Why African Resource Exporting Nations Need Tariffs

by John Brian Shannon

Many nations in Africa are presently experiencing a boom in resource exports. And that is truly wonderful news as exports of any kind contribute handsomely to national GDP and balance-of-trade figures. Not only that, millions of dollars of Foreign Direct Investment (FDI) often accompany resource exports.

For workers involved in the resource sector of a nation, it is unquestionably a positive development. Many other businesses and citizens at the periphery of the resource sector benefit too.

But does resource extraction benefit the rest of the society? It is heartening when one sector experiences strong growth – but when that rapid economic growth is limited to a small proportion of the population, tensions can become inflamed.

Joseph E. Stiglitz, Nobel laureate in economics and Professor at Columbia University has noted the problems inherent to resource-based economies in his recent and excellent article; “From Resource Curse to Blessing” which I urge you to read. Early into his piece, he says;

“On average, resource-rich countries have done even more poorly than countries without resources. They have grown more slowly, and with greater inequality – just the opposite of what one would expect.” — Stiglitz

Rather than develop the resource sector to the exclusion of all else and hope the rest of the society holds itself together — it would be prudent to tax all raw resources which are leaving the country.

In that case, comparatively few people will still make a good living directly from the oil (or other resource) company, while the rest of the country benefits in other ways from additional government spending on programs like improvements to national infrastructure, such as airports, highway systems, rail transportation and hospitals and schools on account of the tariff revenue.

When governments take in additional multi-millions of dollars from raw resource tariffs they will have additional money to improve services across the country.

The one thing governments shouldn’t do is add a tariff when resource prices are high! The major powers in the world will not let that happen as prices begin to skyrocket because that will add to uncertainty in the stock market and huge pressure will be brought to bear against any government attempting such a thing.

The time to add a small tariff is now, when prices are comparatively low and therefore, complaints will be few. Prices won’t drop much anytime soon. Due to the supply and demand equation they will be more often rising in the coming decades.

As we know, many African nations export significant amounts of unrefined oil, raw metals (ore and ingots), minerals or uncut and un-mounted gemstones. When African nations implement a 5% tariff on every exported tonne of resource — or barrel of oil — their economies will fire on all cylinders and with little complaint from rapidly growing and resource-hungry nations.

John Brian Shannon

ABOUT JOHN BRIAN SHANNON

I write about green energy, sustainable development and economics. My blogs appear in the Arabian Gazette, EcoPoint, EnergyBoom, Huffington Post, United Nations Development Programme, WACSI — and other quality publications.

“It is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.”

Green Energy blog: http://johnbrianshannon.com
Economics blog: https://jbsnews.wordpress.com
Twitter: @JBSCanada

Why Resource-based Economies Need Tariffs

by John Brian Shannon

Joseph E. Stiglitz, Nobel laureate in economics and Professor at Columbia University has noted the problems inherent to resource-based economies in his recent and excellent article; “From Resource Curse to Blessing” which I urge you to read. Early into his piece, he says;

“On average, resource-rich countries have done even more poorly than countries without resources. They have grown more slowly, and with greater inequality – just the opposite of what one would expect.” — Stiglitz

The usual solution to the inevitable slowing of a resource-based economy is to facilitate ever more extraction — in the hopes that more resource dollars will stimulate growth and compensate for the lack of progress in other sectors.

Time and time again this fails to work and to make matters worse, other sectors of the economy grow weaker in almost direct correlation with mounting resource exports. Manufacturing often takes the greatest hit.

Moreover, resource-rich countries often do not pursue sustainable growth strategies. They fail to recognize that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer. Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments. — Stiglitz

The government line on this is usually; “We should concentrate on what we do best.” Which is fine except that in so doing, the rest of the economy slowly slips toward the day when the government must then announce; ‘The majority of the resources are gone, we now must rebuild our economy from scratch.” This is when economists are finally consulted and listened to — but are then expected to solve the entire problem by the weekend, with nothing more than a magic wand and an algebraic/transcendental incantation.

Resource-based economies should commit to robust and long-term economic development throughout the economy well before such cantrip is required.

Real development requires exploring all possible linkages: training local workers, developing small and medium-size enterprises to provide inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the country’s economic structure. Of course, today, these countries may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths. From this perspective, these countries’ comparative advantage is having other countries exploit their resources.

That is wrong. What matters is dynamic comparative advantage, or comparative advantage in the long run, which can be shaped. Forty years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be the industrial giant that it is today. It might be the world’s most efficient rice grower, but it would still be poor. — Stiglitz

The problem of course, is how to fund the necessary investment in the non-resource economy. And what level of funding do non-resource sectors enjoy at the present? Less than you might imagine.

Of all solutions, the simplest usually work best. Which is why a nominal export tax is a necessary ingredient to any resource-based economy to assist the national economy maintain a quantitative balance.

After all, taxing natural resources at high rates will not cause them to disappear, which means that countries whose major source of revenue is natural resources can use them to finance education, health care, development, and redistribution. — Stiglitz

There is little need for domestic resource taxes in nations where the majority of resources are exported. Such ‘recycling’ of citizen’s money adds little ‘new money’ to the economy and irritates voters, while the most efficient economic performance enhancement available comes from export tariffs and FDI.

Both export tariffs and FDI revenue streams represent new money entering the system which means unlike domestic taxation, citizens are not paying for other citizens employment programs — foreign interests will be paying that bill.

When resource-based economies implement a 5% to 8% export tariff on every exported tonne of coal/metals/minerals, or barrel of oil, their economies will fire on all cylinders — and with little complaint from the rapidly growing and resource-hungry nations.

John Brian Shannon

Will the Collapse of the Western Manufacturing Base Create a Worldwide Depression?

by John Brian Shannon

The Eastern economies have traditionally been the manufacturers and purchasers of downmarket goods in their own region, while Western economies have traditionally been the manufacturers and purchasers of upmarket goods in their particular region.

Over the past 40 years Asia has taken much of the West’s upmarket manufacturing base, so much so, that the West has lost fully 50% of the manufacturing jobs it once enjoyed previous to 1980. That is the single most important reason why there is significant unemployment, under-employment and worryingly, under-reported unemployment (people who no longer look for work) stats in the Western economies.

Which obviously leaves a big hole in the economy of the West, translating into lower Western economic performance and recessions in North America, Europe, Japan, Australia and New Zealand since the 1970’s.

The fact that many Western corporations are making huge amounts of money at this (outsourcing their manufacturing to Asia – resulting in better corporate profits due to the much lower labour rates there) is now a complete side-issue.

It has now come down to this; The once broad base of Western consumers with generous amounts of disposable income is changing to an ever-broadening base of Western consumers without much disposable income.

If things continue, soon it will impact the Eastern economies — as there won’t be enough people in the West with enough disposable income to afford much of those upmarket goods and services! Translating into reduced economic performance there.

For now, China and India are the only significant economies in the entire world which maintain a healthy growth rate. They have been the economic engines of the world since 1998. Here in the West, we have suffered two recessions since then — and that, with China and India firing on all cylinders and their admirable growth rates of at least 8% per year and sometimes much higher than that.

The U.S. growth rate was an anemic 2% last year and is expected to come in at 1.5% to 1.6% next year. The U.S has not seen any growth rate over 4% since the 1980’s. Europe and Canada have posted similar percentages over that same time-frame.

If demand for Eastern-produced goods slackens any further in the West, the Eastern economies will see recession too. At that point, with the West still mired in the fog of recession — the entire world economy will tailspin resulting in a worldwide depression. This is the fear of many economists — including economists in Asia.

Which is why I favour keeping some significant amount of manufacturing here in the West, as manufacturing produces (relatively speaking) a lot of jobs — while removing resources from the ground and shipping them to Asia produces relatively few jobs.

Oil refineries here cost 12 – 13 billion dollars, while in China they cost 1 billion dollars. No new refineries are planned for the West for obvious reasons. As much as I’d like to say otherwise, there is precious little chance of adding value to our petroleum exports when new refineries are so expensive here.

Which is why we need to find ways to add value to our other resources.There are many North American resources that are being exported away and some would say, squandered away. We need much more focus on a value-added economy. We need to add value to our diminishing resources before they leave our Western economy.

One way, is to manufacture products out of our resources — and then sell them abroad, to enhance our balance of payments, which would contribute to enhancing our GDP, thereby lowering our overall debt-to-GDP ratio. Those ratios are killing us right now in the West.

Another good way to improve our Western economic picture is to tariff all resource exports and use that money to fund infrastructure projects, which would contribute much to the economy, but only temporarily. After all those projects reach completion in about ten years, workers (consumers with disposable income) will again be unemployed or under-employed, just as they are now. What then?

Some economists have suggested a Goods and Services Tax for the U.S. economy and to use those windfall tax funds for national infrastructure programs, as was done in Canada so successfully from 1990 – 2004. I am one of those people. However, with the latest projected U.S. growth rates set to be 1.5% to 1.6% for next year, that means there is a lot of fragility in the economy and some economists say a large, useful Goods and Services Tax might stall the recovery process. A smaller tax would be much less useful, but the taxation rate could be increased as the economy builds positive momentum. Even with those limitations, it is still a good option for the U.S.

It keeps coming back to the fact that we need to add more value to our economy, especially to our export economy on a long-term sustainable basis. We need to create MORE jobs from the resources we extract and from our agriculture and forestry industries — or eventually there won’t be enough demand for Asian-produced products and when those Asian sales sag due to lack of demand in the West, it will hit the fan everywhere.

.

John Brian Shannon writes about green energy, sustainable development and economics from British Columbia, Canada. His articles appear in the Arabian Gazette, EcoPoint Asia, EnergyBoom, the Huffington Post, the United Nations Development Programme – and other quality publications.

John believes it is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Check out his personal blog at: http://johnbrianshannon.com
Check out his economics blog at:
https://jbsnews.wordpress.com
Follow John on Twitter: https://www.twitter.com/#!/JBSCanada

The Prescription for America’s Economy

by John Brian Shannon

As much as I’d like to simply jot down the prescription to cure what ails the American economy, I won’t.  Not before discussing it with you first.

Any doctor will tell you it is better to question, test, diagnose — and then prescribe. So, on that doctorly note let us commit to what ails the U.S. economy before I go off writing prescriptions.

It seems that America is not feeling too well, although she is still plenty powerful. Just sort of an uneasy feeling, a lack of confidence and somewhat limited flexibility. Underneath it all, she is sitting on top of a mountain of debt which just feels wrong.

Ed Hall’s excellent website has numerous links for visitors who may be interested in America’s debt and deficit information.

Here is a snapshot of what it said today:

The Outstanding Public Debt as of 28 Jul 2012 is:
$ 1 5 , 8 8 3 , 9 7 2 , 7 6 5 , 4 7 2 . 1 6

The estimated population of the United States is 313,211,460 so each citizen’s share of this debt is $50,713.26.

The National Debt has continued to increase an average of $3.90 billion per day since September 28, 2007!

If we add to that debt, the total unfunded liabilities and expenses of the United States, the total  liability of the U.S. federal government rises to an estimated 130-140 trillion dollars when all entitlement spending obligations are factored in. Ouch.

Not quite a ‘Code Blue’ condition, but a little too close for comfort. Time to call a doctor – and a good one!

Economist and former senior federal economic policymaker, J. Antonio “Tony” Villamil, the dean of the business school at St. Thomas University, who served as U.S. undersecretary of Commerce for economic affairs during the George H.W. Bush administration, commented in the Miami Herald on America’s debt situation.

The federal debt/GDP ratio is on an unsustainable path, with the federal debt held by the public surpassing 100 percent of GDP in a few short years, according to the non-partisan Congressional Budget Office (CBO). If we desire stronger economic and employment growth, we need a market-credible, long-term fiscal plan that places the federal debt/GDP ratio on a declining scale. Read the entire article here…

Dean Villamil has labeled the present era as “The New Normal” with cyclical (short-term) and fundamental (long-term) factors at play “that suggest a continued period of sluggish economic activity and slow employment growth…”

He expects the cyclical problems — such as the burst real estate bubble and a huge build-up of private debt, both of which conspired to create the largest economic contraction since the Great Depression — will diminish over the next 12 months leaving America with (only!) some fundamental economic challenges to solve.

[Fundamentally]… at this stage of an economic cycle, the economy should be expanding at a 3-percent to 4-percent annual rate, not at the tepid 2 percent or less, as is the case today. – Prof. Tony Villamil

Professor Villamil believes as I do, that growth-based policy is the better way to solve the economic juggernaut squarely ahead of us. When GDP grows faster than the federal debt, the debt-to-GDP level falls correspondingly, which is a happy side-effect of more and better-paying jobs for citizens, higher revenues for governments and a better educated workforce on account of all those parents who can now afford to send junior to university.

Canada took the ultimate shortcut towards these goals some time ago and it was hailed as a spectacular success. The Canadian government instituted a 7% Goods and Services tax on practically everything sold in Canada, from bubble-gum to skyscrapers and everything in between. This raked in uncountable billions of dollars for the government which allowed it to eliminate the huge deficit, make significant paydowns on the accumulated debt, finance massive job creation programs and restructure it’s financial obligations. It’s an outstanding and well-documented success by any measure.

This success story illustrates a major economic leap for Canada and one easily tailored to the U.S. situation. It should be carefully considered by U.S. policy-makers.

One problem Canada wasn’t required to face, was an economy awash in trillions of dollars of ‘easy money’  which led millions of American consumers towards insolvency when the economy began changing in response to economic events occurring outside the U.S.A. in 2008.

For example, the monetary base, due to Fed action, has exploded to $2.6 trillion as of May 2012. This could create an inflationary spiral in the longer term, causing another great recession. Read Dean Villamil here…

For those who support a massive injection of cash into the economy by the government, this is a fine short-term way to stimulate the economy, provide employment, increase taxation revenue for governments and to temporarily stabilize the economy. It is a fine idea and worthy of serious consideration by American policy-makers.

But while stimulus spending would help the economy short-term, it does not address the core issue of the non-growth government policies which caused America’s economic woes in the first place.

I promised you a prescription America, and here it is;

  • A federal 7% Goods and Services Tax on everything sold inside the country beginning in 2013. Some amount of revenue-sharing should occur. If 50 billion dollars of GST are collected in the state of California by the federal government by Jan 1, 2014, for example, California should receive half that amount back from the feds — which the state can then use to spend on it’s own infrastructure and debt-reduction program.
  • Of the federal government’s portion of the GST — half of it should go to paydown the federal deficit until there is no deficit.
  • The other half of the federal government’s portion of the GST should be used for ‘shovel-ready’ infrastructure projects designed to cut unemployment levels in every state.
  • The planned budget cuts to U.S. military spending and other federal spending cuts should still occur as they are necessary and overdue, but could benefit from a relaxed implementation schedule.
  • A comprehensive, results-oriented, duplication of services and waste reduction study by all federal departments with the emphasis on cost-reduction and streamlining of services.
  • Which easily-treatable illnesses could increase American productivity if that cost was covered by government? We need a list! Spending mere pennies per worker here, can save the country many billions of dollars of lost productivity.

Short-term stimulus, combined with a national sales tax – the proceeds of which to be evenly split with the states, eventual elimination of the federal deficit, massive spending on national infrastructure projects, continued cuts to military spending on a slightly-relaxed schedule, national waste/duplication elimination, along with increases to productivity courtesy of free (minor disease) health care – will have America feeling back to her old-self within ten years — and after that, feeling ever better!

In fact you’re looking better now America — just reading your prescription!

Related articles
About John Brian Shannon

I write about green energy, sustainable development and economics. My blogs appear in the Arabian Gazette, EcoPoint, EnergyBoom, Huffington Post, United Nations Development Programme, WACSI — and other quality publications.

It is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Green Energy blog: http://johnbrianshannon.com
Economics blog: https://jbsnews.wordpress.com
Twitter: https://www.twitter.com/#!/JBSCanada

The Case For Austerity

by John Brian Shannon

Finally, finally, finally.

After decades of running endless deficits which, when left unpaid at the end of each year are added to the government debt — increasing the overall debt-to-GDP ratio numbers of nations, many governments around the world have begun to rein-in their spending.

Why is that important? Because those are the same debt-to-GDP ratios that the worlds major credit rating agencies cite when they lower the credit rating of nations which have managed to spend more than they take in year after year – through the good times and the bad times.

Decade after decade, deficits pile up, until one day your national credit rating has sunk from AAA+ to only B+ or worse! This brings about a number of unwanted consequences for those countries.

One, the cost of borrowing multi-billions of dollars to cover government debt is increased at each and every downgrade.

A small change to the interest rate doesn’t hurt much when the amount financed is a small amount, but it really hurts when the amount financed is in the hundreds of billions of dollars. For example, the U.S. is presently financing 15 Trillion dollars of debt (accumulated deficits) and will add another 1.4 Trillion dollars of deficit to the government debt at the end of this fiscal year – September of 2012.

Imagine the borrowing costs on 16.4 Trillion dollars. Now, imagine the borrowing costs on 16.4 Trillion dollars and add another 1% to that interest rate – which is the hypothetical equivalent of a one-point reduction in the credit rating, let’s say from AAA to AA for example. Forget about the B+ rating – you don’t want to know.

Year in and year out, in good times and in bad times, huge chunks of national treasure in the form of interest payments on federal debt and deficits are paid by the taxpayers to foreign lenders to cover the cost of government overspending. It is an automatic drain on a country’s wealth.

Credit rating agencies become empowered at times like these and begin making suggestions to governments in order for them to receive a better credit rating – and thereby lower their overall cost of borrowing.

One suggestion is to impose austerity measures to lower government spending – in an attempt to stem the economic bleeding of the economy in question.

Cutting the number of government workers to decrease government spending is one way to accomplish that – as is reducing the number, or quality, of services that a government performs. In fact, there are thousands of ways to raise revenue and lower spending to eventually produce a zero deficit condition. Levelization of government finances becomes the priority.

Which is a relatively easy thing to do during the good times when the economy is expanding, jobs are plentiful and the government is raking in boatloads of income tax, sales tax and other government revenue-generating schemes — although, even then it is rarely attempted.

Some excellent examples of exceptions to this paradigm do exist.

Austerity during the bad times has no redeeming value at all – except for one important point, which I will cover shortly.

Politicians have traditionally shunned austerity during the good times because in all but a very few cases it gets them voted out of office.

At the worst possible moment, we are now beginning to do the right thing — returning to balanced budgets and paying down government debt.

Everyone is beginning to ‘get it’ governments simply cannot run huge deficits decade after decade and not face a downgrade of their credit rating, which drives up the cost of financing that accumulated debt load. Which, in turn, slows the economy – code words for increased unemployment, higher taxation, stagflation and a lowering of services provided by the government.

So, what is the important point? Voter acceptance – which may be putting it too strongly – but at the very least an understanding is now forming in the consciousness of voters, that governments cannot continue spending at unsustainable levels for decades at a time. Tentatively at first, but now with increasing resolve, politicians have begun to feel empowered to speak out about lowering government deficits and cutting national debt loads.

Now that the process has started (very unfortunately, during the bad times) I would expect it to continue during the coming good times – which, according to the legendary words of economist John Maynard Keynes – is the proper time for deficit-cutting and debt paydown.

It has worked before. In the early 1990’s, Canada was facing high deficits, a toxic government debt load and a lowering of it’s credit rating — at a bad time economically speaking. The then-government of Prime Minister Jean Chretien and his astute Minister of Finance Paul Martin, jumped at the opportunity during a time of nominal growth and higher taxation to cut the deficit to zero and dramatically paydown the accumulated Canadian federal debt.

In short, a win for austerity. A wildly successful effort by those two gentlemen who made it look easy and who never, ever, once complained once about the task fate appointed them.

In fact, there is no doubt at all about it in Canada – austerity won and it won handily.

In the case of Canada, there was no option but to win, there were no better choices available and no big brother like some nations in the EU have available to them to bail us out. The government of the day decided to pare down spending, increase revenues and they were so successful at doing so their plan worked better than even they themselves had envisioned.

The reason Canada was so successful?

Theirs was anything but a clumsy attempt to balance the budget and paydown the debt and both the Prime Minister and the Finance Minister went around to meet the Premiers of each Canadian Province to sell the austerity package to Canada’s Premiers before attempting to take their plan further afield.

Then, and only then, they went to Wall Street to sell the world’s leading economy on the Canadian plan to eliminate Canadian deficits and lower the country’s total debt load.

Once all of that had successfully taken place, Canada’s Prime Minister and its Minister of Finance approached the credit rating agencies with a fait-accompli plan.

By ensuring the full support of every relevant player well-beforehand, Canada won over the credit rating agencies in a moment.

John Brian Shannon writes about green energy, sustainable development and economics from British Columbia, Canada. His articles appear in the Arabian Gazette, EcoPoint Asia, EnergyBoom, Huffington Post, the United Nations Development Programme – and other quality publications.

John believes it is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Check out his personal blog at: http://johnbrianshannon.com

Check out his economics blog at: https://jbsnews.wordpress.com

Follow John on Twitter: https://www.twitter.com/#!/JBSCanada

SEE ALSO:

http://www.theglobeandmail.com/report-on-business/economy/the-lesson-from-canada-on-cutting-deficits/article4252006/?page=all

A short excerpt of this excellent article appears below. Please click on the link above to read the entire article.

The lesson from Canada on cutting deficits
LOUISE EGAN, RANDALL PALMER
OTTAWA— Reuters
Published Monday, Nov. 21, 2011 2:32 PM EST

“Finance officials bit their nails and nervously watched the clock. There were 30 minutes left in a bond auction aimed at funding the deficit and there was not a single bid.

Sounds like today’s Italy or Greece?

No, this was Canada in 1994.

Bids eventually came in, but that close call, along with downgrades and The Wall Street Journal calling Canada “an honorary member of the Third World,” helped the nation’s people and politicians understand how scary its budget problem was.

“There would have been a day when we would have been the Greece of today,” recalled then prime minister Jean Chrétien, a Liberal who ended up chopping cherished social programs in one of the most dramatic fiscal turnarounds ever.

“I knew we were in a bind and we had to do something,” Mr. Chrétien, 77, told Reuters in a rare interview.

Canada’s shift from pariah to fiscal darling provides lessons for Washington as lawmakers find few easy answers to the huge U.S. deficit and debt burden, and for European countries staggering under their own massive budget problems.

“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank, Macdonald-Laurier Institute, who has examined the lessons of the 1990s.

But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth.

It would eventually oversee the biggest reduction in Canadian government spending since demobilization after the Second World War. The big cuts, and relatively small tax increases, brought a budget surplus within four years.

Canadian debt shrank to 29 per cent of gross domestic product in 2008-09 from a peak of 68 per cent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession.

For Canada, the vicious debt circle turned into a virtuous cycle that rescued a currency that had been dubbed the “northern peso.” Canada went from having the second worst fiscal position in the Group of Seven industrialized countries, behind only Italy, to easily the best.

It is far from a coincidence that the recent recession was shorter and shallower in Canada than in the United States. Indeed, by January, Canada had recovered all the jobs lost in the downturn, while the U.S. has hardly been able to dent its high unemployment.

“We used to thank God that Italy was there because we were the second worst in the G7,” said Scott Clark, associate deputy finance minister in the 1990s.

Canada’s experience turned on its head the prevailing wisdom that spending promises were the easiest way to win elections. Politicians of all kinds and at all levels of government learned that austerity could win.”  read more…