The Argentinean Election and the Future of the Left in South America

Matías Vernengo

On Sunday, November 22, Argentineans are going to the polls. The two candidates represent significantly different projects, and not just in economic terms. On the one hand, there is Daniel Scioli, governor of Buenos Aires, ex-vice-president during Néstor Kirchner’s presidency and (even if not completely trusted by those closer to President Cristina Fernández de Kirchner) the candidate of continuity. On the other hand, Mauricio Macri—wealthy scion a business family with origins as public works contractors, president of a popular soccer team, and currently mayor of the city of Buenos Aires—is the main opposition candidate.

The election takes place during uncertain economic times. The Argentine economy grew spectacularly from 2003 (the year after the default) to 2011, including a speedy recovery from the global economic crisis in 2008-9. However, since then the economy has basically stagnated, and inflation has been high. As a result, real wages—which grew fast during the boom years, leading to a reduction of inequality—have now essentially stagnated. And that probably explains to some degree Macri’s rise in the polls and the surprising tight race in the first round of the election.

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What We’re Writing, What We’re Reading

What We’re Writing

Juan Antonio Montecino and Gerald Epstein, Did Quantitative Easing Increase Income Inequality?

Léonce Ndikumana, The Role of Foreign Aid in Post‐Conflict Countries

Matías Vernengo, Bowles on Capitalism and Institutions

What We’re Reading

From regular Triple Crisis contributor Edward B. Barbier:

Marcelo Giugale (World Bank, regular blog at Huffington Post), On Fools and Free Markets

Andy Hoffmann (Michigan State, “The Hopeful Environmentalist” blog), Breaking the Link Between a Conservative Worldview and Climate Skepticism

Matt Kahn (UCLA, “Environmental and Urban Economics” blog), Calm and Sensible Climate Adaptation Discussion in the NY Times

Carlo Carraro (International Center for Climate Governance), Measuring and Assessing Sustainable Development Goals

Triple Crisis welcomes your comments. Please share your thoughts below.

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The Future of Work

Consider the Changing Climate

Juliet Schor

Juliet Schor is a professor of sociology at Boston College. She known worldwide for her research on the interrelated issues of work, leisure, and consumption. Her books on these themes include The Overworked American: The Unexpected Decline of Leisure, The Overspent American: Upscaling, Downshifting, and the New Consumer, and Plenitude: The New Economics of True Wealth (retitled True Wealth for its paperback edition).

Over the last year or two I’ve noticed that conversations about the future of work are now mostly about machines—how smart ones will do fantastic things to make our lives better, or how they’ll make human labor redundant and create a jobless dystopia. My training in economics has led me to be skeptical of both sides in this debate. After all, during the Industrial Revolution extraordinary labor-saving technological change had both good (cheaper products) and bad (pollution) effects. It also resulted in a tremendous increase in hours of work. The lesson from this historical episode, and plenty of others, is that technology doesn’t determine incomes, distribution, employment, or quality of life. It’s one factor in a much larger context.

Today, that context must include consideration of climate change, which has been almost totally missing from discussions about the future of work. The most obvious reason climate change matters is that it promises to be extremely disruptive. Even if the global community can pull off the equivalent of a Hail Mary pass and limit warming to two degrees Celsius, plenty of climate chaos is still in store. At this point, a future of four degrees of warming is more likely, given current national pledges for emissions reductions and considerable uncertainty about them.

This implies catastrophic sea level rise, drought, plummeting agricultural yields, frequent extreme weather, and human migrations on a large scale. These will lead to some predictable changes in the world of work: more need for first responders, health professionals, civil engineers, and aid workers, among other occupations. Climate chaos will also have large macroeconomic effects, reducing investment, consumption, and employment. A just-published study in Nature found that more than a fifth of GDP will be lost by the end of this century, much more than previous models have predicted. Another increasingly likely scenario is the bursting of the carbon bubble, once reserves already priced into fossil fuel company valuations are recognized to be unburnable and these companies’ assets collapse. Climate mayhem leads to economic mayhem. The operative word for the future of work would be shrinkage.

But this apocalyptic future is not our only option. Acting forcefully on emissions today could dramatically increase the likelihood of not only containing warming, but also making work more sustainable, satisfying, and productive. To see how, we need to consider the connection between working hours and carbon emissions, a key link that has been absent from all climate models and the climate change conversation.

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Banking on Bonds, Part 2

This is the second of two excerpts from a recent paper on the role of “repurchase agreements” (or “repos”) in the eurozone crisis, co-authored Daniela Gabor and Cornel Ban. Gabor is an associate professor in the Faculty of Business and Law at the University of Western England-Bristol. Ban is an Assistant Professor of International Relations and Co-Director of the Global Economic Governance Initiative at Boston University.

This part describes the behavior of the European Central Bank in the repo market—for example, tightening the standards for use of repos as borrowing collateral by embattled private banks—which had a perverse (pro-cyclical) impact in the eurozone crisis. Part 1, explaining repos are and their growing importance, is available here. The full text is available on the GEGI website.

Collateral Damage in the European Sovereign Debt Crisis

Daniela Gabor and Cornel Ban

The financial crisis which erupted in 2007 has fragmented the GC repo market in Eurozone government bonds … There is consequently a German GC market, a French GC market and so on, but there is no longer a eurozone GC market, except for oneday repos, where credit risk is minimal. (European Repo Council, 2013)

While US scholars and policy-makers have dedicated close attention to the run on US repo markets following Lehman Brothers’ collapse (Gorton and Metrick, 2012; Krishnamurthy et al., 2014) and the FSB (2012) put repo markets on its shadow banking agenda, scholarship on the systemic fragilities in European repo markets is in its infancy. Although the crisis reversed the Europeanization of sovereign collateral, as suggested in the quote above, the few studies dealing with European repo markets (Mancini et al., 2013; Boissel et al., 2014) do not engage with the impact on collateral markets.

The paucity of research on this topic is striking considering that by 2012, Portugal, Greece and Ireland provided 0.1 per cent of total repo collateral, sharply down from the 3.5 per cent share in 2008 (see Figure 2), and that Eurex (a large CCP) eliminated GIP government bonds from its GC Pooling basket (Mancini et al., 2013). Repo participants also reduced the use of German government bonds, for the opposite reason: in times of uncertainty, investors become reluctant to part with highly liquid assets.

Thus, the insight from the US-based literature on repo markets that government bonds preserve their high-quality collateral status in crisis, when repo lenders stop accepting privately issued securities, does not apply to Europe (Pozsar, 2014). The eurozone crisis shows that governments are also vulnerable to repo market tensions because the private rules that govern collateral and the incentives of systemic repo market participants are inherently destabilizing.

In the eurozone crisis, Member States faced not only destabilizing repo market dynamics, but also a central bank whose collateral policies were pro-cyclical at critical junctures. This clashes with the conventional description of the ECB’s crisis interventions, which emphasizes that its measures helped stabilize repo and collateral markets (ECB, 2010; Drudi et al., 2012; BIS, 2011). The narrative goes like this: throughout 2008 and 2009, the ECB acted counter-cyclically by extending the pool of eligible collateral (lowering the credit rating threshold from A! to BBB!), a measure meant to help leveraged European banks facing severe funding problems (ECB, 2015a). This allowed banks to take ‘bad’ collateral to the ECB’s long-term lending facilities and use high-quality collateral in private repos. Policy action contained potential runs in periphery collateral markets, restoring confidence in the collateral qualities of GIIPs government debt. The several long-term refinancing operations (LTROs) enabled banks to fund government debt portfolios, increasing demand and therefore liquidity in those markets. The OMT finally dealt with unfounded fears of a eurozone break-up in 2012.

A repo lens complicates this account. When examined through collateral practices, the ECB’s crisis interventions were often pro-cyclical. At critical moments, the central bank made margin calls, raised haircuts and tightened collateral standards. Indeed, in those moments the ECB behaved just like a private repo market participant – a ‘shadow bank’ – that disregards the systemic implications of its collateral practices.

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Capital Flight from Africa: What is to be Done?

This October, regular Triple Crisis contributor James K. Boyce spoke at a Joint Meeting of the United Nations General Assembly and the Economic and Social Council on Illicit Financial Flows and Development Financing in Africa. Boyce is a professor in the Department of Economics at the University of Massachusetts and director of the Program on Development, Peacebuilding, and the Environment at the Political Economy Research Institute (PERI). His statement at the session focused on capital flight from Africa and policy responses including stolen-asset recovery, repudiation of odious debt, and new banking regulation.

James K. Boyce

Mr Chairmen, distinguished fellow Panelists, Excellencies, Ladies and Gentlemen;

Thank you for inviting me to present this statement. I am old enough to remember when the subject of illicit financial flow was not discussed in polite company. The topic was relegated to the shadows of official discourse. It is gratifying to see this important issue moving squarely onto the agenda of the international community.

I will focus my remarks this morning specifically on capital flight from Africa and on policy responses to this challenge.

Capital flight and illicit financial flows

The terms ‘capital flight’ and ‘illicit financial flows’ sometimes are used interchangeably, but they are distinct concepts. Capital flight is usually defined as unrecorded capital outflows and measured as the missing residual in the balance of payments, after corrections for underreported external borrowing and trade misinvoicing. All capital flight is illicit, but not all illicit financial flows are capital flight. Capital flight is illicit by virtue of illegal acquisition, illegal transfer, illegal holding abroad, or some combination of the three.

Illicitly acquired capital is money obtained through embezzlement, bribes, extortion, tax evasion, or criminal activities. Wealth acquired by these means is often transferred abroad clandestinely in an effort to evade legal scrutiny as to its origins.

Illicitly transferred funds are outflows not reported to government authorities. Mechanisms include smuggling of bank notes, clandestine wire transfers, and falsification of trade invoices.

Illicitly held funds are assets whose earnings are not declared as income to national authorities of the owner’s country. The concealment of foreign holdings may be motivated by the desire to evade prosecution for illicit acquisition of the funds, or by taxation evasion, or both.

The broader universe of illicit financial flows includes not only capital flight but also payments for smuggled imports, transactions connected with illicit trade in narcotics and other contraband, outflows of illicitly acquired funds that were domestically laundered before flowing overseas through recorded channels, and transfer pricing by the corporate sector. These, too, are illicit, but they are not the same as capital flight.

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