Winds of change in Asia

Martin Khor

In the last month, the international media has been carrying articles on the fight between the United States and China over the formation of the Asian Infrastructure Investment Bank (AIIB).

Influential Western economic commentators have supported China in its move to establish the new bank and judged that President Barack Obama made a big mistake in pressurising US allies to shun the bank.

The United States is seen to be scoring an “own goal” since its close allies the United Kingdom, Australia and South Korea decided to be founding members, as well as other European countries, including Germany and France, and most of Asia.

The United States also rebuked the United Kingdom for policies “appeasing China,” but the latter did not budge.

The United States did not give any credible reason why countries should not join the AIIB.

Treasury Secretary Jack Lew said the new bank would not live up to the “highest global standards” for governance or lending.

But that sounded like the pot calling the kettle black, since it is the lack of fair governance in the International Monetary Fund (IMF) and World Bank that prompted China to initiate the formation of the AIIB, and the BRICS countries (Brazil, Russia, India, China and South Africa) to similarly establish the New Development Bank.

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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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How Much has the IMF Changed in Response to the Global Crisis?

Matías Vernengo

Following the 2008 Global Crisis the notion that the International Monetary Fund (IMF) has moved away from orthodox views on a range of issues, but particularly regarding the need for austerity, has been pervasive. For example, Paul Krugman has argued, in his influential blog, that Olivier Blanchard, IMF’s director of research (or economic counselor) is “helping make at least one international institution less austerity-mad than the others.”

So what is this new view, exposed by Blanchard? For example, in the preface to the last World Economic Outlook, Blanchard tells us that:

Potential growth in many advanced economies is very low. This is bad on its own, but it also makes fiscal adjustment more difficult. In this context, measures to increase potential growth are becoming more important—from rethinking the shape of labor market institutions, to increasing competition and productivity in a number of nontradables sectors, to rethinking the size of the government, to examining the role of public investment.

Note that in neoclassical (or mainstream) economics speak, potential growth is supply-side determined. That’s why the reforms would be less regulation of labor markets (to allow firms to hire workers for a lower wage), reduced regulation (to generate incentives for firm entry to increase competition), and reduced size of the public sector (that’s what “rethinking” means; nudge, nudge, wink, wink). These policies are needed to boost the supply capacity of the economy, its “potential” or “natural” output. Demand expansion, in the form of more spending and fiscal deficits cannot be pursued, since the growth of potential output is “very low.”

These are, in fact, the same neoliberal reforms that the IMF has always supported, and that since the 1990s have been referred to as the Washington Consensus.

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Ask Mark Blyth: "Austerity Doesn’t Work, Period"

Kevin Gallagher

“Austerity doesn’t work. Period.” This quote is the punch line of Mark Blyth’s Austerity: The History of a Dangerous Idea, second edition just out. If that quote was made into bumper stickers and t-shirts it would have been icing on the cake for what was an amazingly well placed and marketed book. As just about every review in the popular press has noted, Blyth’s book is well researched, accessible to a broad array of readers, and right.

For academics and critical thinkers however, there is more to it than that. This is not only a book where an established academic engages with a broader audience and “gives” that audience the tools to understand a contemporary problem. Blyth should be praised for that in and of itself. During this crisis and many others most academics have not been bold enough or too dis-incentivized to enter the fray beyond the water cooler. But Blyth also makes key contributions to the academic literature in international political economy as well. Blyth shows how and why the idea of austerity keeps on living in our politics.

The book starts with an accessible discussion of how the crises in the U.S. and EU were banking crises, not the sovereign debt crises (especially in the European case) that they and their aftermath have been described of in the financial press and media. In two crisp chapters, he shows how banks created the messes in the United States and in Europe—and how government debt became a big issue only after governments bailed out and propped up banks.

Read the rest of this entry »

Ask Mark Blyth: “Austerity Doesn’t Work, Period”

Kevin Gallagher

“Austerity doesn’t work. Period.” This quote is the punch line of Mark Blyth’s Austerity: The History of a Dangerous Idea, second edition just out. If that quote was made into bumper stickers and t-shirts it would have been icing on the cake for what was an amazingly well placed and marketed book. As just about every review in the popular press has noted, Blyth’s book is well researched, accessible to a broad array of readers, and right.

For academics and critical thinkers however, there is more to it than that. This is not only a book where an established academic engages with a broader audience and “gives” that audience the tools to understand a contemporary problem. Blyth should be praised for that in and of itself. During this crisis and many others most academics have not been bold enough or too dis-incentivized to enter the fray beyond the water cooler. But Blyth also makes key contributions to the academic literature in international political economy as well. Blyth shows how and why the idea of austerity keeps on living in our politics.

The book starts with an accessible discussion of how the crises in the U.S. and EU were banking crises, not the sovereign debt crises (especially in the European case) that they and their aftermath have been described of in the financial press and media. In two crisp chapters, he shows how banks created the messes in the United States and in Europe—and how government debt became a big issue only after governments bailed out and propped up banks.

Read the rest of this entry »

Battling to Curb “Vulture Funds”

Martin Khor

External debt is rearing its ugly head again. Many developing countries are facing reduced export earnings and foreign reserves.

No country would like to have to seek the help of the International Monetary Fund to avoid default.

That could lead to years of austerity and high unemployment, and at the end of it, the debt stock might even get worse.

Low growth, recession, social and political turmoil are probable. This has been experienced by many African and Latin American countries in the past, and by several European countries presently.

When no solution is found, some countries then restructure their debts. Since there is no international system for an orderly debt workout, the country would have to take its own initiative.

The results are usually messy, as it faces a loss of market reputation and the creditors’ anger. But the country swallows the pill, rather than have more turmoil at home.

Read the rest of this entry »

Battling to Curb "Vulture Funds"

Martin Khor

External debt is rearing its ugly head again. Many developing countries are facing reduced export earnings and foreign reserves.

No country would like to have to seek the help of the International Monetary Fund to avoid default.

That could lead to years of austerity and high unemployment, and at the end of it, the debt stock might even get worse.

Low growth, recession, social and political turmoil are probable. This has been experienced by many African and Latin American countries in the past, and by several European countries presently.

When no solution is found, some countries then restructure their debts. Since there is no international system for an orderly debt workout, the country would have to take its own initiative.

The results are usually messy, as it faces a loss of market reputation and the creditors’ anger. But the country swallows the pill, rather than have more turmoil at home.

Read the rest of this entry »

G20 Finance Ministers Cannot Hide Failure to Tackle Major Issues

By Jesse Griffiths, Guest Blogger

Jesse Griffiths is the director of Eurodad, European Network on Debt and Development.

The communiqué from this weekend’s G20 finance ministers’ meeting in Cairns tried to paper over increasingly evident cracks in the global economy, trumpeted an OECD initiative to reduce tax dodging which is not as good as it seems, continued to focus on privately funded infrastructure, and suggested G20 impotence in tackling big problems including too-big-to-fail banks and global governance reform.

The global economy: fragile and faltering

The G20 cannot hide the continued high levels of fragility, huge unemployment, and glaring inequality that continue to characterise the global economic situation. The finance ministers’ communiqué notes that, “the global economy still faces persistent weaknesses in demand, and supply side constraints hamper growth.” Recent reports that companies are buying their own stocks at record rates, helping stock market bubbles build rather than investing for future growth, is one reason the ministers “are mindful of the potential for a build-up of excessive risk in financial markets,” though they promise no new measures to tackle this.

Instead, their response has been to trumpet the promise they made in Sydney earlier in the year to “develop new measures that aim to lift our collective GDP by more than 2 per cent by 2018.” They get the seal of approval from the IMF and OECD’s “preliminary analysis, ” which, at three pages long, has so little detail it is impossible to assess its accuracy. Interestingly, according to the crystal ball gazing that inevitably characterises such attempts to assess global impacts of national policy changes, “product market reforms aimed at increasing productivity are the largest contributor to raising GDP,” which appears to largely mean changes in trade policies in emerging markets. The next biggest impact comes from public infrastructure investment commitments – highlighting the problems with the G20’s focus on private investments in infrastructure, discussed below.

Brief reference is made to the problem that dominated the G20 Finance Ministers’ meeting in February: developing countries’ concern about how the gradual ending of quantitative easing and possible future rises in interest rates in the developed world will affect capital inflows and outflows, which can create huge problems for them. The rich countries that dominate the G20 cannot offer more than the promise to be “mindful of the impacts on the global economy as [monetary] policy settings are recalibrated.”

Despite the fact that Argentina – currently fighting a rearguard action to prevent a US court ruling from undermining a decade of debt restructuring – has a seat on the G20, the issue of permanent mechanisms to deal with debt crises continues to be off the table. Instead it was picked up by the UN, which passed a resolution in September to negotiate a “multilateral legal framework for sovereign debt restructuring,” which could be a game changer for how sovereign debts are managed, offering the possibility of preventing and resolving debt crises: a consistent plague for many countries and a huge problem for the global economy.

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