Category Archives: Political Economy

China-West Dialogue (CWD) Members Discuss the Global Debt Management Environment

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The CWD focused recent attention on the global management of debt and the growing threat of a sovereign debt crisis. After a number of virtual gatherings and much focused discussion, the CWD completed a Debt Management Proposal that CWD passed to folks in India as India scheduled the first G20 Finance Ministers and Central Bankers Ministerial at Bangalore, or its official name, Bengaluru.

The  CWD Debt Proposal Summary is currently posted at the Global Solutions Initiative. but we do anticipate that the full Proposal will be up at the Global Summitry Project shortly. Meanwhile, I also wanted give you a flavor for the intense discussions that went on among CWD principals working on the Proposal. First, I wanted to link you to the Debt Management analysis prepared by Deborah Brautigam at SAIS that was published as: “The Developing World’s Coming Debt Crisis: America and China Need to Cooperate on Relief” in Foreign Affairs published on February 20th.

And then I wanted to give you a flavor of the deep discussion that went on for several weeks. This is a short back and forth that took place with Deborah Brautigam, Johannes Linn and Richard Carey on February 21st. I have smoothed the discussion and elaborated on the many acronyms in the back and forth:

“Johannes Linn

If I had one wish, Deborah, after reading your excellent article in Foreign Affairs, it would have been that you had explained more fully the nature of the Heavily Indebted Poor Countries (HPIC) process. In my view it was not “debt cancellation” by the IFIs, but the paydown of IFI debt with resources from bilateral donors and some International Bank for Reconstruction and Development (IBRD) net income (which could otherwise have been contributed to International Development Association (IDA)). If I understood the [current] Chinese proposal for the establishment of a World Bank trust fund in parallel with an existing IMF trust fund to pay off IMF debt (as you mention), then that would in effect be parallel to the HPIC approach, and one wonders why the World Bank didn’t accept that. It  could be that World Bank did not want to risk having bilateral donors reduce their new IDA contributions in reaction, which would have meant less new IDA money for the poorest countries.

It appears that the issue with multilateral debt relief is the following: there is no free lunch — if the Multilateral Development Banks (MDBs) take a hit on their balance sheet and give up their long-established “preferred creditor status”, they risk a downgrading and higher risk exposure and thus more restricted prudent use of capital market funding. IDA will have fewer resources for new lending. In effect, other developing countries will pay the price for multilateral debt cancellation. If they go for a HPIC-like solution then bilateral donors will have to pay, burdening either donor countries’ tax payers (which, one could argue, is not unreasonable); this might risk that their contributions to IDA and other concessional multilateral windows will drop and thus concessional new money from MDBs for the poor countries will decline (in which case other developing countries would again pay the price).

By the way, a straightforward comparison of debt outstanding across creditor classes, while relatively easy to compile, tells only a partial story. One really should look at the net present value of debt service obligations across creditor classes, since that reflects the real cost of debt to countries, allowing for very different terms under which different classes of debt are contracted. Under this approach private debt will weigh much more heavily and MDB debt less so. It would be interesting to see what happens to Paris Club debt versus Chinese debt.

Deborah Brautigam

My own view is that the World Bank should have explored the establishment of a Catastrophe Containment and Relief Trust (CCRT) – an IMF trust – equivalent more seriously. There was a view expressed that China wanted it to be funded in proportion to voting shares, which was deemed infeasible, but the IMF trust is, I believe, funded by voluntary contributions. This would have been a start.

As I recall during HIPC, since the debt relief was counted as “aid”, countries did reduce their non-relief funding. I remember that Japan warned that this would be the consequence.

Richard Carey

The decision to adopt and implement the “enhanced HIPC” was taken at the Cologne G8 Summit in 1999, after agreement at the previous Summit in Birmingham in 1998 that the following year the Summit would definitively deal with debt.

In that intervening year, the details were hammered out in the contentious process as previously described. Funding of multilateral debt reduction came from the OECD’s Development Assistance Committee (DAC) concessional aid essentially (the IMF used some of its own resources for the Multilateral Debt Relief Initiative (MDRI), with a call for bilateral contributions to cover additional needs, and the MDRI was extended to all countries with less than $380 per capita, whether they had been in the HIPC program or not).

The key mover was Clare Short, then new Labour Government Secretary of State with a new Department of International Development (DFID) and a new White Paper which endorsed the 1996 DAC International Development Goals (IDGs). She flew to Washington to help Brian Atwood, then the Head of USAID, face down Treasury and State who held that the 1996 DAC Goals had not been endorsed. The position was that this initiative did represent US agreement for what eventually became the IDGs. The story of how the HIPC became linked to the goal for poverty reduction is told in Chapter 10 of the recent history of the DAC.

In 1998 the Jubilee 2000 Campaign for Debt Reduction was having a major impact on  public opinion. Short saw an opportunity to make debt relief conditional on poor countries drawing up poverty reduction strategies. To establish that link, Short had to fly to Washington to face down USAID Administrator Brian Atwood and objections from Treasury and State that the US had never agreed to the OECD’s DAC International Development Goals. With her position that Prime Minister Blair would publicly criticize President Clinton if he failed to support the IDGs (eventually to become the Millennium Development Goals (MDGs), the 1998 G8 Communique endorsed them in resounding terms. That is how the enhanced HIPC came to be based on Poverty Reduction Strategy Papers. (Note that CWD Common Framework proposal involves countries adopting medium term strategies based on the “new development narratives”…).

A subplot in this story was that the Comprehensive Development Framework (CDF), was lost to the Poverty Reduction Strategy Papers (PRSPs), although the 1999 Cologne G8 Communique had briefly welcomed the CDF. As Chapter 10 in the DAC History relates, a joint note circulated on April 5, 2000, by James Wolfensohn and Stanley Fischer sought to square the circle of the urgency of the PRSPs to deliver fast on debt relief and the more time-consuming task of bringing multiple stakeholders into a country-led long-term development platform:

For some time the formulation of “PRSPs incorporating the principles of the CDF” became a standard phrase. But eventually the battle for the CDF was lost and this formula faded away. And without the CDF, the HIPC PRSPs essentially left out agendas such as infrastructure, urbanisation  and rural development. The MDGs were essentially human development/wellbeing- based proxies  – these left-out agendas only came back with the Sustainable Development Goals (SDGs) in 2015.

In the present case of the CF, medium term country strategies based on the “new development narratives” can in principle be built on the basis of nationally owned SDGs and Nationally Determined Contributions (NDCs)  to the Paris Climate Change Agreement. But let us see what is emerging in Finance Ministers and Central Bankers meeting in India this week and beyond. And, with bond financing now a major part of the picture, impact investing by the private sector and asset managers on the basis of projects and programs that are green, social, sustainable and sustainability linked  (GSSS) seems to be in vogue.  Also, as mentioned, the article by the Lazard Sovereign Debt Unit has useful ideas  -e.g., on how bondholders can be brought into early agreements with special bonds that provide a payoff for “haircuts” if and when the economy is in much better shape.

Johannes Linn

By the way, one question we all seem to studiously avoid in this discussion about debt relief is how to prevent a new debt crisis a few years down the road, after we solve this one. In the mid 1990s I was involved in establishing the broad design of HPIC – moving from basic concept to decision in principle –  with President James Wolfensohn at the World Bank, so it is particularly frustrating to see the debt issues being replayed all over again, except that it may be an even more intractable problem now than it was then.”

Hope you like it.

Image Credit: IMF

A Reform Agenda for China’s G20 Summit

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Chengdu FM July 2016 copy

Coordination and harmonization are keys to collective action in global governance.  The jury remains out as to exactly what China’s hosting can accomplish with respect to either.

ANU’s Adam Triggs recently wrote that there were only three practical things that any G20 Leaders’ summit can accomplish:

… it can share information and best practice policies between countries; it can reform global governance by either reforming existing institutions like the IMF or creating new ones; or it can undertake what Oxford University’s David Vines calls ‘concerted unilateralism’, where countries implement policies (fiscal, monetary or structural) to suit their own economies, but do so collectively.

As a number of us suggested in our V20 Hangzhou gathering at Zhejiang daxue in the spring, Leaders also can, and should extend, their efforts beyond what is described above. Indeed in our collective view there is nothing more critical than having G20 Leaders direct their message to their own publics.  They need to signal their publics as to what is critical in their G20 efforts.  As our Blue Report to the Chinese leadership urged:

Together, G20 leaders can make clear and powerful statements which can signal the path of economic progress to all actors around the world. … Leaders at G20 Summits can strengthen their connection with their publics by devoting more attention to the content and the modes of communications from the summit platform.  … Key ideas could be summarized and Leaders could speak in more direct ways to their publics.  … G20 Leaders understand that globalization requires fair and updated rules that can elicit trust, a sense of fairness, and certainty.

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Tiptoeing to Freer Markets – China and the Shanghai Pilot Free Trade Zone

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Shanghai Waterfront

 

I apologize to all those who regularly read these posts.  They have, unfortunately, failed to be regular recently.

But I have been out there in the wide world – first in Russia at the St. Petersburg Summit and all last week in China. I shall report more on both these trips in the near future.

I did want to report, however, on an interesting experiment now underway – at least as of Sunday September 29th – China’s Shanghai pilot free trade zone (FTA).The FTA, it appears, is the cutting edge of the new leadership’s effort to bring more market and less regulation to China’s economy.  The FTA is 29 square kilometres in the north eastern section of Shanghai – stringing together areas of docks, hangars and warehouses in the Pudong district.

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“Creeping Urgency” Still

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The New York Times article today, “Leaders Say the They Expect Agreement on Aid for Spanish Banks This Year.” called leaders decision-making as “creeping urgency”.  So where are European Leaders?  Well kinda where they were months ago.   Leaders have agreed to set up a Eurozone bank supervisor, among other things, but the current agreement leaves unclear when the new bank supervisor will be fully in place.  That is critically important because without the bank supervisor in place, European Stability Mechanism (ESM) funds will not be available to struggling banks, especially in Spain.  So while the EU leaders will seek to “spin” the agreement as success, the lack of clarity around the regulatory startup is trouble.

And why is the date for the start of this new banking supervisor still so unclear?  Well, the problem is a German election in 2013 where German Chancellor Merkel doesn’t want to have to defend the use of ESM funds directly to the sagging banking sector in Spain.  So while the European Commission urged that the banking supervisor be up and operating by the start of the year – January 2013, it is pretty evident that European politics will not permit that.  So some of Europe’s most fragile banks are unlikely to be under this new European supervisor.  In fact Germany has insisted that the extension of regulation of Eurozone banks be done in stages.    That too appears to be a product of national politics.  The German local and state banks are not eager to be regulated by this new ECB bank supervisor.

And the determination to bring Greece into line in a austerity program that is well off track appears to have made no progress either.   And there other supervisory and budgetary issues that EU leaders have been unable to resolve.

Notwithstanding the “comforting” words of leaders in the Eurozone, the bank supervisory issue – that was generally perceived by officials and observers to be reasonably straightforward – is being delayed.   Leaders have to be assuming – at least hoping – that global markets will not render their own judgment on the failure of Eurozone leaders to resolve the continuing sovereign and banking debt issues.  That kind of gamble well may not pay off.

The only good thing that may arise from this lack of collective political will is that there is no immediate prospect of a G20 Leaders meeting.  Att least at the moment G20 leaders are not to gather until September 2013 though finance ministers and central bankers will gather well before this.  If such a summit were planned we could once again witness an agenda largely hijacked by Europe’s apparent determination not to take the necessary action to resolve the debt issues stalking at least Europe.

Meanwhile watch global markets!

Image Credit:  CNNMoney.com

 

Local or Global

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Notwithstanding the mandate (?) the G8 – or more likely the G7  leaders – expressed concern over the consequences of a continuing debt crisis in Europe especially in Greece.  Apparently President Obama raised concern over the decline of the euro and the possible impact on US exports.

The Greek debt crisis highlights two features of the current global governance system.  First – and possibly rather obviously – the debt crisis in Greece reminds us how integrated the global economy is.  Debt in Greece impacts interest rate spreads in other European  countries namely the other PIIGS – Portugal, Ireland, Italy and Spain raising concern over their own significant debt loads.  And with American concerns over exports there is a corresponding concern in Europe over the sustainability of the debt load in the United States.

The second – maybe less obvious feature of the crisis – seems to suggest the opposite of this tight interdependence  – where should the locus of  debt resolution lie. The Europeans have involved the IMF in the debt crisis.  The IMF has much experience in dealing with debt and the threat of sovereign default.  But the IMF should not be drawn in to guarantee Greek debt.  For the nub of the Greek debt problem is the unwillingness of the Europeans – principally the French and the Germans – to reschedule Greek debt.   The problem is political.  The  Europeans have put off resolving the rescheduling of the Greek debt. Dealing with this problem requires the institutions holding the debt – mainly French and German banks – to take a “haircut”.  Thus the Greek debt issue is principally a European one.  Neither the G8 states – nor the G20 states – or the IFIs, need to be dragged into financially supporting this European debt problem.

Let’s not turn the IFIs and others into the Irish government saving the Irish banks from rescheduling.

Meanwhile – The Beat Goes On

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My last blog post The Inflation Tiger Rising concerned the rising tide of inflation in the BRICS countries – and the government efforts in China and Brazil to rein inflation in.

This post examines the other side of that coin – the impact of the US dollar on global prices and interest rates. A recent article by Tom Lauricella at The Wall Street Journal (see “Dollar’s Decline Speed Up, With Risks for the US” (April 23, 2011) chronicles the decline of the US dollar.

The US dollar as we all know is the international reserve currency.  Most international transactions, and much of the key international pricing – oil for example – is done in US dollars.

The US dollar has declined 1 percent in the past week against a basket of of currencies, repeating a similar drop of the week before.  In the past week the dollar as measured by the ICE US dollar index hit its lowest point since the lowest point of the index on March 16, 2008 – the Index fell to 70.698 (the Index had begun in 1973 after the demise of the Bretton Woods System of fixed rates at 100.).  Just before the 2008 global financial crisis the dollar had lost some 40 percent of its value against the basket of 6 currencies including the Pound, Euro, Canadian dollar and Japanese Yen.  This low point in 2008 represented a a steady decline of six-years of the dollar’s value.  As noted above, the Index is approaching that low once again.

The US dollar depreciation is a product of a low and continuing interest rate policy and the the growth differentials with the emerging market countries.  The rising price of oil is also a product of the depreciating dollar adding to inflation fears in the US.  The inflation impulse in the BRICS could add another element in the decline of the dollar as well, of course, the fears of the US deficit and debt and the fears that US politics will make reaching a sensible deficit strategy almost impossible.

The declining US dollar has led China officials to allow a steady appreciation of the renminbi in the last few weeks.  While US officials have urged a significant appreciation in the renminbi,  it leads Chinese officials to be less needful of purchasing US dollar debt with China’s now outsized $3 trillion exchange surplus.

The vicious as opposed virtuous cycles of exchange remain.

The Inflation Tiger – Rising

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The announced inflation rate for China signaled again the emergence of inflation as a serious global economic issue.  At the moment it lies principally with large emerging market countries notably in China, India and Brazil.

The Chinese government has targeted 4 percent.  But China’s consumer prices rose at 5.4 percent on a year-on-year basis in March.  This level represents the biggest inflation jump since July 2008.

Meanwhile in India inflation rose at almost 9 percent in March after rising 8.3 percent in February.

Finally, in Brazil the consumer price benchmark rose to 6.44 percent, which is the fastest rate in 2 years.

These major emerging economies are responding with increases in interest rates.  Thus, China’s central bank announced recently its fourth increase in cash reserves for the large banks in China.  These banks must now set aside 20.5 percent  of their cash reserves representing an increase of half percent.  It is then hoped that banks in will reduce their loans to take account of the need to retain larger cash reserves.

Brazil raised its central bank rate to 12 percent representing a quarter point increase – this after two previous increases of a half percentage each.  This interest rate is the highest of any major economy.

All these emerging markets, and others, plus developing countries are experiencing significant increases in food prices as well as energy prices.  The interest rates and inflation rates appear to contrast with the traditional economies – the US core rate rose at 1.2 percent, though the CPI is at 2.7 percent and Europe with a 2.7 percent increase though this represents the highest rate in two years. This increase though significantly lower than the large emerging markets has prompted an interest rate rise by the European Central Bank.

The rising emerging market rates – have helped fuel the appreciation of their currency – the Real has risen some 40 percent since early 2009.  Yet this interest rate efforts  – to deal with inflation – have had the perverse effect of only further encouraging capita inflows precisely what the the Brazilian government, for example, has been trying to staunch since it only causes the currency to further appreciate.  China does not suffer from this vicious cycle only because its currency is managed – indeed presumably significantly undervalued – as argued by US officials and others.

Where does this leave the large emerging markets.  For China the rising inflation may encourage a more rapid appreciation of its currency. Wage and product price increases may likely follow and the virtual circle where China growth and lower pricing may come to an end.  China may well export inflation as well as goods.  India may do the same.

For Brazil there are strong voices urging that the Brazilians need to shift to their own form of managed currency (see Roberto Luis Troster’s  Feature of the Week at the Munk School Portal) to constrain the vicious cycle of inflation and interest rate hikes leading to further currency appreciation.

The Inflation Tiger is indeed dangerous.

Step by Step – Building Global Governance

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So the G20 Finance Ministers and Central Bankers met this weekend in Paris to coordinate efforts on the question of global imbalances.  Overcoming the deep skepticism in the global financial press especially, it appears the meeting took the first step in a long and arduous effort to build a system, which would tackle global economic imbalances and avert the next crisis.

The discussion of progress often seems like a witnessing a tug of war.  The folks – reporters and analysts – at the FT, the WSJ and the NYT, especially, but not only, are quick to minimize progress and to forecast failure.  With progress these  same reporters grudgingly admit advance but declare the need to make significantly greater progress to ensure effective policy.  And while it may be true that far greater coordination is required to avert a future economic crisis, still the skepticism is annoying and undermines the effort to – I  suspect – assess the positive effort being made.

All that aside it does appear that material progress was made by the G2o Finance and Central Bankers this last weekend.  It is interesting to note that such progress appears to have been made notwithstanding China’s objections to identify the factors that  all countries could examine to determine if there were countries in trouble.

While China apparently insisted and the communique did not include precisely “real exchange rates” or “current account imbalances” the language of the communique includes language to, “take due consideration of exchange rate, fiscal, monetary and other policies.” Even this less precise language seems to be a victory of sorts since the communique appeared to have removed “exchange rates” altogether at the insistence of the Chinese only to be reinstated at the insistence of the US, Germany and the United Kingdom (See Ralph Atkins and Quentin Peel, “G20 strikes compromise on global imbalances,” FT, (February 19-20, 2011).

So where do the G20 go from here?  Well the Framework Working Group (FWG) – chaired by India and Canada – moves forward to an April deadline.  Ironically the Group will meet in Beijing and at that time hopes to conclude the “indicative guidelines” for each of the selected economic indicators.  In addition the IMF has be tasked to provide a G20-wide assessment of these policies in time for the G20 Leaders Conference in November in Cannes France.

So the policy progress continues notwithstanding that national interests do not converge on global imbalances.  What is apparent however, is that there is no reduction of the this debate to a clash between the West and the Rest – not even the BRICs.  It would appear that China is isolated on  its exchange rate policy.   Brazil and the other large emerging market countries are not in the China camp.  Brazil has spoken out strongly on currency manipulation – read that as the China fixed exchange – and the US quantitative easing.

Brazil is determined to raise the need for a new additional international reserve currency.   Brazil, according to its Finance Minister Guido Mantega wants to expand the use of special drawing rights (SDRs) and to include both the Chinese renminbi and the Brazilian real in the SDR basket along with the US dollar, the euro, the yen and the British pound.

The US remains fixed – if not fixated – on the renminbi and the failure of Chinese authorities to allow the renminbi to appreciate more rapidly.

And Germany is determined that the analysis of global imbalances not be locked into ‘hard’ limits.

National interests remain divergent – but global governance progress is being made – nonetheless.

The ‘Drug’ of External Trade

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Notwithstanding the assurances from China on exchange rate and valuation, the current account surplus that was just announced by the Chinese government has jumped dramatically.  In a WSJ article it is reported that China’s second quarter surplus was $USD72.9 billion a 35 percent increase from a year earlier.  The announcement from SAFE (State Administration of Foreign Exchange) was that China’s trade surplus had reached $102.3 billion. This figure represents a doubling from a year earlier.

The second quarter numbers signaled a major rebound from the first quarter when the current account surplus was down 32 percent from a year earlier. It would appear with this announcement  of third quarter figures that China’s external current account surplus is returning to levels reached before the 2008 global financil crisis.

With figures reaching 7.2 per cent of gross domestic product that all the discussion of redirecting China’s economy to greater domestic consumption is to be kind – ‘premature’.  It would appear that China’s foreign  exchange reserve are now about $USD2.65 trillion.  This very large figure puts pressure on China’s authorities to address exchange rates and should be putting pressure on these officials to accelerate efforts to finalize “indicative guidelines” for the global imbalances discussions at the G20.

If not ‘currency war’ the expression coined by the Brazilians to describe the current global imbalances may be proven not to be wrong.