Protecting Money or People?

Amid climate change, what’s more important?

James K. Boyce

the latest round of international climate talks this month in Lima, Peru, melting glaciers in the Andes and recent droughts provided a fitting backdrop for the negotiators’ recognition that it is too late to prevent climate change, no matter how fast we ultimately act to limit it. They now confront an issue that many had hoped to avoid: adaptation.

Adapting to climate change will carry a high price tag. Sea walls are needed to protect coastal areas against floods, such as those in the New York area when Superstorm Sandy struck in 2012. We need early-warning and evacuation systems to protect against human tragedies, such as those caused by Typhoon Haiyan in the Philippines in 2013 and by Hurricane Katrina in New Orleans in 2005.

Cooling centers and emergency services must be created to cope with heat waves, such as the one that killed 70,000 in Europe in 2003. Water projects are needed to protect farmers and herders from extreme droughts, such as the one that gripped the Horn of Africa in 2011. Large-scale replanting of forests with new species will be needed to keep pace as temperature gradients shift toward the poles.

Because adaptation won’t come cheap, we must decide which investments are worth the cost.

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Bretton Woods After 70 Years

“The End of (Monetary) History”

Erinç Yeldan

As we are about to wrap up 2014, it may prove worthwhile to celebrate the 70th anniversary of one of the most innovative and exciting episodes of homo economicus: The Bretton Woods Monetary Conference. Convened in 1944 at the Mount Washington Hotel in New Hampshire, the conference established the World Bank and the IMF (later referred to as the “Bretton Woods Institutions”) and set the gold standard at $35.00 an ounce with fixed rates of exchange to the U.S. dollar.

Based on John Maynard Keynes’s famous dictum, “let finance be a national matter,” and on the productivity advances of Fordist technology and institutional structures, the global economy expanded at a fast rate over the postwar era, from 1950 to the mid-1970s. Per capita global output increased by 2.9% per year over this period, which later came to be referred to as the “Golden Age of capitalism.” (In contrast, the average rate of per capita growth over the whole century has been estimated at 1.6%.)

The conditions that created the Golden Age were exhausted by the late 1960s, however, as industrial profit rates started to decline in the United States and continental Europe due to increased competition, particularly from the Asian “tigers” or “dragons” (Republic of Korea, Taiwan, Hong Kong, and Singapore). In the meantime, Western banks were severely constrained in their ability to recycle the massive petro-dollar funds and the domestic savings of the newly emerging baby-boomer generation. Trumpets for the “end financial repression” intensified with the so-called McKinnon-Shaw-Fama hypotheses of financial deregulation and efficient markets. A global process of financialization was commenced, lifting its logic of short-termism, liquidity, flexibility, and immense capital mobility over objectives of long-term industrialization, sustainable development, and poverty alleviation with social-welfare driven states.

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The Failed Austerity Experiment in the UK

Philip Arestis and Malcolm Sawyer

A general election in the UK is set to be held in May 2015, which will mark the end of a five year period of Conservative-Liberal Democrat coalition government. This government set in 2010 as its prime policy target the elimination of what they have tended to refer to as Labour’s deficit and “clearing up the mess.” In an “emergency budget” introduced just over a month after coming into power (June 2010), Chancellor of the Exchequer George Osborne introduced some emergency cuts amounting to £6 billion—which can be compared with a deficit of over £150 billions. Initial plans were put in place to come close to eliminating the deficit over the lifetime of the Parliament, reinforced by the Spending Review of October 2010. These plans were based on “expansionary fiscal consolidation” arguments, along with a number others. “The most urgent task facing this country is to implement an accelerated plan to reduce the deficit. Reducing the deficit is a necessary precondition for sustained economic growth. To continue with the existing fiscal plans would put the recovery at risk, given the scale of the challenge. High levels of debt also put an unfair burden on future generations. …The Government has therefore set a forward-looking fiscal mandate to achieve cyclically adjusted current balance by the end of the rolling, five-year forecast period” (HM Treasury Budget 2010, emphasis added).

It was not only that the budget deficit was to be largely eliminated over a five year period, but that it would go alongside a booming economy with the output gap (between actual output and potential output) closed. The ability of the government to achieve a close to balanced budget and a closed output gap was validated by the newly established and “independent” (of government) Office for Budget Responsibility. This was accompanied by forecasts that investment and exports would recover and grow rapidly, and this would in effect enable the budget deficit to decline and the economy to grow.

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A 2 x 4 x 20 Climate Change Agreement

Edward B. Barbier

On November 12, President Barack Obama announced what he called a “historic agreement” on climate change between the United States and China. The gist of the bilateral pact is that the United States has pledged to reduce greenhouse gas (GHG) emissions to 17 percent below 2005 levels by 2020, and 26 to 28 percent below these levels by 2025. China aims to cap its total GHG emissions by 2030, if not sooner. Other commitments and details of this bilateral deal can be found in David Baliol’s excellent summary in Scientific American.

There are sound economic grounds for this agreement. In a paper published by the Kiel Institute for World Economy earlier this year, Johnson Gwatipedza and I show that growing trade and capital flows between the United States and China also provide a powerful incentive for cooperation on jointly reducing GHG emissions. Economists refer to this incentive as issue linkage: increasing economic ties between the U.S. and China fosters their mutual interest to negotiate a bilateral deal on GHGs. Our paper also suggests that any agreed national targets should be differentiated, which means that each country should adopt an emission reduction strategy that is suitable to its economic structure and stage of development. It therefore makes economic sense that the relatively rich United States proposes GHG limits to be achieved in 2020 and 2025, whereas an industrializing economy such as China does not start capping emissions until 2030.

The bilateral agreement between China and the United States has also sparked hope of an eventual global climate change deal. As David Baliol writes: “The agreement between the two countries that together emit more than 40 percent of global CO2 pollution suggests a strong deal will be signed by the world’s nations in Paris in 2015, under the terms of the United Nations Framework Convention on Climate Change.” One further encouraging sign is that the third largest global emitter of GHGs—the European Union of 28 countries—has also pledged to cut greenhouse gas pollution by 40 percent below 1990 levels by 2030. Clearly, as suggested by Jaime de Melo and Mariana Vijl in their Green Growth Knowledge Platform blog post, “the recent China-US announcement of national targets calling for substantial additional efforts by both is a step in the right direction.”

Unfortunately, expectations that this “step in the right direction” will turn into a signed global deal by 2015 in Paris may be a leap of faith. Instead, a more realistic path to achieving substantial and quick reductions in global GHGs might be a “2 x 4 x 20” climate change agreement.

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The IMF's Perestroika Moment

Cornel Ban and Kevin Gallagher

The economic crisis that struck in 2008 challenged many myths. One of them is the myth of the International Monetary Fund (IMF) as a global agent of economic orthodoxy. Since the 1970s, the IMF has been heavily criticized for being insensitive to the diversity of domestic conditions. Its rigid commitment to a conservative view of economic development has been dubbed the “Washington Consensus.” However, we argue in a forthcoming special issue of the journal Governance that this conventional wisdom is outdated. The IMF is not what it used to be.

In some of its policy thinking the IMF has undergone deep transformations that often point in a more Keynesian direction. The most radical change has been in the IMF’s research on the systemic risks posed by the interconnectedness of global banks, followed by its views on capital controls, and its interventions in the austerity debate.

Surprising its critics, the IMF has endorsed capital controls—of which it was a staunch opponent for decades—as well as state spending to stimulate the economy under certain conditions. Moreover, it has been sharply critical of the theory—popular with E.U. institutions—that spending cuts reignite growth and has become an advocate of slightly more progressive taxation systems. The IMF now holds a strong preference for more spending on public investment and safety nets as the main instruments in the stimulus toolbox.

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$2 Lost for Every $1 Gained

The Single Fact That Shows How the Global Financial System Fails Developing Countries

Jesse Griffiths, Guest Blogger

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad).

This will make you angry. After six months crunching all the best data from international institutions, here’s what we found: for every dollar developing countries have earned since 2008, they have lost $2.07. In fact, lost resources have averaged over 10% of their Gross Domestic Product (GDP).

We’re not talking about all flows of money out of developing countries, just the lost resources: money that should have been invested to support their development, but instead was drained out. Twice as much is leaking—or rather flooding—out than the combined inflows of aid, investment, charitable donations and migrant remittances.

Losses vs. Inflows

The graphic above shows the proportionate losses of resources compared to one dollar of inflows. The figures are in U.S. cents, and are based on the average inflows and losses between 2008 and 2011. The four main lost resources shown in the graphic point to the problems, but also the solutions. Read the rest of this entry »

Strategies for Addressing Capital Flight, Part 5

A Global Compact Against Capital Flight and Safe Havens

James K. Boyce and Léonce Ndikumana

This is the final post of a five-part series, drawn from Political Economy Research Institute (PERI) working paper No. 361, “Strategies for Addressing Capital Flight,” by James K. Boyce and Léonce Ndikumana, available here. The paper is forthcoming in Capital Flight from Africa: Causes, Effects and Policy Issues, S.I. Ajayi, and Leonce Ndikumana, eds. (Oxford University Press, 2014), accessible here.

Capital flight from Africa is not just a national problem. Nor is it only a continental problem. It is a global problem, and as such it requires a global solution. Institutional reforms at the national level are critically needed to discourage capital flight and tax evasion, but these will not be fully effective unless supported by international efforts to tackle corporate sector corruption, banking secrecy, and other dodgy business practices in the global trading and financial systems.

Strategies at the national level

While African countries have undertaken a number of efforts to combat corruption, money laundering, tax evasion, and illicit financial flows, the scope of these efforts and their degree of effectiveness remain uneven. Even where relevant agencies have been established, they often face serious financial, technical, and human capacity constraints. Moreover, efforts often are spread too thinly across a multitude of agencies, with little systematic coordination and few synergies among them.

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Ricardo Hausmann’s Tall Tales

Misunderstanding South Africa’s Foreign Economic Relations and Worker Productivity

Patrick Bond

South Africa’s class struggle generated two gold medals for performance in 2014. In February, PricewaterhouseCoopers identified the Johannesburg bourgeoisie as, according to The Times, “the world leader in money-laundering, bribery and corruption, procurement fraud, asset misappropriation, and cybercrime,” with 77% of all internal fraud committed by senior and middle management. (This may help explain SA’s 2013 rating as, according to the International Monetary Fund, the third most profitable country for corporations among major economies.)

Then in September, for the third year in a row, the World Economic Forum’s Global Competitiveness Report ranked the South African proletariat as the world’s most militant out of 144 countries surveyed. The intensity of South Africa’s class struggle is reflected in the war of ideas just as much as in the strike wave that commenced in 2012.

South Africa’s leading corporate-funded strategic think-tank is the Centre for Development and Enterprise (CDE). Last week’s input to CDE by Harvard Center for International Development director Ricardo Hausmann—“Raising South Africa’s ‘speed limit’”—makes two central claims about, first, the current account and, second, the allegedly high cost and low productivity of labour.

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Renewed Battle on Climate Change

Martin Khor

It’s that time of year again when the United Nations gathers 192 countries and thousands of people to discuss actions to tackle climate change.

This year’s climate conference is in Lima, the capital of Peru. The country is home to 51 indigenous peoples who comprise 45% of the population of 30 million.

At the time of the Spanish invasion around 1500, the Incas were dominant in the Andes, and they had a sophisticated civilisation with cities, temples and buildings in the mountains that are a marvel admired by legions of visitors, epitomised by the famed ancient city of Machu Picchu.

Unfortunately, many of the indigenous people died after the Spanish conquest due to diseases brought in by the invaders, and to battles and ill treatment at the hands of the conquerors.

Peru is also famous for being the centre of origin of the potato. It was here that the local communities, thousands of years ago, learnt to grow that crop which today is the staple food in large parts of the world.

It is thus fitting, geography-wise, that Peru is hosting the 2014 conference.

The first week of this two-week affair has already passed and it exposed the difficulties in finding solutions to possibly the biggest threat to humanity’s survival.

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The BRICS Alliance: Challenges and Opportunities for South Africa and Africa

William Gumede, Guest Blogger

William Gumede is associate professor, School of Governance, University of the Witwatersrand (Johannesburg), and chairperson of the Democracy Works Foundation. His most recent book is South Africa in BRICS: Salvation or Ruination (Tafelberg).

This article is based on a longer paper, “South Africa and the BRICS alliance,” from Shifting Power: Critical Perspectives on Emerging Economies (Transnational Institute).

One of the key drivers of African growth in the past decade has been the seemingly unlimited appetite for African commodities in fast-growing emerging markets—mainly in BRICS countries such as China and India.

According to South Africa’s Standard Bank, BRICS countries’ trade with African countries jumped 70% in the past five years: In 2013, China’s share of this trade was 61%; India’s, 21%; Brazil’s, 8%; South Africa’s, 7%; and Russia’s, 3%. In 2013, BRICS members’ trade with Africa stood at $350 billion.

Meanwhile, according to South Africa’s Industrial Development Corporation, in 2012 Africa (excluding South Africa) was the source of 15% of overall BRICS imports, or $420 billion out of $2.8 trillion. In 2013, South Africa’s trade with Africa stood at $25 billion—mostly in manufactured goods.

The big question, however, is to what extent the emergence of these new economies has benefited Africa? In the case of South Africa, which is both a member of BRICS and also an African country, what has engagement with BRICS meant for its economy, society and its relationships with its African neighbours?

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