Jayati Ghosh
Since her death, many eulogies of Thatcher have spoken of her as a revolutionary. Thatcherism (along with the associated Reaganomics) is seen as a radical transformative agenda that changed the face of economy and society. But seen from the developing world decades later, much of this agenda appears familiar, in the form of structural adjustment policies that have been forced upon different countries at different times by international institutions.
Given the broad contemporaneity of these strategies, it is a moot point who “inspired” whom, or just how original those ideas were. But it is certainly true that they contributed to shaping policy dialogue in fundamental ways, and thereby left a continuing (if unfortunate) legacy. Consider just five significant elements of this legacy, most features of which are now found across the world and especially in developing countries.
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Sasha Breger, Guest Blogger
Why are development institutions so supportive of the derivatives industry? Given what we now know about derivative instruments and markets—they are complex, volatile, poorly regulated, crisis-prone, and dominated by very large financial firms—the alliance between prominent global development agencies like the World Bank and UNCTAD and the derivatives industry gives real reason for concern. In fact, this appears to be yet another instance in which the interests of the development establishment seem grossly misaligned relative to the goals of the constituencies they purport serve.
As I detail in my recent book on the topic, the governments of commodity dependent economies, agricultural firms involved in commodity trading and processing, and even small farmers have been targeted by these two institutions as actors who stand to benefit from more derivatives trading and the expansion of derivative markets across the developing world. The basic argument is that the welfare of these actors depends critically on prices in global commodities markets. By using derivatives to manage the risk of price fluctuation, tax and export revenues, business revenues and personal incomes could be stabilized and even raised in some cases.
To this end, UNCTAD has been recommending the establishment of local commodity exchanges in a variety of developing countries, exchanges that can both facilitate spot exchanges as well as provide opportunities for forward contracting, and futures and options trading. Similarly, though with a slightly different orientation, the World Bank has been recommending that various developing country parties (public and private) trade on global derivatives exchanges (located mostly in the West) in order to mitigate price risk.
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Arjun Jayadev
One of my favorite lines from recent economics papers is the following one from this paper by Thomas Phillipon, who in talking about the performance of the financial sector suggests that “the unit cost of intermediation is higher today than it was a century ago, and it has increased over the past 30 years. One interpretation is that improvements in information technology may have been cancelled out by increases in other financial activities whose social value is difficult to assess.”
The claim that the financial sector has been ‘functionally inefficient’ was made 30 years ago by James Tobin, and it’s great to have a quantitative basis to make this sort of judgment. Another way to have some sort of handle on the degree to which intermediation has become more expensive is to look at the spread between funding costs and lending rates.
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Philip Arestis and Malcolm Sawyer
The EU summit meeting, 28th/29th June 2012, took a number of relevant decisions in terms of a possible euro area banking union. However, this particular set of decisions was more about initial steps rather than steps for a significant move towards such a union. The relevant decisions are related to: banking supervision by the ECB; banking licence for the European Stability Mechanism (ESM); The ESM will provide financial assistance to members of the euro area when in financial difficulty. It was established on 27th September 2012, but will not come into full operation before 2014. It will function as a permanent firewall for the euro area with a maximum lending capacity of €500 billion. It will replace the two existing temporary EU funding programmes: European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). ESM member states would be able to apply for an ESM bailout when they are in financial difficulty or their financial sector is a threat to stability and in need of recapitalization. Another precondition for receiving an ESM bailout will be that the member state must have fully ratified the Fiscal Compact (see our blog of December 2011 for more details on the Fiscal Compact); when the ESM is introduced, it will have access to the ECB funding and this will greatly increase its firepower. Germany objected to the latter proposal on two grounds: the ECB should not be responsible for all 6000 euro area banks (including small banks such as Germany’s regional savings banks); and there should be a clear separation between ECB monetary policy and bank supervision. The relevant European Council statement (adopted on 18th October 2012) insists on such a separation, and yet no focused explanation is provided for such a need. We would argue that such separation is not acceptable. Central banks need to play a key role in supervising banks as the “great recession” has demonstrated. A good example is the case of the Bank of England, where the removal of banking supervision from this Bank in 1997 has now been reversed.
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Jennifer Clapp
NGOs have stepped up their critique of large investment banks’ involvement in agricultural commodity derivatives markets in recent months. Now, it appears that the banks are starting to fight back.
Last September, the World Development Movement estimated that Barclays earned some $785-million from financial speculation on food commodities in 2010 and 2011. And last month a new WDM report estimated that Goldman Sachs’ earnings from food price speculation in 2012 were over $400 million.
These figures were the latest to come out of a prominent NGO campaign against ‘gambling on hunger’ that has captured widespread attention and concern, particularly in Europe, over the past few years. Investment banks have been a primary target of this campaign, given their important role in facilitating large-scale financial investments in agricultural commodity derivatives, which NGOs say is responsible for food price spikes and rising hunger in the world’s poorest countries.
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Robert Guttman, Guest Blogger
A strange calm has settled over Europe. Following Mr. Draghi’s July 2012 promise “to do whatever it takes” to save the euro, which the head of the European Central Bank followed shortly thereafter with a new program of potentially unlimited bond buying known as “outright monetary transactions,” the market panic evaporated. Since then super-high bond yields have come down to more reasonable levels, allowing fiscally and financially stressed debtor countries in the euro-zone to (re)finance their public-sector borrowing needs a lot more easily than before. Even Greece has been able to borrow in the single-digits for the first time in three years.
This calming of once-panicky debt markets has led to optimistic assessments that the worst of the crisis has passed. Draghi himself declared at the beginning of the new year that the euro-zone economy would start recovering during the second half of 2013. He talked of a “positive contagion” taking root whereby the mutually reinforcing combination of falling bond yields, rising stock markets and historically low volatility would set the positive market environment for a resumption of economic growth across the euro zone. Christine Lagarde, as the head of the IMF part of the “troika” (i.e. ECB, IMF, and European Commission) managing the euro-zone crisis, declared at the World Economic Forum in Davos a few weeks ago that collapse had been avoided, making 2013 a “make-or-break year.”
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Daniela Schwarzer
In the euro area, the crisis mood has somewhat calmed down. Several events in late 2012 have reduced the tensions. Among them are the European Central Bank’s announcement of its bond-buying programme OMT, the agreement on the creation of a banking union (however incomplete it may be for the time being) and the launch of the permanent European Stability Mechanism (ESM). The relief the euro area is experiencing at the moment may, however, only be temporary. Risks are emerging all over. The more obvious challenges still lie in the financial sector and in public finances – and further steps of crisis management and integration may indeed prove necessary to tackle them. Less obvious and more complex to solve are the political and social challenges.
The debate on the EU’s democratic legitimacy has gained pace. The European Union is quite used to discussing its democratic deficiencies. This post argues that the current crisis adds new dimensions to an old problem. The immature governance structures of the currency union prevent it from providing what European integration has been based on since its start: output legitimacy. While it is today (still) uncontested that European integration contributes to maintaining peace on the continent, it is hard to argue that the euro zone has sufficient instruments at hand to ensure long-term economic growth, social stability and sustainable public finances.
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Sasha Breger Bush, Guest Blogger
Back in 2003, Yale economist Robert Shiller noted in his book The New Financial Order, “We need to democratize finance and bring the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart” (1). More recently, Shiller’s 2012 article in The New York Times connects suggestions to “democratize finance” to the Occupy Wall Street Movement: “Finance is substantially about controlling risk. If risk management is suitably democratized, and if its sophisticated tools are better dispersed throughout society, it could help reduce social inequality.” Among Shiller’s proposals, in the older book and more the recent article, are for income insurance based on occupational derivatives and financial innovations to manage old age risks, thereby reducing pressures on welfare based entitlements like Social Security. Efforts to democratize finance in the advanced industrial economies are mirrored in development policy circles, where officials from the World Bank and UNCTAD, among other agencies, have been recommending for many years now that certain kinds of derivatives markets (largely for commodities and the weather) be re-tooled to better meet the needs of the agrarian poor.
On the surface, such efforts appear to be rather successful. As I detail in my recent book, derivative exchanges have proliferated across the developing world over the past several decades, with 23 of the top 50 derivatives exchanges (by volume) located in the global South in 2010. This same year, the most rapidly growing derivatives exchanges in the world were located in Asia and Latin America. Between 2003-06, commodity derivative contract volume outside of the OECD well surpassed that within. And, in 2009, China’s Securities Regulatory Commission announced that China had become the largest commodity derivatives market in the world, contributing over 40% of global volume. On the micro level, commodity and weather derivative contracts are being transformed into retail products, designed for use by smaller and poorer actors who have traditionally been excluded from global derivatives trading—e.g. retail crop insurance based in weather derivatives markets (“weather-index insurance”), agricultural producer bonds with built-in price insurance (like Brazil’s rural product bonds), and other mechanisms for passing on the risk management services of derivatives to those unable to participate directly in the markets. What could be more democratic?
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Matias Vernengo
A friendly debate between Stiglitz and Krugman (and also further comments here) on the role of income distribution in the recovery has been getting some attention in the blogosphere. Note that I don’t think neither Krugman nor Stiglitz would deny that worsening income distribution was not relevant for the crisis, even if they were slower than some heterodox economists like Jamie Galbraith or Bob Pollin, to name two, in emphasizing the role of inequality. The question is whether inequality has been central for the slow recovery in the last few years.
Stiglitz’s main reason for suggesting that the recovery has been stifled by inequality is that “middle class is too weak to support the consumer spending that has historically driven our economic growth.” Krugman, for some reason, thinks that this argument is a long run one, and suggests that while: “it’s true that at any given point in time the rich have much higher savings rates than the poor. Since Milton Friedman, however, we’ve known that this fact is to an important degree a sort of statistical illusion. Consumer spending tends to reflect expected income over an extended period.” However, he thinks that “you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs.” In other words, worsening of income distribution might actually help the recovery.
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Kevin Gallagher
“What used to be heresy is now endorsed as orthodox,” John Maynard Keynes remarked in 1944, after helping to convince world leaders that the newly established International Monetary Fund should allow the regulation of international financial flows to remain a core right of member states. By the 1970’s, however, the IMF and Western powers began to dismantle the theory and practice of regulating global capital flows. In the 1990’s, the Fund went so far as to try to change its Articles of Agreement to mandate deregulation of cross-border finance.
With much fanfare, the IMF recently embraced a new “institutional view” that seemingly endorses re-regulating global finance. While the Fund remains wedded to eventual financial liberalization, it now acknowledges that free movement of capital rests on a much weaker intellectual foundation than does the case for free trade.
Read the full post at Project Syndicate. (c) 1995-2012 Project Syndicate
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