The decision of several European countries to join the China-inspired Asian Infrastructure Investment Bank has created a widely believed narrative as follows. Beijing, frustrated by its exclusion from the centres of power in existing international economic institutions, creates its own. The accession of the UK to the bank, followed by (to date) five other European countries, is a powerful testament to China’s role as a rising hegemon.
This narrative is not wrong, but is far from the whole story. First, China’s decision to bypass multilateral institutions and go it alone with development lending was hardly forced on it. Second, Beijing’s willingness to allow western nations to join the AIIB is also an admission that its bilateral efforts have often not worked well. Read more
So, how would you go about bailing out a war-zone? The IMF’s rescue plan for Ukraine, agreed by the fund’s executive board last week, has to grapple with an extraordinary combination of problems. On top of the usual party pack of issues endured by IMF borrowers – a collapsing currency, a large debt burden, a corrupt and sclerotic economy – Ukraine faces the unusual challenge of a belligerent nuclear-armed neighbour fomenting a civil war.
In this context, the critical question of whether to restructure private sector debt becomes an unusual one. The IMF made obvious mistakes in previous crisis countries such as Argentina and Greece, where debt restructurings were delayed until the situation had gone critical. This experience suggests a rapid early reduction in net present value, including a cut in face value if necessary, to tip debt dynamics towards stability. But where there is a large and completely uncontrollable risk that might instantly change the situation, there is a strong case for giving Ukraine medium-term breathing space rather than a once-and-for-all write-off. Read more
If there’s one thing that central banks like, it is being independent. But EM central bankers’ decisions are currently being made with the influence of their developed economy counterparts looming large over them.
Many central banks in emerging markets are still in easing mode. The People’s Bank of China cut rates by 25 basis points, effective March 1, while a few days later India made the second of two cuts this year outside its normal meeting cycle. But with the dollar soaring, the Fed apparently still on track to raise rates for the first time in June, and the market’s attention focusing on the large stock of dollar-denominated corporate debt issued by emerging markets, further cuts are likely to get riskier as time goes on. Read more
There is a natural tendency, when looking at economic development, to regard emerging markets as simply developed economies that got a late start. True, their patterns of sectoral change are broadly the same, moving out of agriculture into manufacturing and eventually into services. And just like the advanced economies, many emerging markets are now heading into a demographic headwind as their populations age and the dependency ratio of non-working to working people rises.
But there are some key differences in the way that emerging markets will have to cope with the demographic challenge. Both the way that their people have grown better-off and, now, the way that they are growing old are distinct from the paths that the advanced economies trod before them. Read more
The intricacies of Venezuela’s bizarre economic policy apparatus long ago became a subject approached with confidence only by seasoned specialists. Undaunted, Caracas this month decided to make an already byzantine currency system even more complicated by introducing another official exchange rate to the two (plus the black market version) that already exist.
The move came after pressure from falling oil prices, which have hammered Venezuela’s exports and reduced its dollar earnings. Other countries with similar problems in recent years such as Iran (and to some extent, Argentina) have also taken the route of multiple exchange rates. Read more
Whenever some hapless country has a debt crisis these days, rescue negotiations with the International Monetary Fund (IMF) and other lenders are often enlivened by rumours and speculation that Russia and/or China will ride in to save the day.
The latest subject of such conjecture is Greece, currently conducting combative talks with its eurozone government creditors about trading off fiscal space and debt relief for implementing structural changes. Such speculation, though, has so far almost entirely been disproved, and so it will very likely be in this case.
Like Iceland, Pakistan and Cyprus before it, Greece simply cannot offer enough to either China or Russia to be worth the money and geopolitical turmoil involved. EM governments are still a long distance from supplanting the crisis-fighting role of the advanced economies and the multilateral institutions. Read more
One of the few African proverbs that appears to exist other than in the minds of journalists searching for an intro is: “When the elephants fight, the grass suffers”.
Recently, the gyrations in the mastodonic major currencies have placed pressure on the EM countries maintaining pegs or ceilings or otherwise actively managing their easily-trampled exchange rates.
For those targeting the euro, the fall in the single currency after the European Central Bank embarked on QE has increased the challenge in holding their exchange rates down. For economies with dollar pegs, the question is rather whether they can stand the overall loss of competitiveness entailed in following the US currency upwards. For the moment, though, it seems unlikely that a large number of pegs will come undone or ceilings be destroyed. Read more
One persistent disappointment among emerging markets over the past few years has been the performance of exports, traditionally one of the engines of EM growth. Recently, some fears appear to have arisen that trade is not just underwhelming but positively alarming.
A combination of a slowing Chinese economy and sharp falls in two of the world’s three major advanced economy currencies, the euro and yen, might hurt emerging markets’ exports. Indeed, given the openness of many EMs, particularly in Asia, a slowdown in trade in itself could act as a coincident indicator of weakness in the world economy. Such fears have been fuelled by the fall in the Baltic Dry Index, a measure of bulk shipping costs. Read more
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