Tuesday, 15 September 2009

Global Policy Options Open Up Again

(Two boats, a lot of waves, and one Mount Fuji)

There’s a new law of global economics: the deeper you are in a crisis, the emptier the policy tool box becomes. And the emptier the policy toolbox is, the more similar the measures become in practice. (Global economics starts its life in a very odd way…)

Before the credit crunch, we all thought that monetary policy was rapidly converging towards flexible exchange rate based inflation targeting, while fiscal policy keeps being all around the place. The size of the state relative to the economy, the structure of the tax system, the principles governing the government’s actions, as well as the source of legitimacy and relationship with the population, all varied tremendously. It was not only that the mature economies were following very different paths, the US and Sweden being the two different poles, but also emerging markets started to display a very varied set of behaviour. The logic of high resource revenue - weak manufacturing wealthy emerging markets is drastically different from the logic of manufacturing export-based rapid structural change countries, or even from the logic of commodity exporting but poor economies. The world of the mid-2000‘s was dominated by monetary policy convergence and fiscal policy divergence.

This picture changed dramatically a year ago. As the monetary transmission mechanism disappeared, suddenly central banks were at a loss, and governments found themselves in shock, imagining the picture of total collapse. And there came the surprise: there was more homogeneity among the panic policies than any time during the past two decades. As the world economy was nosediving towards the abyss, the fiscal solutions employed around the world were all being read from the same book. In the course of the past two years, for example, the average budget deficit of the advanced economies shrunk from -0.5% to the the staggering -4.5%. As a consequence, the average OECD gross debt per GDP measure, for instance, is jumping 26 percentage points to 100% between 2007 and 2010.

Which is funny, for probably, the way governments started to spend as well as the magnitude of the fiscal stimuli was far from optimal. However, wanting to appear as proactive during the crisis, most governments ended up doing the same as others, and against their best protectionist wishes they ended up providing the world economy with a decent fiscal push. As an example, the total increase in budget deficit of the advanced economies (using the IMF’s categorisation), amounts to 5.2 percent of the global GDP. Add to these the gigantic government boost in a host of emerging markets, China, India, Brazil being the prime examples.

Curiously enough, now that the recovery seems to be under way, the policy space seems to be opening up again. Some of the badly hit countries, like Japan (expected to reach 197% in 2010 from 172% in 2008), Italy (to 127% from 112%) or Hungary (to 82% from 73%) were already in a tight spot, while Iceland (to 62% from 34%) or the UK (to 91% from 54%) or Ukraine (to 35% from 20%) had started off from relatively good debt positions (although the premia varies tremendously of course). Clearly, some will find it easier to restart their economies than others.

The variation in the upcoming fiscal constraints does not stop with countries in trouble. While Germany and France already see the signs of recovery, they are way out of the Maastricht bounds, and thus they will have to combine the management of slow recovery (and possibly a jobless one, see previous posts on jobless recovery and the role of technology dynamics in jobless recovery) with getting back into the limits they never supposed to have left. Compare that to Sweden’s 46.6% that was virtually unchanged from 44% in 2008, which -- combined with the fact that they reduced it from 80%, where it was a decade earlier -- shows real discipline. (Or take the Czechs, Denmark, Finland, all expected to be under 40% in 2010.) -- Check out the OECD's "Beyond the crisis" report.

The consequence of this might shape the global economy’s dynamics the post-crisis years. We might find that the combination of the new primacy of fiscal policy and the variation of fiscal capacities might have a long-lasting effect. If the 2000’s can be taken as an indication, the next decade we’ll see new global structures emerging, and activist governments might just give a crucial competitive edge.

Thursday, 10 September 2009

Reinventing the BRICs Amidst The Global Recovery

The silly talk is returning about emerging markets as the global economy is turning into a full-blown recovery mode. In particular, there is a renewed hype about the non-existent group formed by Brazil, Russia, India and China: the BRICs.

The reality is that the term BRICs has never made sense in either the International macroeconomics, or the global economics framework. For much of the 1980’s and 1990’s, emerging markets formed a marginalised asset class. Although global finance was itself materialising, most of the action took place in the mature economies, while the developing nations with their backward economies and underdeveloped financial markets entered the headlines only in times of crisis. When in 2001 Goldman Sachs started to use the term BRIC, it was a mere shorthand for the four largest emerging markets that could not be ignored any more. (See how the future of the BRICs was imagined in 2003. Or read the Goldman Sachs 2007 book 'BRICs and Beyond', which is a good book, apart from using the obsolete national economies framework -- it is also a brill reminder how rosy the pre-crisis outlook was. We are rapidly returning to the same dreams and myth now...)

However, apart from size, there never was much commonality among the BRICs. Russia and Brazil are commodity exporters. India, and especially China are commodity importers. China and Brazil are becoming important manufacturing bases of the world economy, and India a specialty exporter. In opposition to these, Russia has no manufacturing exports of importance whatsoever, almost all of its domestic dynamics is based on the raw material revenues the country is collecting. Brazil and India are full-blown democracies, Russia and China less so. India and Brazil have sheltered capital markets, unlike the wild waters of China and Russia. Furthermore, the term BRIC has never really taken off as an analytical notion, and stayed merely as an investment banking sales concept only. And, all attempts by the four governments to harmonise any of their international stances yielded empty rhetoric, no real action (see for instance the official BRIC summit website).

The height of the BRICs hype came in the middle of the credit crunch, when people had started to argue -- notably people who were not emerging market experts -- that the crisis will decouple the largest developing economies from the mature economies. This is based on the observation that while in 1992 only 5% of the global GDP was produced by these four countries, their combined share grew to 15% by 2008. In this process, they achieved breakneck growth speeds, and one could easily imagine how a small dip in their growth would still leave enough momentum to provide an effective demand a bridge during the crisis of the developed economies. A dream, as it turned out.

(The funny thing is that for most emerging market analyst crowd this argument never really made sense. The origin of the difference in the emerging market decoupling expectations might be in the difference of experience emerging economies had compared to the mature one. While the history of the developed economies, at least post-war, is mostly about the rise of their domestic demand followed by their opening up, the history of the emerging economies is more about external dynamics. In the case of the former, structural change tended to originate in processes generated by entities at home. In the case of the latter, almost without exception, the source of the change has always been outside the country. For the Asian tigers, it was Japan, then the US, then the world economy. For the resource rich developing countries, e.g., South Africa, or the Gulf, or Central Asia, it was the global demand for raw materials. For Central European transition economies, it was the West European economic dynamics. The point is that although the rise in exports tended to generate “rapid structural change”, which in turn creates domestic demand, it is a long time down the line of the development before their domestic dynamics takes over the export engine. Supporting this, the experience has always been that at the time of crisis not only exports fall, but so does the previously genuine domestic demand looking stuff as well.)

Thus there is no reason to group these four countries together now any more than before the crisis. However …

The mid 2000‘s, the category of emerging markets had been falling apart, giving space to a completely new grouping of developing economies. However, as the global economy was melting down, emerging markets started to behave like coherent group again. While, their rise was differentiated, they are plunged was synchronised. We were back to the old world.

Yet, now they are coming out of the ditch, and some are rising more unscathed than others. Early calculations even suggests that unlike the BRIC’s, there are some emerging markets that did even contribute to the global recovery. Indonesia and Turkey might be two candidates for this role. (But it is far too early, as the data for the summer is not out yet.) The pecking order, to say the least, has changed. If there is going to be a table at which the new global regulatory framework, or even a currency framework, will be set, some emerging markets will want to have a seat there. And it will be the large ones and the healthy ones only to have a chance to get it. (Ukraine, Hungary, Argentina need not apply.) And thus, even if neither the old term BRIC, nor its new versions would make any more analytical sense than any time before, a global politics shorthand to the new guys at the table might be handy.

If so, we surely have some better name for them than the one that sounds like the “rectangular-shaped, heavy clay object”.

Tuesday, 8 September 2009

Global Economics’ Disappointment In Barack Obama

Once upon a time there lived a very very large dragon. This beast was the scariest of all creatures ever lived. It was taller than a house, and its mouth was big enough to gobble down six little children at once. Its teeth? Oh those giant, yellow teeth were the largest, sharpest, spikiest in the whole wide world. There were all kinds of princes, kinglets, knights, and quite a few of the smallest and cleverest sons of men with agricultural occupations trying to fight off the fearsome dragon. But to no avail. The world was getting darker by the day. Even some very brave princesses had a go at the beast, but they failed too. Everyone who had gone up to the firebreathing basilisk, either got a bit burned and went home, or died the most horrifying of deaths, deep in the dark lair of the monster.

There was only one who could stop it.

But he didn’t.

And that’s the end of the story. Goodnight.

Obama is disappointing the global economics crowd again. As the crisis went into full swing around a year ago, the global nature of the meltdown became undeniable. "Sweeping global actions needed", went the empty words at every summit. But, there was a problem. The global policy that could have dealt with the root causes of the crisis and stopped the spiral would have required more than just a few one-off actions. Rather, a lasting institutional framework on the global level with powers to set, implement, and enforce policy would have been needed. However, there were no political leaders that could’ve led the transformational action. The US was amidst its presidential election, and unlike Clinton eight years earlier, the Bush administration lacked the global clout, as well as the will to rise to the challenge. The new Obama administration was, obviously, nowhere in sight. After its lost decade, Japan was not in shape, either. And the Chinese government was still well before its change of tack with regard to global institutions. The most likely candidate alternative to the US, the EU, failed yet again to come up with a common idea about what to do with the global economy, or even to put forward one person to represent it on the world scene.

Granted, the leadership should have been intellectual as much as political. Despite the pretence of the macro economics profession, neither analysts, nor policymakers had the first idea about what was going on.

This blog has argued the need for theoretical innovation: a new global economics. The main argument against it was that you should not use untested theories for policy-making. (Which is rather funny in retrospect having seen the random policy “innovation” to which politicians turned in their utter panic.) In any case, the global economics policy argument in its current form is not necessarily pushing for a new theory, rather the recognition that the subject matter of our research, as well as, our policy problem has moved from the national level to the global level. Thus, we end up with the same conclusion: irrespective of whether the world economy will end up being modelled in an international macroeconomics framework, or a new global economics framework, the rise of global economic policy institutions is inevitable.

Barack Obama, as the new president of the US, came to power with unprecedented global political capital. Not only was he seen as a possible, legitimate leader for the entire world, but the Bush administration’s policies, as well as the failure of the governments of the developed economies to stop the crisis, had left a political vacuum. Obama was seen as the only one who could become the leader the global economy needed. He combined credibility and trust, the hope of a fresh start, and the power to act.

It is unfortunate, at least from a global economics point of view, that he did not use this opportunity. His domestic economic policy hardly contains any new vision, most of it is a mix of traditional economics and policy solutions already tested in other countries, mostly Europe. And his global economic policy … Well, there is none.

Just as we did not understand what was really happening as the global economy was spiralling into recession, we do not understand how it is coming out now. If it is coming out, at all. But assuming that recovery is on the way, it is nothing but the lucky, unplanned, undesigned outcome of a set of spur of the moment, short-termist policy actions. Bar another stroke of luck, the next crisis will bring much scarier pictures than those we have seen this time. History, I fear, will be harsh on Barack Obama.

Monday, 7 September 2009

G20 In Yet Another Fake Action

Is that very funny how the G20 is doing it again? As the crisis unfolded, some 'out of line' people suggested that banks should perhaps be treated as utilities. They were wiped off the table. Now, that it is becoming clear that the largest economies of the world will again fail to harmonise real policy action, they are pledging to clamp down on the banks together instead. The previously marginalised view of regarding banking services as utilities is returning via plans to increase capital requirements. Banks will be asked to put down more money to back their actions.

The trouble with all of this, is that there is no distinction being made between banking services that aims at the domestic market and banking services that are essentially international in nature: global financial hubs. While there is merit to the idea that domestic economy focused banking provides general services not dissimilar to some characteristics of utilities, it would not be too difficult proposition to defend that the regulations around that part of the industry were in most countries in not too bad shape. Arguably, the US and the UK perhaps were exceptions, but their troubles would not have necessarily translated into a global recession. It was the second form of banking, namely that with global coverage and global reach, that caused the negative spiral. There is no reason for us to believe that this bit of finance has anything to do with being a utility. (Perhaps far in the future, this may change, but it is definitely not the case now.)

It seems, another opportunity is being missed.