Wednesday, May 04, 2005

Another example of overflowing global liquidity

Real interest rates in the developed world are low or negative, and this probably reflects a very low return on capital. This, and the abundance of savings just about everywhere except for the US, is driving capital to places where it used to be very scarce. Case in point: a dam gets built in Laos, a country with GDP per capita of less than $400, and where 70% of the population earns less than $2 a day.

This dam, mind you, will be a 1.6 billion dollar investment in a country where GDP is $9 billion. That's 17% of GDP, one project. That's a whole lot of risk, it seems to me.

I see two possibilities: either this dam will help to increase the productivity of Laos, or otherwise it will just generate a huge debt which may or may not be serviceable with revenues from selling electricity to Thailand. I can imagine a scenario in which the capital inflows resulting from the project, along with the job creation, stimulate consumption beyond Laos' means, which could lead to a string of unsustainable current account deficits culminating in financial crisis.

Talk about the glass half empty... But that's actually what happened in the 1970s, the last time real interest rates were systematically negative in the developed world, and when surging oil prices resulted in an overflow of petrodollars that were in turn recycled into loans for developing countries. The consensus around 1981 was that the debt that developing countries (in particular Latin America) had built up was perfectly sustainable, as the proceeds had (supposedly) been used to finance investment projects, like dams and such things. You can see how a person could get cynical about these things... but, as they say, maybe this time it's different.

What do you think?

BBC NEWS | Business | Banks put $1.6bn behind Laos dam

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