Rio+20 Economic Reality Check

The latest economic statistics are out and it is not good news.  The Federal Reserve’s latest projections for the U.S. economy show significant deterioration as previous GDP growth and other projections since the last report in April.  For example, change in real GDP was 1.9 to 2.4% compared to 2.4 to 2.9% in the April projection. The unemployment rate was 8.0 to 8.2% compared to an April projection of 7.8 to 8.0%.  PCE inflation was 1.2 to 1.7% compared to the April projection of 1.9 to 2.0%.

The Philadelphia Fed index surveys business in the Mid-Atlantic region on their business outlook.  It is a key benchmark of business conditions but the latest report showed business contraction in June. This sets up the same “summer slowdown” pattern seen the past few years where first quarter growth is stronger and then wanes over the second half.  But the -16.6 Philly Fed Index reading is the second lowest reading in this recovery.  Any reading above zero indicates growth a negative reading indicates contraction.  What worried economists most in this Philly Fed report was the -18.8 reading for the new orders since factory orders have now fallen in three of the past four months. The bottom line is the economy is deteriorating materially and the forecast is getting worse not better.

Roiling Economic Discontent in Rio. Against this backdrop, more than 130 world leaders arrived for the Rio+20 Summit on Sustainable Development where the mood was just as surly as the global economy.  The G77 bloc of developing nations lead by China pressed their case that the developed world was responsible for pulling the emerging economies up with a ‘sustainable development (read: financial subsidies) of at least $30 billion per year.  Even in the boom years of the global economy this demand for wealth transfer was a tough sell.  Now in the struggle to restore economic stability in both EU and the US the demand was laughable.

The conference has been on the verge of collapse for months ahead of the delegate arrival in Rio. Perhaps, the developing world sees this as their last opportunity to guilt the first world into signing onto a wealth transfer and technology transfer deal the development world will use to compete against them in world markets.  It clearly was not working.

“We cannot be held hostage to the retraction resulting from financial crises in rich countries. We are here to think about the long term and not about crises that may be overcome in one or two years.” —Luiz Alberto Figueiredo, Undersecretary at Brazil’s Foreign Ministry.

The ‘guilt them and they will give’ strategy no longer is working.  Behind the scenes tempers flared as representatives from groups of nations and nongovernmental organizations hoping to shame the major nations into a new round of funding walked out of a core working group on the “green economy” when the tantrums failed to work.   Reality is setting in both in the first world struggling to stabilize wobbly economies as well as the developing world using the ruse of sustainability to extract giant wealth transfers that enable them to avoid reforming their own economies and ending the corruption that makes them unattractive investment locations.

Then there is this—it is more than ironic that this conference is being held again this year in Brazil one of the more promising BRIC developing nations.  Yet even Brazil is struggling with balancing the realities of its dependence upon a global economy and its desire for national development.  Brazil wants more foreign direct investment yet it permits local prosecutors in Rio State to threaten Chevron executives with jail time and huge fines over natural oil seaps in the offshore deepwater Frades play because Rio State and the Brazilian Federal Government are at odds over the split of oil money expected from the project.  I wonder what the reaction in Rio would be if Chevron told the Brazilians that it was pulling out of the Frades project and moving its people and equipment to Angola or Israel or back onshore in North Dakota where the business climate is more ‘sustainable’ because it was focused on the long term.

The tough love lesson from Rio+20 is that true sustainability begins at home by creating economic, tax, policy and business conditions that encourage private investment, respect contracts, property rights and the rule of law, set clear environmental rules and enforce them evenly, and replace corruption with healthy competition.

By. Gary L. Hunt