Hi, everyone!
Could anyone suggest some Austrian literature concerning "dutch disease" and "resource curse"?
It would be really interesting to see austrian perspective on this problem. I live in Russia and the real debate here between liberals and interventionists is whether we should keep the Stabilization fund which is being filled by petrodollars or whether the government should spend it all in order to develop russian economy.
Smiling Dave: If by inflation we mean an increase in the money supply, say rubles in Russia, then this is clearly impossible.
True. Inflation is caused by Central Bank printing up roubles for each petrodollar received. It is however aimed at slowing currency strengthening. It might look fun to you when ruble-holders are getting richer on strengthening, but in fact the economy becomes internationally incompetitive and people are losing their jobs. Some liberal economists (that are despised in Russia after free-market reforms in 90s) say that Russia doesn't need all that population, it suffices to have as many people as there is in Canada just to service the oil and gas industry. The problem as I see it is that Russia ain't Saudi Arabia whose 90% of export revenue comes from oil, it has big cities with big plants left from Soviet Union that should stay afloat despite their inefficiency so that people have employment.
From another point of view, there is that old argument that Russian producers buy some of its machinery and materials from abroad, and so the cost of inputs will go up for them, and thus the domestic prices in stores would also go up, creating thereby inflation. In Russia people largely agree with this argument - is it robust from Austrian viewpoint?
Smiling Dave: Other countries will buy up rubles in order to be able to pay for all that Russian oil, decreasing the amount of rubles in Russia
Oil is traded internationally in dollars, not in roubles. But the argument of pressure of dollar inflow on the Russian money market still holds.
Smiling Dave: But the rest of the world will become "excessively dependent" on Russian oil, won't it?
Well, Europe is dependent on Russia oil and gas, and that really sucks for her sometimes, as Russia is not the greatest trade partner. But not the rest of the world. There is also for example OPEC countries that produce oil.
Smiling Dave: Do you do all these things on your own now, to maintain your economic sovereignity, or do you prefer to buy all that stuff from others, working only at your job?
I think it is a sophism. I think there is an argument of free capital mobility on the international level that impedes this Smith's principle of specialization.
Smiling Dave: High inflation rate is caused by money printing.
That's in the long run. In Russia part of the inflation is blamed on state natural monopolies that raise tariffs and no one stopping them. But that's clearly a failure of a state.
I give you the answers that an average economist or a journalist would give in Russia. I would be really happy to hear Austrian perspective on this because that's what Austrians are good at: they bring up new innovative ideas and prospects that get stolen and reworked in big massive formulas by mainstream later.
Dzmitry Kniahin: It's interesting because this problem clearly seems to be a perfect example of market failure where the government should step in and create some stabilization fund or distribute high oil incomes across the economy.
First, the government should not even be in possession of any oil income. The best thing to do is to divest the government's interest in oil assets and let the market decide where the income should go.
Second, the purpose of the free market is to channel resources to the most efficient uses. Redistribution accomplishes the opposite. Suppose the government were to deliver a few logs to your house, and a big pile of iron ore, and several tons of wheat. If that doesn't make sense then why should the government take money that has been earned by efficient producers and sprinkle that around?
Dzmitry Kniahin:1) the inflow of petrodollars cause inflation
Maybe. But in a free market rising prices result in increases in production. Those petrodollars are not money printed by your government. They represent real wealth earned by the sale of goods. If property rights are respected the new money will stay in the economy and make it grow.
Dzmitry Kniahin:2) government becomes independent from the taxpayers and authoritarian because now it's rich;
Right. So don't let the government have any of the money. Privatize the assets.
Dzmitry Kniahin:3) economy becomes resource-oriented, deindustrialization is happening because of the rising value of national currency;
The oil industry may bid up labor rates in an area causing other industries to relocate. But if this is a problem then why is it a problem only when industries move across national borders? Suppose gold and silver were the only form of money and suppose there were no borders. Then what difference would it make to you if a product were manufactured five miles from you or a thousand? What would matter to you would be the price and quality. So while "deindustrialization" may happen in Russia during an oil boom the real culprit is national fial currencies and varying customs and regulatory environments. And the real loser is not the consumer but the government which is competing for the tax base.
Dzmitry Kniahin:4) the increase of imports leads to excessive dependence of the country, disappearance of economic sovereignty, very sick reaction to any slight negative shock;
Alleged benefits like economic independence and economic sovereignty are just code words for government freedom of action. What would best benefit the consumer would be the division of labor enhancements that come with economic interdependence.
Dzmitry Kniahin: Hi, everyone! Could anyone suggest some Austrian literature concerning "dutch disease" and "resource curse"? It would be really interesting to see austrian perspective on this problem. I live in Russia and the real debate here between liberals and interventionists is whether we should keep the Stabilization fund which is being filled by petrodollars or whether the government should spend it all in order to develop russian economy.
The stabilization funds are supposed to be used when the price of crude goes very low and are supposed to be held when the price of crude goes very high. Actual use different than the intended use because of corruption is unfortunately very hard to stop.
Art transcends ideology.
http://mises.org/Community/blogs/ruben
Marko:resources that rightfully belong to the Russian taxpayer
Wrong.
Growing up in a slum of Moscow does not confer some magic property right over oil thousands of miles away. If anything the Russian taxpayers use the state to steal oil revenue from the rightful owners.
Peace
DBratton:First, the government should not even be in possession of any oil income. The best thing to do is to divest the government's interest in oil assets and let the market decide where the income should go.
DBratton:Right. So don't let the government have any of the money. Privatize the assets.
DBratton:Then what difference would it make to you if a product were manufactured five miles from you or a thousand?
You won't believe it, but both high inflation rate and rising currency value can occur simulteously; and that's what was happening in 2000s in Russia. And that's exactly the policymaker's dillema provoked by Dutch disease.
Wrong. Growing up in a slum of Moscow does not confer some magic property right over oil thousands of miles away. If anything the Russian taxpayers use the state to steal oil revenue from the rightful owners.
Just to add a bit ot the excellent replies already posted: ...the inflow of petrodollars cause inflation... 1. If by inflation we mean an increase in the money supply, say rubles in Russia, then this is clearly impossible. Foreign countries [=countries other than Russia] do not print rubles. In fact, just the opposite will happen, at least temporarily. Other countries will buy up rubles in order to be able to pay for all that Russian oil, decreasing the amount of rubles in Russia [=deflation of money supply]. 2. If by inflation we mean price increases of everything, this too is impossible. Petrodollars flowing in are nothing but foreign currency. After all, a Canadian can only buy Russian oil by first trading his Canadian money for rubles, then using the rubles to buy oil. Bottom line, the Canadian has more oil and the Russian has more Canadian dollars in exchange. What can he do with Canadian dollars? Only one thing Buy Canadian stuff. So that there is no increased demand for Russian stuff, no increase in the money supply, no reason for higher prices. ...the increase of imports leads to excessive dependence of the country, disappearance of economic sovereignty, very sick reaction to any slight negative shock... I imagine you mean that with all the auto industry [for example] labor and resources going to drill for oil, and all the foreign cash pouring in which must be spent on something, the Russian auto industry will wither and die, and people will buy the cheaper foreign cars. Thus Russia will become "excesssively dependent" on the rest of the world for its cars. Its economic sovereignity will disappear, as the Toyota company starts bullying the honest Russians to do what the Japanese want, or else ride on bicycles. But the rest of the world will become "excessively dependent" on Russian oil, won't it? And the rest of the world will lose its economic sovereignity to Russia, dependent as it is on Russian oil. "Excessively dependent" and "loss of economic sovereignity" are just words. The same situation can be described [more accurately] as a mutually beneficient relationship between equals. Has the average person become excessively dependent on everyone else and lost his economic sovereignity because he no longer, like our primitive ancestors, bakes his own bread, raises his own livestock, grows his own food, makes his own clothes, builds his own house? Do you do all these things on your own now, to maintain your economic sovereignity, or do you prefer to buy all that stuff from others, working only at your job? As for very sick reaction to slight negative shock, this is a mere assertion. Can you back it up, please? ...both high inflation rate and rising currency value can occur simulteously; and that's what was happening in 2000s in Russia. Of course they can occur at the same time, because they are caused by two different things. High inflation rate is caused by money printing. [After all, if the supply of money was constant, how would there be enough money for the price of everything to go up? If your salary is the same, and the price of clothing goes up, you will have less to spend on everything else, decreasing demand for everything else, causing prices of everything else to go down]. Rising currency value is caused by increased foreign demand for rubles, meaning increased foreign demand for Russian goods.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Aervew,
As far as I know Austrians don't consider such phenomena as inflation. It is just a price rising, while inflation is a necessary increase in the money supply by the monetary authorities. For example, if a new gold (oil?) source is discovered, or all people got simultenously richer, or half of the produce is destroyed by a hurricane - the resulting increase of the price level is not inflation. Correct?
"It might look fun to you when ruble-holders are getting richer on strengthening, but in fact the economy becomes internationally incompetitive and people are losing their jobs."
Cpu;d you please explain the logic/mechanism behind such a statement? If the ruble strenghtens, meaning it rises in value compared to other currencies, that means people of other countries want rubles more than they used to, so much that they are willing to pay more for rubles than before.
But there is only one thing they can do with rubles, which is buy Russian goods. In other words, a stronger ruble means increased demand for Russian products. Which means the Russian economy is more internationally competitive, not less.
Now it may be that a higher ruble means that some Russian goods become so expensive they cannot compete with cmparable foreign stuff, but those goods are so few that they have have not caused a decline in the price of the ruble. On the whole the demand for Russian goods must have increased, for there is no other explanantion for the rise of the ruble.
The people in those few industries may well lose their jobs, but that will be offset by more jobs in the industry that caused the rise in the price of the ruble. Also, the people as a whole benefit, everyone, by foreign goods becoming cheaper to import, thanks to the rise of the ruble. Also, those industries that rely on imports for raw materials will now bemore competitive, since their costs of production have lowered.
I learned a lot from this short article: http://mises.org/daily/12. It may interest you as well.
"...Russia doesn't need all that population, it suffices to have as many people as there is in Canada just to service the oil and gas industry."
I hope we can agree that from a strictly economic point of view, that is absurd. The larger the population [on decent land, which Russia certainly has, once being the breadbasket of the world], the more people available to do work and be productive, meaning the country will be wealthier.
"...it has big cities with big plants left from Soviet Union that should stay afloat despite their inefficiency so that people have employment."
If they are inefficient, meaning they cannot make a profit, where is the money going to come from to keep paying the workers their salaries? Obviously, somebody else is going to have to pay, meaning those workers are a drain on the economy, making Russia poorer and poorer the longer those plants exist.
The right thing is for those plants to close, and/or be sold to someone who knows what to do with them.
"From another point of view, there is that old argument that Russian producers buy some of its machinery and materials from abroad, and so the cost of inputs will go up for them, and thus the domestic prices in stores would also go up, creating thereby inflation. In Russia people largely agree with this argument - is it robust from Austrian viewpoint?"
Absolutely. Though I think the word "infllation" is being used very loosely, the argument is correct.
I think you are agreeing with me, in substance, that Russia does not lose economic power by exporting a lot of oil, quite the contrary. Otherwise, how could she be a 'poor trading partner"?
Could you explain why free capital mobility impedes Smith's principle? I don't understand.
Smiling Dave: But there is only one thing they can do with rubles, which is buy Russian goods. In other words, a stronger ruble means increased demand for Russian products.
Well, and there is an increased demand for two Russian products: natural resources and "kalashnikovs". And once again Russia receives dollars for her oil and gas, and then she buys bonds of FunnyMae and FreddyMac with these dollars (creating stabilization fund). And some managers and stockholders and bureaucrats are buying foreign property and football teams with these dollars. The tradable sector in general is disappearing, deindustrialization process is setting in (Dutch disease), the non-tradable sector is getting too expensive, provoking inflation (CPI rising). This dependence on international oil-price conjecture (90% of Russian exports are natural resources!) undermines economic sovereignty as income shocks provoke much more severe economic consequences than on average in the world (look at 2008-2009).
Smiling Dave: On the whole the demand for Russian goods must have increased, for there is no other explanantion for the rise of the ruble.
What about purely speculative motives? What would you wanna buy in Russia?
Smiling Dave: The people in those few industries may well lose their jobs, but that will be offset by more jobs in the industry that caused the rise in the price of the ruble.
There is some social cost, history, institutions, and political interests that would impede this scenario to unfold. You can unfold this scenario in a mathematical model very easily and beautifully, but in a real life there are a lot of externalities.
Smiling Dave: The larger the population [on decent land, which Russia certainly has, once being the breadbasket of the world], the more people available to do work and be productive, meaning the country will be wealthier.
It is definitely true from economic logic because the specialization of labor would enhance the productivity. But you said above that inefficient industries should be liquidated, and labor should go into productive industry. Well, the productive one is oil and gas, and it is largely capital-intensive, and not labor-intensive. But, yeah, I agree: the service industry would then expand accuieling all this free labor. But it is not a model, these adjustments don't happen automatically, there are a lot of inefficiencies yet. "Breadbasket" - you probably know that Stalin and fellow communists destroyed once prospering Russian agriculture.
Smiling Dave: I think you are agreeing with me, in substance, that Russia does not lose economic power by exporting a lot of oil, quite the contrary.
It has a lot of political power when the oil prices are high, and vice versa. Economically speaking, Russia is a small open economy, producing like 2% of world GDP.
Smiling Dave: Could you explain why free capital mobility impedes Smith's principle?
http://en.wikipedia.org/wiki/Comparative_advantage#Free_mobility_of_capital_in_a_globalized_world
The tradable sector in general is disappearing, deindustrialization process is setting in (Dutch disease),
Let's sum up Dutch disease so we can all be on the same page. According to Wikipedia, Dutch disease happens like this:
1. Country A is able to drastically increase exports of oil, say.
2. This of course causes a rise in the value of the ruble, because you need rubles to buy Russian oil.
3. The rise in the value of the ruble makes formerly desirable Russian goods other than oil too expensive for foreigners to buy.
4. The manufacturers of those other goods start making less.
I think this whole scenario doesn't apply to Russia at all.
1. When did this happen?
2. When did this happen?
3. I have never bought anything from Russia, or even seen a Russian good for sale anywhere here in the US. Meaning the exports of Russian goods never declined, because it was nonexistent in the first place.
4. This may be happening, for the simple reason that the Russian economy was a dead man walking, with all its factories making garbage. Now that the Russian people have a choice, they won't buy that junk, nor will anyone else.
Come on, you've gotta be kidding.
Graphs are not seen here, so I uploaded them above in a file!
Smiling Dave: 1. When did this happen?
Source: Russian Central Bank, http://www.cbr.ru/eng/statistics/print.aspx?file=credit_statistics/crude_oil_e.htm
Smiling Dave: 2. When did this happen?
Source: Global Economic Monitor, World Bank
Smiling Dave: 3. I have never bought anything from Russia, or even seen a Russian good for sale anywhere here in the US. Meaning the exports of Russian goods never declined, because it was nonexistent in the first place.
Source: World Development Indicators 2011, World Bank
Smiling Dave: This may be happening, for the simple reason that the Russian economy was a dead man walking, with all its factories making garbage.
So liquidationism is all you have to offer?