What We’re Writing, What We’re Reading

What We’re Writing

Juan Antonio Montecino and Gerald Epstein, Did Quantitative Easing Increase Income Inequality?

Léonce Ndikumana, The Role of Foreign Aid in Post‐Conflict Countries

Matías Vernengo, Bowles on Capitalism and Institutions

What We’re Reading

From regular Triple Crisis contributor Edward B. Barbier:

Marcelo Giugale (World Bank, regular blog at Huffington Post), On Fools and Free Markets

Andy Hoffmann (Michigan State, “The Hopeful Environmentalist” blog), Breaking the Link Between a Conservative Worldview and Climate Skepticism

Matt Kahn (UCLA, “Environmental and Urban Economics” blog), Calm and Sensible Climate Adaptation Discussion in the NY Times

Carlo Carraro (International Center for Climate Governance), Measuring and Assessing Sustainable Development Goals

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The Future of Work

Consider the Changing Climate

Juliet Schor

Juliet Schor is a professor of sociology at Boston College. She known worldwide for her research on the interrelated issues of work, leisure, and consumption. Her books on these themes include The Overworked American: The Unexpected Decline of Leisure, The Overspent American: Upscaling, Downshifting, and the New Consumer, and Plenitude: The New Economics of True Wealth (retitled True Wealth for its paperback edition).

Over the last year or two I’ve noticed that conversations about the future of work are now mostly about machines—how smart ones will do fantastic things to make our lives better, or how they’ll make human labor redundant and create a jobless dystopia. My training in economics has led me to be skeptical of both sides in this debate. After all, during the Industrial Revolution extraordinary labor-saving technological change had both good (cheaper products) and bad (pollution) effects. It also resulted in a tremendous increase in hours of work. The lesson from this historical episode, and plenty of others, is that technology doesn’t determine incomes, distribution, employment, or quality of life. It’s one factor in a much larger context.

Today, that context must include consideration of climate change, which has been almost totally missing from discussions about the future of work. The most obvious reason climate change matters is that it promises to be extremely disruptive. Even if the global community can pull off the equivalent of a Hail Mary pass and limit warming to two degrees Celsius, plenty of climate chaos is still in store. At this point, a future of four degrees of warming is more likely, given current national pledges for emissions reductions and considerable uncertainty about them.

This implies catastrophic sea level rise, drought, plummeting agricultural yields, frequent extreme weather, and human migrations on a large scale. These will lead to some predictable changes in the world of work: more need for first responders, health professionals, civil engineers, and aid workers, among other occupations. Climate chaos will also have large macroeconomic effects, reducing investment, consumption, and employment. A just-published study in Nature found that more than a fifth of GDP will be lost by the end of this century, much more than previous models have predicted. Another increasingly likely scenario is the bursting of the carbon bubble, once reserves already priced into fossil fuel company valuations are recognized to be unburnable and these companies’ assets collapse. Climate mayhem leads to economic mayhem. The operative word for the future of work would be shrinkage.

But this apocalyptic future is not our only option. Acting forcefully on emissions today could dramatically increase the likelihood of not only containing warming, but also making work more sustainable, satisfying, and productive. To see how, we need to consider the connection between working hours and carbon emissions, a key link that has been absent from all climate models and the climate change conversation.

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Banking on Bonds, Part 2

This is the second of two excerpts from a recent paper on the role of “repurchase agreements” (or “repos”) in the eurozone crisis, co-authored Daniela Gabor and Cornel Ban. Gabor is an associate professor in the Faculty of Business and Law at the University of Western England-Bristol. Ban is an Assistant Professor of International Relations and Co-Director of the Global Economic Governance Initiative at Boston University.

This part describes the behavior of the European Central Bank in the repo market—for example, tightening the standards for use of repos as borrowing collateral by embattled private banks—which had a perverse (pro-cyclical) impact in the eurozone crisis. Part 1, explaining repos are and their growing importance, is available here. The full text is available on the GEGI website.

Collateral Damage in the European Sovereign Debt Crisis

Daniela Gabor and Cornel Ban

The financial crisis which erupted in 2007 has fragmented the GC repo market in Eurozone government bonds … There is consequently a German GC market, a French GC market and so on, but there is no longer a eurozone GC market, except for oneday repos, where credit risk is minimal. (European Repo Council, 2013)

While US scholars and policy-makers have dedicated close attention to the run on US repo markets following Lehman Brothers’ collapse (Gorton and Metrick, 2012; Krishnamurthy et al., 2014) and the FSB (2012) put repo markets on its shadow banking agenda, scholarship on the systemic fragilities in European repo markets is in its infancy. Although the crisis reversed the Europeanization of sovereign collateral, as suggested in the quote above, the few studies dealing with European repo markets (Mancini et al., 2013; Boissel et al., 2014) do not engage with the impact on collateral markets.

The paucity of research on this topic is striking considering that by 2012, Portugal, Greece and Ireland provided 0.1 per cent of total repo collateral, sharply down from the 3.5 per cent share in 2008 (see Figure 2), and that Eurex (a large CCP) eliminated GIP government bonds from its GC Pooling basket (Mancini et al., 2013). Repo participants also reduced the use of German government bonds, for the opposite reason: in times of uncertainty, investors become reluctant to part with highly liquid assets.

Thus, the insight from the US-based literature on repo markets that government bonds preserve their high-quality collateral status in crisis, when repo lenders stop accepting privately issued securities, does not apply to Europe (Pozsar, 2014). The eurozone crisis shows that governments are also vulnerable to repo market tensions because the private rules that govern collateral and the incentives of systemic repo market participants are inherently destabilizing.

In the eurozone crisis, Member States faced not only destabilizing repo market dynamics, but also a central bank whose collateral policies were pro-cyclical at critical junctures. This clashes with the conventional description of the ECB’s crisis interventions, which emphasizes that its measures helped stabilize repo and collateral markets (ECB, 2010; Drudi et al., 2012; BIS, 2011). The narrative goes like this: throughout 2008 and 2009, the ECB acted counter-cyclically by extending the pool of eligible collateral (lowering the credit rating threshold from A! to BBB!), a measure meant to help leveraged European banks facing severe funding problems (ECB, 2015a). This allowed banks to take ‘bad’ collateral to the ECB’s long-term lending facilities and use high-quality collateral in private repos. Policy action contained potential runs in periphery collateral markets, restoring confidence in the collateral qualities of GIIPs government debt. The several long-term refinancing operations (LTROs) enabled banks to fund government debt portfolios, increasing demand and therefore liquidity in those markets. The OMT finally dealt with unfounded fears of a eurozone break-up in 2012.

A repo lens complicates this account. When examined through collateral practices, the ECB’s crisis interventions were often pro-cyclical. At critical moments, the central bank made margin calls, raised haircuts and tightened collateral standards. Indeed, in those moments the ECB behaved just like a private repo market participant – a ‘shadow bank’ – that disregards the systemic implications of its collateral practices.

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Capital Flight from Africa: What is to be Done?

This October, regular Triple Crisis contributor James K. Boyce spoke at a Joint Meeting of the United Nations General Assembly and the Economic and Social Council on Illicit Financial Flows and Development Financing in Africa. Boyce is a professor in the Department of Economics at the University of Massachusetts and director of the Program on Development, Peacebuilding, and the Environment at the Political Economy Research Institute (PERI). His statement at the session focused on capital flight from Africa and policy responses including stolen-asset recovery, repudiation of odious debt, and new banking regulation.

James K. Boyce

Mr Chairmen, distinguished fellow Panelists, Excellencies, Ladies and Gentlemen;

Thank you for inviting me to present this statement. I am old enough to remember when the subject of illicit financial flow was not discussed in polite company. The topic was relegated to the shadows of official discourse. It is gratifying to see this important issue moving squarely onto the agenda of the international community.

I will focus my remarks this morning specifically on capital flight from Africa and on policy responses to this challenge.

Capital flight and illicit financial flows

The terms ‘capital flight’ and ‘illicit financial flows’ sometimes are used interchangeably, but they are distinct concepts. Capital flight is usually defined as unrecorded capital outflows and measured as the missing residual in the balance of payments, after corrections for underreported external borrowing and trade misinvoicing. All capital flight is illicit, but not all illicit financial flows are capital flight. Capital flight is illicit by virtue of illegal acquisition, illegal transfer, illegal holding abroad, or some combination of the three.

Illicitly acquired capital is money obtained through embezzlement, bribes, extortion, tax evasion, or criminal activities. Wealth acquired by these means is often transferred abroad clandestinely in an effort to evade legal scrutiny as to its origins.

Illicitly transferred funds are outflows not reported to government authorities. Mechanisms include smuggling of bank notes, clandestine wire transfers, and falsification of trade invoices.

Illicitly held funds are assets whose earnings are not declared as income to national authorities of the owner’s country. The concealment of foreign holdings may be motivated by the desire to evade prosecution for illicit acquisition of the funds, or by taxation evasion, or both.

The broader universe of illicit financial flows includes not only capital flight but also payments for smuggled imports, transactions connected with illicit trade in narcotics and other contraband, outflows of illicitly acquired funds that were domestically laundered before flowing overseas through recorded channels, and transfer pricing by the corporate sector. These, too, are illicit, but they are not the same as capital flight.

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Banking on Bonds: The New Links Between States and Markets

This is the first of two excerpts from a recent paper, co-authored by Daniela Gabor and Cornel Ban and published in the Journal of Common Market Studies, on the role of “repurchase agreements” (or “repos”) in the eurozone crisis. Gabor is an associate professor in the Faculty of Business and Law at the University of Western England-Bristol. Ban is an assistant professor of International Relations and Co-Director of the Global Economic Governance Initiative at Boston University.

Part 1 explains what repos are and how their importance has grown in recent years. Part 2, to be posted next week, describes the behavior of the European Central Bank in the repo market—for example, tightening the standards for use of repos as borrowing collateral by embattled private banks—which had a perverse (pro-cyclical) impact in the eurozone crisis. The full paper is available on the GEGI website.

Part 1: How Repos Work

Daniela Gabor and Cornel Ban

The ‘repurchase agreement’ (often referred to as ‘repo’) has become a key financial device for contemporary capitalism. Though the legal and formal definitions of a repo transaction can make it sound quite complex, it most simply can be thought of as a (usually short-term) secured loan. In a repo transaction one institution (the lender) agrees to buy an asset from another institution (the borrower) and sell the asset back to the borrower at a pre-agreed price on a pre-agreed future date (a day, a week or more). The lender takes a fee (repo interest rate payment) for ‘buying’ the asset in question and can sell the asset in the case that the borrower does not live up to the promise to repurchase it. The fundamental purpose of this circular transaction is to lend and borrow funds (and, in some cases, securities). While financial institutions use it to raise finance, central banks use it in monetary policy.

To illustrate, suppose Deutsche Bank (DB), acting as a borrower, sells assets to a buyer (Allianz), acting as a lender, and commits to repurchasing those assets later (see Figure 1). Allianz becomes the temporary owner of the assets, which also serve as collateral, and Deutsche Bank has temporary access to cash funding. DB and Allianz also agree that the purchase price is less than the market value of collateral (€100) – in this case a 5 per cent difference, known as a haircut. This provides a buffer against market fluctuations and incentivizes borrowers to adhere to their promise to buy securities back. In our example, DB provides €100 worth of collateral to ‘insure’ a loan of €95. When the repurchase takes place, DB pays €95 plus a ‘fee’ or interest payment in exchange for the assets it had sold.

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U.S. Matters

Sunita Narain

This blog post, from regular Triple Crisis contributor Sunita Narain, expands on the arguments put forth in her earlier letter (with co-author Chandra Bhushan) about their recent report on U.S. government policy on climate change: “Captain America: U.S. Climate Goals—A Reckoning.” Narain raises tough criticisms here not only of the inadequate steps that the U.S. government has taken on climate mitigation, but also the complacency of U.S. civil society in counseling the world to wait for the United States to get its act together. As she points out, the world cannot afford to wait, for every day of delay further shifts the burdens of climate mitigation from the U.S. to other shoulders. —Eds.

Why should we look at the U.S. to check out its climate action plan? The fact is that the U.S. is the world’s largest historical contributor to greenhouse gas emissions—the stock that is already in the atmosphere and already warming the earth’s surface—and the second largest contributor (after China) to annual emissions. What the U.S. does makes a huge difference to the world’s fight against runaway climate change. It will also force others to act. It is, after all, the leader. And now, after nearly three decades of climate change denial, the U.S. has decided enough is enough. President Barack Obama has said clearly that climate change is real, and his country must act. It has submitted its Intended Nationally Determined Contribution (INDC)—its emissions reduction framework—to the climate treaty secretariat. The world is already celebrating—the prodigal has returned.

My colleague Chandra Bhushan and I humbly disagree. Our research, which we present in our just released report, Capitan America, presents a few inconvenient truths that might throw cold water on the celebration. The U.S. climate action plan is neither ambitious nor equitable. Worse, it is but business-as-usual. When implemented emissions reduction will be marginal. Whatever reduction is achieved, whether due to increased efficiency or a shift in fossil fuel use, will be negated by runaway gluttonous consumption. We conclude, for the sake of the world’s future: American lifestyle can no longer remain non-negotiable.

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Africa and the WTO

The Perils of Weakening the Development Agenda

Biraj Patnaik and Timothy A. Wise

Biraj Patnaik is the Principal Adviser to the Commissioners of the Supreme Court of India in the Right to Food case. Regular Triple Crisis contributor Timothy A. Wise is the Policy Research Director at Tufts University’s Global Development and Environment Institute.

In the 2013 WTO Ministerial in Bali, India stood mostly alone as the rich countries tried to isolate the government for its stockholding and food security program. But India is far from alone in recognizing the value of public food reserves as insurance against price volatility, emergency food in the event of shortages, and stocks for anti-poverty programs.

In fact, many African countries, including Kenya, Egypt, and Zambia manage such initiatives. They would be deluding themselves to think that the WTO measures taken against India will not be used against them. Most of these countries have exceeded, or are on the verge of exceeding, the de minimis limits set by the WTO’s Agreement on Agriculture (AoA), tripped up by the same loophole that has snagged India. That technicality, which artificially inflates the calculation of subsidy levels, must be resolved in Nairobi along with additional progress on outstanding agricultural issues in the long-running Doha negotiations.

To put the Doha Round in perspective, suffice it to say that even if the entire round was concluded to the satisfaction of the developing countries, it would not address any of the issues of food sovereignty that are raised by social movements in the Food and Nutrition Watch 2015, released today at FAO in Rome. It is, thus, from the perspective of social movements, a minimalist package facilitated by the WTO – an agency that they believe does not have the legitimacy to deal with issues of agriculture and food security, and which ultimately seems to favor corporations and profit interests of the most powerful States.

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What We’re Writing, What We’re Reading

Triple Crisis contributors Martin Khor and Sunita Narain are both interviewed in the new film This Changes Everything, “inspired” by the Naomi Klein book of the same title and narrated by Klein. Here’s the description from the film website:

Directed by Avi Lewis, and inspired by Naomi Klein’s international non-fiction bestseller This Changes Everything, the film presents seven powerful portraits of communities on the front lines, from Montana’s Powder River Basin to the Alberta Tar Sands, from the coast of South India to Beijing and beyond.

Interwoven with these stories of struggle is Klein’s narration, connecting the carbon in the air with the economic system that put it there. Throughout the film, Klein builds to her most controversial and exciting idea: that we can seize the existential crisis of climate change to transform our failed economic system into something radically better.

What We’re Writing

Daniela Gabor and Cornel Ban, Banking on Bonds: The New Links Between States and Markets

Patrick Bond, Only Pressure on South Africa’s Elites Can Ease University Fee Stress

C.P. Chandrasekhar, The Nobel Committee for Economics Makes Amends, at Least for Now

Matias Vernengo, Causality and the New World Economic Outlook (WEO)

What We’re Reading

European Commission, Press Release: Illegal Tax Advantages Granted by Luxembourg (Fiat) and the Netherlands (Starbucks)

Florence Jaumotte and Carolina Osorio Buitron, Union Power and Inequality

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The World Bank’s Second Chance in South America

Kevin Gallagher

Earlier this month the World Bank held its annual meeting in Lima, Peru—the first time the Bank’s annual gathering has touched down in South America since 1967. Planned long in advance, the original idea had been to celebrate the region’s return to economic growth.

But now there is little to celebrate in the region, as Latin America’s China-led commodity boom has reached a limit and the region faces sliding growth and growing social and environmental conflict.

Riding the coattails of the China-led commodity boom, between 2003 and 2013 Latin American countries grew faster than any period since the relatively high growth of the 1960s and 1970s. As a result, during the boom many countries in the region were able to erase the increases in inequality from the low growth, crisis-ridden Washington Consensus period from the 1980s to 2002—a period associated with the unpopular World Bank and International Monetary Fund (IMF) programs.

At the same time China is experiencing a bumpy transition to a more consumption-led economy and is no longer driving a global commodity boom. The decline in China’s demand for commodities, in part, explains why Latin America is projected to grow at just 0.5 percent in 2015.

While Latin American leaders must be credited for using some of the proceeds to reduce poverty and inequality during the China boom, those same leaders invested little of the proceeds to diversify into services and manufacturing activities that could have picked up the slack now that commodity prices have plateaued and even begun to fall.

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Walled Off From Reality

Trump’s claims about immigration economics are without merit.

John Miller

Mexico’s leaders have been taking advantage of the United States by using illegal immigration to export the crime and poverty in their own country. The costs for the United – States have been extraordinary: U.S. taxpayers have been asked to pick up hundreds of billions in healthcare costs, housing costs, education costs, welfare costs, etc. … “The influx of foreign workers holds down salaries, keeps unemployment high, and makes it difficult for poor and working class Americans—including immigrants themselves and their children—to earn a middle class wage.
— “Immigration Reform That Will Make America Great Again,” Donald Trump campaign website

Donald Trump’s immigration plan has accomplished something many thought was impossible. He has gotten mainstream and progressive economists to agree about something: his claims about the economics of immigration have “no basis in social science research,” as economist Benjamin Powell of Texas Tech’s Free Market Institute put it. That describes most every economic claim Trump’s website makes about immigration: that it has destroyed the middle class, held down wages, and drained hundreds of billions from government coffers. Such claims are hardly unique to Trump, among presidential candidates. Even Bernie Sanders has said that immigration drives down wages (though he does not support repressive nativist policies like those proposed by Trump and other GOP candidates).

Beyond that, even attempting to implement Trump’s nativist proposals, from building a permanent border wall to the mass deportation of undocumented immigrants, would cost hundreds of billions of dollars directly, and forfeit the possibility of adding trillions of dollars to the U.S. and global economies by liberalizing current immigration policies. That’s not counting the human suffering that Trump’s proposals would inflict.

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