Highlights from Revenue Watch: Boom, Bust and Better Policy

Wednesday, March 31, 2010


I attended the Revenue Watch Institute's panel today entitled "Boom, Bust and Better Policy: Crisis Lessons for Resource Rich Countries". The panel was headed by Joseph Stiglitz, a Columbia University professor, chair of Columbia's Committee on Global Thought and recent author of Freefall: America, Free Markets, and the Sinking of the World Economy. His chief counterpart was Chris Canavan, Co-Chief Risk Officer at Goldman Sachs and PhD in Economics from Columbia. Also providing interesting insights was Sarah Pray, a policy analyst for the Open Society Institute.

The discussion was focused on the less often talked about boom and bust in commodity markets seen concurrently with the stock market crash. While a lot of focus is placed on the real estate bubble and the financial crisis, the speculative bubble in commodities is lost among the discussion. The boom and bust greatly impacted heavily commodity-dependent economies around the world. Below is just a general summary of some of the concepts I found particularly interesting:

Stiglitz opened the discussion talking about producer countries that had learned some lessons from the past and had saved in the preceding boom period. He talked about how this crisis started in developed countries that mis-allocated capital into speculative real estate markets among others and how the ensuing fallout has spread to less developed countries. Yet, countries like Chile (pre-earthquake) were actually quite well off even considering the bust in commodity prices because of funds they setup to save during the boom. Particularly hard hit countries included the likes of Russia which through relatively unregulated financial systems heavily invested in US financial products as well as being heavily dependent on oil prices. The best commodity-dependent economies saved and invested it well while others either invested poorly or did not save to begin with.

Chris Canavan talked about the difficulties producer countries have in hedging their price risks. He explained the structural differences between producers and consumers. Producers are typically highly concentrated with a keen interest in price volatility while consumers are dispersed and not particularly concerned about hedging their risks to commodity prices. For a country like Chile that produces 1/3 of the world's copper, there is no relevant way that Chile can hedge away the enormity of its implied long bet on the market. So while the countries that have "learned" from previous crises established some level of savings during the boom, the ability to hedge the country's risk is limited. The savings are ideally used for investments in negatively correlated assets or at least uncorrelated assets.

Sarah Pray focused on the governance aspect for producing countries and how to best encourage governments to save surpluses and invest for the future. Clearly, fighting corruption and fraud are central to accomplishing these goals as well as simply generating the political will it takes to put aside capital in economic booms to weather the inevitable busts that come in the highly volatile commodity markets. Her basic idea seemed to be to adopt regulation in developed countries that would increase transparency within global companies at the individual country level. By enforcing accounting standards that mandate disclosure of pricing over time, individuals in particular producer countries could more easily figure out revenues coming in. They could also pressure their governments for increased disclosure based on a global standard. If citizens are empowered with this information, they will be better advocates of saving in booms and investing wisely.

Canavan found problems in this concept because of the lack of incentives for company's to increase disclosure and transparency in these markets. The primary reason for adhering to accounting standards would be greater investor interest yet many of these companies have no need. A primary producer company within one of these countries is typically controlled by the government and has no need for investment. Without that need, the incentive to disclose is lost and citizens will continue struggling to find reliable information.

One interesting side note:

Stiglitz responded to the news today that the Obama Administration plans to lift the drilling moratorium on 167 million acres of ocean on the east coast (NYT). Stiglitz said he doesn't understand the "Drain America First" mentality and that any plan that incorporates our economic security must consider the implications on our long-term security if we drain our own resources first.
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