Inter Press ServiceFinancial Crisis – Inter Press Service http://www.ipsnews.net News and Views from the Global South Tue, 26 Sep 2017 15:53:25 +0000 en-US hourly 1 https://wordpress.org/?v=4.8.2 More Public Spending, Not Tax Cuts, for Sustainable, Inclusive Growthhttp://www.ipsnews.net/2017/09/public-spending-not-tax-cuts-sustainable-inclusive-growth/?utm_source=rss&utm_medium=rss&utm_campaign=public-spending-not-tax-cuts-sustainable-inclusive-growth http://www.ipsnews.net/2017/09/public-spending-not-tax-cuts-sustainable-inclusive-growth/#respond Tue, 26 Sep 2017 15:53:25 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=152243 Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions during 2008–2015 in New York and Bangkok. Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Tax cuts do not magically improve economic growth. Instead, the government should focus on building more economic capacity with new investments in infrastructure, research and development (R&D), education, and anti-poverty programs. Credit: Amantha Perera/IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Sep 26 2017 (IPS)

The Trump administration’s promise to increase infrastructure spending should break the straightjacket the Republicans imposed on the Obama administration after capturing the US Congress in 2010. However, in proportionate terms, it falls far short of Roosevelt’s New Deal effort to revive the US economy in the 1930s.

To make matters worse, reducing budget deficits remains the main economic policy goal of all too many OECD governments. Governments tend to cut social spending if they can get away with it without paying too high a political price.

But OECD governments’ belief that social spending — on health, education, childcare, etc. — is growth inhibiting is sorely mistaken. There is, in fact, overwhelming evidence of a positive relationship between public social spending and growth.

Return of supply-side economics
The cornerstone of all too many OECD government policies is tax cuts, especially for business corporations, ostensibly so that they will invest more with their higher retained earnings. This policy is premised on the long-discredited ‘supply-side economics’ promoted by conservative economists led by Arthur Laffer, popular during the early Reagan-Thatcher era of the 1980s.

But in retrospect, it is clear that the tax cuts by the Reagan administration on high-income households and businesses failed to boost growth in the US. Harvard professor and National Bureau of Economic Research president emeritus Martin Feldstein, President Reagan’s former chief economist, and Douglas Elmendorf, the former Democrat-appointed Congressional Budget Office Director, have shown that the 1981 tax cuts had virtually no net impact on growth.

Similarly, the 2001 and 2003 Bush tax cuts on ordinary incomes, capital gains, dividends and estates also failed to stimulate much growth, if any. In both cases, growth mainly came from other expansionary policies.

The OECD and the IMF also both doubt that tax cuts significantly induce investments. Cross-country research has found no relationship between changes in the top marginal tax rates and economic growth between 1960 and 2010. During this half-century period, although the US cut its top tax rate by over 40 percentage points, it only grew by just over two percent per annum on average. In contrast, Germany and Denmark, which barely changed their top rates at all, experienced similar growth rates.

Thus, tax cuts do not magically improve economic growth. Instead, the government should focus on building more economic capacity with new investments in infrastructure, research and development (R&D), education, and anti-poverty programs. As the IMF’s 2014 World Economic Outlook showed, the impacts of public investment are greatest during periods of low growth.

Social spending for economic recovery
Effective social programs provide immediate benefits to low-income families, enhancing long-term economic growth prospects. Increased income security improves health and increases university enrolment, leading to higher productivity and earnings.

Similarly, nutrition assistance programs improve beneficiaries’ health and cognitive capacities while housing assistance programs have other positive impacts. Investments in education result in a more skilled workforce, raising productivity and earnings as well as spurring innovation. Extra years of schooling are correlated with significant per capita income increases.

Investments in early childhood, including health and education, also enhance economic benefits. The earlier the interventions, the more cost-effective they tend to be; hence, OECD policymakers now promote preschool childcare and education.

Children enjoying early high-quality care and education programs are less likely to engage in criminal behaviour later in life; they are also more likely to graduate from secondary school and university. Reducing preschool costs also effectively raise mothers’ net incomes, inducing them to return to employment.

But the revenue boost from greater growth and productivity due to such social programs may not be enough to prevent rising deficits or debt. However, there are many ways to deal with revenue shortfalls, including new taxes as well as better regulations and enforcement to stem tax evasion. Progressive social protection programs and universal health care provisioning also help improve equity.

The ‘cure’ is the problem
This is not the time to reduce public debt through damaging cuts to social programs when most OECD economies are stagnant and the world economy continues to slow down. Hence, the current OECD priority should be to induce more robust and inclusive growth.

There is simply no robust evidence – old or new – of growth benefits from ‘supply-side’ tax cuts. This is the time for a pragmatic inclusive growth agenda, breaking free of the economic mythology which has held the world economy back for almost a decade.

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Scaling up Development Financehttp://www.ipsnews.net/2017/09/scaling-development-finance/?utm_source=rss&utm_medium=rss&utm_campaign=scaling-development-finance http://www.ipsnews.net/2017/09/scaling-development-finance/#respond Tue, 05 Sep 2017 15:21:51 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=151937 Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions during 2008–2015 in New York and Bangkok.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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The United Nations and others have revived the idea of the International Monetary Fund (IMF) issuing Special Drawing Rights (SDRs) to finance development. Credit: Sriyantha Walpola/IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR , Sep 5 2017 (IPS)

The Business and Sustainable Development Commission has estimated that achievement of Agenda 2030 for the Sustainable Development Goals will require US$2-3 trillion of additional investments annually compared to current world income of around US$115 trillion. This is a conservative estimate; annual investments of up to US$2 trillion yearly will be needed to have a chance of keeping temperature rise below 1.5°C.

The greatest challenge, especially for developing countries, is to mobilize needed investments which may not be profitable. The United Nations and others have revived the idea of the International Monetary Fund (IMF) issuing Special Drawing Rights (SDRs) to finance development.

IMF quotas
SDRs were created by the IMF in 1969 to supplement member countries’ official reserves (e.g., gold and US dollars). They were designed to meet long-term international liquidity needs, rather than as a short-term remedy for payments imbalances. The SDR is not a currency, but a potential claim on freely usable currencies (e.g., USD) of IMF members.

Currently, SDRs are allocated among members according to their IMF quotas. IMF quotas determine a member’s maximum financial commitment, voting power and upper limit to financing. Determination of quotas has been influenced by the convertibility of currencies, as it provides the Fund with ‘drawable’ resources. Moreover, the current quota formula is highly influenced by countries’ GDPs and trade.

Despite some reforms over the decades, IMF quotas are biased in favour of rich countries. Thus, arguably, SDR distribution based on IMF quotas is not neutral. Allocating more rights to provide poor countries with development finance would help redress this bias.

Concessional finance
The UN has long argued for creating new reserve assets (i.e., SDRs) to augment development finance instead of current provisions for distribution according to IMF quotas.

Creating new SDRs for development finance has its origins in Keynes’ 1944 proposal for an international clearing union (ICU). The ICU was to be empowered to issue an international currency, tentatively named ‘bancor’. The ICU would also finance several international organizations pursuing desirable objectives such as post-war relief and reconstruction, preserving peace and maintaining international order, as well as managing commodities.

From the late 1950s, Robert Triffin and others urged empowering the IMF to issue special reserve assets to supplement development finance. In 1965, the United Nations Conference on Trade and Development (UNCTAD) endorsed a plan similar to Triffin’s.

According to this plan, the IMF would issue units to all member countries against freely usable currencies deposited by members. The IMF would invest some of these currency deposits in World Bank or International Bank for Reconstruction and Development (IBRD) bonds. The IBRD would then transfer some of these to the International Development Association (IDA) for long-term low-interest loans to the poorest countries.

Objections

However, the proposal was blocked by the Group of Ten developed countries. They argued that the proposal, for permanent transfers of real resources from developed to developing countries, would contradict the original intent of costless reserve creation. Additionally, the G10 argued, direct spending of SDRs would be inflationary.

The creation of SDRs is not an end in itself, but a means to raise living standards. Thus far, the SDR facility has been used to try to ensure more orderly and higher growth in international liquidity, e.g., following the 2008-2009 global financial crisis, when a new allocation of SDR 182.7 billion was approved.

Also, by substituting for gold, which requires real resources to be mined, refined, transported and guarded, with costs of production and administration near zero, SDRs generate social savings, which can be used for internationally agreed objectives.

Jan Tinbergen argued that as the creation of new money always implies that the first recipient gets money without having produced something, this privilege should be given to the poor countries of the world, instead of the rich. But changing the SDR allocation formula requires amending the IMF Articles of Agreement, which requires approval of all powerful developed countries, which seems most unlikely in these times.

Development finance
Another recent UN proposal could help overcome resistance to issuing SDRs for development finance. The proposal involves floating bonds backed by SDRs, not directly spending SDRs. Arguably, leveraging SDRs thus would expose bond holders to illiquidity risks and distort the purpose (i.e., reserve asset) for which SDRs were first created.

Opposition to the proposal should be reduced by only leveraging ‘idle’ SDRs held by reserve-rich countries to purchase such bonds. This would be comparable to countries investing foreign currency reserves through sovereign wealth funds, where the liquidity and risk characteristics of specific assets in the fund determine whether they qualify as reserve holdings. Thus, careful design for leveraging SDRs, while maintaining their reserve function, can mitigate objections.

The proposal is also in line with current donor preference for blended finance, using aid to leverage private investment. Hence, this more modest and less ambitious proposal should face less political resistance from developed countries as it delinks the SDR distribution formula from the debate over amending IMF quotas.

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Venezuela’s Government Is Following a “Policy to Repress,” the UN Sayshttp://www.ipsnews.net/2017/08/venezuelas-government-following-policy-repress-un-says/?utm_source=rss&utm_medium=rss&utm_campaign=venezuelas-government-following-policy-repress-un-says http://www.ipsnews.net/2017/08/venezuelas-government-following-policy-repress-un-says/#respond Wed, 30 Aug 2017 18:36:35 +0000 Roshni Majumdar http://www.ipsnews.net/?p=151852 After sending a team to investigate the human rights conditions in Venezuela amid growing political and economic crisis, the UN Human Rights Office has reported that the crushing of anti-government protests point to the “the existence of a policy to repress political dissent and instil fear in the population to curb demonstrations.” After being repeatedly […]

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Secretary-General António Guterres (right) meets with Jorge Arreaza, Minister for Foreign Affairs of the Bolivarian Republic of Venezuela. Credit: UN Photo/Evan Schneider

By Roshni Majumdar
UNITED NATIONS, Aug 30 2017 (IPS)

After sending a team to investigate the human rights conditions in Venezuela amid growing political and economic crisis, the UN Human Rights Office has reported that the crushing of anti-government protests point to the “the existence of a policy to repress political dissent and instil fear in the population to curb demonstrations.”

After being repeatedly denied access into Venezuela, the UN sent a team to monitor the situation remotely. After investigating protests from April 1 until 31st July, the team recorded that the security forces and armed colectivos, a pro-government armed group, were responsible for a total 73 deaths or half of all 146 deaths that the team opened investigations into. The report also sheds light on the gradual escalation of violence, as injured persons in the first half of April reported inhaling tear gas, and by the end of July, came in dozens to treat injuries from gunshots.

As the report clearly outlines Venezuela’s spiral into crisis by continuous use of attacks against peaceful protesters by government forces, the UN High Commissioner for Human Rights Zeid Ra’ad Al Hussein has stressed on the importance to curb this mishandling of power.

“The right to peaceful assembly was systematically violated, with protestors and people identified as political opponents detained in great numbers. The report also identifies serious violations of due process and patterns of ill-treatment, in some cases amounting to torture,” Zeid said.

International pressure, however, has worked to some effect as many detainees, who numbered as many as 5,000 in the beginning of April, have been freed. Still, more than 1,000 are reportedly detained. In addition, 609 civilians have been tried in military courts, instead of ordinary courts.

Besides the use of deadly force, many witnesses gave firsthand accounts of the violence, citing cases where the security forces deliberately fired tear gas at short range, or threw nuts and bolts directly at them. Numerous instances of illegal house raids and unlawful torture of detainees have also been reported.

The breakdown of law and order, with violence primarily attributed to the National Guard and the National Police, has picked up pace in August.

Recent measures like criminalising leaders from the opposition through the newly established Commission of Truth, Justice, and Peace have raised concerns about the partisan nature of inquiries into preventing further violence. This new commission was recently installed by the controversial Constituent Assembly.

Zeid cited the deterioration of conditions in the country and encouraged the government to follow up on the report published by the UN and make conscientious enquiry.

“I encourage the Venezuelan Government to follow up on the recommendations made in the report and to use its findings as guidelines to seek truth and justice for the victims of human rights violations and abuses. I once again call on the Government to renounce any measure that could increase political tension in the country and appeal to all parties to pursue meaningful dialogue to bring an end to this crisis,” he said.

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Quantitative Easing for Wealth Redistributionhttp://www.ipsnews.net/2017/08/quantitative-easing-for-wealth-redistribution/?utm_source=rss&utm_medium=rss&utm_campaign=quantitative-easing-for-wealth-redistribution http://www.ipsnews.net/2017/08/quantitative-easing-for-wealth-redistribution/#respond Tue, 22 Aug 2017 08:51:10 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=151760 Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Quantitative Easing for Wealth Redistribution - A man pushes a cartful of garbage near a busy intersection in Yangon, Myanmar. Credit: Amantha Perera/IPS

A man pushes a cartful of garbage near a busy intersection in Yangon, Myanmar. Credit: Amantha Perera/IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Aug 22 2017 (IPS)

Following the 2007-2008 global financial crisis and the Great Recession in its wake, the ‘new normal’ in monetary policy has been abnormal. At the heart of the unconventional monetary policies adopted have been ‘asset purchase’ or ‘quantitative easing’ (QE) programmes. Ostensibly needed for economic revival, QE has redistributed wealth – regressively, in favour of the rich.

As its failure to revive most economies becomes apparent, and opposition to growing inequality rises, QE may soon end, judging by recent announcements of some major central banks. Already, the US Federal Reserve and the Bank of England have been phasing out purchases of financial assets, while the European Central Bank (ECB) is publicly considering how quickly to do so from December. Meanwhile, these monetary authorities are considering raising interest rates again.

Evaluated by its own declared objectives, QE has been a failure. Forbes magazine, the self-avowed ‘capitalist tool’, has acknowledged that QE has “largely failed in reviving economic growth”. By ‘injecting’ money into the economy, QE was supposed to induce banks to lend more, thus boosting investment and growth. But in fact, overall bank lending fell after QE was introduced in the UK, with lending to small and medium sized enterprises (SMEs) – responsible for most employment – falling sharply.

Bank failure to finance productive investments was not because corporations were short of cash as they have considerable reserves. Instead, the problem is due to under-consumption or overproduction, exacerbated by protracted stagnation and worsening inequality. After all, producing more when demand is soft or shrinking only leads to excess supply or gluts.

 

QE’s regressive wealth distribution

But QE has transferred wealth and income to the rich in the guise of reviving the world economy. New money created by QE was not invested in new productive activities, but instead mainly flowed into stock markets and real estate, pushing up share and property prices, without generating jobs or prosperity. QE has enriched asset owners, increasing the wealth of the rich, while not generating real wealth.

By effectively devaluing currency, QE has diminished money’s buying power, thus reducing real incomes. However, first-time or new asset purchasers lose, having to spend more to buy more expensive assets such as shares or real property. While increased asset prices have to be paid by purchasers, the additional cost to existing asset owners is partially compensated for by higher prices received for assets sold.

Thus, the claim that QE would encourage investment as well as boost growth and employment has disguised the massive redistribution or wealth transfer to the rich. QE, especially in the US and UK, has seen real wages fall as profits rose. While output may have recovered, real wages have been generally lower.

 

In the South too

QE has had similar effects in the global South, enriching asset owners at the expense of the ‘asset-poor’, while making their economies more vulnerable. QE also caused housing, stock market and commodity price bubbles as speculators rushed to buy up such assets. Until petrol prices fell in late 2014, oil-exporting countries enjoyed cash windfalls, at the expense of oil-importing countries, sometimes with devastating consequences, even if only temporary.

QE triggered huge capital flows into the developing world. Around 40 percent of the US Fed’s first QE credit expansion and a third from QE2 went abroad, mostly to ‘emerging markets’. Much of this went into buying existing assets, rather than into productive new investments. And if their currencies strengthened, their exports were undermined.

On the other hand, QE also exacerbated competitive currency devaluations. By reducing the value of their own currencies, ‘reserve currency’ monetary authorities effectively caused other currencies to appreciate, damaging their exports and trade balances.

 

Be prepared

Unlike productive long-term investments, ‘hot money’ inflows of speculative capital worsen currency volatility. Rising interest rates in the West are likely to trigger a mass exodus of capital from emerging markets, potentially triggering currency collapses in emerging markets again, as in mid-1997.

With various recent developments conspiring to reverse the last several years of unconventional monetary policies in the North, emerging markets and other developing economies are generally poorly prepared for the forthcoming change in circumstances.

While policy options in different scenarios are already being publicly considered in the Western reserve currency economies, an ostrich-like approach of not discussing and preparing for such changes is much more widespread in other economies, with potentially catastrophic consequences.

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Leadership Failure Perpetuates Stagnationhttp://www.ipsnews.net/2017/08/leadership-failure-perpetuates-stagnation/?utm_source=rss&utm_medium=rss&utm_campaign=leadership-failure-perpetuates-stagnation http://www.ipsnews.net/2017/08/leadership-failure-perpetuates-stagnation/#respond Wed, 09 Aug 2017 16:33:34 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=151629 Jomo Kwame Sundaram, a former economics professor and United Nations Assistant Secretary-General for Economic Development, received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Growing income inequality in most countries before the Great Recession has only made things worse, by reducing consumer demand and household savings, and increasing credit for consumption and asset purchases. Credit: IPS

By Jomo Kwame Sundaram
KUALA LUMPUR , Aug 9 2017 (IPS)

What kind of leadership does the world need now? US President Franklin Delano Roosevelt’s leadership was undoubtedly extraordinary. His New Deal flew in the face of the contemporary economic orthodoxy, begun even before Keynes’ General Theory was published in 1936.

Roosevelt’s legacy also includes creating the United Nations in 1945, after acknowledging the failure of the League of Nations to prevent the Second World War. He also insisted on ‘inclusive multilateralism’ – which Churchill opposed, preferring a bilateral US-UK deal instead – by convening the 1944 United Nations Conference on Monetary and Financial Affairs at Bretton Woods with many developing countries and the Soviet Union.

The international financial institutions created at Bretton Woods were set up to ensure, not only international monetary and financial stability, but also the conditions for sustained growth, employment generation, post-war reconstruction and post-colonial development.

Debt bogey
In resisting painfully obvious measures, the current favourite bogey is public debt. Debt has been the pretext for the ongoing fiscal austerity in Europe, which effectively reversed earlier recovery efforts in 2009. With private sector demand weak, budgetary austerity is slowing, not accelerating recovery.

Much has been made of sovereign debt on both sides of the north Atlantic and in Japan. In fact, US debt interest payments come to only 1.4 percent of annual output, while Japan’s very high debt-GDP ratio is not considered a serious problem as its debt is largely domestically held. And, as is now well known, the major problems of European debt are due to the specific problems of different national economies integrated sub-optimally into the Eurozone.

The international community has, so far, failed to develop effective and equitable debt workout, including restructuring arrangements, despite the clearly dysfunctional and problematic international consequences of past sovereign debt crises. The failure to agree to sovereign debt workout arrangements will continue to prevent timely debt workouts when needed, thus effectively impeding recovery as well.

Meanwhile, earlier international, including US tolerance of the Argentine debt workout of a decade and a half ago had given hope of making progress on this front. However, this has now been undermined by the Macri government’s recent concession, on worse terms and conditions than previously negotiated, to ‘vulture capitalists’.

Golden cages of the mind
Most major deficits now are due to the collapse of tax revenues following the growth downturn and costly financial bailouts. Slower growth means less revenue, and a faster downward spiral. While insisting on fiscal deficit reduction, financial markets also recognize the adverse growth implications of such ‘fiscal consolidation’.

Many policymakers are now insisting on immediate actions to rectify various imbalances, pointing not only to fiscal deficits, but also to trade and bank imbalances. While these undoubtedly need to be addressed in the longer term, prioritizing them now effectively blocks stronger, sustained recovery efforts.

Recent recessionary financial crises have been caused by bursting credit and asset bubbles. Recessions have also been deliberately induced by public policy, such as the US Fed raising real interest rates from 1980. Internationally, this contributed not only to sovereign debt and fiscal crises, but also to protracted stagnation outside East Asia, including Latin America’s ‘lost decade’ and Africa’s ‘quarter century retreat’.

Yet another distraction is exaggerating the threat of inflation. Much recent inflation in many countries has been due to higher international commodity, especially fuel and food prices. Domestic deflationary policies in response only slowed growth while failing to stem imported inflation. In any case, the collapse of most commodity prices since 2014 has rendered this bogey irrelevant.

Market vs recovery
Strident recent calls for structural reforms mainly target labour markets, rather than product markets. Labour market liberalization in such circumstances not only undermines worker protections, but is also likely to diminish real incomes, aggregate demand and, hence, recovery prospects. Nevertheless, these have become today’s priorities, detracting from the urgent need to coordinate and implement strong and sustained efforts to raise and sustain growth and job creation.

Meanwhile, cuts in social and welfare spending are only making things worse – as employment and consumer demand fall further. In recent decades, profits and rents have risen at the expense of wages, but also with much more accruing to finance, insurance and real estate (FIRE) compared to other sectors.

The outrageous increases in financial executive remuneration in recent years, which cannot be attributed to increased productivity by any stretch of the imagination, have exacerbated problems of financial sector short-termism. Regulations are urgently needed to limit short-termism, including the ability of corporations to reap greater profits in the short-term while worsening risk exposure in the longer term, thus exacerbating systemic macro-financial vulnerability.

Growing income inequality in most countries before the Great Recession has only made things worse, by reducing consumer demand and household savings, and increasing credit for consumption and asset purchases – instead of augmenting investments in new economic capacities and capabilities.

Reform bias
Current policy is justified in terms of ‘pro-market’ – effectively pro-cyclical – choices when counter-cyclical efforts, institutions and instruments are sorely needed instead. Unfortunately, global leadership today seems held to ransom by financial interests, and associated media, ideology and ‘oligarchs’ whose political influence enables them to secure more rents and pay less taxes in what must truly be the most vicious of circles.

John Hobson – the English liberal economist in the tradition of John Stuart Mill – noted that ‘economic imperialism’ emerged from the inherent tendency for economic power to concentrate and the related influence of oligopolistic rentiers on public policy. Selective state interventions to bail out and protect such interests nationally and internationally, while not subjecting them to regulation in the national interest, must surely remind us of the dangers of powerful, but unaccountable oligarchies in a systemically unstable market economy and politically volatile societies.

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Why New US Cold War with Russia Nowhttp://www.ipsnews.net/2017/08/new-us-cold-war-russia-now/?utm_source=rss&utm_medium=rss&utm_campaign=new-us-cold-war-russia-now http://www.ipsnews.net/2017/08/new-us-cold-war-russia-now/#respond Wed, 09 Aug 2017 15:54:16 +0000 Vladimir Popov http://www.ipsnews.net/?p=151631 Vladimir Popov is a Research Director with the Dialogue of Civilizations Research Institute in Berlin. This op-ed is based on a recent DOCRI publication (https://doc-research.org/en/).

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Vladimir Popov is a Research Director with the Dialogue of Civilizations Research Institute in Berlin. This op-ed is based on a recent DOCRI publication (https://doc-research.org/en/).

By Vladimir Popov
BERLIN, Aug 9 2017 (IPS)

Even before the imposition of new sanctions on Russia by Donald Trump and the ongoing fuss over Russian hackers undermining US democracy, Russian-American relations had deteriorated to a level not seen since the 1950s. Why?

Vladimir Popov

Political ideology
After all, the US has fewer ideological disagreements with Russia than with the USSR. Russia now has a capitalist economy and is more democratic than the USSR. Russia is also much weaker than the USSR – its population and territory are about 60 to 80 percent of the Soviet Union, and its economic and military might has been considerably diminished, so it poses much less of a threat to the US than the USSR.
However, US rhetoric and actions towards Russia are much more belligerent now than during the 1970s, or in the 1980s, when the US imposed sanctions against the USSR after Soviet troops invaded Afghanistan. Even when President Reagan was calling the USSR ‘the evil empire’, relations did not deteriorate as much as in recent years.

Bilateral economic relations have taken a similar turn for the worse. Soviet-US trade expanded rapidly in the 1960s and 1970s, nominally increasing nearly a hundred-fold in two decades, before plateauing in the 1980s. There was some growth in the 1990s and 2000s after the USSR fell apart, but after peaking in 2011, trade has been falling.

Why did the fastest expansion of bilateral trade occur in the 1960s and 1970s? After all, the USSR was not a market economy, and also ‘communist’. By contrast, US trade growth with post-Soviet, capitalist and democratic Russia over the next two decades was modest, before actually shrinking in the last half decade.

Geopolitics?

One popular explanation is geopolitical considerations. It is argued that when a hostile power tries to expand its influence, the US, the rest of the West and hence, NATO respond strongly.

Examples cited include the Cold War in the 1950s and 1960s, and sanctions against the Soviet Union after it invaded Afghanistan in 1979. The same could be said about more recent Western sanctions in response to Russian advances in Crimea, Eastern Ukraine and Syria.

But the 1970s contradicts this argument. After all, the USSR was gaining ground at US expense in Indochina, the former Portuguese colonies, Nicaragua and other developing countries. Why then did détente and trade grow in the 1970s?

US as #1
The US position is not primarily determined by either ideology or geopolitics, but rather, by the changing US establishment view of the balance of power. After the devastation of the Second World War, the USSR was hardly a superpower, so the US expected to press the USSR, its erstwhile ally, into submission through the Cold War.

But the Soviet Union began closing the gap with the United States in terms of productivity, per capita income and military strength in the 1950s and 1960s. Even though its economy slowed from the mid-1960s, the USSR had caught up in many respects, enough to qualify as the other superpower. The result was détente. Although the USSR had been offering rapprochement after the Second World War, the US only accepted detente in the 1970s, as the military gap closed.

Today, the US establishment knows that the Russian economy have fallen far behind since the 1980s while its military is getting more obsolete. The strategic conclusion appears to be that Russia can be contained via direct pressure and sanctions, something unthinkable against the communist USSR in the 1970s or China today, even though China is less democratic than Russia and still led by a communist party.

Playing with fire
Economically and militarily, Russia is undoubtedly relatively much weaker today than the USSR was. But its capacity has recovered considerably in the new century from the 1990s, with modest growth reversing the economic devastation of the Yeltsin presidency.

And even if it is true that the US is now an unchallenged ‘number one’, and will remain dominant in the foreseeable future, while Russia is not only weak, but also getting relatively weaker, the current effort of pressing Russia into submission has risks.

US pressure on Russia can result in a stand-off comparable to the 1962 Cuban missile crisis, which the USSR was willing to risk at that time, even though its military capability was well behind that of the US. Eventually, not only were Soviet missiles withdrawn from Cuba, a return to the status quo ante, but the US also promised not only not to invade Cuba, but also to withdraw its medium range missiles from Turkey.

True, Russia is relatively weaker today, but it still has tremendous destructive capacity. One only has to remember that North Korea, with much less military capacity, has successfully withstood US pressure for decades. However, as US economic dominance in the world has been eroding since the Second World War, and its military superiority is the main source of US advantage, the temptation will remain to use this superiority before it is eroded as well.

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UN Analytical Leadership in Addressing Global Economic Challengeshttp://www.ipsnews.net/2017/08/un-analytical-leadership-addressing-global-economic-challenges/?utm_source=rss&utm_medium=rss&utm_campaign=un-analytical-leadership-addressing-global-economic-challenges http://www.ipsnews.net/2017/08/un-analytical-leadership-addressing-global-economic-challenges/#respond Thu, 03 Aug 2017 07:42:45 +0000 Jose Antonio Ocampo and Jomo Kwame Sundaram http://www.ipsnews.net/?p=151552 José Antonio Ocampo was Executive Secretary of the UN-ECLAC from 1998 to 2003 and UN Under-Secretary-General for Economic and Social Affairs from 2003 to 2007. Jomo Kwame Sundaram was UN Assistant Secretary General for Economic Development from 2005 to 2015.

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International solidarity is necessary for reinvigorating and rebuilding the global economy as well as inclusive and equitable development. Credit: Jenny Lopez-Zapata/IPS

By José Antonio Ocampo and Jomo Kwame Sundaram
KUALA LUMPUR, Aug 3 2017 (IPS)

The United Nations recently released the 70th anniversary issue of its flagship publication, the World Economic and Social Survey (WESS). First published in January 1948 as the World Economic Report, it is the oldest continuous publication analyzing international economic and social challenges. The 2017 issue reviews 70 years of WESS policy recommendations, many of which remain relevant today to address global challenges and to achieve the 2030 Agenda or Sustainable Development Goals.

Created in 1945 to ensure world peace, the United Nations charter recognized that economic and social progress for all is fundamental for ensuring sustainable peace. The UN has thus been monitoring socio-economic developments globally since the 1940s. Its analyses have long highlighted the interdependence of the global economy, and advocated international policy coherence and coordination for sustainable, inclusive and balanced socio-economic progress.

The picture which emerges is that the UN has been ahead of the curve on many issues, especially on closing gaps in human well-being between and within countries. From early on, it has urged developed countries to support socio-economic progress in developing countries, not only in their own interest as trading partners, but also to maintain conditions for greater economic stability and more equitable global development. It has also long called for predictable transfers of finance and technology to developing countries, and for opening up developed country markets to developing countries’ exports.

The UN has also pioneered innovative multilateral institution building to fill lacunae. In the 1960s, WESS provided the analytical rationale for establishing the United Nations Conference on Trade and Development (UNCTAD) and the United Nations Industrial Development Organization (UNIDO) to support developing countries seeking to equitably benefit from international trade and investment, and to industrialize.

The 2017 review of issues WESS has underscored the importance of its analyses. The 1951-52 issue identified three major challenges: “maintenance of economic stability, those concerned with persistent disequilibrium in international payments, and those arising from the relatively slow advance of the under-developed countries”. Needless to say, these challenges remain relevant today.

The 1956 issue warned against monetarism and monetary policy solutions, arguing that “a single economic policy seems no more likely to overcome all sources of imbalance … than is a single medicine likely to cure all diseases”. Along these lines, the 1959 issue acknowledged the “evils of large-scale inflation”, but argued that “economic stagnation or large-scale unemployment is not an acceptable cost to pay for price stability or equilibrium in the balance of payments”.

The 1965 issue warned that tying aid would reduce aid effectiveness, external debt burdens were rising rapidly, and capital would flow from developing to developed countries.

The 1971 issue warned of the “unsettling effects of massive movements of short-term capital” and argued for an “international code of conduct and mechanism for surveillance” to curb their disruptive effects. It also warned that IMF governance arrangements dangerously limited developing country voice, and called for Special Drawing Rights to be used to provide development finance.

In the 1970s and 1980s, WESS repeatedly warned that putting the burden of adjustment on deficit countries alone would not only stifle their growth, but also exert deflationary pressure on the world economy. The UN urged provision of additional finance by surplus countries and international financial institutions on less stringent terms and conditions to support robust recoveries and prevent widespread welfare losses.

The 1982 issue warned against the reluctance to undertake expansionary policies at a time of a global crisis for fear of undermining investor confidence: “without more vigorous expansionary policies, recovery will lack strength, levels of demand will not be sufficient to bring present productive capacity into full use, and the incentive to undertake new investment will remain weak”.

WESS’s rich legacy reminds us of the continuing relevance of multilateral institutions, especially in facing major challenges. The global economy needs strong institutions and coordinated international actions, with adequate voice and participation by developing countries. This is particularly true for ensuring international monetary stability and trade dynamism, which remain crucial for global development.

It also underscores that international solidarity is necessary for reinvigorating and rebuilding the global economy as well as inclusive and equitable development. Sustainable development is necessarily multidimensional and often context-specific; requiring strengthened state capacities and capabilities, strategic development planning and appropriate adaptation to local conditions.

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Asian Financial Crisis: Lessons Learned and Unlearnedhttp://www.ipsnews.net/2017/07/asian-financial-crisis-lessons-learned-and-unlearned/?utm_source=rss&utm_medium=rss&utm_campaign=asian-financial-crisis-lessons-learned-and-unlearned http://www.ipsnews.net/2017/07/asian-financial-crisis-lessons-learned-and-unlearned/#respond Thu, 27 Jul 2017 16:02:13 +0000 Yilmaz Akyuz http://www.ipsnews.net/?p=151454 Yilmaz Akyuz is Chief economist, South Centre, and former director, UNCTAD, Geneva

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Much of what has recently been written about the Asian financial crisis on the occasion of its 20th anniversary praises the lessons drawn and the measures implemented thereupon. But they often fail to appreciate that while these might have been effective in preventing the crisis in 1997, they may be inadequate and even counterproductive today because they entail deeper integration into global finance.

Asset and currency markets of all emerging economies with strong international reserves and investment positions, including China, have been hit on several occasions in the past ten years. Office buildings at night, Hong Kong - Credit: Bigstock

By Yilmaz Akyuz
GENEVA, Switzerland, Jul 27 2017 (IPS)

Debates are taking place on whether there will be another financial crisis, whether in some part of the world or that is global in scope.  Governments draw lessons from financial crises to adopt measures to prevent their recurrence.  However, such measures are often designed to address the root causes of the last crisis but not the next one.  More importantly, they can actually become the new sources of instability and crisis. 

Much of what has recently been written about the Asian crisis on the occasion of its 20th anniversary praises the lessons drawn and the measures implemented thereupon.  But they often fail to appreciate that while these might have been effective in preventing the crisis in 1997, they may be inadequate and even counterproductive today because they entail deeper integration into global finance.

An immediate step taken in Asia was to abandon currency pegs and move to flexible exchange rates in order to facilitate external adjustment and prevent one-way bets for speculators.  This has a lot to commend it, but its effects depend on how capital flows are managed.

Under free capital mobility no regime can guarantee stable rates.  Currency crises can occur under flexible exchange rates as under fixed exchange rates.   Unlike fixed pegs, floating at times of strong inflows can cause nominal appreciations and encourage even more short-term inflows.  Indeed nominal appreciations have been quite widespread during the surges in capital inflows in the new millennium, including in some East Asian economies.

Second, most emerging economies, including those in Asia, have liberalized foreign direct investment regimes and opened up equity markets to foreigners on the grounds that equity liabilities are less risky and more stable than external debt.  As a result, non-resident holdings as a percent of market capitalization have reached unprecedented levels, ranging between 20 and 50 per cent compared to 15 per cent in the US.

This has made the emerging economies highly susceptible to conditions in mature markets.  Since emerging economies lack a strong local investor base, the entry and exit of even relatively small amounts of foreign investment now result in large price swings.

Yilmaz Akyüz, chief economist of the South Centre, Geneva.

Third, they have also sought to reduce currency mismatches in balance sheets and exposure to exchange rate risk by opening domestic bond markets to foreigners and borrowing in their own currencies.  As a result sovereign debt in many emerging economies is now internationalized to a greater extent than that in reserve-currency countries.

Whereas about one-third of US treasuries are held by non-residents, this proportion is much higher in many emerging economies, including in Asia.  Unlike US treasuries this debt is not in the hands of foreign central banks but in the portfolios of fickle investors.

Although opening bond markets has allowed the sovereign to pass the currency risk to lenders, it has led to loss of autonomy over domestic long-term rates and entailed a significant exposure to interest rate shocks from the US.  This could prove equally and even more damaging than currency exposure in the transition of the US Fed from low-interest to high-interest regime and normalization of its balance sheet.

Fourth, there has been extensive liberalization of the capital account for residents.  Corporations have been encouraged to become global players by borrowing and investing abroad, resulting in a massive accumulation of debt in low-interest reserve currencies since 2008.

They have also borrowed through foreign subsidiaries.  These are not always repatriated and registered as capital inflows and external debt, but they have a similar impact on corporate fragility.  Hence the reduction in currency mismatches is largely limited to the sovereign while private corporations carry significant exchange rate risks.

Fifth, limits on the acquisition of foreign securities, real estate assets and deposits by resident individuals and institutional investors have been raised or abolished.  A main motive was to relieve upward pressures on currencies from the surge in capital inflows.  Thus, liberalization of resident outflows was used as a substitute to restrictions over non-resident inflows.  Although this has led to accumulation of private assets abroad, these would not be readily available at times of capital flight.

Sixth, banking regulations and supervision have no doubt improved, restricting currency and maturity mismatches in bank balance sheets.  However, banks now play a much less prominent role in the intermediation of international capital flows than in the 1990s.  International bond issues by corporations have grown much faster than cross-border bank lending directly or through local banks and a very large part of capital inflows now goes directly into the securities market.

These measures have failed to prevent credit and asset market bubbles in most countries in the region.  Increases in non-financial corporate debt since 2007 in Korea and Malaysia are among the fastest, between 15 and 20 percentage points of GDP.  At around 90 per cent of GDP Malaysia has the highest household debt in the developing world.  In Korea the ratio of household debt to GDP is higher than the ratio in the US and the average of the OECD.

 

International Reserves

Asian economies, like many others, are commended for building self-insurance by accumulating large amounts of international reserves.  Moreover, an important part of these came from current account surpluses, not just capital inflows.  Indeed, all countries directly hit by the 1997 crisis made a significant progress in the management of their external balances in the new millennium, running surpluses or keeping deficits under control.

However, whether or not these reserves would be sufficient to provide adequate protection against massive and sustained exit of capital is highly contentious.  After the Asian crisis, external vulnerability came to be assessed in terms of adequacy of reserves to meet short-term external debt in foreign currencies.

However, there is not always a strong correlation between pressure on reserves and short-term external debt.  Often, in countries suffering large reserve losses, sources other than short-term foreign currency debt play a greater role.  Currencies can come under stress if there is a significant foreign presence in domestic deposit and securities markets and the capital account is open for residents.

A rapid and generalized exit could create significant turbulence with broader macroeconomic consequences, even though losses due to declines in asset prices and currencies fall on foreign investors and mitigate the drain of reserves.

In all four Asian countries directly hit by the 1997 crisis, international reserves now meet short-term external dollar debt.  But they do not always leave much room to accommodate a sizeable and sustained exit of foreign investors from domestic securities and deposit markets and capital flight by residents.

This is particularly the case in Malaysia where the margin of reserves over short-term dollar debt is quite small while foreign holdings in local securities markets are sizeable.  Indeed its currency has been under constant pressure since mid-2014.  As foreign holders of domestic securities started to unload ringgit denominated assets, markets fell sharply and foreign reserves declined from over $130 billion to $97 billion by June 2015.  In October 2015 the ringgit hit the lowest level since September 1998 when it was pegged to the dollar.  Currently it is below the lows seen during the turmoil in January 1998.

Deepening integration into the inherently unstable international financial system before attaining economic and financial maturity and without securing multilateral mechanisms for orderly and equitable resolution of external liquidity and debt crises could thus prove to be highly costly.
In Indonesia reserves exceed short-term dollar debt by a large margin, but foreign holdings in its local bond and equity markets are also substantial and the current account is in deficit.  The country was included among Fragile 5 in 2013 by Morgan Stanley economists for being too dependent on unreliable foreign investment to finance growth.

Capital account regimes of emerging economies are much more liberal today both for residents and non-residents than in the 1990s.  Asset and currency markets of all emerging economies with strong international reserves and investment positions, including China, have been hit on several occasions in the past ten years, starting with the collapse of Lehman Brothers in 2008.

The Lehman impact was strong but short-lived because of the ultra-easy monetary policy introduced by the US.  Subsequently these markets came under pressure again during the ‘taper tantrum’ in May 2013 when the US Fed revealed its intention to start reducing its bond purchases; in October 2014 due to growing fears over global growth and the impact of an eventual rise in US interest rates; in late 2015 on the eve of the increase in policy rates in the US for the first time in seven years.

These bouts of instability did not inflict severe damage because they were temporary, short-lived dislocations caused by shifts in market sentiments without any fundamental departure from the policy of easy money.  But they give strong warnings for the kind of turmoil emerging economies could face in the event of a fundamental reversal of US monetary policy.

Should self-insurance built-up prove inadequate, economies facing large and sustained capital flight would have two options.  First, seek assistance from the IMF and central banks of reserve-currency countries.  Or second, engineer an unorthodox response, even going beyond what Malaysia did during the 1997 crisis, bailing in international creditors and investors by introducing, inter alia, exchange restrictions and temporary debt standstills, and using selective controls in trade and finance to safeguard economic activity and employment.

The Asian countries, like most emerging economies, seem to be determined not to go to the IMF again.  But, serious obstacles may be encountered in implementing unilateral heterodox measures, including creditor litigation and sanctions by creditor countries.  Deepening integration into the inherently unstable international financial system before attaining economic and financial maturity and without securing multilateral mechanisms for orderly and equitable resolution of external liquidity and debt crises could thus prove to be highly costly.

This paper draws on a recent book by the author; Playing with Fire: Deepened Financial Integration and Changing Vulnerabilities of the Global South, Oxford University Press, 2017. 

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Migrant Contributions to Development: Creating a “New Positive Narrative”http://www.ipsnews.net/2017/07/migrant-contributions-development-creating-new-positive-narrative/?utm_source=rss&utm_medium=rss&utm_campaign=migrant-contributions-development-creating-new-positive-narrative http://www.ipsnews.net/2017/07/migrant-contributions-development-creating-new-positive-narrative/#respond Wed, 26 Jul 2017 14:42:44 +0000 Tharanga Yakupitiyage http://www.ipsnews.net/?p=151437 Despite the “undeniable” benefits of migration, barriers including public misconceptions continue to hinder positive development outcomes, participants said during a series of thematic consultations here on safe, orderly, and regular migration. At a time where divisive rhetoric on migration can be seen around the world, member State representatives, UN agencies, and civil society gathered at […]

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Though the benefits of migration outweigh the costs, public perception is often the opposite and negatively impacts migration policy.

Pakistani migrant workers build a skyscraper in Dubai. Credit: S. Irfan Ahmed/IPS

By Tharanga Yakupitiyage
UNITED NATIONS, Jul 26 2017 (IPS)

Despite the “undeniable” benefits of migration, barriers including public misconceptions continue to hinder positive development outcomes, participants said during a series of thematic consultations here on safe, orderly, and regular migration.

At a time where divisive rhetoric on migration can be seen around the world, member State representatives, UN agencies, and civil society gathered at the UN for a two-day meeting to discuss migrants’ contributions to sustainable development as well as the challenges in harnessing such contributions.

In her opening remarks, Special Representative for International Migration Louise Arbour noted that though the benefits of migration outweigh the costs, public perception is often the opposite and negatively impacts migration policy.

“This must be reversed so that policy is evidence-based and not perception-driven. Policies responding to false perceptions reinforce the apparent validity of these erroneous stereotypes and make recourse to proper policies that much harder,” she added.

Among such evidence is the 575 billion dollars in global remittances transferred by international migrants to their families, almost 430 billion of which went to developing countries.

These essential lifelines, which are are three times larger than official development assistance (ODA) and more stable than other forms of private capital flows, have contributed to progress on key aspects of the 2030 Agenda for Sustainable Development in migrants’ countries of origin, including poverty reduction, food security, and healthy families.

Benefits can also be seen in the countries where migrants reside as 85 percent of migrant workers’ earnings remain in the countries of destination.

Migrants also tend to fill labour market gaps at all skill levels in countries of destination, advancing economic growth, job creation, and service delivery.

Participants noted that this contributes to a “triple win” scenario for the country of origin, country of destination, and the migrants themselves.

“When migrants succeed, societies do too,” said Assistant Foreign Minister for Multilateral Affairs and International Security of Egypt and one of the sessions’ moderators, Hisham Badr.

Contributions of migrants to development in origin and destination countries go beyond financial remittances and include transfers of skills and knowledge and entrepreneurship.

Despite representing 13 percent of the overall population in the United States, immigrants made up over 20 percent of entrepreneurs, building businesses from popular search engines to environmentally-friendly cars.

In fact, 40 percent of Fortune 500 companies in 2016 had at least one founder who immigrated to the U.S. or was the child of immigrants. According to the New American Economy, those firms alone employed almost 20 million globally and generated more than 5 trillion dollars in revenue.

This diaspora is also often “bridge-builders,” maintaining strong links to their countries of origin.

However, participants noted that inadequate policies stand in the way of positive development outcomes.

“The crucial issue is not that migration and development are linked, but how they can be leveraged to create positive development outcomes,” Badr told delegates.

Arbour noted that that cost of sending and receiving remittances remains excessively high. Currently, the global average cost of transactions is over 7 percent, significantly greater than the Sustainable Development Goals (SDG) target of 3 percent.

The lack of access to financial services also poses a major obstacle as it prevents the investment of remittances into productive activities and sustainable development in remittance recipients’ communities.

Arbour stressed the need to boost financial inclusion, calling it “low hanging fruit.”

Participants particularly highlighted the importance of integrating migration into development planning, including the need to engage with the diaspora to create more effective migration and development policies.

Numerous UN member States have already launched initiatives to include the diaspora, including Jamaica, which hosts a biennial conference to motivate greater involvement in the country’s socio-economic development.

During the consultations, the International Organisation for Migration (IOM) launched a similar platform for diaspora communities to contribute to the Global Compact for Safe, Orderly, and Regular Migration (GCM), the UN’s first intergovernmentally negotiated and comprehensive agreement on international migration, which is expected to be adopted in 2018.

“Diaspora communities have emerged as key influencers in global development practices,” said iDiaspora Forum moderator Martin Russell.

“The iDiaspora Forum is a platform designed to initiate ideas, learn lessons, and share best practices. Diaspora engagement is a booming industry,” he added.

In the final panel of the meeting, which aims to gather input and recommendations to feed into the GCM, Overseas Development Institute’s (ODI) Managing Director Marta Foresti pointed to the compact as a unique opportunity that the international community cannot afford to miss.

“With the global compact, we can create a new positive narrative,” she concluded.

Organized by the president of the General Assembly and co-facilitators including the Permanent Missions of Mexico and Switzerland, the informal session is the fourth in a series of six to take place this year.

The last two consultations will take place in Vienna from 4-5 September and Geneva from 12-13 October on the issues of smuggling of migrants and irregular migrants, respectively.

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Alcoholism Cannot Explain Russian Mortality Spikehttp://www.ipsnews.net/2017/07/alcoholism-cannot-explain-russian-mortality-spike/?utm_source=rss&utm_medium=rss&utm_campaign=alcoholism-cannot-explain-russian-mortality-spike http://www.ipsnews.net/2017/07/alcoholism-cannot-explain-russian-mortality-spike/#respond Tue, 25 Jul 2017 14:42:49 +0000 Vladimir Popov and Jomo Kwame Sundaram http://www.ipsnews.net/?p=151424 Vladimir Popov was a Senior Economics Officer in the United Nations Secretariat. Jomo Kwame Sundaram was UN Assistant Secretary General for Economic Development.

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In Russia, the simultaneous increase in the total death rate, deaths due to external causes, and alcohol consumption were all driven by stress. Credit: Pavol Stracansky/IPS

By Vladimir Popov and Jomo Kwame Sundaram
MOSCOW and KUALA LUMPUR, Jul 25 2017 (IPS)

The steep upsurge in mortality and sudden fall in life expectancy in Russia in the early 1990s were the highest ever registered anywhere in recorded human history in the absence of catastrophes, such as wars, plague or famine. The shock economic reforms in the former Soviet economies after 1991 precipitated this unprecedented increase in mortality, shortening life expectancy, especially among middle-aged males.

Shock therapy
During 1987-1994, the Russian mortality rate increased by more than half, from 1.0% to 1.6%, as life expectancy fell from 70 to 64 years! Economic output fell by almost half during 1989-1998 as wealth and income inequalities as well as crime, murder and suicide rates soared.

The dramatic increase in mortality – most pronounced for middle-aged men, mostly due to cardiovascular diseases – has been explained in terms of various factors like falling real incomes, poorer nutrition, environmental degradation, the collapse of Soviet health care, and surges in alcoholism and smoking.

However, dietary changes – less meat and dairy products, yet more bread and potatoes – could not have quickly increased cardiovascular diseases.

Deterioration of health care, smoking and changes in diet would require much more time to increase mortality by so much, while increased pollution is not an acceptable explanation due to the collapse of industrial output.

While deterioration of the Russian diet, the collapse of its health care system as well as increased deaths due to accidents, murders and suicides undoubtedly contributed to increased mortality in Russia, they cannot explain the sudden magnitude of the increase. This leaves two major competing explanations for the mortality crisis – either increased alcohol consumption or heightened stress factors.

Alcoholism

The major explanation popular in the West, as it absolves the West of responsibility, attributes the mortality spike to increased alcohol consumption in the late 1980s and early 1990s after Gorbachev’s anti-alcoholism campaign.

Deaths due to alcohol poisoning are generally considered a better indicator of actual alcohol consumption as some alcohol consumed is produced illegally or smuggled into the country. Such deaths per 100,000 inhabitants increased from 10 in 1990-1991 to nearly 40 in 1994, exceeding the number of deaths due to suicide and murders.

The increased intake of alcohol can, in turn, be attributed to the lower prices of spirits in the early 1990s. But this alcohol explanation does not stand up to critical scrutiny. After all, as with most other goods, demand for alcohol is inversely related to price and positively to personal income and spending capacity.

First, during some periods, per capita alcohol consumption and death rates moved in opposite directions, e.g., alcohol consumption rose or remained stable during 2002-2009, while death rates – also due to external causes, accidents, murders, suicides and poisoning – fell.

Second, per capita alcohol consumption levels in the 1990s were equal to or lower than in the early 1980s, whereas the total death rate increased by over half and deaths due to external causes doubled!

Although strongly correlated with the mortality rate, higher alcohol consumption was not an important independent cause, but also exacerbated by the same stress factors as the mortality rate itself.

The simultaneous increase in the total death rate, deaths due to external causes, and alcohol consumption were thus all driven by another factor, namely stress.

Stress
What were these sources of increased stress and why did they increase premature deaths? Stress factors due to the economic ‘shock therapy’ following the demise of the Soviet Union are associated with the rise in unemployment, labour mobility, migration, divorce, wealth, and income inequalities.

A stress index incorporating these variables turns out to be a surprisingly good predictor of changes in life expectancy in post-communist economies, especially in the Russian Federation.

The evidence shows that many men in their 40s and 50s – who had lost their jobs or had to move to another job and/or another region, or experienced increases in inequalities in their country/region, or had divorced their wives – were more likely to die prematurely in the 1990s.

To reiterate, the Russian mortality crisis of the 1990s was mainly due to the shock economic reforms that led to mass, especially labour dislocations, much greater personal and family economic insecurity and sharp increases in inequalities. The resulting dramatic rise in stress factors was therefore mostly responsible for the sharp rise in mortality.

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The G20 Needs To Go Back to its Rootshttp://www.ipsnews.net/2017/07/g20-needs-go-back-roots/?utm_source=rss&utm_medium=rss&utm_campaign=g20-needs-go-back-roots http://www.ipsnews.net/2017/07/g20-needs-go-back-roots/#respond Mon, 24 Jul 2017 21:36:56 +0000 Inge Kaul http://www.ipsnews.net/?p=151418 Inge Kaul is adjunct professor at the Hertie School of Governance, Berlin, Germany; advisor to various governmental, multilateral and non-profit organizations; and the first director of UNDP’s Human Development Report Office, a position, which she held from 1989 to 1994, and director of UNDP’s Office of Development Studies from 1995 to 2005

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Inge Kaul is adjunct professor at the Hertie School of Governance, Berlin, Germany; advisor to various governmental, multilateral and non-profit organizations; and the first director of UNDP’s Human Development Report Office, a position, which she held from 1989 to 1994, and director of UNDP’s Office of Development Studies from 1995 to 2005

By Inge Kaul
BERLIN, Jul 24 2017 (IPS)

When the finance ministers of the G7 countries proposed the G20 in the late 1990s, a good sense of realism prevailed. They recognized that addressing issues of global finance required the political support from—and involvement of—emerging market economies.

Inge Kaul

This view proved prescient in seeking policy responses to the 2007–08 global financial crisis. The leaders of the G20 met at their first summit in Washington D.C. in 2008 to agree on measures to resolve the crisis through dialogues among the “systemically relevant” countries.

At its creation, the G20 was thus meant to facilitate coordination, cooperation and problem-solving among key actors in a specific policy field, which then was global financial stability. The G20 was not meant to be a jack-of-all-trades, offering welcoming words and restating support for long-accepted and previously reconfirmed goals, as most subsequent G20 summits did.

Why had there been so little real progress? What concrete measures would be taken? Neither question was asked let alone answered—to avoid a spiral of reiterations at subsequent summits.

Not solving the most pressing problems

So far, the G20’s record of practical follow-up to its communiqués has been less than sterling. But this could reflect its shift from solving the most pressing problems to considering all possible facets of a more desirable world.

Forget for a moment the failure to clearly add value. What would the 2017 Hamburg summit have done, if it had stuck to the original G20 idea and approach? Which one or two global key challenges could it have focused on to suggest concrete measures?

One focus could have been mass starvation in Africa, with a clear promise to augment, in a meaningful way and within a few days, financial and other support for the UN Refugee Agency and the World Food Programme. A second could have been mitigating and adapting to climate change.

Even if only 19 of the 20 had stated what concrete breakthroughs they would make on the Monday morning following the Hamburg summit, much could have been gained by inspiring others to ratchet up their corrective measures. Why was such a determination to lead not in evidence?

Trend away from multilateralism

Many factors come into play. Among them might be that the G20 has increasingly been promoted as a core element and driving force of the ongoing trend away from genuine multilateralism to increasing minilateralism and club-based global governance.

The G20 agenda has been loaded with diverse issues, and the preparatory processes have accordingly been broadened to afford many parties a chance to raise their pet topic and see it in the summit communiqués. That would also give them a sense of importance as they commented on how to run the world, while the other 173 countries and their people could only observe the summits from the sidelines.

Would the world miss something if such G20 summitry were stopped? Not really. It is important for world leaders to talk and to consult each other. However, plenty of opportunities exist for that.

Just think of the high-level segment of the United Nations General Assembly each September, or the regular Bretton Woods meetings, or the many global conferences convening heads of state or government, or such informal meetings as the Syrian Peace Talks.

There is no scarcity of opportunities for world leaders to announce intentions and explore common ground. What is rare is translating words into action—and into action that is up to the challenge.

Time to revisit the role of the G20

Despite nearly 10 years of G20 summitry, the list of unmet global challenges is lengthening and the human, political, environmental and economic costs of global crises are mounting. So wouldn’t this be the time to revert to the original G20 concept as a global forum for announcing concrete measures to resolve—not just chat about—the most pressing global challenge?

Any other challenges could be taken up in other multilateral forums. And if leaders feel that these challenges also deserve attention and solution, they could instruct their representatives at those forums to announce their country’s ongoing or planned corrective actions—to lead by example and make a real difference that all would perceive as fostering sustainable and inclusive growth and development. How, then, to engineer such a return of the G20 to its original purpose?

Argentina, as the host of the next G20 summit, would be well positioned to initiate debate on this issue and to invite views and suggestions on what should be the basic features of a system of global governance fit for the 21st century and on what should be the potential role of the G20 within this system alongside other informal bodies of various groups of state and non-state actors. Perhaps, it could do so together with the hosts of the last two G20 summits, China and Germany.

The best outcome would be for the G20 leaders to recognize that the G20 is not the right forum to decide on a new, reformed system of global governance that will affect all countries and to instead encourage debate on this issue at the United Nations. This could also be a way for the G20 to clarify its future role and eventually, in whatever form it may continue, to invite less opposition and enjoy more political acceptance, legitimacy and effectiveness.

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Prepare Now for the Next Financial Crisishttp://www.ipsnews.net/2017/07/prepare-now-next-financial-crisis/?utm_source=rss&utm_medium=rss&utm_campaign=prepare-now-next-financial-crisis http://www.ipsnews.net/2017/07/prepare-now-next-financial-crisis/#respond Sat, 22 Jul 2017 20:24:08 +0000 Martin Khor http://www.ipsnews.net/?p=151403 Martin Khor is Executive Director of the South Centre, a think tank for developing countries, based in Geneva.

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The developing countries went through the 2008 financial crisis without much harm, because of certain conditions, which no longer exist. Credit: Bigstock

The developing countries went through the 2008 financial crisis without much harm, because of certain conditions, which no longer exist. Credit: Bigstock

By Martin Khor
PENANG, Malaysia, Jul 22 2017 (IPS)

The Asian financial crisis started 20 years ago and the global financial crisis and recession 9 years back. When a new global financial crisis strikes, the developing countries will be more damaged than in the last crisis as they have become less resilient and more vulnerable.  They thus need to prepare from being overwhelmed.

A debate is taking place as to whether the time is now ripe for a new crisis.  Most economists and commentators think not, as an economic recovery, admittedly weak, appears to be taking place in developed economies.

On the surface, the present situation seems quite good.  The US stock market continues to hit new highs, and the head of the Federal Reserve recently testified the US economy is robust and job growth is good.

There has been a rebound of foreign capital flows to emerging economies in the first half of 2017, after two years of outflows.

The G20 leaders focused on climate change, trade and disagreements with the United States in their Hamburg summit, and seemed complacent about the world’s economic condition; they didn’t worry about any looming crisis.

But below the surface calm, the waters are boiling and churning.  As Shakespeare wrote in his play Hamlet:  “Something is rotten in the state of Denmark.”

Whether the deep-seated problems boil over shortly into full-blown crisis, or continue to fester for some time more, is hard to predict.  But the world economy is in trouble.

Amidst a weak global economy recovery, many serious risks remain, wrote  Martin Wolf, the Financial Times’ chief economics commentator, on 5 July.

“The possibly greatest danger is a collapse in global cooperation, perhaps even an outbreak of conflict,” he said.  “That would destroy the stability of the world economy on which all depend…

“We in the high-income countries allowed the financial system to destabilise our economies.  We then refused to use fiscal and monetary stimulus strongly enough to emerge swiftly from the post-crisis economic malaise.

When a new global financial crisis strikes, the developing countries will be more damaged than in the last crisis as they have become less resilient and more vulnerable. They thus need to prepare from being overwhelmed, says Martin Khor

Martin Khor

“We failed to respond to the divergences in economic fortunes of the successful and less successful.  These were huge mistakes.  Now, as economies recover, we face new challenges: to avoid blowing up the world economy, while ensuring widely shared and sustainable growth.  Alas, we seem likely to fail this set of challenges.”

The Star (Malaysia) on 12 July reported that the possibility of the US Federal Reserve raising interest rates and reducing its balance sheet of US$4.5 trillion is causing regional stock markets and currencies to fall and funds to flow out of the region.

Is this another blip that will be corrected soon, or the start of a turn of the boom-bust cycle in capital flows to and from emerging markets?

A comprehensive and in-depth analysis of the global economic situation and how it affects developing countries is given in a recent paper by the South Centre’s chief economist Yilmaz Akyuz, assisted by Vicente Yu.

The US and Europe have wrongly managed the aftermath of the 2008 crisis by policies that will have very adverse effects on most developing countries, according to the paper, “The financial crisis and the global South:  impact and prospects.”   (South Centre Research Paper 76;)

The developing countries went through the 2008 crisis without much harm, because of certain conditions, which no longer exist.

Meanwhile, these countries have recently built  up new and dangerous vulnerabilities which expose them to serious damage when the next crisis strikes.

It is thus imperative that the developing countries review their precarious situation and act to protect their economies to the extent possible to reduce the effects of the new turmoil.

It is thus imperative that the developing countries review their precarious situation and act to protect their economies to the extent possible to reduce the effects of the new turmoil.
Akyuz says the post-2018 crisis has moved in a third wave to several emerging economies after having swept from the US to Europe. A central reason is the wrong crisis response policies of the US and Europe.

“There are two major shortcomings:  the reluctance to remove the debt overhang through orderly restructuring, and fiscal orthodoxy,” adds Akyuz.

“These resulted in excessive reliance on monetary policy, with central banks going into uncharted waters including zero and negative interest rates and rapid liquidity expansion through large bond acquisitions.

“These policies not only failed to secure a rapid recovery but also aggravated the global demand gap by widening inequality and global financial fragility by producing a massive build-up of debt and speculative bubbles.  They have also generated strong deflationary and destabilising spillovers for developing economies.”

When a new crisis comes, developing countries will be harder hit than in 2008.  Their resilience to external shocks is now weak, due to three factors.

First, many developing economies deepened their integration into the international financial system, resulting in new vulnerabilities and high exposure to external shocks.

Their corporations built up massive debt since the crisis, reaching US$25 trillion (95% of their GDP);  and dollar-denominated debt securities issued by emerging economies jumped from $500 billion in 2008  to $1.25 trillion in 2016, carrying interest rate and currency risks.

Moreover, foreign presence in local financial markets reached unprecedented levels, increasing their susceptibility to global financial boom-bust cycles.

Second, the current account balance and net foreign asset positions of many developing countries have significantly deteriorated since the crisis.  In most countries, foreign reserves built up recently came from capital inflows rather than trade surpluses.  They are inadequate to meet large and sustained capital outflows.

Third, the countries now have limited economic policy options to respond to adverse developments from abroad.  Their “fiscal space” for counter-cyclical policy response to deflationary shocks is much more limited than in 2009;  they have significantly lost monetary policy autonomy and lost control over interest  rates due to their deepened global financial integration; and flexibile exchange rate regimes are no panacea in the face of financial shocks.

“Most developing economies are in a tenuous position similar to the 1970s and 1980s when the booms in capital flows and commodity prices ended with a debt crisis as a result of a sharp turnaround in US monetary policy, costing them a decade in development,”  warns Akyuz.

It would be hard for some of them to avoid international liquidity or even debt crises and loss of growth in the event of severe financial and trade shocks.

Unfortunately, the South has not been effective in reflecting on these problems nor in taking collective action.

Global reforms are required to prevent the major countries from transmitting the effects of their wrong policies to developing countries; and global mechanisms are needed to prevent and manage financial crises.

There have been many proposals for reform in the past but hardly any action taken due to opposition from developed countries.

“Now the stakes are too high for developing countries to leave the organisation of the global economy to one or two major economic powers and the multilateral institutions they control,” concludes Akyuz.

If his wide-ranging analysis is correct, then the crisis that started in 2008 will enter more dangerous territory due to new factors fanning the flames.

The underlying  causes are known, but what is yet unknown is the specific event that will trigger and ignite a new phase of the crisis, and when that will happen.

When the new crisis takes place, developing countries will in a less fortunate position to ride through it compared to 2008, so there is ever less reason for complacency.

Each country should analyse its own strong and weak spots, its vulnerabilities to external shocks, and prepare actions now to mitigate the crisis in advance, rather than wait for it to happen and overwhelm its economy.

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Early Death in Russiahttp://www.ipsnews.net/2017/07/early-death-russia/?utm_source=rss&utm_medium=rss&utm_campaign=early-death-russia http://www.ipsnews.net/2017/07/early-death-russia/#respond Thu, 20 Jul 2017 16:09:37 +0000 Vladimir Popov and Jomo Kwame Sundaram http://www.ipsnews.net/?p=151376 Vladimir Popov was a Senior Economics Officer in the United Nations Secretariat. Jomo Kwame Sundaram was UN Assistant Secretary General for Economic Development.

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The Russian mortality crisis underscores the impact of stress on life expectancy. Credit: Alexey Yakushechkin/IPS

By Vladimir Popov and Jomo Kwame Sundaram
MOSCOW and KUALA LUMPUR, Jul 20 2017 (IPS)

The transition to market economy and democracy in the Russian Federation in the early 1990s dramatically increased mortality and shortened life expectancy. The steep upsurge in mortality and the decline in life expectancy in Russia are the largest ever recorded anywhere in peacetime in the absence of catastrophes such as war, plague or famine.

During 1987-1994, the Russian mortality rate increased by 60%, from 1.0% to 1.6%, while life expectancy went down from 70 to 64 years. Although life expectancy declined from 1987, when Mikhail Gorbachev was still in charge, its fall was sharpest during 1991-1994, i.e., during Boris Yeltsin’s early years.

In fact, mortality increased to levels never observed during the 1950s to the 1980s, i.e., for at least four decades. Even in the last years of Stalin’s rule (1950-1953), mortality rates were nearly half what they were in the first half of the 1990s.

Economic output fell by 45% during 1989-1998, while negative social indicators, such as the crime rate, murder rate, suicide rate and income inequalities, rose sharply as well, but even these alone cannot adequately explain the unprecedented mortality spike.

Distress
This Russian mortality crisis underscores the impact of stress on life expectancy. Anne Case and Angus Deaton have linked deteriorating American white male real incomes to various distress indicators since the turn of the century. Their careful work helps us better understand the election of US President Trump, thanks to the electoral majorities he secured in the ‘rust belt’ states, so crucial in the American ‘electoral college’ system.

During the Enclosure movement and the Industrial Revolution in Britain from the 16th to the 18th century, mortality increased and life expectancy fell by about a decade – from about 40 to slightly over 30 – due to lifestyle changes, increased income inequalities and mass impoverishment.

Other instances of life expectancy reduction due to social changes – without wars, epidemics and natural disasters – are very few and never involved a fall in life expectancy by five years, from 69 to 64 years, in the three years from 1991 to 1994 for the entire population of a large country like Russia!

This dramatic fall has been obscured in much of the Western media coverage, although some academic research has been more accurate. Thus, the Economist implied that the fall was greater during Gorbachev’s final years (1987-1992) compared to Yeltsin’s early years (1992-1997).

Why premature death?
What kinds of stress did the transition induce, and why did they lead to premature death? Stress is correlated to the rise in unemployment, labour mobility, migration, divorce, and income inequalities.

These stress indicators turn out to be good predictors of changes in life expectancy in Russia during the ‘post-Soviet’ transition. Men in their forties and fifties who had lost their jobs, or had to move to another job and/or region, or lived in regions with greater inequality or higher divorce rates, were more likely to die prematurely in the 1990s.

The major popular alternative ‘explanation’ is increased alcoholism, which does not stand up to closer critical scrutiny for several reasons. First, during some periods, per capita alcohol consumption and death rates moved in opposite directions, e.g., during 2002-2007, death rates due to external causes – including murders, suicides and poisoning – fell as alcohol consumption rose.

Second, according to both official statistics and independent estimates, per capita alcohol consumption levels in the 1990s were equal to or lower than in the early 1980s, whereas death rates due to external causes doubled, and the total death rate increased by half. This simultaneous increase in indicators (total death rate, death rate due to external causes, and alcohol consumption) appear to be driven by another factor, namely stress.

Post-communist transitions varied
But not all post-communist transitions had equally traumatic consequences. Countries which proceeded more gradually – such as China, Uzbekistan and Belarus – managed to preserve institutional capacities and capabilities, thus avoiding or at least mitigating the output collapse and the sudden, dramatic increase in socio-economic stress indicators.

China and Vietnam did not experience any recession during their transitions, while life expectancy in both these countries continued to rise, although more slowly in China compared to before the 1980s, and to other countries with similar per capita GDPs and life expectancy levels.

In the case of Cuba, the 40% output reduction during 1989-1994 did not result in a mortality crisis. Instead, life expectancy in Cuba increased from 75 years in the late 1980s to 78 years in 2006.

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Reforming the International Financial Systemhttp://www.ipsnews.net/2017/07/reforming-international-financial-system/?utm_source=rss&utm_medium=rss&utm_campaign=reforming-international-financial-system http://www.ipsnews.net/2017/07/reforming-international-financial-system/#respond Thu, 13 Jul 2017 15:27:43 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=151294 Jomo Kwame Sundaram, a former economics professor and United Nations Assistant Secretary-General for Economic Development, received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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The 1997-1998 East Asian crises provided major lessons for international financial reform. Two decades later, we appear not to have done much about them

In Southeast Asia, existing mechanisms and institutions for preventing financial crises remain grossly inadequate. Credit: Sandra Siagian/IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Jul 13 2017 (IPS)

When we fail to act on lessons from a crisis, we risk exposing ourselves to another one. The 1997-1998 East Asian crises provided major lessons for international financial reform. Two decades later, we appear not to have done much about them. The way the West first responded to the 2008 global financial crisis should have reminded us to do more. But besides accumulating more reserves, Southeast Asia has not done much else.

Crisis prevention and management
First, existing mechanisms and institutions for preventing financial crises remain grossly inadequate. Financial liberalization continues despite the crises engendered. Too little has been done by national authorities and foreign advisers to check short-term capital flows while unwarranted reliance has been put on international adherence to codes and standards. There is also little in place to address the typically exaggerated effects of movements among major international currencies.

Second, existing mechanisms and institutions for financial crisis management are grossly inadequate. The greater likelihood, frequency and severity of currency and financial crises in emerging market economies in recent times — with devastating consequences for the real economy and innocent bystanders — makes speedy crisis resolution imperative.

Economic liberalization has also compromised macro-financial instruments available to governments for crisis management and recovery. Instead, governments have little choice but to react pro-cyclically, which tends to exacerbate economic downturns. Governments thus fail to act counter-cyclically to avoid and overcome crises, which have been more devastating in developing countries.

There is a need to increase emergency financing during crises and to establish adequate new procedures for timely and orderly debt standstills and work-outs. While IMF financing facilities were significantly augmented in 2009, little else has changed.

Only governance reform of international financial institutions can ensure more equitable participation and decision-making by developing countries. The concentration of power in some apex institutions can be reduced by delegating authority to others, and by encouraging decentralization, devolution, complementarity and competition with other international financial institutions, including regional ones.
International financial institutions, including regional institutions, should be able to provide adequate counter-cyclical financing, including for ‘social protection’. Instead of current arrangements which mainly benefit foreign creditors, new procedures and mechanisms can help ensure that they too share responsibility for the consequences of their lending practices.

Developmental reforms
Third, international financial reform needs to go beyond crisis prevention and resolution to improve provision of development finance, especially to small and poor countries that face limited and costly access to funding their development priorities. For years now, the World Bank and other multilateral development banks have abandoned or cut industrial financing.

Fourth, powerful vested interests block urgently needed international institutional reforms. Only governance reform of international financial institutions can ensure more equitable participation and decision-making by developing countries. The concentration of power in some apex institutions can be reduced by delegating authority to others, and by encouraging decentralization, devolution, complementarity and competition with other international financial institutions, including regional ones.

Fifth, reforms should restore and ensure greater national economic authority and autonomy, which have been greatly undermined by national level deregulation as well as international liberalization and new regulation. These can enable more effective, especially expansionary and counter-cyclical macroeconomic management, as well as adequate development and inclusive finance facilities.

One size clearly cannot fit all. Policy ownership will ensure greater legitimacy, and should include capital account regulation and choice of exchange rate regime. As likely international financial reforms are unlikely to adequately provide what most developing countries need, national policy independence in regulatory and interventionist functions must be assured.

Regional cooperation
Finally, appreciation is growing of the desirability of regional monetary cooperation in the face of growing international financial challenges. The Japanese proposal for an Asian monetary facility soon after the outbreak of the 1997 crises could have helped check and manage the crises, but US opposition blocked it. With its opposition to more pro-active global initiatives, alternative regional arrangements cannot also be blocked.

Such regional arrangements also offer an intermediate alternative between national and global levels of action and intervention, besides reducing the monopoly power of global authorities. To be effective, regional arrangements must be flexible, but also credible and capable of both crisis prevention and management.

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G20’s Record Does Not Inspire Hopehttp://www.ipsnews.net/2017/07/g20s-record-not-inspire-hope/?utm_source=rss&utm_medium=rss&utm_campaign=g20s-record-not-inspire-hope http://www.ipsnews.net/2017/07/g20s-record-not-inspire-hope/#respond Fri, 07 Jul 2017 13:35:33 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=151199 The G20 leaders meeting in Hamburg, Germany, on 7-8 July comes almost a decade after the grouping’s elevation to meeting at the heads of state/government level. Previously, the G20 had been an informal forum of finance ministers and central bank governors from advanced and emerging economies created in 1999 following the 1997-1998 Asian financial crisis. […]

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By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Jul 7 2017 (IPS)

The G20 leaders meeting in Hamburg, Germany, on 7-8 July comes almost a decade after the grouping’s elevation to meeting at the heads of state/government level. Previously, the G20 had been an informal forum of finance ministers and central bank governors from advanced and emerging economies created in 1999 following the 1997-1998 Asian financial crisis.

Expectations of the Hamburg G20 summit are now quite modest, and there is greater media and public interest in the bilateral meetings around the event. It is a sad reminder that needed reforms to improve the world economy and the welfare of its people are unlikely to come from the G20, and tragically, from any other quarter for some time to come.

Anis Chowdhury

The new grouping’s record in steering the global economy since the first summit in Washington, DC in November 2008 after the global financial crisis (GFC) was acknowledged by financial markets to have begun a couple of months before.

London Summit’s high point
At the following April 2009 London Summit, hosted by Gordon Brown, the G20 leaders demonstrated unprecedented solidarity in confronting the global meltdown with financial packages for the IMF, World Bank and others worth USD1.1 trillion. The London financial package included USD250 billion to help developing countries secure trade finance in the face of financial uncertainty.

These measures succeeded in turning the tide, with world economic growth recovering robustly from minus 2.1% in 2009 to plus 4.1% in 2010, exceeding the pre-crisis 2007 level of 3.8%. G20 boosters are inclined to claim that the London Summit pulled the global economy from the cusp of the first post-Second World War “great depression”.

However, there has been little evidence of how the funds may have saved the world economy. There has been modest trade growth since 2008 — after earlier sustained trade expansion — as most G20 member countries introduced essentially ‘protectionist’ trade measures despite their declared commitment to the contrary. The leaders also agreed to develop new financial regulations and improve financial supervision, but the patchwork which emerged has had limited and mixed consequences.

Toronto U turn
G20 leadership, evident at the April 2009 London summit, was abdicated with its U turn at the June 2010 Toronto summit while claiming success for its earlier collective efforts. The Canadian hosts trumpeted its own strong recovery from around -3% in 2009 to +3% in 2010 as the G20 exaggerated hints of recovery to pave the way for ‘fiscal consolidation’ instead.

Expectations of the Hamburg G20 summit are now quite modest, and there is greater media and public interest in the bilateral meetings around the event. It is a sad reminder that needed reforms to improve the world economy and the welfare of its people are unlikely to come from the G20, and tragically, from any other quarter for some time to come.

Jomo Kwame Sundaram. Credit: FAO

Canada received strong support from Germany and Japan which also claimed strong recoveries. Further support came from the International Monetary Fund (IMF) and the European Central Bank (ECB) which invoked the ‘expansionary fiscal consolidation hypothesis’ to claim that urgent U turns would boost investor confidence to sustain economic recovery.

The U turn from Keynesian-style debt-financed fiscal stimulus measures deprived the modest recovery of the means for sustaining renewed expansion, thus ensuring the GFC’s ‘Great Recession’, which has dragged on in much of the North for almost a decade since, dragging down world and developing country growth in recent years.

Recession self-inflicted
Despite warnings from the United Nations and a few others against premature fiscal consolidation, G20 leaders at the Toronto Summit agreed to cut budget deficits in half by 2013, and to eliminate deficits altogether by 2016! The decision triggered a double dip recession in Japan and some Eurozone countries.

Canada and Germany, which pushed for rapid fiscal consolidation, have since experienced significantly slower growth averaging 1.8% and 1.2% respectively. The global economy thus began a prolonged period of anaemic growth averaging around 2.5% per annum.

Clearly, G20 economic growth continues to be modest. They are still unable to attain the 2010 growth rate, giving the lie to the ‘expansionary fiscal consolidation’ claim. The IMF has since acknowledged that its initial recommendation of rapid fiscal consolidation was based on “back of the envelope” calculations!

Research also shows that fiscal consolidation has exacerbated income inequality while fiscal consolidation basically began once financial sectors had been rescued from the consequences of their own greedy operations.

Ersatz substitute
Lack of accountability to the rest of the world has also meant that the G20 continues to undermine multilateralism. Inclusive multilateralism is now being threatened on many other fronts as well, not least by the Trumpian turn in the White House and the growing tendency for the Europeans to act as a bloc.

The G20’s broader membership has made negotiations and consultations more difficult than those involving the G7 grouping of major developed economies. But its greater inclusion and diversity has also ensured its superior record compared to the G7, which continues to decline in relevance.

As the Toronto U turn and its devastating legacy remind us, the G20’s finest moment after its London summit in 2009 was easily reversed through host country efforts although the US and China were acting quite differently in practice.

Expectations of the Hamburg G20 summit are now quite modest, and there is greater media and public interest in the bilateral meetings around the event. It is a sad reminder that needed reforms to improve the world economy and the welfare of its people are unlikely to come from the G20, and tragically, from any other quarter for some time to come.

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1997 Asian Crisis Lessons Losthttp://www.ipsnews.net/2017/07/1997-asian-crisis-lessons-lost/?utm_source=rss&utm_medium=rss&utm_campaign=1997-asian-crisis-lessons-lost http://www.ipsnews.net/2017/07/1997-asian-crisis-lessons-lost/#respond Wed, 05 Jul 2017 07:27:42 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=151164 Jomo Kwame Sundaram, a former economics professor and United Nations Assistant Secretary-General for Economic Development, received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Washington Consensus policy advocacy of financial liberalization from the 1980s had uneven consequences for the East Asia region. Credit: Kara Santos/IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Jul 5 2017 (IPS)

After months of withstanding speculative attacks on its national currency, the Thai central bank let it ‘float’ on 2 July 1997, allowing its exchange rate to drop suddenly. Soon, currencies and stock markets throughout the region came under pressure as easily reversible short-term capital inflows took flight in herd-like fashion. By mid-July 1997, the currencies of Indonesia, Malaysia and the Philippines had also fallen precipitously after being floated, with stock market price indices following suit.

Most other economies in East Asia were also under considerable pressure. In November 1997, despite South Korea’s more industrialized economy, its currency also collapsed following withdrawal of official support. Devaluation pressures also mounted due to the desire to maintain a competitive cost advantage against the devalued currencies of Southeast Asian exporters.

Blind spot
Mainstream or orthodox economists first attempted to explain the unexpected events from mid-1997 in terms of orthodox theories of currency crisis. Many made much of current account or fiscal deficits, real as well as imagined.

When the conventional wisdom clearly proved to be unconvincing, the East Asian miracle was turned on its head. Instead, previously celebrated elements of the regional experience, e.g., government interventions and ‘social capital’, were blamed for the crises.

The media emphasized ‘cronyism’, i.e., government favouritism for particular business interests, and poor corporate governance. These were real problems, but irrelevant to explaining the crisis. Increasingly, blame was put on poor sequencing of financial liberalization, but not on capital account liberalization itself.

This blind spot has helped ensure that the most important lessons from the crisis have been largely lost. Other currency and financial crises from the 1990s make clear that key lessons have not been appreciated. Instead, erroneous lessons drawn by orthodox economists, financial analysts and the media have muddied the policy discourse. Also, the policies and policymakers responsible for the crisis need to be identified and addressed as they have come back, albeit in different guises.

Wrong lessons have diverted attention away from the intellectual and ideological bases of the erroneous thinking, analyses and policies responsible for the crises. Such ideas are largely, though not exclusively associated with Washington Consensus’ advocacy of economic liberalization at both national and global levels. Thus, drawing critical lessons would undermine the intellectual, analytical and policy authority of the interests and institutions involved.

Finance rules
Although there was analytical work critical of East Asia’s ‘miracle’ before the crisis, none actually anticipated the debacle or saw its roots in financial liberalization. Meanwhile, transnational dominance of industry in Southeast Asia facilitated the ascendance and consolidation of financial interests and politically influential rentiers, later deemed ‘cronies’ after 1997.

This increasingly powerful alliance successfully promoted financial liberalization in the region, both externally and internally. Southeast Asian financiers were quick to identify and capture rents from arbitrage and other opportunities offered by international financial integration. Little caution was urged in the face of greater foreign capital flows in Southeast Asia, which became more pronounced in the 1990s.

Washington Consensus policy advocacy of financial liberalization from the 1980s had uneven consequences and implications for the region. This eventually led to new kinds of currency and financial crises due to easily reversed capital inflows, including foreign bank borrowings and portfolio capital flows.

As the interests of domestic financial capital did not fully coincide with those of international finance, the impact of financial globalization was partial and uneven. For instance, both Malaysia and Thailand wanted capital inflows to finance current account deficits. This was largely due to their service account deficits, mainly for imported services and investment income payments abroad. Such deficits grew with imports for consumption and construction, as well as greater ease of investment, including speculation, abroad.

There is no evidence that such capital inflows contributed significantly to accelerating the growth of export earnings. Instead, they blew up asset price bubbles, which inevitably burst with devastating economic, social and political consequences.

Lessons not learnt

Two decades later, there is apparently still no consensus on the East Asian crises and their causes. But contrary to the impression conveyed by the Western media, most serious analysts now agree that the crises essentially began as currency crises of a new type, different from those previously identified with current account deficits, or fiscal profligacy, or even macroeconomic indiscipline more generally.

They also agree that the crises started off as currency crises and quickly became more generalized financial crises, before affecting the real economy. Reduced financial liquidity, inappropriate official policy responses and ill-informed, ‘herd’-like market responses then exacerbated this chain of events.

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Southeast Asia: From Miracle To Debaclehttp://www.ipsnews.net/2017/06/southeast-asia-miracle-debacle/?utm_source=rss&utm_medium=rss&utm_campaign=southeast-asia-miracle-debacle http://www.ipsnews.net/2017/06/southeast-asia-miracle-debacle/#respond Thu, 29 Jun 2017 14:40:13 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=151104 Jomo Kwame Sundaram, a former economics professor and United Nations Assistant Secretary-General for Economic Development, received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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For many, the "Southeast Asian" has turned out to be nothing more than a misleading illusion. Credit: IPS

For many, the "Southeast Asian" has turned out to be nothing more than a misleading illusion. Credit: IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Jun 29 2017 (IPS)

The World Bank and other influential international financial institutions and development agencies have been touting Southeast Asian (SEA) newly industrializing countries as models for emulation, especially by African developing countries seeking to accelerate their development transformations. But these recommendations are usually based on misleading analysis of their rapid growth and structural transformation.

Sub-regional differences
Typically, various cultural and other justifications are offered to justify recommending SEA, rather than Northeast Asia (NEA), as the better sub-region for emulation. Consequently, important lessons from East Asian experiences have been misrepresented, drawing erroneous lessons from the region’s undoubtedly impressive economic performance during its high growth periods.

Despite SEA’s much greater resource wealth, NEA’s growth performance was superior over the long term in the second half of the 20th century until the 1990s, when Japanese economic growth collapsed following its financial liberalization ‘big bang’ shock and the strong yen (endaka) decade from 1985. For over two decades, growth in Japan, Korea and Taiwan averaged 8 percent, compared to 6 percent in Malaysia, Thailand and Indonesia.

Population growth has been much lower in NEA, increasing per capita differences over at least a quarter century. While income inequalities have grown in most of SEA, they have remained lower in NEA. Hence, economic welfare improvements have been much greater in NEA.

Education
Most accounts of the ‘East Asian miracle’ emphasize education. But educational achievements in Indonesia, Malaysia and Thailand have been greatly inferior to NEA’s. Ironically, the Philippines, which long had the highest share of tertiary educated in East Asia, has not had an impressive economic growth record.

Thus, actual experience compels scepticism about the facile policy recommendations that governments should enhance human resources, but only subsidize primary schooling. Instead, there is now compelling evidence that industrialization and productivity gains have been slowed by the region’s modest progress on education.

Foreign direct investment
Greater SEA dependence on foreign direct investment (FDI) has impeded the development of industrial and technological capacities and capabilities, raising concerns as to whether their industrialization processes were sustainable.

The region has become less attractive for new FDI in the face of growing competition from alternative locations seeking to be part of ‘global value chains’. Meanwhile, the supposed ‘middle income country’ trap in SEA is essentially due to limited development of indigenous industrial and technology capacities owing to modest ‘technological learning’ from the presence of ‘foot-loose’ FDI temporarily locating parts of their ‘value chains’ in the country.

Investment policy reform to promote more sophisticated industries in SEA is long overdue and needs to be coordinated with technology policy reform. SEA governments have not been conducive to elaborating and implementing appropriate investment and technology policies. The rest of SEA has not emulated Singapore’s pro-active technology policy attracting desired investments in line with its own national development priorities besides developing capacities and capabilities using government investments.

Financial havoc

Favouring FDI has weakened the influence of domestic industrial capital in the region, allowing financial interests, both domestic and foreign, to become more influential. Finance capital has developed symbiotic relations with other politically influential rentiers, dubbed ‘cronies’ following the 1997-1998 (mainly Southeast) Asian financial crisis. This powerful alliance successfully promoted partial financial liberalization in the region before the crisis.

Although capital account liberalization greatly increased short-term capital flows, which precipitated the 1997 crisis without increasing FDI, the region has opened up again to short-term capital inflows after accumulating reserves believed sufficient to withstand future crises. This is wrongly referred to as ‘self-insurance’ although there is no insurance element involved. Meanwhile, regional monetary cooperation has advanced beyond earlier bilateral swap arrangements, but there has been little progress beyond that.

Policies
After 1997, the ‘Asian model’ fell into disrepute as the East Asian miracle was written off as a debacle. Hence, it is crucial to also recognize the reasons for its inferiority and vulnerability during the high growth period from the 1960s to the 1990s when the Asian financial crisis exposed its new vulnerabilities.

But it would be a mistake to throw the baby out with the bathwater as there are undoubtedly important lessons to be learnt from SEA as well. Also, some of the very policies that the West has criticized were actually crucial for rapid growth and structural transformation in East Asia.

NEA has generally had more sophisticated and effective industrial policy compared to SEA. This accounts, in no small way, for the major differences in industrial and technological capabilities between the two East Asian sub-regions. Of course, there have also been different industrial policy orientations, emphases and instruments within SEA, sometimes involving discernible contrasts in investment and technology policies.

As these policies were inappropriately or prematurely undermined or terminated, the ‘miracle’ ended, often rather abruptly, due to the financial crises precipitated by liberalization. Contrary to popular Western narratives of the debacle, East Asia’s previously successful ‘catch-up’ efforts had in fact been undermined by financial liberalization promoted by the Washington Consensus.

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Putting the Spotlight on Women Migrant Workershttp://www.ipsnews.net/2017/06/putting-spotlight-women-migrant-workers/?utm_source=rss&utm_medium=rss&utm_campaign=putting-spotlight-women-migrant-workers http://www.ipsnews.net/2017/06/putting-spotlight-women-migrant-workers/#respond Sat, 24 Jun 2017 22:25:30 +0000 Roshni Majumdar http://www.ipsnews.net/?p=151040 Migrant workers, and their economic contribution to the development of both the country of origin and the host country, have caught the eye of governments and policymakers worldwide. But the hardships faced by women migrants, who disproportionately bear the brunt of discrimination at work, are often swept under the rug. This is why, experts from […]

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Eni Lestari Andayani Adi (Indonesia), Chairperson of the International Migrants Alliance (IMA), addresses the opening segment of the United Nations high-level summit on large movements of refugees and migrants. Credit: UN Photo/Cia Pak

By Roshni Majumdar
UNITED NATIONS, Jun 24 2017 (IPS)

Migrant workers, and their economic contribution to the development of both the country of origin and the host country, have caught the eye of governments and policymakers worldwide.

But the hardships faced by women migrants, who disproportionately bear the brunt of discrimination at work, are often swept under the rug.

This is why, experts from UN Women and the United Nations University (UNU) in New York came together this week to discuss and raise awareness about migrant women workers’ rights.

In 2015, female migrant workers, who number 117 million, contributed about half of the world’s total remittance flow.

As labour markets shuffle in the new world order, two distinct patterns have emerged. Women have increasingly moved to hospitality and nursing industries, or the “domestic” economy, as well as areas previously dominated by men, such as agriculture. Demand has continued to rise in developed countries, but women’s contributions have been severely underappreciated.

By contributing to the gaps of the labour economy, women have lifted the working age population, and contributed to technological and human capital. By virtue of their soft skills, they have closed the gaps of a receding tax base, undermined by an aging population, and have come to the assistance of the elderly in the chaos of cutbacks in the health sector.

In the Philippines, for instance, which is the world’s third highest remittance receiving country, women migrant workers have been the sole breadwinners for their family. Typically, women largely migrate to Europe and North America.

Still, with the change in the world order and the growth of newer economies, this flow is likely to change. Experts predict that the flow from the Global North to the Global South will shift, as migrants move into the fast growing economies of Asia, like China and India.

“Migration is going to continue because a single country will not have all the resources in and of itself. Even if technology advances, we are not going to put our children in the hands of a robot,” Dr. Francisco Cos Montiel, a senior research officer at UNU, told IPS.

Inkeri Von Hase, an expert on gender and migration issues, told IPS that “we have to prioritise women’s empowerment so they are able to realise their full potential.” The New York Declaration for Refugees and Migrants, which was adopted in 2016 with this very aim to protect and empower migrant workers, has largely failed to take into account specific rights for women’s protection.

Still, all this is not to say that all women migrant workers are necessarily victims of sexual assault and discrimination at work. Many have found a renewed sense of agency and purpose, for instance, the women who have fled violence in Guatemala and El Salvador. To ensure they can continue to tread this path, however, it becomes crucial to adopt newer policies today.

It is also significant that many migrants have become de-skilled in the process of migration, and have settled for the first jobs they found, in a bid to earn money to send home.

The new recommendations by experts in the Global Compact for Safe, Orderly, and Regular Migration report could be crucial to ensure the autonomy and independence of women migrant workers across the world.

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UN Response Teams Underfunded as Costs Hit Staggering $23.5 Billionhttp://www.ipsnews.net/2017/06/un-response-teams-underfunded-costs-hit-staggering-23-5-billion/?utm_source=rss&utm_medium=rss&utm_campaign=un-response-teams-underfunded-costs-hit-staggering-23-5-billion http://www.ipsnews.net/2017/06/un-response-teams-underfunded-costs-hit-staggering-23-5-billion/#respond Fri, 23 Jun 2017 05:24:11 +0000 Roshni Majumdar http://www.ipsnews.net/?p=151009 UN response teams that help the most vulnerable people in the world are still largely underfunded, a new status report has revealed. The funding available to the teams is no match for the record number of people—141 million—who need assistance today. Newer and protracted conflicts have raised the bar of funding requirements to a staggering […]

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A wide view of a briefing on the humanitarian affairs segment (scheduled to take place in Geneva, 21 to 23 June) of the 2017 session of the Economic and Social Council (ECOSOC). Credit: UN Photo/Manuel Elias

By Roshni Majumdar
UNITED NATIONS, Jun 23 2017 (IPS)

UN response teams that help the most vulnerable people in the world are still largely underfunded, a new status report has revealed.

The funding available to the teams is no match for the record number of people—141 million—who need assistance today.

Newer and protracted conflicts have raised the bar of funding requirements to a staggering 23.5 billion dollars. International donors, since the launch of Humanitarian Appeal in 2016 by the UN and its partners, have contributed to a total of 6.2 billion dollars.

The lack of funding is especially worrying as many countries have seen a resurgence in violent conflicts – for instance, rapid escalation of fighting in the Democratic Republic of Congo’s central Kasai province. Many others are threatened by natural disasters, such as the drought in Kenya, or flooding in Peru. Still others, almost 20 million people, are at risk in countries at the brink of a famine, such as northeastern Nigeria, Somalia, South Sudan and Yemen.

However, teams have worked hard to reach people, and have provided crucial assistance to many. The numbers, although small in comparison to the people who need aid, is worthy of recognition to the commitment of the UN Humanitarian Appeal. Some 5.8 million people in war-torn Yemen, and 3 million people in famine-struck South Sudan have, for instance, received life-saving assistance.

“Funding to response plans is a high-impact investment as they are prioritized on the basis of thorough needs assessment and analysis. Supporting the plans also provides the most neutral and impartial aid,” said Stephen O’Brien, the Under Secretary-General for Humanitarian Affairs and Emergency Relief Coordinator.

The report highlights the pressing need for financial aid to support people across 37 countries, and urges donors to step up their contributions.

“With generous donor support, humanitarian partners have swiftly scaled up to deliver record levels of life-saving assistance in challenging and often dangerous environments. Donors have invested in these efforts but we are in a race against time. People’s lives and well-being depend on increasing our collective support,” said O’Brien.

The Economic and Social Council (ECOSOC) brings together Member States, United Nations entities, humanitarian and development partners, private sectors and affected communities at the Humanitarian Affairs Segment (HAS) to discuss urgent humanitarian issues each year in June. The event this year runs from 21st until 23rd June

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East Asia’s Real Lessonshttp://www.ipsnews.net/2017/06/east-asias-real-lessons/?utm_source=rss&utm_medium=rss&utm_campaign=east-asias-real-lessons http://www.ipsnews.net/2017/06/east-asias-real-lessons/#respond Wed, 21 Jun 2017 17:20:45 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=150996 Jomo Kwame Sundaram, a former economics professor and United Nations Assistant Secretary-General for Economic Development, received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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International recognition of East Asia’s rapid economic growth, structural change and industrialization ("East Asian Miracle") grew from the 1980s.

To better learn from ostensible miracles, it is necessary to demystify them. Credit: IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Jun 21 2017 (IPS)

International recognition of East Asia’s rapid economic growth, structural change and industrialization grew from the 1980s. In Western media and academia, this was seen as a regional phenomenon, associated with some commonality, real or imagined, such as a supposed ‘yen bloc’.

Others had a more mythic element, such as ‘flying geese’, or ostensible bushido and Confucian ethics. Every purported miracle claims a mythic element, invariably fit for purpose. After all, miracles are typically attributed to supernatural forces, and hence, cannot be emulated by mere mortals. Hence, to better learn from ostensible miracles, it is necessary to demystify them.

The World Bank’s 1993 East Asian Miracle (EAM) volume is the most influential document on the subject. It identified eight high-performing Asian economies: Japan, Hong Kong, three first-generation newly industrialized economies, namely South Korea, Taiwan and Singapore, and three second-generation South East Asian newly industrializing countries, viz, Malaysia, Thailand and Indonesia. Despite a title implying geo-spatial commonality, the study denied the significance of geography and culture, and specifically excluded China, the elephant in the region.

Strategic interventions?

The book identified six state interventions as important, approving of four ‘functional’ interventions, but sceptical of two ‘strategic’ interventions. Functional interventions supposedly compensated for market failures, while strategic interventions were deemed more market-distortive.

These two ‘strategic’ interventions are in the areas of finance, specifically what it calls directed (targeted) and subsidized credit, and international trade, particularly what is often referred to as ‘industrial policy’, or more rarely as ‘investment and technology policy’.

Careful consideration of the accelerated East Asian growth and transformation experiences underscore that such interventions were mainly responsible for the superior performance of the Northeast Asian HPAEs compared to their Southeast Asian counterparts.

Industrial investments

Debates over Northeast Asian industrialization continue, but the pioneering work of American political economists Chalmers Johnson and Alice Amsden was undoubtedly seminal. Both showed that Japanese, Korean and Taiwanese government measures were quite different from typical World Bank development policy advice.

Successful finance ministry and central bank efforts to keep interest rates positive, but low, were crucial for accelerating industrial investments. From the mid-1970s, more orthodox Western economists began to characterize this as constituting ‘financial repression’, for depressing interest rates, the incentive to save and funds available for investment.

Only later did other Western economists explain this Korean anomaly in terms of ‘financial restraint’ to overcome financial market failures. But few have noted that savings rates actually follow, rather than determine investment rates. Meanwhile, cultural explanations have also been invoked to explain East Asia’s high savings and investment rates.

Ownership matters
Subsidized and directed (or targeted) credit also promoted desired investments. Fiscal and other policies also encouraged reinvestment of profits, rather than maximizing ‘shareholder value’, while other incentives encouraged desired investments. Where private investments were not forthcoming, the governments themselves made needed investments despite active discouragement by international development banks.

Strict controls on capital outflows, especially when foreign exchange resources were still scarce, also served to discourage capital flight. Northeast Asian economies were also careful to distinguish between long-term foreign direct investment (FDI) and short-term portfolio investment, or ‘hot money’.

Perhaps owing to Bank preference for FDI, ostensibly to close both the ‘savings-investment’ and ‘foreign exchange’ gaps, the EAM also favoured FDI and did not consider ownership important. However, during the early decades of high growth before the 1990s, Northeast Asian governments encouraged national ownership of industrial enterprises.

This policy served to promote vertically and horizontally integrated industrial conglomerates in the case of Korean chaebol and Japanese keiretsu. (Zaibatsu were suppressed after the Second World War as they were held responsible for the pre-war Japanese military industrial complex.) Instead of FDI, South Korea encouraged licensing and, if necessary, joint-ventures to promote technology transfer.

Singapore and Malaysia in Southeast Asia have especially sought to attract FDI, initially for political reasons. Singapore desired strong Western support after establishing a new state in 1965. Since then, FDI has been attracted as part of a pro-active technology policy complemented by government policies, including investments. Attracting FDI to accelerate technology development is quite different from capital account liberalization enabling short-term financial inflows.

Trade policies
The Japanese, Korean and Taiwanese governments pursued import substituting industrialization policies from the 1950s, but later encouraged export orientation as well. Infant industries were provided with effective protection conditional on export promotion, effectively requiring firms to quickly become internationally competitive.

By protecting firms temporarily, depending on the product to be promoted, and by requiring certain output shares be exported within pre-specified periods, discipline was imposed on firms in return for the support provided. Such policies forced firms to achieve greater economies of scale and accelerate learning to reduce production costs quickly.

Requiring exports has also meant producers have had to achieve international consumer quality standards quickly, which accelerated progress in product and process technology. This ‘carrot and stick’ approach induced many firms to rapidly become internationally competitive.

Thus, the very industrial, trade and financial policies rejected by the Bank were in fact necessary for East Asia’s achievements. Some policies were inappropriately and prematurely undermined or terminated, e.g., with Japan’s financial ‘big bang’, with disastrous consequences.

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