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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The Danger of Trusting Corporations to Lead the Fight Against World Hunger

Timothy A. Wise

Cross-posted from Global Post.

GENEVA — The world’s elites gathered in Davos, Switzerland last week for the annual World Economic Forum (WEF), paying $20,000 a person for the privilege of offering grand solutions to other people’s problems.

I was down the road in Geneva attending a decidedly low-brow, two-day expert workshop on agricultural trade and development. But downwind we could almost smell their champagne fondue, which no doubt helped the powers-that-be focus on the global food crisis.

WEF’s “New Vision for Agriculture” is their answer, which, along with the G8 nations’ “New Alliance for Food Security and Nutrition,” represent the bold new initiatives from the rich world to solve poor people’s hunger.

For all the newness, the world’s small-scale farmers can be forgiven for seeing little more than new bottles for some old wine, which they still can’t afford. The old wine includes an overwhelming focus on technological solutions, industrial-scale farms, and high-input methods often poorly suited to small-scale farmers.

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The Global Crisis Reaches Turkey

Özgür Orhangazi, Guest Blogger

Since the late 1970s, “developing and emerging economies” (DEEs) have experienced boom-bust cycles of private capital flows that led to severe crises in most cases. The latest boom began in the aftermath of the 2008 U.S. financial crisis, fed by the quantitative easing policies of the Federal Reserve and the European Central Bank (ECB). Much of Fed’s injections of credit into the system ended up in the stock markets of advanced economies and even more in the DEEs.

This latest wave of capital flows into DEEs led to currency appreciations, growing current account deficits, credit expansions and asset bubbles. As Akyüz (2013) has noted, this boom “has been creating or adding to macroeconomic imbalances and financial fragility in several recipient countries in large part because they have been shy in applying brakes on them” (p. 89). The way that these boom-bust cycles begin is usually similar (e.g., rapid expansion of liquidity and low interest rates in the United States), but they end in different ways. This time the decision of the Fed to “taper” its injections created a slowdown in capital flows to these economies.

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Breaking the Impasse of 2013

Sunita Narain

Cross-posted from Center for Science and Environment.

When I look back at 2013, I hear a cacophony. There was huge dissent about the way we are mismanaging coal reserves; the Supreme Court shut down iron ore mining in Goa; there was outcry about rampant sand mining and the havoc it is wreaking on rivers. There were equally loud calls for the need for green clearance to all projects, from hydropower projects in the Himalayas to mines in dense forests of central India. One side wanted to shut everything; another wanted to open up everything.

The polarisation was absolute. This has not benefited the environment’s cause; it has certainly not changed the way we will manage our natural resources for sustainable and inclusive growth. This impasse does not work.

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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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Global Dollar-Based Financial Fragility in the 2000s, Part 1

This is the first in a four-part series excerpted from the Political Economy Research Institute (University of Massachusetts-Amherst) working paper “The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach,” by Junji Tokunaga and Gerald Epstein. Tokunaga is an Associate Professor in the Department of Economics and Management, Wako University, Tokyo. Gerald Epstein is a Professor in the Department of Economics, University of Massachusetts-Amherst, and Co-Director of the Political Economy Research Institute (PERI). The full paper is available here.

The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach

Junji Tokunaga and Gerald Epstein

Global financing patterns have been at the center of debates on the global financial crisis in recent years. The global imbalance view, a prominent hypothesis, attributes the financial crisis to excess saving over investment in emerging market countries which have run current account surplus since the end of the 1990s. The excess saving flowed into advanced countries running current account deficits, particularly the U.S., thus depressing long-term interest rates and fueling a credit boom there in the 2000s.

According to this view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which was the epicenter of the financial crisis. Instead, we argue that a key cause of the global financial crisis was the dynamic expansion of balance sheets at large complex financial institutions (LCFIs) (Borio and Disyatat [2011] and Shin [2012]), driven by the endogenously elastic finance of global dollar funding in the global shadow banking system.

The endogenously elastic finance of the global dollar contributed to the buildup of global financial fragility that led to the global financial crisis. Importantly, the supreme position of U.S. dollar as debt-financing currency, underpinned by the dominant role of the dollar in the development of new financial innovations and instruments, and was a driving force in this endogenously dynamic and ultimately destructive process.

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Dazzled in Davos: What Bill Gates Forgot to Mention

Edward B. Barbier

At the 2014 World Economic Forum in Davos, Switzerland, the founder of Microsoft and leading global philanthropist Bill Gates, along with his wife Melinda, released the 2014 Gates Annual Letter “3 Myths That Block Progress for the Poor”.  In the letter, Gates notes that, since 1960, more than a billion people have risen out of extreme poverty.  He then goes on to make this bullish prediction:

“By 2035, there will be almost no poor countries left in the world… Every nation in South America, Asia, and Central America (with the possible exception of Haiti), and most in coastal Africa, will have joined the ranks of today’s middle income nations.”

I have no quarrel with such a prediction, optimistic though it might be.  I also don’t question the global poverty trends—they pretty much match what is stated in “The State of the Poor” of the World Bank’s Poverty Reduction and Economic Management Network (PREM).  According to the World Bank, extreme poverty has fallen by 25% in the past 30 years for the developing world.

However, what Bill Gates did not mention is the following.

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A Bigger Global Role in China?

Martin Khor

Cross-posted from The Star (Malaysia).

China seems to be preparing to play a bigger role in global economic affairs, but not at the cost of giving up its developing-country status.

After years of being rather low key in economic and social affairs at the United Nations, it looks as if China is now ready to upgrade its role in future.

This is the impression I got at a conference on Transformative Global Governance: China and the United Nations, in Shanghai last week.

For decades China has been careful not to assert itself at the forefront of the UN’s economic and social affairs, focusing instead on its own economic development, and insisting that it is a poor or average developing country.

It has played an active role as part of developing-country groupings, particularly the Group of 77 and China, which is the umbrella body for over 130 developing countries.

In recent years there have been calls especially by Western leaders for China to play a “leadership role” in international affairs. And a debate has been taking place in China itself on how to respond to this.

The Shanghai conference debated this as its central theme.
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The Icelandic Chutzpah Prize Is Retired: Portes and Baldursson Win by Losing

William K. Black, guest blogger (originally posted at New Economic Perspectives, Benziga, and the Dollars & Sense blog)

Portes as the poster child for the failure of econometrics and neoclassical dogma

Richard Portes is the economist that the U.K.’s neoclassical economists chose to be their representative.  They consider him to represent the greatest strengths of neoclassical economists in general and econometricians in particular.  “Econometricians” is a fancy term for economists whose specialty is statistics.  Economics is unique in that one can receive exceptional honors from fellow-neoclassical economists for proving catastrophically wrong – repeatedly and causing immense human suffering.  Wesley Marshall and I are doing a book that illustrates this point by focusing on Nobel Laureates in economics, and explains the underlying pathology that has so twisted the field.  Portes has not been made a Laureate, but he is a global leader among neoclassical economists.  Portes’ pronouncements on Iceland have proven so wrong, so often, that they serve a similar purpose in illustrating these crippling pathologies.

His infamous November 2007 ode to the soundness of the big three Icelandic banks was commissioned by Iceland’s Chamber of Commerce and it went on at length about Portes’ accomplishments.  Here is a brief excerpt to give the reader a feel for tone.

“Professor Portes is a Fellow of the Econometric Society, a Fellow of the British Academy, a Fellow of the European Economic Association, and Secretary-General of the Royal Economic Society. He is Co-Chairman of the Board of Economic Policy. He is a member of the Group of Economic Policy Advisors for the President of the European Commission; of the Steering Committee of the Euro-50 Group; of the Bellagio Group on the International Economy; and Chair of the Collegio di Probiviri (Wise Men Committee) of MTS.”

Yes, they were so sexist that they had a “Wise Men Committee” in 2007, and Portes used that phrase to describe the group.  The Committee, of course, proved to be an oxymoron composed of regular morons.  The Queen named him a Commander of the British Empire (CBE) in 2003 then famously asked British economists why they had missed the developing crisis.

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“Structural Reforms” and Unemployment

Philip Arestis and Malcolm Sawyer

There is little doubt that the “fiscal compact,” which has replaced the Stability and Growth Pact of the Economic and Monetary Union, reinforces an already-established neoliberal perspective on macroeconomic policy—with the emphasis on balanced budgets and an “independent” central bank only concerned with price stability (the latter to be achieved through interest-rate manipulation).

The perspectives on labour and product markets were not so clear-cut initially, but recent developments have seen a distinct shift in the neoliberal direction. There had long been calls from institutions such as the European Central Bank (ECB) for “structural reforms,” “liberalisation,” etc., alongside fiscal consolidation. Now, the Treaty on Stability, Coordination and Governance imposes, for any country subject to an “excessive deficit procedure,” that it “shall put in place a budgetary and economic partnership programme including a detailed description of the structural reforms which must be put in place and implemented to ensure an effective and durable correction of its excessive deficit” (emphasis added).

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