The Political Economy of Managing Capital Flows in South Korea and South Africa

Kevin Gallagher

In the immediate aftermath of the global financial crisis, the world economy was characterized as experiencing a “two-speed” recovery.  Industrialized nations, where the crisis occurred, saw slow growth whereas many emerging market and developing countries grew significantly.  These growth differentials, coupled with significant interest rate differentials across the globe, triggered significant flows of financial capital to the emerging market and developing countries.  As a result, many countries experienced sharp appreciations of their currencies and associated concerns about the development of asset bubbles.

Two of these countries were South Korea and South Africa.  Between 2009 and 2011 currency appreciation in each country was from close to 20 and 40 percent respectively and stock prices doubled.  This triggered significant political debates in each country over what to do.  Interest groups lined up along predictable lines.  In South Korea and South Africa the financial sector was dead set against any intervention by the government, as they perceived themselves to be “winners” of the cheap credit and cross-border finance entering and leaving these nations at will.  In South Korea, exporters were split.  Some were in lock-step with the financial sector, especially the shipping industry that was using the carry trade to not only hedge currency risk but also to speculate for more profit.  Others, such as US auto firms operating in South Korea, were quite concerned about the impact of exchange rate volatility on their competitiveness and asked the government to take action.  However, the financial authorities in South Korea still had the 1990s and global financial crisis in their memory and overpowered interest groups to create a set of traditional and innovative measures from taxes on inflows to limits on the speculative positions of foreign exchange derivatives.

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The Barriers to Full Employment Are Political, Not Economic

Malcolm Sawyer

In “Political Aspects of Full Employment,” a still widely cited article from 1943, Michal Kalecki raised many questions about the ability of a capitalist economy to maintain prolonged full employment — even though in light of the understanding of tools for stimulating aggregate demand and the use of fiscal policy brought about by the Keynesian ‘revolution.’ In a series of papers, Kalecki showed that the arguments against the use of budget deficits to secure full employment were invalid. Among these arguments, and their rebuttals, were that:

> deficits add to government debt, which is a burden on future generations
(rather, the government debt is bonds owned by individuals, pension funds etc.);

> deficits crowd out investment
(rather, they allow savings to take place and enable investment); and

> deficits cause higher interest rates
(the current situation makes the rebuttal to this clear).

Yet those arguments are still trotted out.

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How we learned to stop worrying and love capital controls: From Cyprus, to Iceland, to Brazil

Ilene Grabel

There’s a political cartoon that I’ve had in mind these days when I think about recent changes in the international political economy of capital controls.  Picture a sailboat in stiff winds on rough seas. The wind in the sails is labeled something like “Cyprus, Iceland, Brazil, China, or the Global South.” The boat is labeled “S.S. Capital Controls.” The International Monetary Fund’s (IMF) Managing Director Christine Lagarde is at the tiller, and she barks at her worry-stricken shipmate—“No, don’t trim the sails!” But we also see that the ship is trailing its anchor, which is labeled  “Neoliberalism.”

I begin with this image because I think it captures well the conflicted processes surrounding capital controls during the current global financial crisis.  Many extraordinary things have happened during the crisis. One is that we’ve come to learn an awful lot about countries like Iceland and Cyprus, countries that we could safely say weren’t even at the periphery of any discussions of the global financial system until 2008.  Another is that capital controls (so long anathema to neo-liberals) have been successfully “re-branded” as a tool of prudential financial management, even within the corridors of the IMF.  In a recent paper, I examine the myriad factors that have enabled this re-branding.  As with most rebranding exercises there is uncertainty about whether the framing will prove sufficiently sticky, especially in the context of tensions and countervailing impulses at the IMF and elsewhere.

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Marketing derivatives: The role of development institutions

Sasha Breger, Guest Blogger

Why are development institutions so supportive of the derivatives industry? Given what we now know about derivative instruments and markets—they are complex, volatile, poorly regulated, crisis-prone, and dominated by very large financial firms—the alliance between prominent global development agencies like the World Bank and UNCTAD and the derivatives industry gives real reason for concern.  In fact, this appears to be yet another instance in which the interests of the development establishment seem grossly misaligned relative to the goals of the constituencies they purport serve.

As I detail in my recent book on the topic, the governments of commodity dependent economies, agricultural firms involved in commodity trading and processing, and even small farmers have been targeted by these two institutions as actors who stand to benefit from more derivatives trading and the expansion of derivative markets across the developing world. The basic argument is that the welfare of these actors depends critically on prices in global commodities markets.  By using derivatives to manage the risk of price fluctuation, tax and export revenues, business revenues and personal incomes could be stabilized and even raised in some cases.

To this end, UNCTAD has been recommending the establishment of local commodity exchanges in a variety of developing countries, exchanges that can both facilitate spot exchanges as well as provide opportunities for forward contracting, and futures and options trading.  Similarly, though with a slightly different orientation, the World Bank has been recommending that various developing country parties (public and private) trade on global derivatives exchanges (located mostly in the West) in order to mitigate price risk.

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The WTO “Papal” Conclave

Robin Broad

Let’s start today’s trivia quiz with the Rome Papal conclave:  Name 2 of the last 3 popes. And, for a bonus question, tell us something about the process by which a new pope is chosen.

And now let’s switch to the Geneva WTO Director General conclave – or more accurately the choosing of the new head of the World Trade Organization: Name 2 of the last 3 WTO heads. Tell us something about the process by which a new Director General of the WTO is chosen. And, wild card question, name even 1 of the 9 candidates vying to be head of the WTO.

If you are like most people I surveyed, you know more about the selection of the pope than that of the WTO head.  And, even if you do know some of the WTO candidates, you probably don’t have much of a sense of who, if anyone, might be a better candidate for those of us who care about economic governance that balances social, environmental, and economic issues.

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