June » 2011 » TripleCrisis

What about Capital Controls on Outflows?

Kevin P. Gallagher and Stephany Griffith-Jones

In the wake of the financial crisis, Western economists and policy-makers are to be applauded for recognizing that financial globalization has its limits and that capital controls may be necessary for emerging and developing nations to defend their economies from volatile capital flows. Most of the discussion to date has focused on controls on capital inflows, but could there be a role for controls on outflows as well?

Perhaps controls on outflows in the US would have bolstered the effect of quantitative easing. There may be situations where developing countries will need to resort to controls on outflows in order to prevent de-stabilizing outflows of capital from their countries as well.

Keynes thought so. He said that, “control of capital movements, both inward and outward, should be a permanent feature of the post-war system.” Indeed, Keynes and Harry Dexter White each argued that in order for capital controls to work coordination was needed at “both ends” of a capital flow, meaning at the source of the capital outflow and the receiving end or in terms of capital inflows.

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Whatever happened to stability analysis?

Alejandro Nadal

Once upon a time, stability of the general equilibrium was considered an important element in the education of students in economics. Today it seldom receives the attention it deserves and this is regrettable. Stability is one of the most important aspects of neoclassical theory because it addresses the question of just how the mechanism of free competition in the marketplace actually leads to the formation of equilibrium prices.

This crucial aspect of microeconomics is seldom covered adequately (if at all) in recent textbooks and university programs, whether at the undergraduate or post-graduate levels. Most students spend years learning how individual agents maximize, or exploring cases of oligopoly, or playing around with game theory, but when it comes to stability, their teachers skirt around the main issues.

As a result, a cloud of confusion persists. Students come to believe that somewhere in the sacred scriptures of the discipline there exists a theory that accurately reproduces just how the market forces of competition guide an economy through a price adjustment process that leads to the formation of equilibrium prices. In fact, if stability analysis received the attention it deserves, students would be able to see that it is the most important failure of general equilibrium theory.

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Majority Rule at the IMF

The following post was originally published by the World Policy Institute’s blog, a Triple Crisis partner, by Martin S. Edwards. Edwards argues that the selection of a new IMF leader needs to take all members’ interests into account.

With the recent resignation of IMF managing director Dominique Strauss-Kahn, the issue of IMF governance is on the front burner of international policy. At a time in which there are crucial issues at stake in the global economy, one of the most important international organizations has a very large “HELP WANTED” sign in the window. There’s already been a great deal of talk about the selection process, and one can even place wagers on who is going to be named as the next Managing Director. The concern, however, should be less with who gets the job than with how they get it.

At the time that these organizations were founded, the unwritten rule was simple – the IMF was to be run by a European, and the World Bank was to be run by an American. Today, it seems that Europe is speaking with one voice in favor of Christine Lagarde, the French finance minister. With a decisive level of support and a large bloc of votes, Lagarde’s candidacy for the next Managing Director looks hard to stop.

The problem for Lagarde is that the world of 2010 is very different than the world of 2000. The IMF’s most important borrowers are now in the Eurozone, rather than in the developing world. The IMF’s message of fiscal consolidation and cutting government spending is not being heard across Europe and the U.S. as these countries struggle to produce vigorous growth. Meanwhile, many developing countries have gone from borrowing from the IMF to lending to it. Brazil, Russia, India, and China have invested a total of $80 billion into the Fund in recent years. This expansion of the IMF’s coffers—which has only come about because of rapid growth in the BRIC countries—has given it more flexibility in dealing with the economic crisis in Europe.

Read the full post at the World Policy Blog.

Towards Productive Forestry

Sunita Narain published the following article in Business Standard, on the need to re-position forests in development and assess the tangible economic returns of forests.

My position on the need to re-position forests in development has invited a huge response. On the one hand are those who argue that the functions of forests already include conservation vital to life; they need to be valued and protected. The unsaid – but often stressed – corollary is that any discussion on the need to improve productivity of forests through the involvement of people needs to be shunned. The stretched and simplistic position that this view takes is that forests and people cannot go together. One letter writer has even argued passionately that the government should think of taking over – buying out – large areas of forests from people and then protecting them for future generations. On the other hand are those who argue for further engagement of people with forests.

The discussion on this matter is deeply polarised. The two sides are at war, in which both forests and wildlife are the losers. But let me stress again that the stalemate in the forest policy is not tenable.

With each passing day, the constituency for forest protection is shrinking. And this is when forest land in India is under a big threat — not necessarily from the people living in forests but from developers who want the land, minerals, water and other resources. Over time, the infrastructure imperative will take away forests, which have become the only “free” and “available” resource in the time of scarcity. The demand to open up forests will grow.

Read the full article in Business Standard.

How to Add Value to the G20 Agriculture Ministers' Meeting

Jennifer Clapp

The G20 Agriculture Ministers will gather together for their first ever meeting next week in Paris (June 22-23) to discuss potential measures for the G20 governments to endorse regarding food price volatility. Many are sceptical about what the G20 can accomplish in this area. This scepticism was reinforced by the fact that some G20 members did not even want the meeting to take place when it was first suggested by France, this year’s G20 host.

But the meeting is going ahead. So let’s give the Ministers the benefit of the doubt for a moment. How can they add the most value?

Before they release any statements, the Ministers will likely spend time reviewing recommendations in the policy report Price Volatility in Food and Agriculture Markets: Policy Responses written by ten international organizations, released on June 2. This document is the latest version of a report which has gone through several iterations since it was first leaked back in March.

There is much to applaud in the latest version of this IO report to the G20. Among the various measures proposed are: boosting investment in food production in developing countries, establishing agricultural information systems, improving transparency in commodity futures markets, removing trade barriers, reducing conflicts between food and fuel, instituting emergency reserves, and so on. It is a long shopping list, covering the gamut of potential factors that influence food price volatility.

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How to Add Value to the G20 Agriculture Ministers’ Meeting

Jennifer Clapp

But the meeting is going ahead. So let’s give the Ministers the benefit of the doubt for a moment. How can they add the most value?

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The IMF’s ‘social justice’ ruse in Cairo

Patrick Bond, Guest Blogger

After the International Monetary Fund’s long support for tyranny, dictatorship and rampant corruption in Egypt, the last few weeks have witnessed the incongruous appearance of the two words, ‘social justice’, in official statements. The June 4 loan of $3 billion adds to an existing $33 billion in foreign debt inherited from Hosni Mubarak’s regime, which a genuinely new, free democracy would have grounds to default on because of its ‘odious’ nature in legal and technical terms.

To legitimize that debt requires new loans that have an aura of relevance. As Ratna Sahay, IMF mission head in Egypt, said on June 2, “We share the draft budget’s overarching goal aimed at promoting social justice. The measures go in the right direction of supporting economic recovery, generating jobs and assisting low income households, while maintaining macroeconomic stability.”

Three days later, acting Managing Director John Lipsky claimed, “We are optimistic that the program’s objectives of promoting social justice, fostering recovery, and maintaining macroeconomic stability and generating jobs will bring positive results for the Egyptian people.”

The same day, Sahay repeated, “Following a revolution and during a challenging period of political transition, the Egyptian authorities have put in place a home-grown economic program with the overarching objective of promoting social justice.”

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Financial Reform: Why credit the rating agencies?

Ilene Grabel

The credit rating industry is firing from both barrels. The industry has launched a public relations effort that aims to delegitimize proposed regulations announced for public comment last month by the US Securities and Exchange Commission (SEC). The proposed regulations stem from the Dodd-Frank Act of 2010. At the same time the industry is taking its hubris to new levels by inserting itself aggressively and directly into public policy debates in the US and Europe.

This is a rather stunning reversal of fortunes for the rating agencies. In the early days of the financial crisis, it looked as if the industry was in for a fundamental overhaul. At that time, it seemed that there was momentum in the US around the creation of a new rating industry model—in the new model they would operate as public utilities. Elsewhere in the world, discussion of the failings of this industry was part of broader conversations about the need to move away from a US-centered financial architecture. In Europe and Asia, in particular, the misdeeds of the rating industry led to calls to create new regional and/or national entities that would credibly and ethically perform this work.

An overhaul of the rating industry was long overdue. The current crisis made it simply impossible to paper over the industry’s multiple failings. These include, but are not limited to, the conflict of interest that is an intrinsic feature of a business model wherein those whose securities are being rated pay for their ratings. Moreover, the industry’s analysts and the models they use have consistently failed to assess sovereign and private risk accurately. There is a revolving door between analysts and the entities that they rate. The structure of the industry means that rating firms have incentives to build business by offering more lenient ratings than their competitors. And the monopoly power of the industry is maintained by the fact that some entities (such as insurance companies) can only invest in assets that are rated, and these ratings must be performed only by firms that the SEC designates as nationally recognized statistical rating organizations. And though the report by the US Financial Crisis Inquiry Commission (a Congressional panel) was disappointing in so many respects, it did correctly indict the credit rating industry, calling its three biggest firms “essential cogs in the wheels of financial destruction.”

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What Food Crisis? Measuring Global Hunger

Timothy A Wise

Last week, Oxfam launched its new international campaign, GROW, to fight food insecurity. The advocacy organization’s campaign materials cite many of the statistics with which the post-food-crisis world has become familiar. Most common is the estimate that more than one billion people in the world are now hungry as a result of the combined impacts of rising food prices and the global economic recession. The estimate comes from the UN’s Food and Agriculture Organization (FAO), and few have questioned the validity of the numbers.

Now two studies suggest the estimate may be inflated. In the May/June special issue of Foreign Policy magazine on food, Abhijit Bannerjee and Esther Duflo, from their perches at MIT’s Poverty Lab Project, have an article with the provocative subtitle, “but what if the experts are wrong?” Meanwhile, IFPRI’s Derek Headey, in a VoxEU post, examines the prevailing FAO/World Bank methodologies for estimating global hunger and suggests that these institutions are overestimating hunger, mainly because they discount the positive impacts of economic growth in some of the world’s most populous countries.

On closer inspection, Bannerjee and Duflo deepen our understanding of the nature of hunger in developing countries, but they offer little here to call into question the billion-hungry estimate. Headey, on the other hand, is onto something, but it’s worth going deeper still to understand the relationship between poverty, high food and agricultural prices, economic growth, and government policy.

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What is the Correct Keynes Solution?

Paul Davidson, Guest Blogger

The financial market crisis and the Great Recession of 2008-2010 provided the empirical nails for the coffin of the efficient market hypothesis. Since the 1970s, efficient market theorists, government policy makers, and central bankers insisted that (1) government regulations of markets and large government spending policies are the cause of all our economic problems, and (2) ending big government and freeing markets, especially financial markets, from regulatory controls is the solution to our economic problems, domestically and internationally. Stickiness in wages and prices – including financial market prices– caused our economic problems. Flexible market prices was the solution.

The fundamental principles underlying Keynes’s theory of liquidity can explain why free markets, free trade, freely flexible exchange rates and free international capital funds mobility are ultimately incompatible with the economic goal of global full employment and rapid economic growth. Moreover, Keynes’s liquidity analysis suggests policy prescriptions to completely prevent or at least quickly alleviate the distress caused by financial market problems.

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