Two Tales in Post-Crisis Adjustment

Erinc Yeldan, Guest Blogger

Two Latin American style economies, Argentina and Turkey, shared a common history until very recently.  This “commonness” included a prolonged history of import substitution industrialization (ISI) with inward-looking, state-led development paths.  Both economies had relatively high rates of growth during their respective stages of ISI and yet, found out that these paths reached their limits by late 1970s (Argentina perhaps half a decade earlier than Turkey).

Both countries had also witnessed a lost decade, respectively; Argentina the 1980s, Turkey 1990s.  For both countries the period after was one of active reform.  Both countries suffered from an almost identical type of financial crisis in 2001, while both of them were following an IMF-led disinflation programme that rested on exchange rate-based stabilization adventures.  The contraction of the GDP and the burden of adjustment through rapid currency depreciation, banking collapses, and a severe rise of unemployment were also at comparable scale across the two countries.  However, the two had divergent paths of adjustment subsequently. Turkey followed a strict orthodox adjustment programme under the auspices of the IMF, while Argentine chose to set its own course with debt default and an adherence to what is commonly referred to as a heterodox adjustment programme, while maintaining a strong anti-poverty and pro-employment stance.

Almost a decade into this divergence, Argentina was in the international news once again, now with a ruling by the district court of New York that the Argentinian government ought to pay $1.3 billion to a “vulture fund”: Elliott Capital Management.  The ruling further contained a statement that prohibited third parties to aid Argentina in its efforts of debt re-structuring.

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Let's Stop Calling Countries "Markets"

Robin Broad

Here’s my most recent — and, I believe, imminently winnable — campaign: Let’s stop calling countries “markets” or “economies.” And while we’re at it, let’s not call any set of countries “emerging markets.”

It seems like a small thing – the change in terminology from “countries” and “people” to “markets” and “economies.” But it makes countries and people – in all their diverse reality – disappear.  And it puts an unspoken premium on places that are buying lots of goods from U.S. corporations.

Some of us slip into this terminology ourselves, from time to time, without even thinking. But, when I hear my colleagues and students use it, I find myself cringing for all that is unsaid between the lines. And I cringed even more at a recent Washington, D.C. event when an Obama government official proudly introduced herself as someone with “emerging market” expertise.

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Let’s Stop Calling Countries “Markets”

Robin Broad

Here’s my most recent — and, I believe, imminently winnable — campaign: Let’s stop calling countries “markets” or “economies.” And while we’re at it, let’s not call any set of countries “emerging markets.”

It seems like a small thing – the change in terminology from “countries” and “people” to “markets” and “economies.” But it makes countries and people – in all their diverse reality – disappear.  And it puts an unspoken premium on places that are buying lots of goods from U.S. corporations.

Some of us slip into this terminology ourselves, from time to time, without even thinking. But, when I hear my colleagues and students use it, I find myself cringing for all that is unsaid between the lines. And I cringed even more at a recent Washington, D.C. event when an Obama government official proudly introduced herself as someone with “emerging market” expertise.

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Food Crisis Update: Main Drivers of Price Volatility Still Not Addressed

Timothy Wise and Sophia Murphy

Last year international food markets suffered their third price spike in five years. The trigger was a terrible drought in the United States—a major agricultural producer and exporter. An unstable climate met low levels of international grain reserves, while U.S. ethanol gobbled up maize supplies. The resulting high and volatile prices struck yet another blow at the world’s already fragile food systems.

This is exactly the scenario we warned of a year ago when we published “Resolving the Food Crisis,” a comprehensive assessment of the international community’s response to the global food price crisis. High and volatile food prices in international markets will continue until structural reforms to trade, finance and agriculture are put in place to address the real drivers of the food crisis.

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China is the new bank in Latin America. Is it a better deal?

Kevin Gallagher and Estefanía Marchán

China’s presence grows ever larger in Latin America. Yet it is still unclear whether the Asian giant’s expanding influence will favor sustainable development in the region.

Latin America’s abundance of oil, minerals, and other natural resources attract China to the region and the numbers prove it: our study “The New Banks in Town: Chinese Finance in Latin America,” estimates that, since 2005, China has provided approximately $86 billion in loan commitments to Latin American countries. Sixty-nine percent of these loans were loans in exchange for oil.

Putting the data in context, in 2010, for example, China offered more loans to Latin America than the World Bank, the Inter-American Development Bank, and the Export-Import Bank of the United States combined. What does this deepening of ties with China mean for the region?

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Is the Euro Crisis Over?

Robert Guttman, Guest Blogger

A strange calm has settled over Europe. Following Mr. Draghi’s July 2012 promise “to do whatever it takes” to save the euro, which the head of the European Central Bank followed shortly thereafter with a new program of potentially unlimited bond buying known as “outright monetary transactions,” the market panic evaporated. Since then super-high bond yields have come down to more reasonable levels, allowing fiscally and financially stressed debtor countries in the euro-zone to (re)finance their public-sector borrowing needs a lot more easily than before. Even Greece has been able to borrow in the single-digits for the first time in three years.

This calming of once-panicky debt markets has led to optimistic assessments that the worst of the crisis has passed. Draghi himself declared at the beginning of the new year that the euro-zone economy would start recovering during the second half of 2013. He talked of a “positive contagion” taking root whereby the mutually reinforcing combination of falling bond yields, rising stock markets and historically low volatility would set the positive market environment for a resumption of economic growth across the euro zone. Christine Lagarde, as the head of the IMF part of the “troika” (i.e. ECB, IMF, and European Commission) managing the euro-zone crisis, declared at the World Economic Forum in Davos a few weeks ago that collapse had been avoided, making 2013 a “make-or-break year.”

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News from The Global Development and Environment Institute

The International Monetary Fund issued new guidelines on the use of capital account regulations, and GDAE’s co-sponsored Task Force on Regulating Capital Flows has continued to track and engage with the process. In a widely syndicated piece for the Project Syndicate, Gallagher called the reforms an important “half step,” important for acknowledging the value of such tools for developing countries to prevent damaging swings in currency values and contagion from international financial markets. His Pardee Policy Brief, “The IMF’s New View on Financial Globalization: A Critical Assessment,” goes into more detail. His Financial Times piece circulated widely, as did a piece on the issue by The Globalist, which appeared in China Daily, Valor Econômico (Brazil), The Financial Express (India). Gallagher also authored a provocative article in Global Policy, “Social Costs of Self-Insurance” that shows that the another way to regulate capital flows—by accumulating foreign exchange reserves—can be quite costly for emerging market and developing countries.

GDAE released new analysis of the incompatibilities between the new recognition of the validity of capital regulations and most U.S. trade agreements, which prohibit them. Gallagher teamed with the co-chair of a Pardee Task Force Leonardo E. Stanley to publish a policy brief, “Global Financial Reform and Trade Rules: The Need for Reconciliation,” in advance of the full Task Force Report, slated for release in March. Gallagher reiterated the contradictions in meetings with congressional leaders, and published his perspective in Al Jazeera, “Trade rules should not constrain fixing global finance.” While GDAE continues its work on Capital Flows and Development, Gallagher has been awarded a grant from the Institute for New Economic Thinking (INET) to collect some of his analysis on capital flows into a book.

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For a Place in the Sun

Sunita Narain

How will solar energy be made to work in India? As I discussed in my previous article there are three key challenges. One, how will the country pay for solar energy in a situation where there is no money to pay for even the crashed costs of installation. Two, what is the best model for the distribution and use of this relatively expensive energy in a country where millions still live in the dark? Three, how should India combine the twin objectives of supply of clean energy and creation of domestic manufacturing capacities?

The government proposals for funding the differential costs of solar are twofold. One, under the National Solar Mission phase II draft guidelines the Ministry of New and Renewable Energy has proposed a viability gap funding for new projects. In other words, it wants to go back to the era of capital funding, which has been riddled with problems. For instance, wind energy suffered because the operator had no real incentive to generate power; it only eyed benefits of capital finance and depreciation. The plants’ performance was abysmally low; therefore, generation-based incentive was introduced. It paid the differential but only based on actual power generation. Reversing this will be disastrous in a sector where there is a huge gap in performance of systems. Capital funding will be used without consideration for efficiency and output.

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The Island Dispute Between China and Japan: The Other Side of the Story

Robert Wade

The current dispute between China and Japan over a few barren islands inhabited by goats – called Diaoyu in Chinese and Senkaku in Japanese – looks at first sight to be a mere territorial spat. But it has escalated to a very dangerous level in recent months — first words, then actions of police forces, now actions of air forces, and, behind all these, both sides have mobilised all their military, political, economic, diplomatic, and cultural energies to engage in the dispute. It is more fundamental than normal territorial disputes, because the very identities of the two countries are at stake.

A strong narrative has taken hold in the West and much of East Asia about China’s behaviour, which starts with the proposition that China is the provocateur. Examples include, “China sows new seeds of conflict with neighbours”;[1] China has adopted an “increasingly sharp-elbowed approach to its neighbors, especially  Japan”;[2] “China…has launched a new campaign of attrition against Japan over the Senkaku islands…. Beijing has sought to challenge Japan’s decades-old control, despite the risk that an accident could spiral out of control”.[3]

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