Expensive Oil: The Saudi side of the story

During the past couple of years, oil has constantly been in the news. Just about 99% of the coverage has centered on price trends, OPEC and the impact of expensive oil on the economies of rich nations. There’s a glaring gap here: what about the impact on the economies of producing nations?

Obviously, these come in all shapes and degrees of dependency on oil. Some, like Mexico, have large, diversified economies where oil plays a minor part. Others, such as Saudi Arabia, the world’s largest producer, basically live off the black stuff (in 2003 oil production represented nearly 40% of its GDP) and thus make for interesting subjects of inquiry.

Needless to say, the Saudi kingdom did very well last year. According to the IMF, it’s dollar-based GDP grew 16% last year. Given that inflation was non-existent and the exchange rate held steady, this increase pretty much reflects how much their purchasing power rose in 2004.

(As an aside, this stat also shows why one must not exclusively rely on real variables. The IMF estimates that in real terms Saudi GDP rose 5%, but this figure clearly does not reflect the true rise in that nation’s income).

The most interesting question is how all that money was spent. According to the data, the stereotype of huge petro-dollar funded shopping sprees in Harrod’s is rather dated.

Total demand, made up of consumption and investment, rose 7.7% in dollar terms last year in Saudi Arabia. Obviously, it’d be much better if that money was spent on infrastructure and such, but one couldn’t blame the Saudis if they splurged a bit (the available information doesn’t break down total demand). Nonetheless, national saving rose 66%, which shows that the government/royal court has learned something about the value squirreling away some money for low oil price days.

All in all, as a nation, Saudi Arabia spent only 80% of its available income last year (English to wonk translation: the current account surplus stood at 19.8%), up from 86% in 2003.

One can only hope that all that extra income will temp aspiring jihadis to pursue worldly affairs rather than martyrdom.

Face to face with globalization

Globalization has been a hot topic for many years. In rich nations, people vaguely recognize that it’s mostly a good thing: more choice, lower prices, etc. Yet, they also worry about losing their job to a foreigner who will do the same thing for much less pay. For now, this seems mostly a distant and faceless threat (that is, unless one works in manufacturing).

Well, the other day I came face-to-face with globalization. I ended up both scared and fascinated, even though I’m a skilled professional living in a middle-income country.

My encounter took place in a site called Elance Online. Basically, it’s a market place where firms put up for bidding small, independent projects that need to be done. Independent contractors from any nation can participate in the auction. Most are software-related, but there is a wide variety including editorial work, accounting, etc.

Take a look at this project for translating 51,000 words of English text to Spanish (and other languages). My wife has worked as a translator for over 10 years and she told me she would charge around US$ 3,000 for a job like this. Her rate is not low, but it is competitive for high-quality work. Now look at the bids: nearly 20, from places in Russia, India, the U.S., Argentina, Uruguay, Britain and Portugal, with the lowest at US$200 and the highest at US$ 1,450 (the average would be around US$1,100).

Obviously, it’s difficult to evaluate how serious some of these proposals are. However, many state that they include proofreading and quite a few have positive reviews for previous Elance projects.

I’ve seen many other examples. On average, qualified U.S. contractors’ bids were nearly three times higher than those provided by Indian and other foreign sources. Needless to say, quality and language are important issues that may justify higher prices, but the differentials are pretty large.

Frankly, I don’t know how big or how far this trend will run. Clearly, only fairly simple and straightforward projects can be contracted out now and it’s hard to tell if this will change. Nonetheless, this means intense competition for independent professionals everywhere. But it also has the potential to make life much easier for start-ups by enabling them to contract out non-essential functions (accounting, design, etc.), spurring growth and innovation. This will benefit everyone in the long-run, but it’s bound to be a bumpy ride for many.

News Not In the News: Mexico City's mayor

With all eyes on the Vatican, I'm sure that the plight of Mexico City's mayor won't be getting much attention from the international press. However, it's bound to be a huge story in the next few months.

It's a complicated case which no one understands clearly, but here's the gist: the government, with help from the ruling party (the PAN) and the nation's largest party (the PRI), is trying to convict Andrés Manuel López Obrador (aka AMLO), the mayor, for violating a court order related to a very minor land use dispute. If this happens, he can't run for the presidency next year.

AMLO is by far the most popular politician in Mexico and polls show he is way ahead of other presidential candidates. This is why nobody believes that the accusations against him are a matter of "upholding the rule of law", as the government says. If he's out of the way, the PAN and the PRI would vastly improve their chances of winning the top prize in 2006.

Now, AMLO is a smooth and tough politician. He's already upped the stakes for his opponents by calling for massive demonstrations in the streets. Polls show that 80% of the population backs him in this dispute. It's hard to predict what will end up happening, but Mexico will certainly be rocked by an all-out political dogfight even before the electoral process starts. Things will probably get very nasty.

We're talking about one of the largest emerging markets. As it is, this asset class will have a very tough time over the next few months due to rising interest rates in the U.S. and a weaker global economy. Trouble in Mexico will probably raise its risk-premium and this may spill over, although it probably won't have a direct short-run impact on that nation's macroeconomic indicators.

But what really scares me is the medium and long-term picture. Mexico badly needs structural reforms in countless areas. AMLO is a left-wing populist (probably more Lula than Chávez, though) who will not carry them out if he wins. If he's brought to trial, this will create a climate of intense polarization which will make it impossible for important agreements to be reached even if a more pro-reform candidate wins in 2006. It seems poor Mexico is set for yet another lost decade.

Politics bites Greenspan

I don’t usually read magazines with half-naked babes on the cover, but the latest issue of GQ (thanks to Slate for the pointer) has an interesting piece on Alan Greenspan.

The main thrust of the article is that although the chief of the Federal Reserve isn’t supposed to meddle in politics (and politicians can’t mess with the Fed by law), Mr. Maestro hasn’t resisted the temptation. Allegedly, he struck deals with Bush senior and Clinton to lower interest rates in exchange for tax hikes to curb Ronnie Reagan’s monumental deficits.

This doesn’t make much sense –even though the sources look reliable—since the Fed would probably have reduced rates anyway given the economic conditions of the time. However, these “deals” do seem to indicate that Greenspan prodded these two former presidents to do the right thing in fiscal policy, pointing out that lower deficits would allow rates to fall, thus jump-starting economic growth. The recipe worked just fine for Clinton and the nation, but the benefits didn’t come soon enough to save George H. W. Bush.

One long boom later, Greenspan had to deal with the next Bush and a set of radically different circumstances. The budget was in the black, but an unusual asset-driven recession was looming. The president adamantly wanted tax cuts and got Greenspan to sign on: he firmly and publicly backed them, which everybody interpreted as an endorsement of the chief executive’s plans.

Four years later, the nation faces twin fiscal and external deficits that may lead to a nasty crisis down the road. If this happens, Greenspan’s latest incursion into politics may be the undoing of his place in history as one of the greatest ever central bank chiefs or worse.

To be fair, backing tax cuts when a recession is imminent is not bad policy per se and he probably never envisioned just how irresponsible Bush and the Republicans would be in fiscal matters. Nonetheless, Greenspan must be really, really wishing he could take those words back.

Time to backpedal and promote fiscal sanity with full-force? Seems so. He’s already started to this in some speeches, which haven’t attracted much attention, and he’ll probably give quite a few “can’t quote me on this, but here’s what I really think” interviews. However, his scope for doing this while in office is limited if he doesn’t want to undermine the Fed’s political independence.

It’ll be interesting to see what he does and what he says out of office a year from now. Hopefully, he’ll do his penance and contribute towards the reestablishment of fiscal sanity.