The Reregulation of Cross-Border Finance

Kevin Gallagher

Regular Triple Crisis contributor Kevin Gallagher, of Boston University and the Global Economic Governance Initiative (GEGI) summarizes the key arguments in his new book Ruling Capital: Emerging Markets and the Reregulation of Cross-Border Finance. He focuses on the re-emergence of capital controls since the 2008 financial crisis—with developing-country governments reining in cross-border capital flows from “flying into their country, flying out”—and how the “policy space” emerged for such measures.

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Bracing for Another Storm in Emerging Markets

Kevin P. Gallagher

In 2012, Brazilian President Dilma Roussef scolded U.S. Federal Reserve Chairman Ben Bernanke’s monetary easing policies for creating a “monetary tsunami”: Financial flows to emerging markets that were appreciating currencies, causing asset bubbles, and generally exporting financial instability to the developing world.

Now, as growth increases in the United States and interest rates follow, the tide is turning in emerging markets. Many countries may be facing capital flight and exchange-rate depreciation that could lead to financial instability and weak growth for years to come.

The Brazilian president had a point. Until recently U.S. banks wouldn’t lend in the United States despite the unconventionally low interest rates. There was too little demand in the U.S. economy and emerging market prospects seemed more lucrative.

From 2009 to 2013, countries like Brazil, South Korea, Chile, Colombia, Indonesia, and Taiwan all had wide interest rate differentials with the United States and experienced massive surges of capital flows. The differential between Brazil and the U.S. was more than 10 percentage points for a while—a much better bet than the slow growth in the United States.

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Climate Policy as Wealth Creation, Part 5

James K. Boyce

This is the final installment of a five-part series on climate policy adapted from regular Triple Crisis contributor James K. Boyce’s March 31 lecture for the Climate Change Series at the University of Pittsburgh Honors College. This installment lays out his case for a cap-and-dividend policy, which Boyce argues would put into practice the “widely held philosophical principle … that we all own the gifts of creation in equal and common measure.”  The first four installments of the series are available here, here, here, and here.

The full lecture and subsequent discussion are available, as streaming video, through the University of Pittsburgh website. Click here or on the image below.

The Case for Cap and Dividend

A carbon price is a regressive tax, one that hits the poor harder than the rich, as a proportion of their incomes. Because fuels are a necessity, not a luxury, they occupy a bigger share of the family budget of low-income families than they do of middle-income families, and a bigger share for middle-income families than for high-income families. As you go up the income scale, however, you actually have a bigger carbon footprint—you tend to consume more fuels and more things that are produced and distributed using fuels. You consume more of everything; that’s what being affluent is about. If you’re low-income, you consume less. So in absolute amounts, if you price carbon, high-income folks are going to pay more than low-income folks.

Well, under a policy with a carbon price, households’ purchasing power is being eroded by that big price increase, that big tax increase. But money is coming back to them in the form of the dividend. Because income and expenditure are so skewed towards the wealthy, the mean—the average amount money coming in from the carbon price and being paid back out in equal dividends—is above the median—the amount that the “middle” person pays. So more than 50% of the people would get back more than they pay in under such a policy. As those prices are going up, then, people will say, “I don’t mind because I’m getting my share back in a very visible and concrete fashion.” I would submit to you that it’s politically kind of fantastical to imagine that widespread and durable public support for a climate policy that rises energy prices will succeed in any other way.

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Practicing What They Preach: The IMF and Capital Controls

Kevin P. Gallagher and Yuan Tian

Regular Triple Crisis contributor Kevin P. Gallagher is an associate professor of international relations at Boston University and co-director of the Global Economic Governance Initiative (GEGI) and Global Development Policy Program. Yuan Tian is the CFLP Pre-Doctoral Fellow for GEGI’s Task Force on Regulating Global Capital Flows. She is currently a third-year PhD student in economics at Boston University.

In the wake of the 2008 financial crisis, the International Monetary Fund (IMF) began to publicly express support for ‘capital controls’ in emerging markets.  In addition to public statements, and the endorsement of controls in Iceland, Ukraine, and beyond, the IMF underwent a systematic re-evaluation of Fund policy on the matter, and published an official view on the economics of capital flows in 2012.  To the surprise of many who witnessed the IMF’s scorn for regulating capital flows in the 1990s, in this new ‘view’ the IMF concludes that capital account liberalization is not always the optimal policy and that there are situations where capital controls—rebranded as ‘capital flow management measures (CFMs)’—are appropriate.

It is well known that the IMF claims that it has changed its tune, but has it really changed its ways?

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Turkey’s Hot-Money Problem

Bilge Erten and José Antonio Ocampo, Guest Bloggers

The ongoing financial volatility in emerging economies is fueling debate about whether the so-called “Fragile Five” – Brazil, India, Indonesia, South Africa, and Turkey – should be viewed as victims of advanced countries’ monetary policies or victims of their own excessive integration into global financial markets. To answer that question requires examining their different policy responses to monetary expansion – and the different levels of risk that these responses have created.

Although all of the Fragile Five – identified based on their twin fiscal and current-account deficits, which make them particularly vulnerable to capital-flow volatility – have adopted some macroprudential measures since the global financial crisis, the mix of such policies, and their outcomes, has varied substantially. Whereas Brazil, India, and Indonesia have responded to surging inflows with new capital-account regulations, South Africa and Turkey have allowed capital to flow freely across their borders.

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Turkey's Hot-Money Problem

Bilge Erten and José Antonio Ocampo, Guest Bloggers

The ongoing financial volatility in emerging economies is fueling debate about whether the so-called “Fragile Five” – Brazil, India, Indonesia, South Africa, and Turkey – should be viewed as victims of advanced countries’ monetary policies or victims of their own excessive integration into global financial markets. To answer that question requires examining their different policy responses to monetary expansion – and the different levels of risk that these responses have created.

Although all of the Fragile Five – identified based on their twin fiscal and current-account deficits, which make them particularly vulnerable to capital-flow volatility – have adopted some macroprudential measures since the global financial crisis, the mix of such policies, and their outcomes, has varied substantially. Whereas Brazil, India, and Indonesia have responded to surging inflows with new capital-account regulations, South Africa and Turkey have allowed capital to flow freely across their borders.

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Emerging Markets: Deja vu all over again

Jayati Ghosh

So now we have witnessed yet another sell-off of emerging market assets in global financial markets in the last week of January, which has caused currencies to depreciate from Argentina to Indonesia and many countries in between. For those who had seen it coming,  it was one more reminder of the extreme fragility generated by global financial integration, and the problems that such exposure can create for developing countries whether or not they also have specifically domestic economic concerns. Essentially, these markets are now so peculiarly integrated into the global financial system that they are part of the collateral damage whenever U.S. monetary or fiscal policy changes.

Indeed, the first round of such capital flight in the middle of 2013 did not even require any actual policy change in the United States. Rather it was generated simply by talk, when U.S. Federal Reserve Chairman Ben Bernanke announced the likely possibility of tapering down the massive monetary stimulus that had been feeding capital markets with huge amounts of liquidity since 2009. Suddenly, “taper” entered the financial lexicon of developing countries with an extremely adverse connotation, as the fear of capital inflows to emerging markets reducing or even reversing in the wake of such a move caused anticipatory movements, often by residents of the countries themselves rather than only external investors.

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Is a New Economic Crisis at Hand?

Cross-posted from The Star (Malaysia)

AT the end of last week, several developing countries saw sharp falls in their currency as well as stock market values, prompting the question of whether it is the start of a wider economic crisis.

The sell-off in emerging economies also spilled over to the American and European stock markets, thus causing global turmoil.

Malaysia was not among the most badly affected, but the ringgit also declined in line with the trend by 1.1% against the US dollar last week; it has fallen 1.7% so far this year.

An American market analyst termed it an “emerging market flu”, and several global media reports tend to focus on weaknesses in individual developing countries.

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