NEW YORK — The cost of energy will continue to increase and the trend toward globalization will also continue, despite the recent drop in the price of oil and the worldwide economic downturn, according to a speaker at the CIES World Food Business Summit here.
Michael Mandelbaum, a professor at the Johns Hopkins School of Advanced International Studies, told attendees during an opening session at the conference that although the food industry will be less impacted by the economic crisis than other sectors of the global economy, companies will have to come to grips with the fact that the price of fuel is on an unstoppable upward trajectory.
“We have seen in recent months a steep drop in energy costs, especially oil, down from $140 a barrel to $30 a barrel, but it will rise, and it will continue to rise,” he said. “What we are seeing is a major trend — an ongoing secular rise in the cost of energy. There will be twists and turns, and ups and downs, but over the long term, energy, especially for transportation, will continue to get more expensive.”
Mandelbaum described the current economic crisis as a “triple whammy” that combined the bursting of the real estate bubble, an acute disruption of credit markets and a global economic recession.
He compared the bubble bursting to a drinking binge, in which the imbiber feels better and better the more he drinks, until he finally collapses.
The recession, he said, can be compared to a bout of influenza. Everybody gets the flu once in a while, and all economies are occasionally sidelined by recessions.
And like the flu, recessions vary in their duration and severity, he explained — noting that the current recession is the most severe since World War II.
A credit crisis, however, is worse, he said.
“That can be compared to a heart attack,” Mandelbaum said. “The financial system, the credit markets, can be compared to the heart of the economy. When it stops, you are in real trouble.
“Luckily,” he added, “the financial system did not stop completely, because if it had, people would have had to pay for their food with beads and shells, which presumably would not fit in with most of the business plans of the companies here.”
He noted that the government action in the wake of the financial crisis — lowering interest rates and taking control of some financial institutions — “seems to have been successful” because banks seem to be increasing their lending.
However, he also sounded a cautionary note, and said there are four risks the global economy still faces:
Governments' rescue efforts could prove to be inadequate, “and the result will be that the recession is longer and deeper than it need be,” Mandelbaum said.
“This is more likely in Europe and Japan than in the U.S. and China,” he explained, “because the governments in the U.S. and China have spent more money, and the U.S. in particular has lowered interest rates more. There is the risk that some governments will do too little.”
Overexpansion of debt.
“Governments have taken on enormous debt to deal with this financial crisis, and in the U.S. this comes on top of eight years of fiscal deficits by the federal government,” Mandelbaum noted.
The problem is made even more severe in the U.S. because of the rising costs of Medicare and Social Security, which will be borne by the same taxpayers who will be asked to repay the nation's ballooning debt.
“In these circumstances, there is always the danger that the government will take the easy way out, by inflating the currency,” he said. “That may be a short-term solution, but in the long term this will be very dangerous.”
“There is the risk that some countries will put up higher and higher barriers to the cross-border flow of goods and capital,” Mandelbaum said.
Such measures in the past have proven “disastrous” for the global economy, he said, but despite this, “there have been growing signs of economic nationalism.” He cited the U.S. government's effective takeover of General Motors and some European banking controls that seek to keep capital within country borders.
“It's not surprising that taxpayers want benefits to go to their fellow citizens,” Mandelbaum said. “It's logical, but from the point of view of the global economy, it's not healthy.”
Failure to rebalance the economy.
Now that the U.S. consumer has cut back sharply on spending, other countries around the world will need to increase their spending to make up for it, he said.
“In these circumstances, in order to underpin and sustain global growth, spending must come from somewhere, and countries that previously focused on saving must instead focus on consumption,” Mandelbaum explained. “And the shift from saving to consumption is not necessarily an easy one. How fast and how fully countries such as China make that shift will impact how fast and fully the recovery takes effect.”