea has the highest nitrogen content of all solid nitrogenous fertilizers in common use (46.4%), and consequently it is very effective since it has the lowest transportation costs per unit of nitrogen nutrient. Basically urea is commercially produced from two raw materials, ammonia, and carbon dioxide. Large quantities of carbon dioxide are produced during the manufacture of ammonia from coal or from hydrocarbons such as natural gas and petroleum-derived raw materials. So yes, you got it, the cost of urea is intimately connected with the cost of other major energy products - like coal and petroleum (as can be seen in the chart) - and this means that price of food is naturally propelled upwards by rising energy costs, whether or not we have the added complication of diverting agricultural land for the production of biofuels. If you don't produce the biofuels then the cost of petroluem products is going to be up, and this only pushes food products up by the indirect route. There is, unfortunately, no simple win-win strategy available here.

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And to the rapid growth in GDP in the BRIC economies you need to add the longer term relative downward drift in the value of G6 currencies vis a vis emerging economy ones (the euro has still to feel the force of this, since recently it has simply risen and risen against the dollar, but I think the change will come, while the dollar case is already clear enough) - and the rise in the dollar value of the Turkish Lira, the Brazilian Real and the Indian Rupee (to mention but three of the more prominent cases) has been pretty spectacular since the start of 2007. What this effectively means is that in the OECD world we are now - more than likely - in for a protracted dose of stagflation, as central banks on the one hand are constrained from too much monetary easing by inflation concerns, while the credit crunch on the other seems to imply that cheap mortgage and personal finance is unlikely to become so widely and freely available as it was, whatever the base interest rates set by the central banks.

Yet unlike previous recessionary occasions (arguably ALL such previous occasions in living memory) funds are not coming running home to the G6 economies for safe cover during the current downturn. Instead they are in a kind of headlong flight towards the emerging ones: hence the steady fall in the dollar, and the rise in currencies like the Turkish lira, the Brazilian real or the Indian rupee. In these countries it is literally raining money (saving good old Ben the trouble of having to get his helicopter out). We could take the Indian case as a clear example here.India's foreign exchange reserves (which are a reasonably proxy for the rate of capital inflows) rose $2.7 billion to touch $311.9 billion during the week ended April 4, and this is a rise of some 50% on the level of $204 billion which existed in May 2007.

At the same time, and despite having fallen back somewhat recently, India's rupee is up substantially against the dollar, perhaps by 12% across 2007 as a whole.

What this really means to me is that the damn has finally burst - and that the huge accumulation of population at one pole of the planet and of wealth at the other is now in the process of unwinding itself - and really there is no turning back. Country after country is now hitting the development high road and this will not only have an impact on the rate of global population growth (slowing it markedly), global fertility (ditto) and global ageing (in this case we are likely to see an acceleration, as improving health increases life expectancy, while declining fertility reduces the size of the younger cohorts), it will also put enormous short term pressure on the supply of global resources, and it is on this issue that I really want to focus here.

The picture is that not only is population growing rapidly in some developing countries (foreseen), but both population and per capita living standards are growing (not foreseen) - and indeed these living standards are rising so fast that the gap between some of the leading countries and the developed economies is closing rapidly. This latter - unforeseen- effect is the principal reason we are seeing such acute pressure on the global supply of agricultural products.

One of the obvious reasons for such a sharp rise in demand for agricultural products is that food consumption forms a much greater part of the extra income earned in a poor country than it does in a rich one. As a rough and ready rule, the poorer the country the greater the share of every extra dollar earned which will be spent on food.

The poorest of the world’s poor are the 1.1 billion people with income of less than a dollar a day. Around 700 million—almost two-thirds—of these people live in rice-growing countries of Asia. Rice, the dominant staple in Asia, accounts for more than 40% of the calorie consumption of most Asians. Poor people spend as much as 30–40% of their income on rice alone. Ensuring sufficient supplies of rice that is affordable for the poor is thus crucial to poverty reduction. Given this, the current sharp increase in rice price is a major cause for concern.
International Rice Reasearch Institute

To take the example of Russia, Russia's very rapid economic growth since the turn of the century is producing an equally rapid rise in incomes and living standards. According to the Russian Statistics Office Rosstat, average real wage and disposable income increased by 16.2 and 12.9 percent, respectively during the first nine months of last year, and increases of this order, when coupled with currency changes, produce a very sharp rise in purchasing power, as can be seen in the chart below.

The consequence of rapid growth in a tightly constrained labour market like the Russian one isn't hard to predict: rampant inflation. In fact Russian consumer price inflation accelerated in March to hit an annual rate of 13.4% (Bank of Russia data), up from 12.7% in February, and led by bread, vegetables and other food costs. Prices rose 1.2 percent from February. Russian prices have already risen by an icredibly 4.8 percent in the first three months of this year alone (January to March).

And if we come to look for a moment at the components of Russian inflation (see charts below) we will find two of our old friends out there in the forefront - food and construction. In fact in the first 10 months of 2007 the rate of increase in construction costs was some 15% (as compared to only 9% during the equivalent period of 2006). And if we look at the chart for Russian CPI weightings (see below, - and note by way of comarison that in China and Turkey, food related products also constitute around 25% of the CPI basket).

And again here Russia is a nice example of the extent of this problem, since Russia's manpower shortages (see this post) mean that supply in the agriculture sector is now pretty constrained, while technological improvement if investment totals are anything to go by is not notably accelerating. Investment in transport and communication constituted 23.31% of total investment in Russia the first half of 2007, investment in real estate constituted 12%, and investment in agriculture constituted only 4.7% of the investment total.

In terms of FDI the situation seems to be even worse, since FDI in Russian agriculture only constituted 0.7% of total FDI during the same period (World bank data). As a result of all this neglect it should come as no surprise to find that labour productivity in Russian agriculture only grew by 4.4% per annum over the 1999 - 2004 period (the lowest by a long way for any sector, World Bank calculations), and thus starved of its workforce, and lacking the necessary capital investment to compensate, Russian agriculture is bound to struggle to meet the needs of an ever more affluent urban population. The result of course is that Russian inflation is now spiralling upwards almost out of control.

Richard Ferguson, an analyst at Nomura Holdings, argued recently in the Financial Times that Russia could raise its grain production fourfold by better crop management and returning fallow land to cultivation. Russia now has some 40 million hectares (99 million acres) of land lying fallow, equal to 50 percent of the area currently being cultivated, according to Ferguson. He argues that better management and more farming could increase Russia's production of cereal crops to 300 million tons a year, compared with 75 million tons now.

The argument looks very attractive on the surface. All too attractive perhaps? It doesn't really address the long term issues about why the land is fallow in the first place, and it certainly doesn't explain where the manpower will come from to fuel the output. Russia's working age population,rember, peaked in 2003 and is now steadily declining, and will, of course, continue to do so as far ahead as the eye can see. So you can't at one and the same time open brand new car factories in St Petersburg (etc) and put 40 million hectares of fallow land back into production, the human resources simply aren't there to do this.

Unless, of course, you import labour, which Russia is currently doing as a rate of around 1 million net new migrants a year (a precise figure for migrants arriving and settling in Russia is very hard to come by, since so many of the migrants - several million - are short term seasonal workers).

But it isn't only the total supply of labour which constitutes a difficulty, the distribution is also highly problematic, since Russia's labor resources tend to be highly concentrated in the centre of the country in a way which is starting to produce a serious nationwide imbalance. The outflow of labor is worst in Siberia and Russia's Far East: In January-September 2006 - according to data from the Social Development Ministry - more than 371,800 people (75 percent of them within the 15 to 65 working age range) left these regions.

This "people flight" out of the far east is now becoming a really serious problem since according to Brookings Fiona Hill - in this excellent piece of analysis - while Russia is very rich in physical resources (as well as agricultural land) the Russia suplus labour resources are all to be found in the wrong places. Siberia holds nearly 80 percent of Russia's total oil resources, about 85 percent of its natural gas, 80 percent of its coal, and similar quantities of precious metals and diamonds, as well as a little over 40 percent of the nation's timber resources. According to studies by geographer Michael Bradshaw and economist Peter Westin, with the exception of the city of Moscow and the industrial region of Samara in the Urals, the major contributors to the Russian economy in terms of per capita gross regional product (GRP) are all natural-resource regions, primarily Siberia and the Russian Far East. The oil-producing region of Tyumen in West Siberia tops the list; then Chukotka, also a major energy producer; Sakha (Yakutia), the site of Russia's world-class diamond industry; Magadan, a major mining region; Sakhalin, the island repository off the Pacific coast of one of Russia's richest new finds of oil and gas; and Krasnoyarsk, a vast coal mining, mineral, and precious metal producing region. So the issue of who is actually going to work in these areas in the future is in fact no mean one.

And almost 40 percent of the labor which is available in the Primorye Territory is concentrated in the city of Vladivostok, while the rural and remote areas are facing a population-blight type crisis. The Far East constitutes 30 percent of Russia's total territory, but has less than 5 percent of its population. It has substantial natural resources which could stimulate economic activity and employment, but investors are becoming increasingly reluctant to commit themselves since there is almost no one left to employ there.

The situation in the Russia's Southern Federal District, meanwhile, couldn't be more different. Here labor supply greatly exceeds demand; approximately 20 percent of the working-age population is unemployed. According to the Independent Institute of Socio-Political Studies, for example, only 36,000 people are employed in the Republic of Ingushetia (17 percent of the working-age population, as compared to the Russian average of 74 percent employment rate). Chronic unemployment continues to dog Dagestan, Ingushetia, Kabardino-Balkaria, and Karachayevo-Cherkessiya, where the share of long-term unemployed job-seekers exceeds 65 percent. In Ingushetia, unemployment amongst young people is stuck somewhere around 93 percent mark.

Of course increased inward migration would help mitigate Russia’s growing labor shortage. Russia is already experiencing large migrant inflows, mostly from lower income CIS countries, where working age population is still growing rapidly (such as the Central Asian countries). Migrants are also arriving from China to help ease the labour supply problem in the far East.

According to data from Russia’s Federal Border Guard Service approxiamtely 750,000 Chinese nationals have been legally entering and leaving Russia each year since 2002, about 80 percent of them entering through checkpoints of the Far Eastern Border District. The majority of these workers enter and leave each year, but there are an unknown number who remain behind, and especially among those who did not enter the country legally in the first place.

As Yuri Andrienko and Sergei Guriev convincingly argue in their recent paper "Understanding Migration in Russia", Russia's present migration policy is extremely counterproductive as it both restricts much-needed migration and creates a constant flow of illegal immigrants. Evidently the pressure of its demographic problems mean that Russia will soon have to reconsider its present policy and it is more than likely that it will have to introduce some sort of amnesty for those currently working illegaly in the counrty in the not to distant future. The overall situation is not helped at all by the Russian government's ability to volte face and contradict itself (in the face of xenophobic pressure) on a seemingly regular basis. While attracting immigrants with the one hand, it denies them the opportunity to work with the other. The announcement by Prime Minister Mikhail Fradkov in November 2006 that as of 1 January 2007 the government would be restricting the employment of immigrants in the retail trade sector to 40% of the total was certainly not a constructive move.

However, getting hard numbers on migrant workers in Russia is not easy, and it is important to distinguish between temporary and permanent migrants. As I have already mentioned maybe 750,000 Chinese go to work in Russia on a temporary basis every year, and we know from the Russian migration service that they have just completed an agreement to allow 500,000 or so workers from Uzbekistan to go to work legally in Russia every year. The same sources accept that there are a roughly equivalent number from Tajikstan, and slightly more from both Kazakstan and Ukraine. But as Andrienko and Guriev emphasise, what Russia really needs to compensate for its demographic decline are not temporary migrants, but permanent settlers. In order to adequately compensate for this drop, there needs to be an annual inflow of about 1 million working age migrants the authors estimate, and this is three times the average net rate of inflow which occured in the years between the Censuses of 1989 and 2002. And during this earlier period, of course, we were talking about ethnic Russians returning from the old outposts of the former Soviet Union. Tjiks and Uzbeks may indeed be seen in a rather different light, as already seems to be the case on many a Moscow street.

Rice As An Example of What is a Global Problem

Thailand's benchmark 100 percent B grade white rice was quoted at a record high of more than $1,000 per tonne last Thursday as a result of constrained supply and rising demand as governments in one rice producing country after another consider taking steps to restrain exports. The price was up from around $950 per tonne a week earlier and $383 per tonne in January. Thailand is the world's number one rice exporter and exports almost twice as much rice as India, its nearest rival.

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In fact Thailand produces about 22 million tons of milled rice annually and exports about 10 million tons. The sharp spike in prices was produced by a report from a World Bank official earlier in the week, and prices did subsequently fall back again after Finance Minister Surapong Suebwonglee siad reassuring words to the effect that Thailand has no plans to limit rice exports.

``If a key exporter like this limits foreign sales, it would be very much like Saudi Arabia reducing oil exports,'' said James Adams, vice president of the bank's East Asia and Pacific department.

Several of the world's food producers - including Egypt, Vietnam, China and India - have recently placed restrictions and limits on food exports in an attempt to contain domestic prices and to reduce protests from urban consumers. Brazil - which this year should harvest an 11.9 million ton rice crop, up from 11.3 million last season - was busy backtracking at the end of last week on an earlier decision to restrict exports. Brazil's Agriculture Minister Reinhold Stephanes followed the example of his Thai counterpart and stated that Brazil would not, in the end, curb exports. Pakistan is also stepping up to the plate in what has virtually become a global emergency and has stressed it has plans to export 2.5 million metric tons this year, according to farm minister Chaudhry Nisar Ali last week.

Vietnam, however, which is the world's third-biggest rice exporter (after Thailand and India), is going to go ahead and reduce rice shipments by 11 percent this year to 4 million tons to ensure supplies and attempt to curb inflation that is its highest in more than a decade (see more on Vietnam in this post). In doing this Vietnam is following in the footsteps of the world's number two rice exporter - India - whol last month put significant restrictions on the export of rice.

Indonesia, which is the world's third-largest rice producer (as opposed to exporter), also intends to hold back surplus rice from export this year in order to bolster domestic stockpiles, according to President Susilo Bambang Yudhoyono speaking on April 18. Export restrictions are particularly threatening to the large rice importers whose populations ofetn depend of the staple for their basic food supply. The Philippines was the world's largest largest importer last year, followed by Nigeria. The Philippines received offers for only two-thirds of the grain it sought to buy on April 17.

Rice is in fact - after wheat - the world's second cereal product. At the beginning of the 1990s, annual production was around 350 million tons and by the end of the century it had reached 410 million tons. World production totaled 395 million tons of milled rice in 2003, compared with 387 million tons in 2002. This reduction in total output which occured around the turn of the century is largely explained by the strong pressure which have been placed on land and water resources, which led to a decrease of seeded areas in some Western and Eastern Asian countries.

Production is geographically concentrated in Western and Eastern Asia, and these retgions now account for more than 90 percent of world output. China and India, between them host over a third of the global population and supply over half of the world's rice. Brazil is the most important non-Asian producer, followed by the United States. Italy ranks first in Europe.

Growth in rice production has, however, been far from linear. Historically, production in ex-Japan Asia has increased steadily but at the end of the 1990s Asian output started to stagnate and in particular in China where rice areas have declined as a consequence of water scarcity and competition from more profitable (oleaginous) crops.

The international trade in rice is estimated between 25 and 27 million tons per year, which is only a very small part (5-6 percent) of total world production., and this makes the international rice market one of the smallest in the world when compared with other grain markets such as wheat (113 million tons) and corn (80 million tons). It also means that the price level is very sensitive to comparatively small changes in the level of exports coming from some key exporters. As can be seen from the chart below, global stocks of rice have declined substantially since the turn of the century. While in part this can be explained by product market efficiencies and the sustainability of lower inventories, it does mean that the sensitivity of the traded rice price to any supply side products has risen considerably of late. Also of note is the way in which stocks of rice have fallen inside China, reflecting the problems the country is having in finding the food to meet the needs produced by the rising living standards of its population (with pressure to transfer land from rice production to other crops or to commercial uses).

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Besides the traditional main exporters (Thailand, Vietnam, India and Pakistan), a relatively important but still limited part of the rice which is traded worldwide now comes from developed countries in Mediterranean Europe and the United States. There are two major forces behind this: new food habits in developed countries and new market niches in developing countries.

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As we have seen, rapid eceonomic growth across Asia is now putting enormous pressure on food prices. Consumer prices in China, the world's fastest-growing major economy, soared 8.7 percent in February, the fastest pace in 11 years. In Thailand, inflation is running at 5.3% (March) but this is still enough to worry the government, while in Vietnam, inflation jumped to 19.4 percent this month, the fastest pace since July 1995. Vietnamese food prices jumped 30.6 percent from a year ago, with the component including rice leaping 30.1 percent from March 2007 and 10.5 percent from February 2008.

The Food and Agriculture Organization said in February that 36 nations including China face food emergencies this year. World rice stockpiles may total 72.1 million metric tons by end of July, the lowest since 1984, the U.S. Department of Agriculture said.

Prices of agricultural commodities are also being driven by investors looking for alternatives as the dollar and stocks drop. Global investments in commodities rose almost 33 percent to $175 billion last year, according to Barclays Capital. The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials climbed to a record on Feb. 29 and is up 16 percent so far this year.

But not everyone wants to restrain exports. Rubens Silveira commercial director of Rio Grande do Sul state's Rice Institute said the state - Brazil's No.1 rice grower - should export about 10 percent of this years crop at current prices, and argued that these exports will both help support domestic prices and provide incentives to producers to invest in improving output. Mainstream economists tend to agree with him:

``Limiting exports is pure politics and bad economics since export controls destroy the incentive of farmers to plant more rice,'' Nobel laureate Gary Becker, an economist at the University of Chicago, said in an interview. ``But governments tend to favor the urban workers over the farmers, since urban groups are more politically active.''

And it isn't only rice that is under pressure. Wheat prices are also rising fast. Wheat for July delivery was trading at around $8.1750 a bushel on the Chicago Board of Trade last week, down from the February peak, but still up 62 percent in the past year. Global wheat production is expected to rise 6.8 percent in the 2008-09 season as record prices spur farmers to sow more, the International Grains Council said last week. Wheat output is expected to climb to 645 million tons from 604 million tons this season, according to the London-based council. Inventories are forecast to gain 12 percent to 128 million tons, led by an increase in the U.S.

Global wheat production will advance approximately 6 percent in 2008 over 2007 - to an all-time high of 640 million metric tons - as record prices spur farmers to grow more according to Rabobank estimates. That is 37 million metric tons up on output in 2007 . Plantings will also gain 5 percent and global stockpiles will rise 9 percent they suggest. But then we might like to note that even with a 6% growth rate in output (which is no mean rate of increase) prices have still risen by 62 percent. This gives us some measure of the scale of the problem.

The prices of wheat, corn, rice and soybeans have all risen to record levels this year on shrinking global stockpiles and rising demand from the food, feed and biofuel industries. The rally has meant higher costs for everything from Italian pasta to Japanese noodles, and spurred street protests from Haiti to Ivory Coast.

``We have been neglecting our basic rice production infrastructure and research and development for 15 years,'' said Robert Zeigler, director-general of the International Rice Research Institute in the Philippines. ``

India's output is increasing rapidly, but so is demand there, as high rates of economic growth boost incomes. Indian wheat output may climb to 76.8 million tons this year, according to India's agriculture secretary PK Mishra. That's up on the 74.8 million tons estimated in February and up from 75.8 million tons last year. Indian rice output is also expected to rise to a record 95.7 million tons, from the 94.1 million tons estimated on Feb. 7. That's 2.5 percent more than the 93.6 million tons produced a year earlier, but still far from enough to stabilise Indian wholesale prices which are now running at the fastest pace in nearly three years.

Labour Supply

"Thailand has even gone the extra mile to explore additional land for rice production," James Adams, the bank's Vice President for East Asia Pacific, said in a statement.

But with countries as far apart as Ukraine and Thailand (where fertility in each case is already well below replacement level, see here for Ukraine, and here for Thailand) moving to open up more land for agricultural production, we may well want to ask ourselves just where the anticipated manpower is going to come from. Ukraine is already suffering from severe labour shortages as most of its immediate neighbours (and in particular Russia) have sought to resolve their own labour shortage problems by importing Ukrainian migrants. Now the labour shortages back home are producing yet another a massive inflation bonfire:

Since this post is already inordinately long, I am continuing the labour shortage part of this study, in a separate post focusing on Vietnam (which can be found here).


So what is the point - at the end of this very long and tortuous post - that I am actually trying to make here.

Well I think my points would be several.

1/ Firstly and most obviously that the current increase in global commodity prices is NOT simply a monetary phenomenon. Of course it IS a monetary phenomenon, since without he money, as the economic "smart-aleks" likie to point out you can't have the inflation, but it is not SIMPLY a monetary phenomenon, since it is underpinned by profound structural changes in the real economy, structural changes which are taking place on a global scale. Under such circumstances traditional monetary policy is in fact rather limited in its ability to substantially change the situation. Basically the central banks are not as powerful, or as influential, as many seem to think they are, and in particular when globalised money markets mean that traders can leverage funds from one country which is forced to reduce interest rates to meet domestic growth needs (the United States) to supply credit to another where the central bank is busily trying to tighten (India) and where the bottom line in the so-called "carry trade" is set by a Bank of Japan which even during the longest expansion in the country's recent history has proved unable to raise its base interest rate above 0.5% (with few really taking the trouble to ask themselves why this is).

2/. Some of the global imbalances which have been built up over the last half century are now unwinding. In particular some countries which became very poor and very populous in the second half of the 20th century, having now entered their demographic transitions (and see this excellent recent post from Claus for a much fuller exploration of what this really means) are well on the high road to economic development. But due to the specific structure of short term demand as income rises (ie that the marginal propensity of populations in these countries to spend extra income on food) we are seeing important structural changes in some relative prices globally, and the consequences of these changes are quite far reaching.

3/. Almost all countries globally are passing through the Demographic Transition, but countries are at different stages in the process, and in particular some countries have already seen fertility fall sharply below replacement while still remaining economically relatively poor (Eastern Europe and parts of Asia - in particular China, Vietnam and Thailand). This situation really presents us with quite new and complex issues in the context of the rapid rise in the demand for food which the rising living standards which are occuring in these countries is producing. Unlike previous experience in the traditional "demographic dividend" countries, low rural fertility in the above countries means that as young people leave to enter the rapidly growing urban labour market insufficient are left to increase agricultural output at a fast enough rate. Part of the solution to this problem is technological, with increased investment taking place in agriculture, but only part, since as we have seen in developed economies like Spain and the United States which have recently increased their agricultural output, a constant supply of relatively cheap migrant labour has also been necessary. A second solution comes from increasing the relative wages of rural labour (which in its turn of course stimulates technological investment), but then there is no getting away from it, food is going to become relatively more expensive, and this situation is not going to change.


Well at the price of making this already unmanageably long post even more unmanageably long, I will try to keep updating a bit with relevant information. Staring with the fact that the Financial Times today (8 May) had an article about the fact that Chinese companies are now going to be encouraged to buy farmland abroad, particularly in Africa and South America, to help guarantee food security under a plan being considered by Beijing.

A proposal drafted by the Chinese Ministry of Agriculture would make supporting offshore land acquisition by domestic agricultural companies a central government policy. Beijing already has similar policies to boost offshore investment by state-owned banks, manufacturers and oil companies, but offshore agricultural investment has so far been limited to a few small projects.

China is losing its ability to be self-sufficient in food as its rising wealth triggers a shift away from diet staples such as rice towards meat, which requires large amounts of imported feed. China has about 40 per cent of the world’s farmers but just 9 per cent of the world’s arable land. Some Chinese scholars argue that domestic agricultural companies must expand overseas if China is to guarantee its food security and reduce its exposure to global market fluctuations. “China must ‘go out’ because our land resources are limited,” said Jiang Wenlai, of the China Agricultural Science Institute. “It will be a win-win solution that will benefit both parties by making the maximum use of the advantages of both sides.” In the first quarter of this year, food prices in China rose 25 per cent from a year earlier, the highest level of farm inflation since the early 1990s, said UBS.

China is still a net exporter of agricultural commodities but is increasingly reliant on soybean imports and is about to become a net buyer of corn.It imported up to 60 per cent of the soybean it consumed last year and the crop would be a focus of policy support for companies acquiring land overseas, along with bananas, vegetables and edible oil crops, said an official familiar with the ministry’s proposal. The ministry is already talking to Brazil about the possible acquisition of land for soybean, according to this official.

Some countries would find it particularly problematic if Beijing supported Chinese firms to use Chinese labour on land bought or rented abroad – common practice for most companies operating overseas.

Basically, China is not overly rich in surplus rural population, but it does have lots of people trying to farm on inferior quality land who could be "resettled" elsewhere to work more productive land, but on the other hand administrators could be sent out to (for example) Africa to oversee African rural labour working on Chinese projects. Bloomberg also had a piece about a rice project in Tanzania which very possibly is along exactly these lines:

Chongqing Seed Corp., a seed researcher and producer based in southwestern Chongqing city, will plant its proprietary rice in a pilot project in the central African country, a report on China's Ministry of Commerce's Web site said.

China will set up 10 agricultural technology centers in Africa by 2009 under an agreement reached at a November 2006 summit. The Asian country, seeking to tap into Africa's resources, is encouraging its agricultural businesses to expand overseas as its own arable land and water become scarcer.

Chongqing Seed, which also supplies seeds to the Chinese government, will initially plant the crops on a few hundred mu of land in Tanzania next year to promote its products, the statement said. The company has signed a contract for 4,500 mu (300 hectares) of land in the African country, it said.

Wednesday, April 23, 2008

Germany - Keeping People at Home?

by Claus Vistesen

Following up on a point I mentioned about international migration in my previous post on global demographics (where I reviewed a recent paper by David S. Reher) I would like to briefly examine some of the issues raised in a German context. In my post I latched on to a point made by Mr. Reher about how some low fertility countries might see adverse effects from exporting surplus labour to other countries. The argument was specifically centered on East european transition economies but, as you will see in what follows, the argument can also be expanded. The main issue becomes one of rearranging those proverbial deck chairs on the Titanic (i.e. to get the best spot relative to watching the inevitable demise of the ship) as many countries across the globe seek to mitigate a labour dearth by importing foreign labour. The allure of such policies should not be neglected. Relative to actually doing something about the underlying issue (i.e. nudging fertility back up) receiving foreign labour becomes an immediate, if only temporary, fix for labour shortages and even in some cases the source of unprecedented economic booms (Spain would be an excellent example here). In this present context it might serve us well to take a trip to Germany and do so by looking at an eloquent piece in the IHT (aggregated from Reuters) by Erik Kirshbaum. As Kirshbaum neatly points out we all know that Germany is hard at work trying to ramp up its industry and export its pension and health systems out of economic trouble but is also, as it were, exporting itself into even deeper trouble in another department - the human capital one. Basically, it is one thing shipping off semi-conductors and cars, but it is quite another to ship out human capital, since the latter is becoming an increasingly scarce resource in Germany.

Still plagued by high unemployment owing to the turmoil of reunification in 1990 and rigid labor laws, Germany has been helping its skilled and less-skilled jobless workers match up with foreign employers searching for manpower. The country has also been offering financial support to cover moving and transportation costs for unemployed Germans searching for jobs across the European Union, and even as far away as Australia and Canada. In one typical example, a newspaper in Fuerteventura, one of the Canary Islands of Spain, was recently filled with advertisements placed by Germans hunting for jobs.

"German seeks job in hotels or tourism," read one. "All relocation and travel costs paid for by German Labor Office."

Germany had an unemployment rate of 8 percent in February, about one percentage point higher than the euro zone average: 3.6 million people in the country are without jobs and more than 155,000 Germans emigrate each year. Many thousands have been helped by the Labor Office's International Placement Service in Bonn, which offers to some "Mobilitãtshilfe" (mobility assistance) or a "Mobilitãtsprãmie" (mobility bonus). The financing, known as the "Mobi," helps cover moving and travel costs for jobless Germans and their families. It is discretionary and aimed at those with job prospects abroad, although it is also available for relocations inside Germany.

"The mobility assistance benefits can be used for moves to anywhere in the world," said Sabine Seidler, spokeswoman for the International Placement Service in Bonn. "They're granted on a case-by-case basis and there's no upper limit on the sum involved. Applicants usually must have a contract and meet certain criteria. The main purpose is to help those who've lost their jobs find work as quickly as possible."

Now here on Demography Matters we have previously tried to draw attention to the worrying rend in net German migration. Back in May 2007 we cited the last available report from the Federal Statistics Office which showed that

"......on the basis of provisional results, 662,000 persons in-migrated to Germany in 2006 and 639,000 persons out-migrated. This results in net inward migration of 23,000 persons. That was 46,000 in-migrations less and 11,000 out-migrations more than in 2005. Consequently, net inward migration decreased strongly from the previous year (–71%), following a decrease by just 4% from 2004 to 2005. So there is a net inward balance of migrants in 2006 of 23,000. "

In view of the significant ageing process which is taking place in Germany this steady decline in the net balance is indeed preoccupying. Germany is currently a long long way from making up for all those "missing births" with inward migration. We have previously commented on this situation on DM a number of times (and here). We also cited an article from the Financial Times which gave some indication of the impact the absence of substantial inward migration was having on some sectors of the German economy:

Germany’s decision to restrict the working rights of east Europeans is hitting consumers where it hurts – their asparagus steamers. After this year’s warm, wet spring, the sandy plains of central Germany should have yielded an asparagus vintage for the history books. Instead, entire fields of the delicacy are rotting unplucked. Farmers, politicians and economists are scrambling for an explanation. At the Federal Statistical Office, which charts the amount produced in the country, experts are warning about a paradoxical year, with a harvest below the record 82,000 tons registered in 2005 despite better growing conditions.

Everyone agrees on the reason; there is a shortage of pickers. The 300,000 foreign seasonal hands, mainly Poles, who normally work the three-month “Spargelsaison” seem to have better things to do this year...... Herbert Buscher, economist at the IWH research institute in Halle, agrees that Germany, whose booming economy is now suffering from drastic shortages of workers in certain sectors, has “shot itself in the foot with its restriction to the free movement of workers”.
However what we now need to note is not only that Germany has unwisely beeen placing restrictions on the free movement of fellow EU workers into its labour market, it has also been operating a policy of helping people to find work abroad and, perhaps much more worryingly, it still seems to be encouraging this process. Re-locations inside Germany are of course one thing but actually helping people to leave Germany seems to be extraordinarily ill-advised at this point. Obviously, we can all see how it helps "beef-down" the unemployment statistics but as a long term policy it is anything but sound. Some however, are now beginning to sound the alarm ...

In Germany, the assistance is controversial. Economists and industry leaders say paying people to leave a country with a shrinking population and one of the lowest birth rates in the world is a recipe for disaster. Shortages of skilled labor are now acute in industries like engineering and car production, but they also loom in sectors like retailing, health care and finance. Meanwhile, "depopulation" has become an explosive issue in some areas, especially in the formerly Communist east.

"It's obviously better if they find work in Germany and pay tax, as well as contribute to the state's social welfare system," said Werner Eichhorst, deputy director of labor policy at the Institute for the Study of Labor in Bonn.

"In the short term, emigration takes people off jobless rolls, but in the long term we're losing workers with skills," he said. "It's usually the best and most flexible who leave. They're also often at ages where they have children. They're lost to Germany and obviously their children won't contribute later either."

The article also quotes Deutsche Bank's chief economist Norbert Walter for saying that even though he formally supports the mobility aid Germany should try kick it into reverse. Specifically Walter mentions how Germany will need to attract a significant amount of immigration in the coming years to compensate for the decline in the labour force. Right on cue Mr. Walter. Unfortunately, with Germany's size and the region's demographic trends (e.g. in Eastern Europe) this is going to be anything but the trifle Mr. Walter seems to think. Essentially, I don't think I can express myself much clearer than this. Germany desperately needs to instigate a sound policy on migration. The current one which in some ways encourages skilled labour to leave is way past its time and peak.


We are incorporating the following three additional charts to accompany the discussion in comments.

(please click on images for better viewing)

Further the newspaper Frankfurter Allgemeine Zeitung reported on Friday 25th April that the German government has decided not to open its doors to East European workers till the second half of 2011 - the very last date possible under the EU Accession Treaty for the new members. This would seem to indicate that far from addressing its demographic problem Germany is at present moving backwards on it.

The executive committee of the conservative Christian Democrats (CDU) approved pushing the deadline on opening Germany's borders back two years, from 2009, committee member Karl-Josef Laumann told the Frankfurter Allgemeine.

"The extension has been decided," Laumann said.

In 2005 Germany persuaded Brussels to allow it to impose restrictions until 2009 because of fears that a flood of cheap labour would put Germans out of work.

The newspaper reported that both the CDU and their junior partner in the German parliament's ruling coalition, the center-left Social Democrats (SPD), were in favour of the extension. German Labour Minister Olaf Scholz, of the SPD, expressed support two months ago, while German Chancellor Angela Merkel has said she could not imagine opening the borders prior to 2011.

The Financial Times also had an article recently reporting on a study by the consultants McKinsey who warn that more than 10m Germans could fall into poverty by 2020 because of insufficient economic growth. Assuming annual gross domestic product growth of 1.7 per cent, those earning between 70 per cent and 150 per cent of the average income – the standard definition of the middle class – will constitute less than half the German population by 2020, compared with 54 per cent today, according to McKinsey. Of course this is assuming sustained economic growth at an average of 1.7% per annum on average, which may be a questionable assumption. Anything less than this number and the problem, of course, will be greater. Gross domestic product in Germany rose by only around 1.4 per cent in the decade to 2006, 2007 was a very exceptional year since global trade grew at record rates thus giving a huge boost to german exports, and it now remains to be seen what sort of annual growth Germany can produce during an economic downturn.

“In recent years, the German growth model has relied almost exclusively on productivity gains,” the authors of the McKinsey report write. “Given the new challenges, this concept is now reaching its limits.” McKinsey also warns the government against short-term measures aimed at boosting income and consumption. Only structural steps, the study says, can raise annual GDP growth to 3 per cent – the level it says is required for standards of living to stabilise. The consultancy blames Germany’s poor long-term economic prospects on slowing productivity gains, falling working times, a shrinking working population and a failing education system.