Latin America: From Recovery To Slowdown
Economic performance in Latin America has been disappointing. After a successful recovery from the global financial crisis, growth in 2014 was in most countries, much below expectations and in 2015, growth would still be low. Among the largest seven economies of the region (LAC7), a contraction of output is expected in Argentina, Brazil and Venezuela, while in Chile, Colombia, Mexico and Peru, growth would be about 3 percent. This paper discusses the main factors that explain why growth has been declining. There are cyclical reasons, and, as should have been expected, after rapid recovery, a deceleration should follow. In addition, the evidence would support that potential output growth is below what was experienced at the beginning of this decade, whereas previous assessments were optimistic. The slowdown started before commodity prices started declining, and terms of trade were not significantly low. Therefore it is difficult to blame external factors on the slowdown. However, prospects of lower commodity prices will add to the drag of economic growth. The commodity price boom had a relevant effect on activity, but more than an income effect, it resulted in an investment boom. This has been particularly relevant in Chile and Peru, where that boom has come to an end, adding to the deceleration. Although monetary and fiscal policy may still have a role in supporting demand within inflation target regimes, the main problem in the region is not a lack of demand, but low productivity growth. Efforts must be made to foster productivity. More recently, the cost of institutional weakness and high degrees of inequality have highlighted areas of progress which should be actioned in order to resume high sustainable growth.
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Yin Yang Oil Prices and the Rise of African Economies: Policy ImplicationsAfrican oil exporters have been hard hit by the sustained decline in international oil prices. African oil importers are seeing dramatically lower oil import bills, but most have economies that are not energy-intensive enough to benefit greatly from the oil price change. For the continent as a whole, growth forecasts have been revised downwards, as the benefits of cheaper oil are being offset by costs associated with reduced demand for African exports of other primary commodities, especially metals and minerals. These developments highlight the continuing vulnerability of African countries to adverse terms-of-trade shocks and to the costs associated with lack of progress in structural transformation and trade diversification away from primary commodities, oil included. The poor growth outlook for Africa clearly shows that success in diversifying trade partners, though it has been highly beneficial and growth-enhancing, does not eliminate the risks associated with commodity-dependent development models.
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Risk Exposures in International and Sectoral Balance Sheet DataThis paper outlines the opportunities and pitfalls for risk analysts in interpreting the information embedded in international and sectoral balance sheets. It places an emphasis on the different risks posed by net financial stock imbalances and the cross-holding of large stocks of gross financial assets and gross financial liabilities. It argues that it is important to supplement sectoral-level data with more disaggregated levels of data, in view of the importance of intra-sectoral financial linkages and the heterogeneity in portfolios and funding mechanisms within sectors. Finally, the growing internationalisation of financial balance sheets means that it is important to take a unified approach to the joint analysis of international and sectoral balance sheets.
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International Liquidity Management Since the Financial CrisisThis article discusses how international liquidity management has been affected by the recent crisis. It notes that since the Bretton Woods system collapsed in 1971 it was expected that the demand for international reserves would diminish, since countries were no longer obliged to sell foreign currencies in case of need to support their own currencies in foreign exchange markets. However, international reserves increased in total from 3.1% of world gross product at the end of 1970 to 16.7% at the end of 2013. The paper explains this phenomenon in the context of the global demand for liquidity up to and after the global financial crisis of 2008-09. Different means of providing international liquidity assurance are assessed and the paper concludes that without an international lender of last resort, the world financial structure remains vulnerable to a new liquidity crisis.
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To Establish a Balanced Multi-currency International Reserve SystemThe dollar’s important role in the global economy is inevitably contradictory with its role as a sovereign currency. How to solve this contradiction? The combination of a multi-currency international monetary system, mainly made up of dollar, euro and Renminbi (RMB), as well as a super-sovereign currency, for instance special drawing rights (SDR), may be the answer to the Triffin problem and a right path towards the establishment of a stable international reserve currency system. This paper puts forward some ideas, aiming to arouse constructive debates on this issue.
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Has Excessive Public Debt Slowed World Growth?This paper contends that worldwide fiscal excess, as embodied in heightened public debt levels, is central to understanding why global growth has been sub-optimal since the transatlantic crisis. It notes that in the five years before the 2009-10 financial crisis average world economic growth was close to 5 per cent per year, but has since averaged only 3 per cent. The author states that government expenditure spiked notably more in advanced economies in response to the crisis and remains around 9 percent higher as a share of GDP in G20 advanced economies on average than in emerging economies. The paper explores recent literature which focused explicitly on the crowding out effects of fiscal stimulus in contrast to the Keynesian orthodox view. Attention is focussed on the impact of beneficial austerity on growth and also notes that additional government spending on infrastructure without regard to its productivity is risky.
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Offshoring and the Labour Share in Germany and USDespite broad public concern with the effect of offshoring on inequality, there is scant research. The authors shift the focus to the effect of offshoring on the labour share in value added. Regression analysis for a sample of 14 OECD countries in 21 manufacturing sectors covering the period 1995 to 2008 reveals that the effects of offshoring on the labour share are negative. They also show that different policy regimes with regard to labour markets, education and innovation, and trade liberalisation mediate these effects whilst contrasting the experiences of Germany and the U.S. where the manufacturing labour share decline was particularly strong.
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Did increased inequality cause the Great Recession?This paper considers the basis of the thesis of left-wing economist Thomas Piketty, the author of Capital in the Twenty-First Century, that “a market economy based on private property” has “powerful forces of divergence” which are likely to increase future inequality. Although Picketty’s “fundamental contribution” has been lauded as a contribution in the field of data collection and presentation, Piketty’s book contains a number of “explanatory narratives”, with descriptions of events and the identification of possible causes. This paper considers its treatment of one such narrative, that rising inequality was a principal cause of the Great Recession of 2008 – 2010. An analysis of data on the US economy in the Great Recession shows that the behaviour of the corporate sector, unrelated to personal income inequality, was responsible for about half of the drop in demand. In contrast, the personal sector, where inequality could matter, experienced falls in residential investment and in personal consumer expenditure, but a long run investigation found no relation between the degree of inequality and the stability of the housing market. Finally, an econometric analysis of the effects of personal disposable income and debt on consumption, two variables highlighted by Picketty, showed them to have had close to no impact on the recorded change in consumption.
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Korean Housing Finance, Household Debt, and Economic GrowthGovernments around the world are confronted with the problem of stoking demand and re-firing growth. The Korean government has relied on making mortgage credit more readily available to boost the housing market and energize the economy. However, this policy exposes Korean households to additional financial risks given their high levels of indebtedness. Moreover, since typical Korean home mortgages feature short-term maturities, floating-rate interest payments, and final balloon payments of principal, such risks are heightened. The Korean mortgage system requires reform, and efforts are needed to reduce the vulnerability of Korean households in coping with possible external shocks, such as sharp interest rate rises and unexpected house price declines. Since housing accounts for almost three quarters of typical Korean household asset portfolios, the housing market, combined with an expected decline in the Korean population, has a significant implication for long-term growth prospects of the Korean economy and the fortunes of the middle class in Korea. The paper assesses public policy options for reform of the mortgage market in Korea with the aim of reducing vulnerabilities for households and for economy more generally. Governments facing similar policy choices as does Korea must balance policies for short-term growth with the longer-run risks involved.
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The IMF’s Uneasy Excursion into the Euro ZoneMuch of the evolutionary history of the International Monetary Fund reflects its responses to unanticipated events. The crisis in the Eurozone at the end of the 2000s was largely unexpected. For many years prior to the crisis, the IMF’s clientele had been made up of low income and emerging economies and it was generally assumed that the future pattern of IMF lending would see some of them graduating from the Fund, rather than the Fund once again lending to ‘advanced’ economies. Programs in Greece, Ireland, Portugal and Cyprus confronted the Fund with a range of unfamiliar problems. These cover the IMF as a crisis averter, crisis lender and crisis manager. In particular the conventional design of IMF adjustment programs is not feasible in countries that belong to a monetary union. In this regard the ‘major overhaul’ of conditionality made in the aftermath of the global economic crisis may have been unhelpful. While various reforms could enhance the Fund’s ability to help Eurozone countries in the future, perhaps the main lesson that emerges from this interlude is that it is better for the IMF’s assistance not to be needed in Eurozone countries.
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The Eurozone: Was the UK Right to Opt Out?This article examines the performance of the British economy since the beginning of the single European currency in 1999, in relation to that of the Eurozone countries. The aim is to consider whether the retention of sterling with the freedom to pursue an independent monetary policy produced a better economic performance. Relative performance between the UK and the Eurozone countries is measured between 1999 and 2014 in terms of inflation, real GDP growth, the government public budget deficit/surplus and total government debt. The evidence indicates that the U.K. outperformed the Eurozone on almost all criteria until 2005, whereas in the following five years this better performance was gradually lost during the period of the global economic and financial crisis. However, since 2010 the UK has again outperformed the Eurozone on most measurements. The poor showing of the UK in the middle period can be attributed to policy failures by the third Labour government resulting in a deterioration in government finances, huge budget deficits and increased government debt. Since 1999 the decision to remain out of the Eurozone appears to have been justified.
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Costing a Data RevolutionThe lack of reliable development statistics for many poor countries has led the U.N. to call for a “data revolution” (United Nations, 2013). One fairly narrow but widespread interpretation of this revolution is for international aid donors to fund a coordinated wave of household surveys across the developing world, tracking progress on a new round of post-2015 Sustainable Development Goals. We use data from the International Household Survey Network (IHSN) to show (i) the supply of household surveys has accelerated dramatically over the past 30 years and that (ii) demand for survey data appears to be higher in democracies and more aid-dependent countries. We also show that given existing international survey programs, the cost to international aid donors of filling remaining survey gaps is manageable--on the order of $300 million per year. We argue that any aid-financed expansion of household surveys should be complemented with (a) increased access to data through open data protocols, and (b) simultaneous support for the broader statistical system, including routine administrative data systems.
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Data on Singapore’s Sovereign Wealth Fund is FlawedThis paper undertakes a critique of the quality of Singapore’s public economic data in the context of the claim that one of the island’s sovereign wealth funds, Temasek Holdings, reports that it has earned since inception in 1974 an average annualized rate of return of 16%. Over a similar time period the Singapore stock market earned 4.99% implying that Temasek on average outperformed the local stock market in which it was heavily invested, by a factor of more than three times every year. The paper replicates Temasek’s portfolio and analyses Singapore’s public finances and finds that irregularities may exist within Temasek financials. It concludes that if there are as of yet unknown financial weaknesses within Singaporean public finances that have yet to be realized then given the importance of the island in Asia’s financial markets, this should raise concerns over the quality of financial statements produced by government linked corporations and the public sector.
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Can Intra-Regional Trade Act as a Global Shock Absorber in Africa?The global financial crisis and the subsequent uneven recovery have underscored the need for Africa’s resilience to output and other shocks originated in the rest of the world. A comparison of two regional economic communities – the East African Community (EAC) and the Southern Africa Customs Union (SACU) – suggests that deeper intra-regional, and in particular intra-industry, trade ties have contributed to the EAC’s resilience to external output shocks. More broadly, intra-regional and intra-African trade with fast-growing economies, together with geographically diversified trade links, can strengthen the capacity of African countries to absorb global output shocks. Besides helping shield countries from external shocks, intra-regional trade also supports economic diversification and participation in regional value chains.
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Are There Limits to Green Growth?Although there is progress in developing green sectors in some countries, the key challenge facing the expansion of economy-wide green innovation and structural change is the absence of relevant policy follow-up to the green stimulus enacted during the Great Recession. The boost to green sectors provided by such measures is waning quickly, given that much of the green stimulus focused on energy efficiency. The biggest obstacles to sustaining green growth are major market disincentives, especially the underpricing of fossil fuels and market failures to spur green innovation. A three-part strategy to overcome these obstacles would involve, first, removing fossil fuel subsidies, second, employing market-based instruments to further reduce the social costs of fossil fuel use, and third, allocating any resulting revenue to public support for green innovation and investments. Such a strategy would ensure that green growth is not about promoting niche green sectors but instigating economy-wide innovation and structural transformation.
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Investing in green growth for sustainable development in AfricaAn overview of the distributional impact of global warming shows that the negative externalities of carbon-intensive development models are already significant in Africa. The most compelling reasons for promoting green investments in Africa is the direct economic returns in terms of savings and employment opportunities. Most renewable energy jobs created over the last few years have occurred outside Africa possibly another missed opportunity after the information and communication technology (ICT) revolution. Carbon-free technologies must not be used to sustain income inequality and macroeconomic imbalances between industrialized and developing countries, but to uniformly boost green investments.
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Taking Stock of MicrofinanceThis paper explores the current global turmoil in microfinance in the context of the problems that have arisen at SKS Microfinance in India. The authors argue that the roots of the current crisis lay in the attempt to scale-up the original “Grameen” model of microfinance set up in Bangladesh I order to establish profit-seeking bodies which have neglected the core value of trust underlying successful initiatives. Unfortunately, corrective steps may exacerbate existing problems. The founders of microfinance may have overestimated the impact of microfinance in abolishing poverty, but the hasty regulation that has been imposed to address some of the setbacks experienced in India, may only undermine further trust between borrowers and lenders. Undoubtedly, microfinance institutions have has an impact on economic exclusion, social change and on community building, but future growth in the sector may require a reversion to its original not for profit foundation.
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Quicksilver MarketsOne of the missions of the Office of Financial Research is to analyse asset market valuations and if there are excesses, explore the potential financial stability ramifications of a sharp correction. The author argues that U.S. stock prices today appear high by historical standards. Although he notes that the financial stability implications of a market correction could be moderate due to limited liquidity transformation in equity markets, he addresses other financial stability issues that may be more relevant, such as leverage, compressed pricing of risk, interconnectedness, and complexity.
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Deflation? What Deflation? Statistical Origins of Japan’s Declining Price LevelsAlthough Japan’s CPI is often criticized for potential upward bias, it deals with improvements in the quality of individual goods in ways that make the statistical inflation rate much lower than actual price changes. Moreover, the quantitative importance of this effect has risen progressively since the early 2000s due to increased weights of technology-intensive electronic products and changes in the method of adjusting their prices for quality improvement. Once this artificial effect is taken into account, it becomes questionable that Japan’s recent deflation has been so serious as to justify the adventurous monetary policy currently implemented by its central bank.
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Inflation Targeting in Developing CountriesThis paper analyzes economic and institutional factors that affect the likelihood of adopting an inflation-targeting monetary policy regime in emerging markets and developing countries. We use a logit model for a sample that comprises both inflation-targeting and non-targeting countries for the period of 1990–2009. The results show that countries experiencing improved macroeconomic performance and stronger institutional stability have a high chance of switching to the inflation-targeting framework. In particular, central bank independence, as measured by governor turnover rate and legal independence, positively affects the decision to change regimes.
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What is Britain worth to the next generation?Government economic policy implicitly aims to build up useful reserves for future generations, or at least to not burden our children and grandchildren with unsustainable debt. Surprisingly, even though this must be an important policy objective, it is rarely discussed or measured. This paper estimates what Britain is now worth to the next generation and we explain how well recent British governments have done in building up value to hand on. The results are eye-watering for anyone who has assumed that there has been a steady build-up of wealth.
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What Have We Learned From the Global Financial Crisis of 2008-09 and its Aftermath?This article summarizes a number of key lessons from the effects of the global financial crisis that, with the passage of time, are having an important impact on views about global financial stability, macroeconomic theory and policy, income inequality and the role of the international financial architecture (IFA). The crisis followed a period of rapid growth in financial globalization that largely escaped the governing capacity of the IFA and coincided with a benign view of the limited role for government regulation given the self-disciplining power of financial institutions and the inherent stability and self-correcting capacity of capitalist market economies. The crisis has confirmed the important role for government policies in promoting economic recovery and minimizing or reversing the negative distributional effects of the crisis, although little has been done to deal with income inequality. Also, strong intergovernmental coordination has been required to correct major defects in the IFA.
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Measuring GDP in Europe Author: , June 2015
In Europe the quality of national income statistics is less constrained by the capacity and resources devoted by national statistics offices to follow international best practice than is the case in many other parts of the world. In addition the members of the European Union have to meet the harmonised standards of national accounting set by Eurostat which are based on the United Nations System on National Accounts. However, despite recent modifications both these standards fail to adequately record the size of the informal economy.
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Measuring The Americas GDP Author: , March 2015
The Americas, comprising the USA and Canada, the Spanish speaking countries of South and Central America plus Brazil and the Caribbean, is a region displaying large differences in living standards. The availability of resources has an impact on the quality and reliability of economic statistics. Chile and Mexico, both OECD members, produce economic data that can be compared favourably with the USA, Canada and many European countries. In other countries out of date base years, outdated national income accounting standards and problems in recording the size of the informal economy mean that GDP figures are likely to be underestimated. The most insidious problem in the region arises from the political manipulation of economic data in Argentina which has led to a censure of the government by the IMF.
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Is part of the Latvian economy already in the middle-income trap?There are fears that the observed moderation of growth rates in Latvia suggest it may soon be stuck in a Middle Income Trap. No uniform understanding has been reached as to what a Middle Income Trap is and what signs testify to its existence. In order to avoid the danger of this trap structural reforms will be necessary which together with higher quality investment could raise Total Factor Productivity.
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GDP as the champion of measurementsThis paper considers the importance of measurement in complex societies and notes that the concept of measuring macroeconomic variables such as GDP was grounded in the impact of the 1929 Wall Street Crash on America. Simon Kuznets, a Harvard economist, produced a report for the National Bureau of Economic Research (NBER) which was published in 1934. Despite warnings of the limitations of GDP, its use has expanded to include government expenditures while to Kuznets government activities were an intermediate service and not part of final output. This paper considers particular inadequacies in using GDP as a measure of welfare when it includes, prison funding, natural disaster relief or expenditure on big sports events. The paper also argues that we should move beyond GDP while still recognizing its benefits as an organized methodology. Climate change, environmental disasters and international terrorism, transcend the assumption that economic growth is all we need. It concludes that an index capable of measuring social progress, independent from economic activity is needed.
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The Illusory Economic Gains from Hosting the Olympics & World CupThe IOC's Olympic Games and FIFA's World Cup are the two most popular global sporting events. Winning the rights to host these competitions comes with great fanfare. Yet except under special circumstances, the scholarly evidence suggests that hosting either event is no economic bargain for the host city or country. Short-run costs for venue construction and operations invariably exceed Games-related revenues by billions of dollars and long-term gains are elusive. The bidding process to host is structured such that a monopolist auctions off the rights to a world of competitors. The top bidder is likely to experience a winner's curse.
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The Poverty of Statistics: Military Power, Defence Expenditure and Strategic BalanceMilitary expenditure and the number of service personnel are the two features most commonly used to compare national military power. The question remains, however, to what extent these reflect the real-world situation. This study aims to provide an answer by using economic and military data about conflicts between great powers over the last 160 years. Correlations of War data are employed to show that the relationship between pre-war military expenditure and army size on the one hand and outcomes of war on the other, is blurry to say the least. States with higher military expenditure prevailed in only six of the nine conflicts between great powers examined in this research. Only four of the nine were won by the state with the larger peacetime army. Using the case of the Franco-Prussian War, this work illustrates that even the superiority of both mentioned variables cannot ward off a crushing defeat, let alone ensure victory. A nation’s military power stems from its ability to adapt effectively to the realities of modern warfare. This is what neither high military expenditure nor sheer soldier numbers can guarantee.
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