Normative Narratives


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The Greek Bailout Deal Is A Failure of Leadership in Both Greece and Germany

Kick-The-Can2

The terms of the 3rd bailout deal between Greece and its creditors brought a lot of issues to the forefront.

Silly me for thinking negotiations had to with economics–modernizing the Greek economy by enacting needed structural reforms, while providing the Greek government with the fiscal space needed to promote growth and address it’s pressing humanitarian crisis (which said structural reforms would only exacerbate in the short run). Instead, the defining elements of the deal were related to personality and politics.

The Germans were mad at the Greeks, so much so that German finance minister Wolfgang Schäuble said perhaps Greece might be better off leaving the Euro–this short-sighted self interest is not suitable behavior for Europe’s de facto leader. Tsipras’s government, for it’s part, apparently did not have a backup plan in case it’s creditors failed to offer a reasonable deal. I know Syriza is new to politics, but you don’t have to be a master negotiator to know that going into negotiations without a backup plan is a flawed strategy.

I was a fan of Tsipras’s government because of the interim agreement it secured in February–the potential for trading structural reforms for fiscal space. But since that point it terribly misplayed its hand. It went into negotiations without a backup plan. It held a referendum at least a month too late–the overwhelming “no” vote would have been a strong bargaining chip had Greece been able to take it back to the negotiating table while still covered under the terms of its prior bailout.

But once those terms expired, and Greek banks closed, the only choices for Greece were Grexit or capitulation. Since there was no plan in place for a Grexit, Greece ended up with the terrible deal it got. That deal–as it currently stands–fails in all regards: financial sustainability, growth prospects, and short term humanitarian concerns.

Not Financially Viable:

The International Monetary Fund threatened to withdraw support for Greece’s bailout on Tuesday unless European leaders agree to substantial debt relief, an immediate challenge to the region’s plan to rescue the country.

A new rescue program for Greece “would have to meet our criteria,” a senior I.M.F. official told reporters on Tuesday, speaking on the condition of anonymity. “One of those criteria is debt sustainability.”

The I.M.F. is now firmly siding with Greece on the issue. In a reportreleased publicly on Tuesday, the fund proposed that creditors let Athens write off part of its huge eurozone debt or at least make no payments for 30 years.

The I.M.F. said in its report that a write-down could be avoided, but only if creditors extended the schedule for Greece to repay its debt. The only other alternative to a haircut would be for the eurozone countries to give Greece the money it needs to repay them.

“The choice between the various options is for Greece and its European partners to decide,” the I.M.F. report said.

Greece would need to spend a sum equal to more than 15 percent of G.D.P. annually to pay interest and principal on its debt, according to the latest I.M.F. report.

Does Not Fulfill Greek’s Human Rights:

The implementation of new austerity measures in Greece amid the country’s deteriorating economic crisis must not come at a cost to human rights, a United Nations expert warned today as he urged international institutions and the Greek Government to make “fully informed decisions” before adopting additional reforms.

“I am seriously concerned about voices saying that Greece is in a humanitarian crisis with shortages in medicines and food,” Juan Pablo Bohoslavsky, the UN Independent Expert on foreign debt and human rights, stressed in a press statement today. “Priority should be to ensure that everybody in Greece has access to core minimum levels of economic, social and cultural rights, including the right to health care, food and social security.”

“A debt service burden that may be sustainable from a narrow financial perspective may not be viable at all if one considers the comprehensive concept of sustainable development, which includes the protection of the environment, human rights and social development,” he added.

And of course, as the IMF report highlights, the deal is not even “sustainable from a narrow financial perspective”.

Kicking the Can or Letting Heads Cool?

If Greece’s creditors, led by Germany, ultimately want to see Greece stay in the Eurozone (for the long run), a friendlier deal is needed. If a “Grexit”, with its short term pain but long term possibilities to return Greece to economic health, is indeed in Greece’s best option given what it’s creditors are willing to offer, why not take that tough medicine and let the healing start? The current deal represents the worst of both worlds–economic pain now and a likely Grexit in the future.

The one positive of this deal is that it did buy time, which should not be undervalued as “Grexit” would be permanent and have terrible geopolitical consequences. But  without stimulus (there are talks of a 35 billion euro stimulus fund by 2020 if reforms are fully implemented, but this may be too little too late) and debt restructuring (which cannot be ruled out, but also cannot be counted on), the deal is little more than kicking the can down the road–all while the Greek people continue to suffer.

Greece’s creditors cannot keep dangling future carrots while imposing fiscal restraints which hurt Greece’s already beleaguered citizenry in the here and now. Aid must be synced with structural reforms, or else the Greeks will see their situation go from terrible to worse and reject the terms of this 3rd bailout. 

Doing the same thing and expecting different results is the definition of insanity. Greece has tried to implement reforms in order to unlock future aid before, and we see where that got it--a severely contracted economy, depression level unemployment rates, and costly political instability. 

This is not the time for more business as usual; this is the time for bold action and trust between Greece and it’s creditors. Unfortunately nothing about the past few months of negotiations suggest this is outcome will be realized.

 

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The Evolution of the Post-WWII International Order

As representatives from the IMF, World Bank, and the G20 converged on Washington last week, there was a sense that America may be losing its position as the main guarantor of international order:

As world leaders converge here for their semiannual trek to the capital of what is still the world’s most powerful economy, concern is rising in many quarters that the United States is retreating from global economic leadership just when it is needed most.

Washington’s retreat is not so much by intent, Mr. Subramanian said, but a result of dysfunction and a lack of resources to project economic power the way it once did. Because of tight budgets and competing financial demands, the United States is less able to maintain its economic power, and because of political infighting, it has been unable to formally share it either.

Other experts and historians, however, say too much can be made of the moment. Walter Russell Mead, a professor of foreign affairs at Bard College, noted that the rise of China as an economic force was inevitable, and that its establishment of a rival lending institution was far different from the international behavior of the Soviet Union and communist Chinese during the Cold War.

Then, he said, America’s rivals were trying to destroy and replace the economic order established by the United States and Britain after World War II. Now, emerging powers are emulating it, however imperfectly.

Sure other countries have risen in prominence since America stood as the lone super-power after the Cold War, but has this really resulted in America’s decline? I would argue that building up strong allies to help promote America’s vision of international order–one based on democracy, human rights, economic and defensive interdependence, and more recently environmentally sustainable economic development–was exactly why the U.S. took the lead in setting up the United Nations and the Brenton Woods Institutions (the World Bank, IMF, and GATT).

Therefore, in assessing America’s influence over international order, we should consider how these institutions have evolved. While they were all conceived with the best of intentions, good intentions do not always lead to good outcomes. Have these institutions been able to learn from their mistakes and make meaningful contributions to maintaining international order? Lets consider them on a case by case basis:

The International Monetary Fund (IMF):

The IMF was originally conceived to promote currency stability and help countries overcome short-term balance of payments issues. But as technological advances made the world smaller, the IMF took on a much larger mandate, and began extending loans to help developing countries modernize. The so called “Washington Consensus” linked development loans to “ex-post” (after the fact) conditions such as hitting fiscal targets (reducing the size of government) and liberalizing trade.

While these policies by and large do promote growth in already developed countries, they ignored the historic lessons of the world’s developed countries. Every advanced country relied on some degree of protectionism to cultivate its own industries and government spending to build both physical infrastructure and a skilled workforce as it modernized.

The “Washington Consensus” programs did not allow for policy space based on the historical experiences and current realities in the countries they intended to help. As I have often written, economics–particularly development economics–is highly context-sensitive; the “Washington Consensus” was simply to rigid and narrow-sighted to work.

The “Washington Consensus” was a consensus failure, and left many countries worse off than before they accepted this “help” (see “the lost decade” in Latin America). Thankfully the IMF abandoned this flawed set of policies.

The failure of the Washington Consensus led to IMF to reconsider how it does business–the “conditionality” attached to its loans. Instead of relying on a rigid set of targets a country must meet in order to continue to receive support, the IMF now focuses on pre-set “ex ante” conditionality. If a country has a sound macroeconomic position, it can tap into IMF financing while maintaining the policy space needed to address the needs of its citizens (and ultimately maintain its legitimacy).

The IMF will have to deal with the specter of the Washington Consensus for some time, but going forward it has evolved in meaningful ways.

The World Trade Organization (WTO):

The General Agreement on Tariffs and Trade (GATT) officially became the World Trade Organization (WTO) in 1995. The WTO sets rules for global trade and provides a forum for airing grievances. With membership covering 96.4% of global trade and 96.7% of global GDP, the WTO is unquestionably an important institution.

Critics often argue the WTO is ineffective, but any organization whose stated goal is the resolve international trade disputes is by definition going to be contentious. I would argue that the WTO has helped keep trade disputes trade disputes, and that without it many of these disputes could have ended in armed conflict.

In recent years, international trade news has been dominated by two proposed regional agreements, the trans-pacific partnership (TPP) between the U.S. and Asian economies, and the trans-atlantic trade and investment partnership (TTIP) between the U.S. and Europe.

There is no consensus as to whether regional free trade agreements (FTA) such as these undermine the global free trade movement, or if they are building blocks towards this goal. But one thing is for certain–free trade agreements create winners and losers. The winners tend to be the wealthy who are positioned to benefit from greater market access; the losers tend to be wage earners.

In the context of political dysfunction and simmering class-warfare in America and beyond, it is necessary that policies to transfer some of the gains from the “winners” to protect the “losers” of any FTA are baked into the agreements themselves. The ability of governments to address the inequality and environmental impacts of any FTA will greatly affect its historical legacy.

The United Nations (UN):

The United Nations is arguably the most important of the international institutions. In addition to providing a forum for countries to address one another, the UN also serves a global policy adviser, giving it the strongest normative mandate of any of these organizations.

The Millennium Development Goals (MDGs) are 8 specific goals whose intent is to guide the trajectory of the developing world. The successes of these goals has been uneven–some countries have a great record, while others not so much. As these goals are set to expire at the end of 2015, they are commonly viewed as beneficial but imperfect. Their successors, the Post-2015 Sustainable Development Goals (SDGs), aim to build on their successes while learning from their short-comings.

There are a number of ways the SDGs deviate from the MDGs. For one, they are much more inclusive and consultative. Seen as being drafted behind closed doors by the global elite, the MDGs were hampered from the start. Conversely, the SDGs are being drafted with input from numerous thematic and national consultations with the very people they are intended to benefit.

There is also greater emphasis on the roles of various stakeholders (governments, private sector, NGOs, civil society, and international organizations) with regards to both financing the agenda and being accountable for their operations in the developing world. “Who Will Be Accountable?” highlights these common but differentiated responsibilities, providing general guidelines for holding those who violate the SDGs accountable.

Between the launch of the Post-2015 Development Agenda (the SDGs) and the 2015 UN Climate Conference in Paris (which is expected to result in the first universal global climate treaty), 2015 will prove to be a pivotal year for sustainable human development initiatives.

One area the U.N. has not reformed sufficiently is in promoting global security. Given that security is a necessary precondition for sustainable human development, the significance of this shortcoming cannot be understated.

Nowhere has this problem been more acute than in the Middle East, where armed conflict has left 1 in 4 children out of school, led to immeasurable economic, physical, and psychological damage, and has completely overwhelmed the international humanitarian assistance network. The inability to protect children is especially alarming, as it plants the seeds for future conflicts.

The United Nations needs to respond more decisively against regimes that commit gross human rights violations. The concept of national sovereignty is meant to protect a country from outside invasion, not act as a shield for human rights abusers.

The Responsibility to Protect (R2P) was supposed to put peoples rights before national sovereignty, but it has proven to lack the teeth needed to provide meaningful protection. The need is clear, as I have called for in the past, for the UN General Assembly to have a mechanism for overruling UN Security Council vetoes. Such a reform would give the R2P the power it needs to fulfill its important mandate to prevent / end gross human rights violations.

The World Bank Group (WB):

The World Bank Group is responsible for financing development projects in the developing world. While its existence has been a “net benefit” for developing countries, the World Bank has had issues enforcing “good governance” standards on its projects, often resulting in adverse consequences for the worlds most vulnerable people:

The World Bank regularly fails to enforce its own rules protecting people in the path of the projects it bankrolls, with devastating consequences for some of the poorest and most vulnerable people on the planet, a new investigation by the International Consortium of Investigative Journalists, The Huffington Post and more than 20 other media partners have found.

The investigation’s key findings include:

  • Over the last decade, projects funded by the World Bank have physically or economically displaced an estimated 3.4 million people, forcing them from their homes, taking their land or damaging their livelihoods.
  • The World Bank has regularly failed to live up to its own policies for protecting people harmed by projects it finances.
  • The World Bank and its private-sector lending arm, the International Finance Corp., have financed governments and companies accused of human rights violations such as rape, murder and torture. In some cases the lenders have continued to bankroll these borrowers after evidence of abuses emerged.
  • Ethiopian authorities diverted millions of dollars from a World Bank-supported project to fund a violent campaign of mass evictions, according to former officials who carried out the forced resettlement program.
  • From 2009 to 2013, World Bank Group lenders pumped $50 billion into projects graded the highest risk for “irreversible or unprecedented” social or environmental impacts — more than twice as much as the previous five-year span.

Days after ICIJ informed the World Bank that the team’s investigation had found “systemic gaps” in the bank’s enforcement of its “social safeguard” rules, World Bank Group President Jim Yong Kim acknowledged “major problems” with the bank’s resettlement policies and vowed to seek reforms.

Being a “net benefit” for the developing world is not a high enough standard for the World Bank, it must adopt a “do no harm” principle in all its projects. To achieve this goal, the World Bank should emulate the UN in consulting with those who will be affected by their projects.

The World Bank has an important role to play in promoting the SDGs, but first it must get its own house in order.

Some may point to the recent rise of parallel international organizations such as the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) as further signs of the deterioration of an American led international order. Indeed, there are serious governance questions these institutions must address, lest they be counter-productive in the pursuits of promoting peace and eradicating extreme poverty.

It would be most constructive to have the UN promote these values (accountability, good governance, etc.) to emerging international institutions, not the US. The UN has international legitimacy; the same message coming from the UN would likely be much more well received.

US-centric international organizations are free to work with these parallel institutions or not, and their positions can evolve as these new institutions reveal their values through their actions. But as professor Walter Mead aptly points out, these institutions are not challenging America’s Post WWII vision of international order, they are doubling-down on it. As the saying goes, imitation is the greatest form of flattery.


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Transparency Report: Anti-Corruption Movements and Populism

World Bank President Dr. Jim Yong Kim called corruption “Public Enemy Number One“:

“In the developing world, corruption is public enemy number one,” said Kim, speaking at an event hosted by the World Bank’s anti-corruption investigative arm, the Integrity Vice Presidency. “We will never tolerate corruption, and I pledge to do all in our power to build upon our strong fight against it.”

“Every dollar that a corrupt official or a corrupt business person puts in their pocket is a dollar stolen from a pregnant woman who needs health care; or from a girl or a boy who deserves an education; or from communities that need water, roads, and schools. Every dollar is critical if we are to reach our goals to end extreme poverty by 2030 and to boost shared prosperity.”

An important step toward fighting corruption and helping more people lead better lives is to build institutions with greater integrity, Kim noted.  He described three key elements in the World Bank Group’s approach:

“First, we need to improve the way we share and apply knowledge about building institutions with greater integrity; second, we need to empower citizens with information and tools to make their governments more effective and accountable; and third, we need to build a global movement to prevail over corruption.”

In addition to governmental action in anti-corruption, Kim called on other partners to join the fight, including the private sector. 

“The private sector has to be part of the solution as well. Oil, gas, and mining firms are increasingly disclosing their contracts with governments. This gives everyone a chance to scrutinize the behavior of corporate and public officials.”

This transparency and accountability approach to development marks a stark contrast from the World Bank of 1990s. The IMF has recently also taken a more context-sensitive approach compared to “Washington Consensus” policies of the 1990s. This trend points to greater policy coherence between the World Bank, the IMF, and the U.N. as the Post-2015 development agenda is finalized.

These organizations have fully embraced the importance of the political economy of development. Without considering “good governance”, economic gains can be embezzled or misused. Corruption retards growth, increases inequalities, and causes grievances which can boil over civil if not regional conflicts. Economic growth and poverty reduction cannot be achieved on a large scale without considering political factors.

Ultimately, there are limits to even what global organizations can accomplish. To sustain social progress, people must be able to hold “duty bearers” (generally governments, but also private sector actors and social service providers) accountable for their human rights obligations. The role of international organizations and governments is mainly an empowering / enabling one–provide access to information, advocate for avenues / institutions to meaningfully voice grievances, and let people-power do the rest.

The anti-corruption push has recently taken hold in a number of countries. Below are a few notable examples:

India:

“Today, the common man has won,” Kejriwal said in a triumphant speech at Delhi’s Ramlila grounds, the very place were huge protests over corruption erupted in 2011, opening the way for the birth of the AAP.

“This truly feels like a miracle. Two years ago, we couldn’t have imagined such a revolution would happen in this country.”

In a December 4 election to the legislative assembly of Delhi, a city of 16 million people, no party won the majority of seats required to rule on its own.

Wearing a simple blue sweater and with a boat-shaped Gandhi cap on his head, Kejriwal pledged to set up an anti-bribery helpline.

“If anyone in the government asks you for a bribe, don’t say ‘no’,” he said. “You report it on the phone number and we’ll catch every bribe-taker red-handed.”

 Kejriwal, who has tapped into a vein of urban anger over the venality of the political class and the neglect of citizens’ rights in the world’s largest democracy, has promised to expand his movement across the country.

Along with a pledge to send Delhi’s corrupt lawmakers to jail, the AAP has also promised free water for every family in the capital and a sharp reduction in their electricity bills.

business lobby group said on Saturday the unorthodox ideology was not important as long as results were delivered.

“We feel that though the promises made by it may look tall, they can still make a good economic sense if the objective … is achieved by bringing in operational efficiencies,” Rana Kapoor, president the Associated Chambers of Commerce and Industry of India, said in a statement.

Turkey:

The allegations of high-level corruption threaten to undo Mr. Erdogan’s accomplishment of wresting Turkish politics from the military and overseeing a long period of economic growth. Like a Moses in the wilderness, he has led his people from one sort of bondage but appears unable to deliver them to a promised land of transparent government where people are ruled through consensus rather than bullying and threats.

Mr. Erdogan does not know how to play defense. Last weekend, he addressed rally after rally and cursed the “international groups” and “dark alliances” trying to undermine Turkey’s prestige.

The government is treating the crisis as nothing short of a coup by those jealous of its success. This is nonsense.

The opposition it faces has emerged because of the A.K.P’s own lack of respect for the rule of law and a cynical disregard for public accountability. It can no longer hide behind conspiracy theories and bluster.

Indonesia:

Since its establishment in 2002, the KPK (Corruption Eradication Commission) has become, contrary to all expectations, a fiercely independent, resilient, popular and successful institution that is a constant thorn in the side of Indonesia’s establishment.

[In 2009] police arrested two KPK commissioners for extortion and bribery. The charges were dropped after nationwide street protests and a Facebook campaign that gathered one million supporters.

“The KPK’s only friend is the public,” says Dadang Trisasongko, secretary general of the Indonesian chapter of global corruption watchdog Transparency International.

The international business community is watching this tussle closely. Executives surveyed in the World Economic Forum’s Global Competitiveness Report 2011-12 said corruption remained “the most problematic factor for doing business” in Indonesia.

The World Bank has said corruption across the world costs $1 trillion. No one has done a thorough study of the costs in Indonesia, the world’s fourth-most populous country and one of the hottest emerging markets with an economic growth rate of 6 percent. The Anti-Corruption Studies Center at Gadjah Mada University in Yogyakarta put the losses to the state at $1 billion over the past five years alone.

Thailand:

Thailand protests are different in the sense that the opposition is arguing for less democracy and less populist economic policies. Opponents of Prime Minister Yingluck’s Pheu Thai party cite corruption as their main grievance.

Populist economic policies, while generally beneficial in the long run, do have a common pitfall of corruption. Populist policies rely on the government signing many contracts for social goods and services. Without proper oversight, these contracts themselves present many opportunities for corruption / embezzlement of tax-payer money.

I do not know if this is what has happened in Thailand, or whether these claims are unfounded (it is worth noting that Thailand does not score well on Transparency International’s “Corruption Perception Index“. Regardless, the Pheu Thai party should consider setting up social accountability mechanisms to allay the fear of corruption.

Anti-corruption measures are themselves populist policies. Enabling people to hold corrupt government officials accountable realizes a key political right. Moving money from corrupt politicians pockets to social services helps fulfill economic and social rights. Therefore, the anti-corruption movement is an indispensable aspect of the human rights based approach to development.

The near universal embrace of anti-corruption measure–from the highest level of global governance to local politicians and their constituents on the ground–bodes well for the Post-2015 development agenda. While much work remains to be done, every anti-corruption / accountability / civilian empowerment policy is a step in the right direction.


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Economic Outlook: Quantitative Easing, Monetary Policy Coordination, and the IMF

I was going to write a  conflict watch about the chemical gas attack in Syria, but as different actors are aligning with their interest and using mostly circumstantial evidence (Russia / Assad Regime: rebels did it, why would we launch chem weapons while U.N inspectors here?; Opposition / Western governments: Assad did it, emboldened by lack of international intervention after previous chem attacks, Assad subsequently shelled area so time would pass, now UN inspectors cannot get reliable results), I will refrain from speculating on these troubling events until more information emerges.

Continuing the narrative that has come to the forefront since G-20 finance talks in Moscow and the focus surrounding extra-territorial consequences of loose monetary policy at the Fed’s annual Jackson Hole meeting, policy coordination between central banks and new policy responses by IMF are needed to ensure as smooth as possible a transition from Q.E. to Fed monetary policy tightening (exactly when this will occur is uncertain, I am of the mind that it will be later rather than sooner).

Original articles:

Reuters:

Central banks should coordinate to avoid unwanted side effects as they exit from ultra-easy monetary policies that have left the world awash in cheap money, top policymakers were told on Saturday.

“The main challenge will be to manage the consequences of monetary policies, and their evolutions, on cross-border liquidity movements,” Jean-Pierre Landau concluded in a paper he presented to an audience that included top central bankers from advanced as well as emerging market economies.

The Fed’s bond buying, or so-called quantitative easing, has been at the heart of its aggressive efforts to revive U.S. economic growth after it cut interest rates to nearly zero in 2008. Interest rates in Europe and Japan are also ultra-low.

However, the purchases have spurred massive capital inflows into faster growing emerging economies, which are now suffering as investors anticipate an end to the easy money.

But he lamented that the necessary coordination on monetary policy was unlikely, and warned of the potential for the “fragmentation” of global capital markets.

Stocks and currencies plunged in India, IndonesiaBrazil and Turkey this week as investors fretted over a looming reduction in the U.S. Federal Reserve’s monthly bond purchases.

Landau acknowledged that central bankers dislike the idea of coordinating monetary policy because their job is to focus on domestic goals. But they worked well together during the 2007-2009 financial crisis, when the Fed, European Central Bank, Bank of Japan and other central banks coordinated rate cuts and currency swap lines.

As cross-border liquidity pressures build, they will find it productive to do so again, although cooperation is more likely through regulatory and financial structures aimed at preventing excessive leverage or harmful asset bubbles, he said.

In an ideal world, the cooperation would extend to monetary policy because policies in major economies such as the United States can have an international impact that amplifies their magnitude with domestic implications, Landau argued.

“The system itself is producing more accommodative monetary conditions than warranted by the situation,” he said. “In a reverse environment, when monetary policies need tightening, the effects could be symmetrical and complicate the exit from non-conventional measures.”

In addition, much could be gained through an international “lender of last resort,” which would remove the motive for some nations to maintain massive foreign exchange reserves, he added.

“All countries have a common interest in finding ways to disconnect reserve accumulation from exchange-rate management,” Landau said. “The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis.”

Economix:

The stimulus campaigns of the Federal Reserve and the central banks of Europe and Japan, by depressing domestic interest rates, have helped to push trillions of dollars into developing markets in recent years.

The question of what central banks are supposed to do about it dominated the formal agenda here at the Kansas City Fed’s annual monetary policy conference.

The answers were surprisingly mellow. The rest of the world would like the Fed to explain its plans clearly, and then to travel slowly. Bankers from developing nations said they might need to impose some restrictions on the outflow of capital, but expressed little concern over the potential for serious economic disruptions.

Christine Lagarde, the managing director of the International Monetary Fund, struck the same sanguine tone in a Friday speech, declaring that “Central banks handled entry well, and we see no reason why they should not handle exit equally well.”

She added that the fund – and by extension, the major economies – accepted that some developing countries might need to impose some financial controls. “In some circumstances, capital flow management measures have been useful,” she said.

This is not the way that policymakers used to talk. The big countries and the I.M.F. spent the last few decades pushing for the liberalization of financial markets. They argued that developing nations were creating their own problems by failing to take the painful steps necessary to moderate capital inflows, notably by allowing their currencies to appreciate. And they showed no tolerance for capital controls.

The argument for global monetary policy coordination– mainly that in today’s globalized world, where unfathomable amounts of money can and do flow at the click of a mouse, that a large countries monetary policy choices have a direct impact on other countries–has already been explored in depth.One of the most important developments in monetary policy over the last generation is the conclusion that central banks can increase the power of their actions by talking about their goals, thereby shaping the expectations of investors.” Managing expectations and policy coordination are logically related and present a synergy point for global monetary policy coherence. 

Central banks historically have served a dual mandate, to manage unemployment and inflation. A 3rd (secondary) mandate has emerged since the Great Recession; to manage the extra-territorial effects of monetary policy decisions.

Two other interesting points are raised in these articles; the issue of capital controls and flexible credit lines.

Capital Controls:

International  capital investments are necessary for helping least developed countries (LDCs) escape poverty traps / expedite their development process. However, the mobility and liquidity of capital in today’s digital and globalized age make capital flows intrinsically volatile–capital controls help temper this volatility. IMF managing director Christie Lagarde has endorsed the use of capital controls in certain instances, which represents a complete 180 from the IMFs “Washington Consensus” policies of the 1980s and 90s. When money is “cheap” (as it is now), it flows to places that offer a higher rate of return (i.e. developing countries). Capital controls provide a buffer from capital flight when monetary policy tightens (which is inevitably as the global economy recovers), which can otherwise have devastating standard of living / human rights implications.

Capital flight may lead to less investment / higher “risk premium” (investors will not like the idea of not having complete control over their investment), but it is surely should be a countries own decision what investments it allows in its country and under what conditions, considering the destabilizing nature of unchecked financial inflows. If speculative money does not wish to come into a country, that may be in that countries best long term interests anyways. The failure of “Washington Consensus” policies, culminating in global financial contagion during the Great Recession, has led the international financial community (headed by the IMF) to reverse it’s previous stance on capital controls.

Flexible Credit Lines:

Jean Pierre-Landau alluded to flexible credit lines with this comment;

In addition, much could be gained through an international “lender of last resort,” which would remove the motive for some nations to maintain massive foreign exchange reserves, he added.

“All countries have a common interest in finding ways to disconnect reserve accumulation from exchange-rate management,” Landau said. “The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis.”

Flexible Credit Lines are available to countries through the IMF if they meet certain preconditions (a shift by the IMF from imposing constitutionality on loans to having countries reach certain thresholds for eligibility, but after that providing assistance without conditions that can sometimes undermine development (see “Washington Consensus”). Countries gain access to funding by the IMF at an agreed upon rate (which is fairly low). By having this IMF insurance policies, countries are able to pursue policies in their best long-term interests (for example capital controls, or fiscal investments in public goods), as opposed to the short-term interests of speculative investors.

The existence of a FCL eases concerns of financial actors. The overall experience with FCL countries (to date Mexico, Columbia, and Poland, evidence suggests that Ireland will be next) has been overwhelmingly positive. These countries have been able to borrow at a lower risk premium without ever having to access FCL money–no FCL country has ever had to draw on FCL funds. The efficacy of FCLs is only amplified against the backdrop of the European Debt Crisis.

I am a strong advocate of both FCLs and capital controls for developing countries. Both policies are fully consistent with a human rights based approach to sustainable human development. Both policies can temper the destabilizing effects of capital inflows, giving governments the capital, policy, and fiscal space needed to respond to crisis situations. It is encouraging to see high level policy makers are of the same mind when it comes to monetary policy coordination, FCLs, and capital controls.

I invite my readers to view a PPT presentation (FCL Final) I did last year on FCLs. The study shows graphically the experiences of Mexico, Columbia and Poland before, during, and after the Great Recession (these three countries all performed very well compared to comparable countries). It concludes by arguing for “scaling-up” of FCLs by offering them to more countries as a potential development tool.

 


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Conflict Watch: Egypt’s Impending Humanitarian Crisis

There has been lots of media coverage over the past two years of the civil unrest in Egypt following the ouster of Honsi Mubarak 2 years ago. While political jockeying continues amongst members of the Muslim Brotherhood (Mr. Morsi’s Sunni dominated party) and the small Christian / Shi’ite minority who see his rule as a challenge to their vested interests secured through decades of supporting the military dictator Honsi Mubarak, the majority of Egyptians are presumably pleased with the new freedoms that have come with democracy and wish simply for the political coherence needed to move the country forward.

But those who stand to lose their privileged positions will not give up so easily (there is also the argument that Egypt’s new constitution does not protect minority rights, but I believe this is a scare tactic being used against Morsi’s regime). It is essentially a collective action problem, those who stand to lose from Morsi’s rule stand to lose a lot, while those who stand to benefit stand to gain only incremental benefits (at least in the short run). Morsi’s opponents are also bolstered by the idea that if they can simply continue to apply pressure a little longer, they can break Morsi’s hold on power.

And they may be correct. I for one am a fan of Morsi and the democracy experiment in Egypt. But no matter who is right or wrong, or who really wants what is best for the people of Egypt, if the Morsi government is unable to provide essential services to the people, his opponents will leverage this ineffectiveness as a means to incite further political instability in Egypt.

At the source of this potential humanitarian crisis is the shortage of food and fuel. It also ties into my post yesterday about international finance and energy subsidies:

“The root of the crisis, economists say, is that Egypt is running out of the hard currency it needs for fuel imports. The shortage is raising questions about Egypt’s ability to keep importing wheat that is essential to subsidized bread supplies, stirring fears of an economic catastrophe at a time when the government is already struggling to quell violent protests by its political rivals. “

“United States officials warn of disaster unless Egypt soon carries out a package of tax increases and subsidy cuts tied to a $4.8 billion loan from the International Monetary Fund. That would persuade other lenders that Egypt was creditworthy enough to obtain billions more in additional loans needed to meet its yawning deficit. “

“Egypt has held two years of unsuccessful talks with the I.M.F., and the current government is still balking at the politically painful package of overhauls — even as rising prices and unemployment make those measures more difficult with each passing day.

‘They are operating on the notion that Egypt is too big to be allowed to fail, that the U.S. and the West will step in,’ Mr. Shimy said. ‘They think Egypt has a right to get the loan, and I think they will probably keep pushing all the way.’”

“Energy subsidies make up as much as 30 percent of Egypt’s government spending, said Ragui Assaad, of the Economic Research Forum here. The country imports much of its fuel, and for the first time last year it was forced to import some of the natural gas used to generate electricity — the reason for the recent blackouts. Egypt also imports about 75 percent of its wheat, mixing the superior foreign wheat with lower-quality domestic supplies to improve its subsidized bread. “

“But the two years of mayhem in the streets since the ouster of Mr. Mubarak have decimated tourism and foreign investment, crippling the economy. The government’s reserve of hard currency has fallen to about $13 billion from $36 billion two years ago.”

Part of the problem appears to be people’s expectations. According to Mr. Farash of the Supply Ministry, people are hoarding goods and gaming the system because they fear future uncertainty. Fuel truck drivers are diverting fuel to black markets, and bakeries are reselling their subsidized wheat at higher prices to people who fear future shortages. The thinking being, once shortages do hit, those who have supplies horded will have the goods they need to survive and will be able to sell their excess at a steep profit.

Morsi’s government is planning on installing “smart cards” to increase accountability of fuel truck drivers and bakers, which should make gaming the system more difficult. But people will still find ways to take advantage if they believe it is essential for their future well being. In order to change people’s expectations and their actions, the Morsi government will need to secure international financing to allow the Egyptian economy to run as usual.

This is where the story ties into yesterdays Normative Narratives post. One section of yesterdays post highlighted a recent IMF report stating that countries should stop fuel subsidies as a means of injecting money into the economy. With 30% of Egyptian spending tied up in fuel subsidies, clearly the IMF will not extend financing until Egypt does something to temper its unsustainable fuel subsidies.

But these subsidies are popular amongst the people, something Morsi understandably does not want to undermine early into Egypt’s first attempt at democracy in decades. There are especially important now as the value of the Egyptian pound has plummeted in conjunction with the instability caused by removing Mubarak from power and unemployment remains high. Reducing fuel subsidies will be important for Egypt’s long term fiscal stability, but doing so prematurely—as the IMF is insisting on—would undermine the popular support needed for a democratic regime to govern.

Which brings us to the second point of yesterdays post; the BRICS proposed development bank. The Bank’s purpose is to provide an alternative to IMF and WB financing, and is specifically focused on energy and infrastructure projects. This Bank could be essential to providing the financing that the IMF is currently unwilling to lend without imposing the politically impossible conditions the IMF is insisting on. But this bank was just proposed, is it really possible for it to provide funding that is needed more or less immediately?

Up till this point, unrest in Egypt has been mostly politically motivated. But if a food and fuel shortage based humanitarian crisis unfolds, the Morsi regime will be under real threat of a full blown revolution. It is essential for Egypt’s attempt at democracy to succeed, as it is a natural experiment whose results will dictate whether future attempts at democracy are attempted in the region. In order for Morsi to remain in power, international financing has to come from somewhere. Will the IMF budge on it’s conditionality? Will the BRICS development bank be running soon enough to help stabilize the Egyptian economy? Will Morsi ultimately have to cave in to IMF demands in order to receive emergency financing? Or will the democracy project in Egypt fail? None of the answers to these important questions are yet written in stone—we will have to keep a close eye on the situation as it continues to unfold.

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