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Confidence and energy keys to economies

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Daniel Yergin, Pulitzer Prize-winning author and respected economist

President Lemierre

says Daniel Yergin at EBRD Annual Meeting

From the ‘commanding heights’ of his reputation as a Pulitzer Prize-winning author and respected economist, Daniel Yergin delivered the 2004 Jacques de Larosière lecture at the 13th annual meeting of the EBRD.

Dr Yergin used the term ‘commanding heights’ as the leitmotif of his overview of the global economy. The term was originally coined by Vladimir Lenin who said that in building a communist system, the state should control heavy industry in particular – the ‘commanding heights’ of the economy in his day. Dr Yergin’s most recent book is The Commanding Heights: The Battle for the World Economy. He is also well known for his book The Prize: The Epic Quest for Oil, Money and Power. Dr Yergin is Chairman of Cambridge Energy Research Associates.

Control of oil supplies established the commanding heights of the global economy in the latter half of the 20th century, and heavy industry in the first half of that century. However, Mr Yergin said, “in international markets today the most essential element is confidence”.

How times have changed

He said this reality has changed the role of governments. “They’re now focused on GDP and institutions that sustain growth.” Thirteen years after the collapse of the Soviet Union he reminded the audience just how much had changed, with a large part of the world moving from a time “when governments tried to control strategic industries, to a new era of openness, competition and private ownership”.

“If communism had collapsed in the 1970s it would have been much easier for those countries because lots of western countries still believed in mixed economies” combining state and private ownership. He reminded his listeners that even in some western countries, “not so long ago an entrepreneur was a pretty suspect character”.

He said the transition of former communist countries to market economies within multi-party democracies “has been both harder and more successful than expected, and also more peaceful”. (The EBRD was established in 1991 to invest its taxpayer-backed capital in such economies, to promote economic transition.)

Among the many lessons learned in the transition period were:

• the need for solid governmental and other institutions. “They have been taken for granted in the past and were not seen as integral to markets.”
• the role of small and medium-sized enterprises. “SMEs need confidence and predictability…That’s where you get sustainable growth.”
• the need for social safety nets (eg welfare for the poorest; pensions)
• development of human capital through education and health programmes
• the power of big ideas as to how society should be organised.

Could pendulum swing back?

Given that economic transition has caused a lot of difficulty for some segments of society, particularly as social safety nets have disintegrated, Dr Yergin asked, “could the pendulum swing back?” That led him to propose a number of tests as to whether a market system “delivers the goods”, including its impact in terms of:

• fairness and equality
• environmental concerns
• demographics such as aging population
• competence of the nation state
• quality of the rules of the game and how people judge them.

Trade means growth

He said economic growth depends on trade, which is now global. “Poor globalisation,” he joked, “so much criticism, so much emotional freight.”

“Economists on both the left and the right agree that trade is a good thing but sometimes the public views it as a zero sum game.” However, he said, no one has come up with anything else that works as well as an engine of growth and antidote to poverty. He noted that post-war Singapore was so desperately poor “there was concern whether it would survive as a nation”. Today, thanks to its fierce commitment to international trade, “it has a per capita income higher than Great Britain which had a 200-year head start”.  

The ‘new economy’ based on information technology turned out not to be as powerful as was believed. Rather, he said, “energy security still underpins regional and global GDP.” He noted the “dynamic element of Caspian Sea” oil and gas supplies, Russia’s emergence as a global leader in energy supply, and the voracious appetite of booming China and India for hydrocarbons and other natural resources.

As to the state of global energy supplies, he said, “we’ve been running out of oil since 1859 when a Standard Oil shareholder sold his shares because he was told there were no supplies beyond Pennsylvania. In reality it will probably be 30 years before we reach the peak.” He forecast that by 2025 natural gas could overtake oil as the world’s number one energy source. He also believes renewable sources of energy, while “not a magic solution”, still have potential in addressing some energy needs.

20 April 2004