Spotlight G-20: For the Must-Do List: Retire the Dysfunctional Key Currency System

Jane D’Arista, Guest Blogger
Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.

The most recent development in the blame-game over international payments imbalances is what the Brazilian finance minister has termed “currency wars”.  The US shares his concern about competitive devaluations in the sense that it blames trade balances on currency manipulation by surplus countries, pointing to China’s refusal to allow market forces to influence the value of the yuan.  As Secretary Timothy Geithner argued before the October meeting of G-20 finance ministers and central bankers in South Korea, this gives China a “huge” short-term advantage that is unfair to all its trading partners. Meanwhile, other countries see the 10 percent decline in the dollar against major currencies from June to October as the primary cause of currency tensions and Brazil’s central bank governor views the Federal Reserve’s prospective quantitative easing as a form of intervention that will create “serious distortions”.

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US Elections: The Deficit Hawks Have Already Won

Jeff Madrick

Austerity economics has won in Europe. But there is a mythology traveling around that the U.S., at least, has retained the Keynesian orientation that helped cut short an economy spiraling downward into full-fledged depression. Not so. The deficit hawks have also largely won in the U.S.  The announcement last week that GDP grew at an annual rate of 2 percent only brings the point home: the U.S. needs a serious fiscal injection quickly.  But it is not going to get it.

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Spotlight G-20: Why Capital Controls Are Not All Bad

Ilene Grabel and Ha-Joon Chang, from Financial Times
Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.

Last Monday, Triple Crisis contributor Ilene Grabel co-authored the following piece for the Financial Times with noted author Ha-Joon Chang, building on an FT-hosted debate that included an earlier contribution by Triple Crisis blogger Kevin P. Gallagher. They urge the leaders of the G-20 economies to acknowledge the need for a new international financial architecture in the wake of the global financial crisis and the widespread adoption of currency controls in the developing world at their upcoming summit in Seoul, on November 11-12. Their piece kicks off the Triple Crisis Blog’s “Spotlight: G-20” series. Starting today and running through the G-20’s crucial meetings, we will feature daily pieces from Triple Crisis bloggers and guest contributors on the key issues that need to be addressed at the upcoming summit.

Was it really just over a decade ago that the International Monetary Fund and investors howled when Malaysia imposed capital controls in response to the Asian financial crisis? We ask because suddenly those times seem so distant. Today, the IMF is not just sitting on its hands as country after country resurrects capital controls, but is actually going so far as to promote their use. What about the investors whose freedoms are eclipsed by the new controls? Well, their enthusiasm for foreign lending and investing has not been damped in the least. So what is going on here? In our view, nothing short of the most significant transformation in global financial management of the past 30 years.

Read full article at Financial Times

Read more capital controls from Triple Crisis and at the Global Development and Environment Institute.

Understanding Instability: Mandelbrot, Fractals, and Financial Crises

Alejandro Nadal

Lightning in the sky does not follow a straight line. The irregular patterns in a cauliflower or the capricious forms of a tree’s branch are a challenge to the clean geometric figures we learn in school. Neither the straight lines, nor the smooth curves of that geometry exist in nature. But after the wonderful work of Benoit Mandelbrot it is now possible to get closer to a theory of the manifold wrinkles and rough surfaces that are the stuff of our universe. And our economies.

Ten days ago this great mathematician, the creator of fractal geometry and other wonders closely related to chaos theory, passed away.

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Renewing the International Renewable Energy Agency (IRENA)

Adil Najam

The excitement that had marked the creation of the International Renewable Energy Agency (IRENA) in early 2009 – to act “as the global voice for renewable energies” – dissipated fast in the last year and a half. Indeed, for those few who followed what was happening at the agency, feelings of crisis and panic set in fairly early and in recent weeks had turned into a distinct sense of foreboding and desperation. One hopes that this is finally about to change as new excitement has been injected into IRENA after the resignation of its beleaguered founding Director General – Helene Pelosse from France – and the appointment of Kenyan development economist and seasoned UN official Adnan Amin as her replacement.

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Climate Negotiations: Clouds over Cancún?

Miquel Muñoz, Guest Blogger

In the last weeks, two hurricanes have threatened Cancún. Hurricane Paula veered east, hurricane Richard southwest, both sparing the resort city and venue for the upcoming UN Climate Change Conference (COP 16). If this post was about the last COP in Copenhagen, the headlines would be unmistakable: “Hurricane Threatens Climate Negotiations.” For Cancún, conversely, a better analogy can be found in Copenhagen’s winter weather: grey and overcast. This would fittingly describe the level of expectations for Cancún.

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Britain’s Austere Future: Zombie Flick or Godzilla Movie?

Mark Blyth

The Triple Crisis Blog is pleased to welcome Mark Blyth as a regular contributor.

In my first triple crisis piece I wrote about John Quiggin’s new book thesis concerning Zombie Economic ideas. Lead zombie of the moment is the idea of fiscal austerity as the way out of the crisis, despite oodles of evidence to the contrary. In short, we need to cut budgets to restore fiscal sanity, and we know that this is the way forward since small open economies in the 1980s (Ireland, Belgium, Denmark) that cut their budgets still grew. The economic (ir)rationale for this has been pointed out by Krugman, Stiglitz, and others. But for me the most interesting, and most tragic part of this story, are the distributional consequences of these policies, and the politics that they engender.

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Funding Post-Crisis Recovery in Africa: Aid vs. Domestic Revenue Mobilization

Eric Ogunleye

The Triple Crisis Blog is pleased to welcome Eric Ogunleye, a Research Fellow at the African Center for Economic Transformation in Accra, Ghana, as a regular blogger.

The negative effects of the recent global financial crisis on African countries are still very fresh in our minds. Global commodity demand fell precipitously, protectionist and restrictive trade policies soared, foreign investment shrank and foreign aid contracted, threatening the growth and poverty reduction achieved in the recent past. For instance, between 2007 and 2009, real GDP growth plummeted in percentage points from 20.3 to 0.7 (Angola), 4.8 to -3.7 (Botswana) and 6.2 to -3.7 (Madagascar). During the same period, fiscal balance excluding grants worsened from +11.5 to -4.8 (Angola), +0.8 to -4.9 (South Africa), +5.6 to -10.6 (Botswana) and +3.6 to -15.4 (Liberia). Increasing unemployment remains a major risk; South Africa lost 484,000 jobs in the third quarter of 2009 alone. The Nigerian stock exchange lost almost 70% of its value.

These were all the result of vulnerability to foreign financial resources. To reverse these negative trends and re-launch the continent on the path of sustainable recovery, deepening domestic revenue mobilization is imperative.

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Capital Controls are Prudent but not Easy

Kevin P. Gallagher, Financial Times, October 20, 2010

Triple Crisis blogger Kevin P. Gallagher was invited to submit an article for the Financial Times as part of a three-way debate on the use of capital controls. His piece begins below, and you can read the full article at Financial Times, as well as the other positions written by Guillermo Calvo and Gerard Lyons. For more on the issue from Triple Crisis, see Ilene Grabel’s recent post, and other contributions on capital controls. Read more on Gallagher’s work on issue for the Global Development and Environment Institute.

Emerging markets have their hands full trying to stem currency appreciation and asset bubbles due to their higher interest rates and formidable economic recoveries relative to the west. The situation will only worsen as world leaders continue to fail to reform global finance and the US moves to another round of quantitative easing.

In times like this, capital controls have regained their legitimacy as a tool emerging markets can resort to.

One can make the argument that many emerging markets eventually need to let their currencies appreciate, in real terms. But flows of speculative capital that stop and start suddenly are a destabilizing way to that end….

Read the full article