John Rapley

I left Oxford on a cold, damp morning when the streetlamps were reduced to glowing balls in the thick fog of winter. The Christmas rush awaited me, but still, it was good to return to the warm air of Kingston.

I had some time to reflect on some of the changes that are happening in the world, and which look likely to continue happening. Passing through Miami, I caught up with the American news. There seemed to be a growing gloom that 2007 might see the economy sink into a recession.

But here was something interesting. In the past, whenever the U.S. economy went into recession, the consequent decline in demand for primary commodities caused raw material prices to fall. This had a self-correcting effect on the U.S. economy. As input prices fell, inflation abated, and costs and interest rates came down. Thereby, the economy could get back on track.

This time, prices on bond markets suggest that investors consider a recession an increasing likelihood in the U.S. However, prices on commodities remain high. Partly as a result, inflation has remained stubbornly above the U.S. Federal Reserve Board's 'comfort zone.' So the Fed has held off reducing short-term interest rates. That, in turn, may postpone an economic rebound.

Simple cause

There is a simple cause for this apparent anomaly: China. Its economy is booming, driving demand for primary commodities. Add to its influence the expected future demand India will add, and there is little reason to expect commodity prices to come down any time soon.

In plain language, the U.S. no longer calls the shots alone. It may remain the world's largest economy, but it has lost the status it enjoyed for several decades after World War II: being the world economy's epicentre.

It's hard to overstate the importance of this. While in England, I spoke with Raphael Kaplinsky, the eminent development economist. He has been doing some work on the terms of trade, and has proved what I have long suspected to be the case. The terms of trade have shifted in favour of primary exporters for the first time in generations. It is better today to be an exporter of primary goods than it is to be an exporter of manufactured goods.

This turns on its head what had been the conventional wisdom of development economics in the post-World War II period. But there is a catch. It is not yet clear that this shift will prove permanent. Moreover, among producers of manufactured goods, the terms of trade have shifted against labour-intensive goods, the kind of goods in which developing countries tend to specialise.

This, once again, results from the impact of China and other Asian economies. Their huge supply of cheap labour, which Prof. Kaplinsky argues has actually been underestimated, will keep wages for unskilled labour cheap for years to come. The only option available to a poor country that wishes to develop without driving its labour costs into the basement will be to move up the productivity chain. This means shifting to knowledge-intensive production.

Looking ahead, there's good news and bad news. The good news is that the research now supports what has long been supposed, that primary exporters like Jamaica have a window of opportunity to ride a global economic wave, even if the U.S. goes into recession. The bad news is, that window may soon close. Meanwhile, the options for going through it are more limited than in the past.

So there won't be any easy rides. But there can be a ride, and the future arguably looks brighter than it has in a good while.

John Rapley is a senior lecturer in the Department of Government, UWI, Mona.