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.
See, this is whats the problem with privatized resource extraction. Its immensely profitable, and all the profits flow out to the stockholders! Whereas with state owned enterprises the taxpayer would get a large share of the wealth. The first situation may be slightly more productive from a global POV, but from the POV of the state’s citizens, state ownership is the superior solution.
Just to add a bit ot the excellent replies already posted:
…the inflow of petrodollars cause inflation…
- 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].
- 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.
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?
Oil is traded internationally in dollars, not in roubles. But the argument of pressure of dollar inflow on the Russian money market still holds.
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.
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.
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.
have you guys even lived in areas with the dutch disease? the oil towns in north dakota have had massive price inflation due to the high wages of oil money pushing demand up. same thing with mining towns in australia,canada, etc. and entire countries have become from cheaper end first world countries to massively overpriced as a result of resource booms. IE australia in the last decade, norway during its oil boom’s start.
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.
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.
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"?
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.
Could you explain why free capital mobility impedes Smith’s principle? I don’t understand.
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).
What about purely speculative motives? What would you wanna buy in Russia?
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.
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.
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.
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:
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Country A is able to drastically increase exports of oil, say.
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This of course causes a rise in the value of the ruble, because you need rubles to buy Russian oil.
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The rise in the value of the ruble makes formerly desirable Russian goods other than oil too expensive for foreigners to buy.
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The manufacturers of those other goods start making less.
I think this whole scenario doesn’t apply to Russia at all.
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When did this happen?
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When did this happen?
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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.
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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!
Source: Russian Central Bank, http://www.cbr.ru/eng/statistics/print.aspx?file=credit_statistics/crude_oil_e.htm
Source: Global Economic Monitor, World Bank
Source: World Development Indicators 2011, World Bank
So liquidationism is all you have to offer?
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OK, I concede the point, and thank you for the info.
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Didn’t see a link or a chart here. Here’s one from wikipedia on Russian ruble:
|
Year |
Lowest ↓ |
Highest ↑ |
Average |
|||||
|---|---|---|---|---|---|---|---|---|
|
Date |
Rate |
Date |
Rate |
Rate |
||||
|
1998 |
1 January |
5.9600 |
29 December |
20.9900 |
9.7945 |
|||
|
1999 |
1 January |
20.6500 |
29 December |
27.0000 |
24.6489 |
|||
|
2000 |
6 January |
26.9000 |
23 February |
28.8700 |
28.1287 |
|||
|
2001 |
4 January |
28.1600 |
18 December |
30.3000 |
29.1753 |
|||
|
2002 |
1 January |
30.1372 |
7 December |
31.8600 |
31.3608 |
|||
|
2003 |
20 December |
29.2450 |
9 January |
31.8846 |
30.6719 |
|||
|
2004 |
30 December |
27.7487 |
1 January |
29.4545 |
28.8080 |
|||
|
2005 |
18 March |
27.4611 |
6 December |
28.9978 |
28.3136 |
|||
|
2006 |
6 December |
26.1840 |
12 January |
28.4834 |
27.1355 |
|||
|
2007 |
24 November |
24.2649 |
13 January |
26.5770 |
25.5516 |
|||
|
2008 |
16 July |
23.1255 |
31 December |
29.3804 |
24.8740 |
|||
|
2009 |
13 November |
28.6701 |
19 February |
36.4267 |
31.68 |
|||
|
2010 |
16 April |
28.9310 |
8 June |
31.7798 |
30.3765 |
|||
|
2011 |
6 May |
27.2625 |
5 October |
32.6799 |
29.3948 |
|||
|
Source: USD exchange rates in RUB, Bank of Russia |
||||||||
Current RUB exchange rates
In other words, no great change, big picture.
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Sorry, i don’t see a link here. Nor do I see any Russian items for sale here. They are all from China, everything.
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I’m not offering anything, certainly not an -ism of any kind. But I’m not sure what the problem is. If a family has two teenage girls who eat all the food and spend all the money, throwing the family into debt, is it “liquidationism” to suggest they stop wasting money and get productive jobs? No it’s not. And those girls are not suffering from Dutch disease, either.
I think you are saying the same thing exists in Russia. There are big factories that pay people to make things that cannot be sold. This is what you wrote earlier. In other words, those factories are full of teenage girls who eat the countries food and spend its money but give nothing back in return. And you are asking me if there is some way to keep them happy and keep giving them free money, and at the same time not take away money from anybody else. I admit I don’t know how to do such a thing. I consider it a mathematical impossibility.
- As for capital moving freely destroying the principle of comparative advantage, not all capital can move freely. What about all the land and factories all over the world, not to mention the people? They cannot move freely at all.
In any case, what Ricardo meant was that if China is very good at making everything better than Russia, than all capital and labor would ideally leave Russia and move to China. Since Russia cannot or will not make this move, what is it best for them and for China to do? The law of comparative advantage gives the answer.
But Ricardo never meant the ridiculous idea that if capital and labor can flow freely anywhere, then everyone should stay put and try to make everything on their own.
Source: Human Action Chaper 8, sections 3, 4, and 5.
How could you pile up default of 1998, the fat 2000s years and the crisis 2008-2009 all together?
It’s well known that in a hospital the average temperature is 36.6C. Big picture.
If you look at the data from 2000 to 2008, you would say that the Dutch disease should be called the Dutch miracle. However, 2008-2010 is the reason why the Dutch disease is a disease. Russia fell in everything much harsher than other countries in the world. For example, industrial sector activity fell by 24% in a couple of months. That’s why this is the name of the thread: if you would let everything go like you see in the graphs in 2000-2008, then you are welcoming a big disaster. And that’s why this is a case against free-market capitalism. You have to do something about it: sterilize petrodollars by accumulating bailout fund, invest into infrastructure, try to diversify economy, do some institutional reforms, I don’t know.
You know that that was the scenario of Soviet Union collapse: the Dutch disease. The empire lived so well on high oil prices during 1970s and 1980s that let herself become the biggest grain importer in the world. However, after 1985 the picture has changed and Soviet economy quickly became insolvent by 1990. The remedy the Soviet Union decided to implement in order to set off a bad export-income conjecture was quite libertarian: shut your eyes and do nothing [Of course, no one argues with Misesian impossibility of socialism, but that was a long-term factor, and not the trigger of the break-up].
Just look up an inch below my name in the response title.
If you don’t see an item in your local Walmart or Radioshack, it doesn’t mean it doesn’t exist in the world. Look up on the internet Russian export structure.
The phrase “all these money are taken from taxpayer’s pocket” would make everybody in Russia laugh, because ordinary taxpayers don’t contribute much to the budget. It is mostly natural resources rents (tax on resource mining and export tariffs) that contribute to the federal budget.
That’s how a “structural move” is feasible in theory: take extra-profits from primary resources and divert them into production sector to keep it from stagnating.
Land and plants is a 19th century story. We are in an information society where human capital (which flyes freely from Russia at full speed, “brain drain”) and technology, as well as financial resources play a role.
Good luck with your studies Dzmitry.
Funny choice of words. That is what socialists in western media say about libertarianism.
Agree. I overstated that. I meant the soviet leaders didn’t do anything in a sense of not responding to new realities, not in a sense of abolishing Sovety, adjourning, and declaring laissez-faire across the Soviet republics. Well, that could be one heck of a reform though )