By Eswar Prasad and Karim Foda
Despite all the portents of doom the world economy has been quietly mending itself.
This is not to say that the recovery is firmly entrenched or that few risks remain, but despite the rough patches in 2010, it is important to keep in mind that the economic picture looks far better now than it did a year ago.
By Thomas I. Palley
The great German physicist Max Planck remarked that “science advances one funeral at a time.” The situation is worse in economics, which is subject to regress, as happened when the valuable but imperfect insights of Keynesianism were supplanted by the ideological blinkers of neo-liberalism.
The effects of this regress have again been on display in the confused discussions and policy responses to Europe’s sovereign debt crisis. The fact is that countries which borrow in their own currency and control their money supply will never default because they can always issue the money needed to repay their debts.
For such countries, central banks should respond to speculative debt crises with “bear squeeze” tactics that have them buy existing debt. In this fashion, countries can buy back debt below par value, in effect repaying it on the cheap. It is what the European Central Bank should have been doing on behalf of its member countries.
By Kevin P. Gallagher
At the recent annual meeting of the Asian Development Bank Taiwan’s Central Bank governor Perng Fai-nan urged emerging market nations in Asia to use capital controls to promote financial stability.
Yesterday, this call was echoed by Noeleen Heyzer, executive secretary of the United Nations Economic and Social Commission for Asia and the Pacific. She singled out China, India, Singapore, Indonesia and South Korea as the most vulnerable nations in need of controls
These statements would have been unthinkable a decade ago, and shows how much has changed.
Part of the stigma attached to capital controls has been dampened by the new tune at the International Monetary Fund (IMF). In a February 2010 staff position note and in the IMF‘s Global Financial Stability Report (GSFR) the IMF said that capital controls are a legitimate part of the toolkit for emerging markets. What’s more, the IMF’s economists found that those countries that deployed capital controls in the run-up to the current crisis were among the least hard hit from the global financial crisis.
It is time for the debate over capital controls to shift from whether to deploy controls to how and when.
The problem is that many of the world’s trade and investment treaties, especially those with the US, make it very difficult to effectively use capital controls.
India: External deficit widens but the rupee appreciates sharply!
In March the Reserve Bank of India (RBI) published the balance of payments data for the October-December quarter of 2009. It elicited surprisingly little comment. Surprising, because for the second quarter in a row the current account deficit was well above 3 per cent of GDP.
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