Once we are up to speed, then what?

Edward B. Barbier
(also available in Portuguese at INESC)

The survey by Gary Gorton and Andrew Metrick on what happened during the 2008-9 financial crisis, “Getting Up To Speed on the Financial Crisis,” to be published by the Journal of Economic Literature, focuses on an important cause of this crisis: global imbalances in the world economy.  As Gorton and Metrick suggest, such imbalances include the “institutional cash pools” caused by sovereign wealth funds and the “global savings glut”.

While the United States has been amassing large current account deficits, China, Japan, other Asian emerging market economies and some oil exporters have been generating trade surpluses.  Similar structural imbalances were occurring within major regional economies, such as the European Union, where the large current account surpluses of France and Germany were offset by deficits in Ireland, Greece, Portugal, Spain and the United Kingdom.  The result was that economies with chronic trade deficits were receiving large and sustained capital inflows from surplus economies seeking new asset investments. These massive credit flows precipitated the bubble and subsequent bust in financial markets, and the persistence of such global imbalances continues to add to the uncertainty and instability of the world economy.

Understanding how the global imbalances caused the financial crisis and subsequent recession is important. But addressing these imbalances in the world economy will need a much more profound change in global economic development.

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Up to Speed, But Lagging Behind

Matías Vernengo

Gary Gorton and Andrew Metrick have just produced a survey on the vast literature on what happened during the last financial crisis (and to a lesser extent why it did) titled “Getting Up To Speed on the Financial Crisis,” to be published by the Journal of Economic Literature. They used only 16 documents, between papers from ‘top journals,’ reports and speeches and congressional testimonies. It must be noted that the objective of the review is to provide “a one-weekend-reader’s guide” to the crisis.

The biggest problem with their paper is not the limited number of documents reviewed, which seem to be fairly representative of conventional views on the financial crisis, but the limitations of what the mainstream of the profession knows about the crisis, and worse, what the profession clearly does not know it does not know, the unknown unknowns, so to speak. And that is why ignoring heterodox and progressive contributions has been very harmful for the profession. I will use three of their cited documents as an example of what I mean.

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Household Profligacy vs. Rentier Neoliberalism as a cause of Household Indebtedness

Arjun Jayadev

American households have been profligate spenders over the last 30 years and have lived beyond their means for too long. Or so it is proclaimed repeatedly in the media and among policy makers. What else could explain the fact that household debt to income ratios have increased while the personal savings rate has fallen?

As it turns out, there are other ways in which debt-income ratios can increase other than actually borrowing more. Specifically, income can grow slower than the real interest burden. The latter in turn depends on both nominal interest rates and inflation. In the case of public debt, there is a long and distinguished literature trying to separate the relevant importance of these effects in periods of leveraging and deleveraging. Interestingly enough, although household debt exceeds public debt substantially (look here at Table L1), there has been virtually no research trying to assess the importance of each channel.

Josh Mason and I have attempted to address this in a new working paper.  The basic idea of our paper is to apply the standard equation used to analyze government debt trajectories to the debt of the household sector. We decompose changes in the sector’s debt-income ratio into a primary deficit (i.e. net new borrowing), nominal interest rates, real income growth and inflation. Using this approach, we find some interesting and underappreciated patterns.

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Oil and Environmental Damage

Fander Falconí

The recent upholding of the ruling against Chevron Corporation by the Provincial Court of Justice of Sucumbíos, Ecuador, comes as an inevitable reminder of the decades-long situation in Nigeria, Africa, with the Shell Oil Company – the one with the sea-shell logo. In Nigeria, the consequences have been disastrous.

It is worth pointing out that inhabitants of Ecuadorian Amazonia, organized in the Amazonia Defense Coalition, state that Texaco, acquired by Chevron in 2001, is responsible for social and environmental damages caused by oil-related activities carried out over the past 26 years. The company was sued for damages and a judgment was pronounced. Although Chevron appealed this decision, the ruling has been fully upheld and the company is now to pay a USD 18 billion damage award. This is a case involving Ecuador. Not the government but the judicial system is responsible for determining the socio-environmental liabilities of the company.

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Economists to Issue Statement on Capital Controls and the TransPacific Partnership Agreement

GDAE and IPS circulated the following sign-on letter for economists demanding that the TransPacific Partnership Agreement (TPPA), now being negotiated, exclude current proposed restrictions on the use of capital account regulations to prevent and mitigate financial crises. They are seeking signatures from economists in the nine current TPPA countries: Australia, Brunei, Chile, Malaysia, Peru, New Zealand, Singapore, United States, and Vietnam.

Economists from these countries who wish to sign on to this call for action please send your name, affiliation and country to: gdaeannounce@tufts.edu.

The TPPA is what US President Barack Obama hails as a “21st Century Trade Agreement” that improves upon and rectifies past problems in US trade and investment treaties.  Thus this is a particularly opportune time to weigh in, as a major TPPA negotiation round will begin in Melbourne, Australia on March 1, 2012.

Since the financial crisis began, the Asian Development Bank, the United Nations Economic and Social Commission for the Asia-Pacific, the International Monetary Fund and others have all agreed that capital account regulations are legitimate tools to buffer nations from volatile capital flows.  However, the U.S. government has used trade agreements to severely restrict a nation’s ability to deploy such regulations.

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Recipe for Disaster

Jayati Ghosh

It is clear that the raging policy debate on allowing multinational companies a greater role in the Indian retail sector, particularly food retail, is not yet over. Already Commerce Minister Anand Sharma has declared that the decision to hold back on liberalising rules of foreign direct investment (FDI) in this sector following the political backlash is only to provide breathing space for the government. It is only too likely that the United Progressive Alliance (UPA) government will seek to push through this “reform” at some point over the next two years of its term.

This makes it all the more important for Indian citizens to become aware of the extent of concentration and control of multinational companies in global food distribution, and the implications of this for both producers and consumers of food. These aspects are drawn out in some recent studies that deserve much more public attention.

A new report produced by Timothy Wise and Sophia Murphy (“Resolving the Food Crisis: Assessing Global Policy Reforms since 2007”, GDAE and IATP, January 2012) makes several interesting points about how the global food crisis is related not just to medium-term supply factors that reflect the effects of more open trade and the policy neglect of agriculture, but also to the biofuel subsidies that have diverted grain acreage and production. Recently, financial speculation too has played a role in pushing up prices of food. But Wise and Murphy also highlight a feature that is often ignored in policy discussion on the food crisis: market power in the food system.

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Will the U.S.-Colombia FTA benefit Colombia? No

Kevin P. Gallagher

The now-official U.S.–Colombia Free Trade Agreement (FTA) will dampen growth and make it harder for Colombia to put in place policies for innovation and industrialization. Colombia will also have fewer tools to confront financial instability, thus forcing it to work twice as hard to maximize the benefits of the agreement.

The agreement will bring only small gains to Colombia—and these will come at a significant cost. In terms of growth, the impact will be negligible, given that much of the U.S. market was already open to Colombia. Indeed, the impact may even be slightly negative. The Economic Commission for Latin America and the Caribbean (ECLAC) estimated in a 2007 study that Colombia will suffer losses of up to $75 million, or 0.1 percent of GDP, as a result of the trade agreement. According to the study, competition from U.S. imports will generate losses to Colombia’s textiles, apparel, food, and heavy manufacturing industries, outweighing the gains from increased petroleum, mining and other exports to the United States.

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The World Bank in Yemen prior to the Arab Spring

Ali Kadri

Not all bad economic policies kill people slowly, some do so very quickly. One such policy was the lifting of subsidies on fuel and other essentials in Yemen in 2005. Immediately after a presidential decision to bypass parliament and remove subsidies, people demonstrated their anger and many died as police and army forces fired into the crowds. The advice to carry out these draconian reforms was contemplated late in 2004 at a conference organised by the World Bank aimed at reducing the government deficit by removal of subsidies.

At the time of the conference, real GDP growth was anticipated at 3.9 percent. Inflation had gone down to 12 from 14 percent. Reserves were at 17 months of imports (7.5 billion) and the deficit was at 5.5 percent of GDP. External debt was at 41 percent of GDP or about 5 billion US$. Unemployment figures were flimsy, but there were two figures set forth: either 18 or 34 percent with the latter estimate being slightly more acceptable. These were relatively encouraging figures for Yemen, which is a Least Developed Country. In the midst of abjection, unemployment figure are meaningless anyways. Nearly half of Yemeni children suffer malnutrition. The average salary for a family of six was about one hundred dollars a month in the city- while conditions are worse in the countryside. More than half of the population reside in absolute poverty.

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Will IMF neoliberalism make a comeback in Africa via Tunisia?

Patrick Bond and Khadija Sharife, guest blogger

With International Monetary Fund (IMF) managing director Christine Lagarde in Tunisia last week, the stage was set for ideological war over the progress of democratic revolutions.

Until 27-year-old fruit seller Mohamed Bouazizi committed suicide by immolation in the provincial town of Sidi Bouzid, Tunisia was packaged as an IMF success story. In 2008, dictator Zine El Abidine Ben Ali was embraced by Lagarde’s predecessor, Dominique Strauss-Kahn: “Economic policy adopted here is a sound policy and is the best model for many emerging countries.”

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Whatever happened to the G20?

Jayati Ghosh

For a while, in the immediate aftermath of the Global Financial Crisis of late 2008, the G20 came into its own. This group of (self-styled) leaders of the global economy, representing governments in nations contributing more than half of global GDP, came together in April 2009 to pledge a co-ordinated response to unprecedented global economic threats. This not only had a role in staving off immediate disaster through the implementation of broadly Keynesian responses, but also promise more for the future. This was not just vainglorious self-importance on the part of these governments. There was a genuine absence of global institutions that were sufficiently small as to be coherent (something that was not as possible in the United Nations, given its size and structure) or even seen as generally reliable, flexible and aware (given how the IMF has discredited itself by awarding good marks to so many economies just before they imploded financially).

But since then, the drama in the world economy could even have been Hamlet without the Prince of Denmark, as Act 2 of the global financial crisis unfolds. In its subsequent meetings, the G20 has been much more about style than substance – and sometimes the style has also been lacking. At least, in its Seoul meeting in 2010, the G20 committed themselves to promoting inclusive and sustainable economic growth. They argued that ‘for prosperity to be sustained it must be shared’ and also endorsed ‘green growth’, which promised to decouple economic expansion from environmental degradation.

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