It’s been a few years since the guns of the international currency wars fell silent, or at least until the main combatants turned most of their attention to other things.
With the strength of the dollar, however, the issue might easily re-emerge. If it does, even if the eurozone and Japan are the main initial targets, emerging markets are unlikely to be able to sit out a renewed burst of hostilities. Read more
There are very few things on which economists overwhelmingly agree: free trade and apple pie are about it. But almost all of them will say that across-the-board subsidies for households and companies to lower the price of fuel are a terrible idea.
While advanced economies in general tax fossil fuels – or the carbon emissions that emanate from its use – emerging markets are still big users of subsidies and price caps. The IMF estimates that consumption of petroleum, electricity, natural gas and coal were subsidised by about 2 per cent of total government revenue in 2011 – and much more if compared to a hypothetical efficient tax system. Hydrocarbon exporters accounted for about two-thirds of the total. The subsidy of fossil fuels by oil producers and particularly within the Middle East and North Africa is extreme. Read more
Like a band reforming to trot out the old hits in the hope of funding their impending retirement, the prospect of Grexit somehow doesn’t seem as exciting the second time round.
Back in 2011 and 2012, when the threat of Greece leaving the euro was taken very seriously by investors, the knock-on effects were considerable. The future of the eurozone was held to be at stake; the bond spreads of the other troubled peripheral countries, notably Spain, Portugal and Italy, blew out to alarming proportions. Read more
This week, a trade war that was supposed to tear the world of high-tech manufacturing apart ended peacefully, quietly and with few casualties.
China announced plans that would comply with a WTO decision from last year by removing export quotas and other restrictions on rare earth elements (REEs), the minerals used widely in the manufacture of electronics, computers and cars. It was another success for the US, which has not only chalked up a series of impressive wins against China in the WTO’s dispute settlement process but also (by no means a given) often succeeded in getting Beijing to implement the decisions.
So, a big victory for global governance? Huzzah for the international rule of law, and a celebratory round of Dan Drezners?
Christmas is a time for giving, but not if you are Australia. Last week the government announced the second big cut in development aid this year, which will reduce its budget by nearly a third.
Having got halfway to the international target of giving 0.7 per cent of GDP in aid, Australia is now projecting assistance to fall to 0.22 per cent by 2017/18. It is a long way from the peak of 0.47 per cent of GDP that Australia gave in aid during the leftist government of Gough Whitlam in the 1970s. Read more
“The Ant and The Grasshopper”, one of Aesop’s darker fables, is a cautionary tale about forward planning. An industrious ant works hard all summer to lay up enough food to survive the winter, while a feckless grasshopper makes merry in the sun. When the cold weather comes, the ant survives and the grasshopper starves.
The chill winter winds of falling crude prices are blowing for the world’s oil exporters, who have seen the price of their product slide by 30 per cent since the summer. Today, the members of OPEC are meeting in Vienna to consider a cut in production. Oil exporters have proved to be a mixture of ants and grasshoppers, with some of the idler insects of previous decades now having learned the virtues of hard work. How well their economies – and asset prices – survive is likely to depend not just on whether they have saved enough of their earnings to smooth domestic demand, but whether their broader economies and political systems are strong enough to take the strain.
Last week was a bad week for us sceptics of global governance, or so it seemed. The US and China struck a deal on reducing carbon emissions that some fairly serious people found not to be meaningless. (Others demurred.) The same two countries also agreed to update the Information Technology Agreement, a plurilateral trade deal that has not been reformulated since a decade before the release of the iPhone. Finally, the US and India made an apparent breakthrough in resolving a spat over food subsidies that had brought already desultory progress in the World Trade Organization to a halt.
But before the multilateral bunting is strung across the streets of Geneva in recognition of the US-India achievement, some caution is in order. For one, the “breakthrough” is a minor clarification over what a particular paragraph in an agreement means. Second, if the deal is used to lever open past WTO agreements on farm subsidies, it will turn out to be a very poor trade-off indeed. Read more
A story told in the Bank of England goes like this. Shortly after the fall of the Berlin Wall, a group of Russian central bankers with solid grounding in Marxist economics came to London for a training course at the BoE. They patiently absorbed the theoretical run-down of supply and demand curves and how prices were determined, and then asked “But who sets the price?” A world without a state official with a clipboard announcing the cost of everything was unthinkable. Eventually the exasperated BoE economists took them on a trip to Smithfield meat market in the City of London to see the magic in action.
After the Wall came down in 1989 – triggered by a single unguarded remark by an East German Politburo member in a press conference – the speed and size of changes in the economies of central and east European (CEE) and the former Soviet Union (FSU) were unprecedented since the Second World War. Twenty-five years later, with currency crises wracking Ukraine and Russia, and FSU economies like Belarus and Moldova struggling to emerge from the Soviet era, the dispersion of performance has been dramatic. Read more
Two central banks surprised the world last week with unexpected hikes in interest rates in the face of panicky financial markets. Raising rates a startling 150 basis points, the Central Bank of Russia was reacting sharply to yet another week of runs on the rouble. (It fell further this week nonetheless.)
The other, the Central Bank of Brazil, increased the cost of borrowing by a more modest 25 basis points. It seemed to be attempting to re-establish its independence credentials after the previous weekend’s presidential elections and subsequent worries that economic policy would tend towards the populist and the inflationary.
Yet just as with the advanced economies’ central banks – the Bank of Japan ramping up quantitative easing just as the Fed withdraws – monetary policy has diverged rather than unified in the big emerging economies. Read more
And now the hurly burly’s done. With Brazil’s presidential run-off last weekend, this year’s elections in the five big deficit-plagued emerging markets are now complete.
Growth in all the fragile five – Brazil, India, Indonesia, Turkey and South Africa – has slowed, and ongoing current account deficits leave them vulnerable to a tightening of global credit. Perhaps unsurprisingly, the elections saw shifts against incumbents. Yet how far that move went, and what it is likely to mean for future policy, has divided those countries and may well determine their performance in the future. Read more
If there’s one subject on which policymakers around the world seem to agree, it’s that foreign direct investment is a Good Thing.
The annual tables of inward foreign direct investment (FDI) are treated by governments of rich and poor economies alike much as football fans treat rankings in the English Premier League, crowed over by countries in the leading pack and quietly forgotten by those in the relegation zone.
There is no doubt that FDI can do a lot of good: it can add to an economy’s productive capacity and import not just capital but technology, production skills and better management. China, which not only welcomed FDI but witnessed intense competition between different provinces to attract it, stands as a shining example. Read more
As if to add substance to complaints from emerging market policymakers about being ignored, a matter mainly affecting middle-income countries became the subject of close global attention only when it emerged as a bone of contention between the US and Europe.
The snappily-titled “investor-state dispute settlement” (ISDS) process, where companies have the right to sue governments for disadvantaging their businesses, has been the subject of deep controversy for years. But since the most vocal discontents were nations like Argentina and Venezuela that complain about more or less everything, it took well-organised campaigning and official German opposition to an ISDS chapter in the US-EU Transatlantic Trade and Investment Partnership (TTIP) to make it a central concern. Read more
Two behemoths of the global economy finally reach a deal to resolve a trade dispute that has rumbled on for a decade. Good news, right? No. The settlement of Brazil’s WTO case against the US over cotton subsidies, announced last week, raises the profoundly disturbing possibility that yet another part of the multilateral governance of trade is now being undermined.
The issue dates from 2004, when Brazil won a famous victory at the WTO’s dispute settlement process against US subsidies to cotton farmers, the first big victory for an emerging market country. The arbitration panel authorised Brazil to retaliate with trade restrictions totalling $830m. Washington dragged out the case by every means possible – first appealing against the decision, then wrongly claiming it had changed its subsidies to comply with the ruling, then saying that the matter could only be dealt with in the multilateral so-called “Doha round”, and then finally and absurdly, paying Brazilian cotton farmers nearly $150m per year in protection money from 2010 onwards to avert trade sanctions. Read more
And so the fall in emerging market currencies continues. Over the past month, the third episode of taper tantrum has pushed exchange rates down almost across the board against the dollar, bringing with it the now familiar round of hand-wringing about the vulnerability of emerging economies.
Once again, however, at least as far as currencies are concerned, the latest bout of weakness falls somewhat short of full taper tantrum catastrophe. The depreciation of emerging market exchange rates looks a lot like a subset of the sharp appreciation of the dollar, which has also shot higher against the yen and the euro, than it does a weakness of the entire asset class. Read more
Financial market traders kicking their heels for much of this year over the (to them) maddening lack of volatility have at last been given something to work with. Several commodity prices have dived lower over the past few months, setting off reactions across a range of different markets.
The usual response would be to worry about emerging markets across the board, particularly net commodity exporters, which have been benefiting from juicy export earnings over the past decade. Indeed, if the current movements mark the end of the up phase of a commodity super-cycle, emerging markets could be in for a tough time for a long while. Ghana and Zambia, which recently called in the IMF after falls respectively in gold and copper prices punched holes in their fiscal and current account positions, are cautionary tales.
Yet there are two reasons to be cautious about hurtling to sweeping conclusions. Read more
Africa is, or has been, rising: on that most people seem agreed. The question is: which parts, and for how long?
The two-decade period of growth enjoyed by many sub-Saharan African economies has raised hopes and doubts in equal measure. It could be another episode of temporary natural resource earnings fuelling growth, which will fall as commodity prices drop and interest rates rise. (The travails of Ghana and Zambia provide some support for this notion.) Or has there been the kind of genuine diversification that could survive a serious shift in the terms of trade? Read more
Raising a standard against happiness is never going to be popular, but here goes.
The mountain kingdom of Bhutan has got a lot of mileage out of its practice, first adopted in 1972, of using a broad “Gross National Happiness” (GNH) measure of its people’s welfare rather than a narrow measure like income.
According to the many people who have fallen in love with the idea – the UN went as far as declaring March 20 the “International Day Of Happiness” – a holistic approach to welfare reflects more accurately the many dimensions of wellbeing in the human condition. The philosophy has been urged upon rich and developing economies alike as the proper goal of government policy. Read more
“Anyone who says that Africa is missing the Millennium Development Goals is missing the point.” You might expect such a tart statement about a canonical organising principle of development policy to come from one of the aid industry’s many curmudgeonly sceptics.
That it came instead from Jan Vandemoortele, a Belgian economist who helped create the United Nations MDGs in the first place, raises questions whether propagating a single set of targets to drive government policy across the entire developing and emerging world is worth doing at all. The “sustainable development goals”, successors to the MDGs, are currently being developed, but the unfortunate signs are that they will be yet more complex and yet less meaningful than the originals.
Pity any Russians wanting to sit down to their regular Sunday lunch of kangaroo steak, medium-rare. Thanks to the trade restrictions Vladimir Putin announced last week, Australia – along with the EU, US, Norway and Canada – found its food exports to Russia blocked forthwith.
As it happens, uninterrupted access to the Russian market is not something any food producer can take for granted. Russia, Australia’s largest market for kangaroo meat, also suspended trade (on bogus health grounds) between 2009 and 2013. And while Australian kangaroo exporters may bound off happily into other markets, Moscow’s consumers will struggle to source their marsupials from Russia’s remaining trading partners. Read more
When a country cuts power to its aluminium smelters so its people can watch the World Cup on TV, you have to conclude that its economic policy isn’t all about investing for the future.
Ghana this week called in the International Monetary Fund after a depreciation in its currency threatened to turn into a rout. The episode is an excellent illustration of the injunction to be careful what you wish for, in this case Ghana’s discovery of oil. Its fellow minerals exporter, copper-rich Zambia, has also called in the IMF.
The two nations have become object lessons in how easy outside financing and high but volatile export prices give countries enough rope to strangle themselves. Their experience is unlikely to be a bad as similar countries in previous decades, but it still represents another chapter in the sad history of resource-dependent economies going wrong. Read more