The ‘Bear’ Necessities of Life – US Recession on the Way?

If you want a bear then Morgan Stanley’s Stephen Roach is the one to look for first. In today’s FT he argues that America’s asset prices (particularly property) must come down with a bump. Its not if, but when, in Roach’s view.

Rising asset prices convinced Americans that they could get by without saving. The US has instead imported about three-quarters of the rest of the world’s surplus savings. The US must raise its domestic savings rate, ergo the share of consumption in GDP must fall. Fiscal stimulus will only postpone the inevitable, argues Roach. Keynes is not the man for this crisis.

A US recession might derail the recent commodity-price boom. Ten years ago we would have said ‘will derail’ not ‘might’. But of course China is now a big global economic motor (though not quite as big as we thought after the World Bank reduced its estimate of China’s share of global GDP). And Japan’s economy now has more life in it (partly thanks to China). Investors in emerging markets (both equity and debt) have so far kept the faith, and bought into the decoupling story: the BRICS train can cheerfully head on down the tracks, while Uncle Sam’s engine goes over the ravine. All the copper that went into wiring-up Florida’s condos simply gets diverted to China and India, and Zambia’s copper miners can sleep easy at night.

Roach ends his piece with a homily — to sit up straight, and take your medicine: “The longer America puts off this reckoning, the steeper the ultimate price of adjustment. Tough as it is, the only sensible way out is to let markets lead the way”. Schumpeter is the man for the moment, not Keynes: let a crisis purge the excesses from the capitalist system, and thereby lay the basis for the next upturn.

So no avoiding the hangover. Except some will suffer more than most — and it won’t be the folks on Wall Street who got the US economy into this mess. Instead it will be the NINJAs (No Income, No Job, No Assets) mortgage-holders, the poorest US neighbourhoods (repossessions are accelerating), and those in casual employment who get sacked first.

The latter include America’s vast reserve army of illegal immigrants: illegal but welcomed with open arms by US construction, hotels and agriculture when times were good. So expect reduced remittance flows to Mexico and everywhere else south of the border when Jose the carpenter loses that job he got during the US housing-construction boom. And expect this to start showing up in Mexico’s capital account soon, shortly followed by Mexico’s poverty numbers. Some of the bare necessities of life are going to be harder to come by.

IMF’s chief economist warns that financial globalization increases shocks

The IMF is becoming less naive about the perils of financial globalization (or at least some Fund staff are). The Fund’s Chief Economist Simon Johnson’s blog notes that “… the spread of financial globalization since 1987 means that shocks can jump to faraway and seemingly unconnected places with extraordinary speed. Shocks can also hit places with no apparent weaknesses in their macro policies and regulatory framework”. This is far from the IMF’s position some ten years ago when, pre Asia-crisis, the Fund promoted financial liberalization without much thought to what happens if short-term capital flows reverse themselves.

Social Protection Can Raise Agricultural Growth

Social protection is now a fast-moving story (see our recent post on Brazil’s Bolsa Família). The rural poor are especially vulnerable to income-shortfalls — reflecting their shortage of assets, dependence on rain-fed agriculture, and a lack of insurance mechanisms. Farm workers with nothing but their wage (in cash and kind) are at high risk, making them often chronically poor (see the Chronic Poverty Report). By reducing risk, well-designed cash transfer programmes can encourage poor people to venture into new (and better) livelihoods. Injecting cash into the local economy also stimulates demand, much of which is spent on local goods and services. The multiplier effects then further encourage the growth of output and employment. A recent ODI briefing paper on ‘Linking Social Protection and the Productive Sectors’ from their social protection team argues that agricultural policy is in disarray in many countries and that a revitalized agriculture needs new approaches; social protection and its ability to reduce vulnerability and promote growth should be a major part of any new national policy. At the same time, some social protection programmes are better than others. The Chars Livelihoods Programme in Bangladesh gets high marks from the ODI briefing paper as does Mexico’s Oportunidades but India’s National Rural Employment Guarantee Act (NREGA) suffers from not providing enough skill enhancement (thereby diminishing its potential growth-enhancing effects) and some dishonest local practices.

Brazil’s Bolsa Família – it works

Everyone has been watching Brazil’s conditional cash transfer programme, Bolsa Família, since its 2004 launch. It covers 11 million families, providing a monthly transfer to poor households with children up to 15 years old and/or a pregnant woman and a monthly transfer to extremely poor households (irrespective of their composition).

Does it work? Fabio Veras Soares et al. at IPC have now done a thorough evaluation. Key questions are answered: is it well-targeted? (yes, by and large); does it reduce poverty? (yes, especially extreme poverty); does it reduce inequality? (yes); does it improve education outcomes? (yes for attendance, but educational attainment remains a problem); does it improve child nutrition? (maybe); is it a disincentive to work? (no). So, by and large, a positive evaluation. A key result is that Bolsa Família does encourages higher labour force participation by both men and women, rather than shirking as critics allege.

Cash transfer programmes are up and running across Latin America; in Chile, Colombia, Ecuador and Mexico (see CPRC and ODI for regular updates). Still, many eligible households are not yet covered—this is the challenge ahead.

Hugo Chávez & the Politics of Poverty

President Hugo Chávez’s bid to change Venezuela’s constitution to end the presidential term limit has failed—for the moment. Chávez lost this week’s referendum by 51% of the vote, to 49%, on a low turnout (over 40% of the electorate didn’t vote). The president has had 9 years in power and was re-elected in 2006 with 63% of the vote (with considerable support from the poor). His mandate lasts until 2013. Bret Stephens at the Wall Street Journal and Mark Weisbrot at the Centre for Economic and Policy Research (CEPR) offer contrasting views of Chávez and the referendum.

Poverty was rising before Chávez was elected and by 2000 some 43-48 per cent of Venezuelans were below the poverty line, and the richest 20 per cent of Venezuelans were receiving over half of all income. There are wildly conflicting claims about the trend in poverty under the Chávez administration. The under-five mortality rate has been falling since 2000 according to the World Bank, and CEPR’s Mark Weisbrot argues that poverty had fallen to around 30% by end-2006. In his 2006 Foreign Affairs article, Jorge Castañeda argues that it has risen.

The urban poor appear not to have turned out in support—at least not in the numbers that Chávez hoped. Government price controls on basic goods have capped the cost of living for them, but the (predictable) result is shortages. Chávez may well have to revisit the macroeconomics of ‘21st century socialism’ if it is not to go the way of ‘20th century socialism’.

Migration and poverty alleviation via Western Union

This is an interesting story in today’s New York Times on the ubiquitous Western Union, and how it both helps poor people and is shaped by their movements around the world.