Gerald Epstein

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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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Erinç Yeldan

Over the last six months, many developing emerging market economies had witnessed large, unforeseen, and unpredictable swings in their exchange rates.  With rumors, and counter-rumors of likely tapering of the U.S. Federal Reserve’s Quantitative Easing (QE) programme, such swings resulted in abrupt depreciations by 16.7% in Indonesia, 7.3% in Thailand, 10.4% in Turkey, 9.3% in Brazil, 13.4% in India, and 8.8% in South Africa…

A recent policy brief by the Peterson Institute for International Economics provided Estimates of Fundamental Equilibrium Exchange Rates and revealed that many of these depreciations were, in fact, overshooting the fundamental equilibrium exchange rates that are consistent with the current account balances of these economies.  Now it is found that Indonesia needs its currency to appreciate by 3.9%; Thailand, by 2.4%; the Philippines, by 3.8%; Malaysia, by 4.3%. Meanwhile, Turkey has to let its currency depreciate by 18.1%; South Africa, by 6.8%; Poland, by 4%; Brazil, by 3.4%.  Table 1 below summarizes the relevant data.

Table 1

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Juan O’Farrell and Soledad Villafañe, Guest Bloggers

Latin American countries’ experiences over the last decade have been widely described as a success story for reducing income inequality. In a work to be published this month, we analyze how the coordination between labor and macroeconomic policies with a clear objective of employment creation and welfare expansion explains the progress made in Argentina and Brazil towards income redistribution with economic growth. Under different macroeconomic regimes, but with similarly active promotion of wage increases and labor institutions, both countries achieved an expansion of employment, wages, and social protections, breaking a long period of downward trends. These factors are behind the reduction in the gap between the rich and the poor.

What these experiences show is that, contrary to the view of labor institutions (like the minimum wage, collective bargaining, etc.) as “rigidities,” these can be key drivers of inclusive development. This holds significant relevance beyond Latin America for an important reason: despite the evidence and increasing consensus of the role of declining wage shares in the unfolding of the global financial crisis, policymakers (especially in Europe) still resist abandoning the mantra of labor market “flexibilization” and internal devaluation as a way out of the crisis. Furthermore, there was an attempt this year to reintroduce the idea of flexibilization in G20 documents.

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Alejandro Nadal

Managing neoliberalism is an uncomfortable proposition, especially when you are a centre left government. The rhetoric from the government palace insists in painting a pretty picture of social progress in a context of economic development. But the truth is somewhat different: the constraints of the neoliberal policy package conspire to cancel the successes that may be attained in the realm of equity or growth. The fact is that neoliberalism is not made for development.

During the past decade a new myth was born concerning Brazil’s economic performance. Its growth rate was above Latin America’s mean rate (2.2 per cent) and its exports allowed for a significant surplus. Besides, the increase in social expenditures resulted in a significant reduction in poverty and hunger. What possibly could go wrong?

The angry demonstrations that spread throughout Brazil’s cities a few days ago were triggered by several factors. They range from the bad quality of public services in transportation, health and education, to widespread corruption and the lavish expenditures in preparation for the World Cup. Violent repression fuelled the vigorous protests against a political elite more preoccupied with preserving their well-paid jobs than anything else. Some analysts have advanced the hypothesis that various conservative forces in Brazil were behind the wave of discontent with an eye on the 2014 elections. That may very well be true and the drop in popularity of Brazilian president, Dilma Rousseff, is a bad sign in this context. She has tried to recover the initiative by announcing a plan for “political reform” that would lead to greater democracy, transparency and better public services. It is too soon to conclude whether this move will be successful or not. In any case, events in Brazil force a more rigorous analysis of the structure and performance of the economy.

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Martin Rapetti, Guest Blogger

Not so long ago, Argentina was considered a case of economic success. In 2001-02, the country suffered a severe crisis — a triple crisis involving the financial sector, the public debt and the balance of payments — that ranks as high as the worst crisis in Argentina´s history. However, in early 2002, soon after the devaluation of the peso, the default of the public debt and the collapse of the financial system, the economy began a sustained and very strong recovery that later on evolved into strong economic growth. By the end of 2006, GDP was 46% higher than the trough of 2002 and 17% higher than the previous peak of mid-1998; unemployment had shrunk from 22% to 8.7%, poverty from 58% to 28%, and extreme poverty from 28% to 9%. It is not difficult to understand why the experience became a very successful example of crisis resolution, especially for countries in the periphery of the European currency union like Greece.

Argentina’s post-crisis experience also represented a successful reference in terms of its macroeconomic policy regime. In the first years following the crisis, the authorities pursued macroeconomic policies that aimed to maintain a stable and competitive real exchange rate (RER) as a means to promote the expansion of dynamic tradable activities and thus promote economic development. The competitive RER was a key factor behind Argentina’s recovery and growth. Many economists consider a macroeconomic framework targeting a stable and competitive RER more development-friendly than the conventional inflation targeting.

Unfortunately, Argentina’s successful economic experience gradually began to fade away. As in the plot of Mario Vargas Llosa’s classic book Conversación en La Catedral, it is hard to determine at what precise moment this experience “f—d itself up”. A possible turning point was in early 2007, when the government fired civil servants of the National Bureau of Statistics (INDEC) and began to manipulate the official Consumer Price Index to openly hide the acceleration of inflation (since then the official inflation rate has been below 10% per year when actual inflation oscillated around 20-25% per year. The manipulation was later extended to other official statistics, including GDP). But regardless of the precise date, the issue is that the government gradually turned to an increasingly populist path based on excessively expansive fiscal, monetary and wage policies that fueled inflation. Instead of moderating the pace of aggregate demand, the government increasingly relied on the exchange rate as the main nominal anchor to curb inflation. This strategy was especially intense in 2010 and 2011. During these two years, domestic prices rose 54% whereas the nominal exchange rate (i.e., the domestic price of US dollar) only 12%. As a result the RER appreciated significantly.

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Erinc Yeldan, Guest Blogger

The IMF released the April edition of its World Economic Outlook (WEO).  One of the key analytical chapters (Chapter 3) of the Report is titled The Dog that Didn’t Bark: Has Inflation Been Muzzled, or Was It Just Sleeping?”  Its main argument (or rather sort of a mystery that needs to be resolved, in the words of its authors) is that over the course of the previous crisis episodes we used to witness severe increases in unemployment along with a simultaneous fall in inflation. Yet, during the current great recession there has been very little movement in inflation, while unemployment rates soared almost everywhere; —hence the metaphor: inflation (the dog…) does not respond (bark).  And the alleged mystery is but why?

The WEO suggests two candidates for explaining the mystery: the first one is based on the “structural unemployment has shifted” hypothesis, arguing that “the failure of inflation to fall is evidence that output gaps are small and that the large increases in unemployment are mostly structural.”  The logical policy implication of this argument is that “… the monetary stimulus already in the pipeline may reduce unemployment, but only at the cost of overheating and a strong increase in inflation—just as during the 1970s”. Yet, by itself this argument does not provide much of an explanation, as the underlying causes of this structural shift still remains unanswered.

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Martin Khor

Many articles and books have been published on the contrast and competition between the present Western and the Asian-style economic models.

Western countries are said to have the free-market model based on competition among private firms, with the government taking a hands-off approach.

East Asian countries are branded as practising “state capitalism” in which the government plays a major role in helping the local private sector and the state also fully or partially owns many enterprises.

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Daniela Schwarzer

The current crisis in the euro area, the reforms governments have to implement, and the high unemployment levels in many member states are weakening the legitimacy of European integration. In my last post, I described how this output legitimacy crisis unfolds.

The debate about legitimacy and democratization in the EU traditionally focuses on the input side. As crises have surfaced, the flaws in the governance structures have also fuelled this old debate. In fact, it can hardly be argued that citizens have the chance to effectively influence the developments that deeply affect them, given the national fragmentation of decision-making and the resulting hazardous nature of macro-economic developments.

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Alejandro Nadal

The global financial crisis is breathing and evolving. In Europe it is treated as a sovereign debt crisis. But given the fact that the crisis exploded in the midst of the private financial sector, how did we get here?

Four decades ago, more precisely on January 3 1973, a new law on central banking was approved in France. The new statute for the Banque de France contained critical provisions for the independence of the monetary institute. Article 25 turns out to be particularly relevant for today’s debate on Europe’s crisis. It stated that the Treasury would not be able to resort to the Banque de France to borrow money.

This represented a historical transformation in public finance and left the State at the mercy of the private commercial banking system. Instead of using the money emission capacity of the central bank, the French government had now embarked on a new course, one that turned out to be a milestone in financial liberalization. Many other countries followed this example. Incidentally, when the law was passed Georges Pompidou was the President of France. He had been director of the Banque Rothschild between 1956-1962, a fact that generated suspicion as to the motivations of the Loi 73-7 of 1973.

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