Archive for the ‘Debt’ Category

Global Finance – Doha: What Chance of Success?

1 December, 2008

World economic turmoil sets the scene for the UN Conference on Financing for Development in Doha (29 November to 2 December), the most important conference on this topic since the UN’s conference in Monterrey back in 2002. Go here for UN updates.

The last quarter of 2008 has seen a lot of talk-talk on development finance. The long-awaited High Level Forum on aid effectiveness was held in Accra in September as well as the UN’s high level event on the MDGs in New York. Calling an event ‘high-level’ lets the international community claim that progress has been made – just by getting senior people together in one place.

What will Doha bring? Can it make headway against the very strong currents now running through the global financial system? Will rich country donors be able to afford aid? On this and other issues see my WIDER Angle article with George Mavrotas – Development Finance: New Opportunities for Doha. We explore the topic further in our new UNU-WIDER book Development Finance in the Global Economy: The Road Ahead (Palgrave).

Nigel Lawson: No Fiscal Stimulus, Darling

24 November, 2008

You can rely on Nigel Lawson, Chancellor of the Exchequer 1983-89, to go against the conventional wisdom (see his views on climate change here and here, for example). He’s certainly not a member of the “we’re all Keynesians now” group. In today’s FT he argues that monetary policy is the key tool, not fiscal stimulus. Keynes was wrong:

“Britain … recovered faster than any other major nation from the 1930s slump. It did so largely on the basis of cheap money and a balanced budget. Between the slump’s deepest point, in 1932, and 1937 the UK economy grew at an unprecedented 4½ per cent a year. Nor was this due to rearmament spending, which did not start until 1936”.

I await the comments of economic historians on his reading of the 1930s. For the moment let me focus on his central message.

Lawson argues that recapitalizing the banks is the priority. Certainly, deleveraging by the banks has been huge. Nobody can deny that the economy can’t move again until the banks are sorted out. They are the achilles heel of the battered Anglo-Saxon model of capitalism. Today Citgroup got a $300 bn bailout.

But is this enough? It won’t be if deflation sets in. Then the real value of debt will rise, which will punish Britain’s already highly indebted households. Once deflationary expectations take hold, they are very difficult to shift as Japan in the 1990s demonstrated. Then monetary policy becomes next to useless: interest rates cannot be cut below zero.

Not using fiscal policy to stimulate consumer spending is therefore enormously risky. For sure, consumers might save rather than spend (see my previous post). And Britain will face a big tax bill (after the next election). The gilts market might take fright, but for now they are buying (few want equities).

Back to the lessons Lawson draws from the 1930s: if Britain was to revert to a balanced budget then it would have to cut public spending in a recession rather than raise it. This would have its own deflationary effect which, as economic activity fell, would reduce the tax base – thereby requiring a further expenditure cut to maintain a balanced budget. This is not a recipe for achieving economic recovery.

So, Nigel Lawson’s defiance of the Keynesian consensus is brave, but wrong. His recommendation is too risky. The same goes for doing nothing about climate change (on the latter: go here for a debate between Lawson and Oliver Letwin).

Tony Addison is Executive Director of the Brooks World Poverty Institute, University of Manchester.

Keynes is Back. But What to Do, Darling?

24 November, 2008

Britain’s Chancellor of the Exchequer, Alistair Darling is praising Keynes – along with just about everyone else. He’s boosted public spending (go here). The present focus on fiscal policy reflects the fear of a ‘liquidity trap’ – which Keynes first identified in the 1930s. The Bank of England is set to cut interest rates further, but this might not encourage banks to lend. So monetary policy alone can’t do the trick (it is said). Hence public spending. And now tax cuts.

Today we hear the Chancellor’s plans (at 3.30 pm: go here). The government’s spin machine was busy over the weekend so a VAT reduction will hardly come as a surprise. The FT reckons it will be a £12.5 bn package:

“At the heart of the stimulus package is an expected “temporary” cut in the VAT rate from 17.5 to 15 per cent, the lowest standard rate allowed in the EU. Food, children’s clothing and some other items have always been zero-rated in Britain”.

Will a VAT cut work? Canada cut its sales tax at the beginning of 2008, but this had modest effects on total spending, according to the ‘Undercover Economist’, Tim Harford interviewed on the BBC Today programme this morning. For a critique of the Canadian tax cuts from a poverty perspective see GrowingGap. Canadian readers: send us your views.

To cut taxes now, taxes have to rise later. Economists describe this as borrowing from ourselves. Spending won’t rise if we fully anticipate the future tax increase. Or at least that’s what some macro-economists say (see Robert Barro). It’s called Ricardian Equivalence (drop that into your next pub conversation on the economic crisis: sure to impress). Economist readers: please up-date us on whether Barro is right.

Will businesses cut prices following a VAT reduction? They are slashing prices in any case, in advance of Xmas – a last ditch hope that the sales can carry them through the new year. Buyers stormed Marks & Spencers last week, following a 20% price cut. So we might all now afford fresh underwear. But will stores cut prices further, or take some of the VAT cut to rebuild their margins?

Ann Pettifor of the New Economics Foundation interviewed on the BBC yesterday was skeptical about tax cuts (Ann was one of the first people to predict this crisis). She believes that people will instead save the VAT cut (i.e. you will still buy the same basket of goods, but now the basket will be cheaper and you won’t add any more items. Your money is then deposited in one of Britain’s hopeless banks or under your mattress). Ann points out that if the money is spent then a lot will go on foreign imports (true, but I don’t think this is necessarily as bad as is often believed. The Americans need help too. I’ll do my bit by buying a new Apple Mac).

Other ideas I have come across: delay VAT payments by small businesses for six months. Many small businesses are penalized by the larger firms not paying their suppliers on time (a zero-cost way for the latter to fund themselves). Peter Mandelson promised a crack down, but doesn’t seem to have achieved much yet. In the recession of the early 1990s, small business failures were running at a 1,000 a week. So maybe government could help with a delay in VAT payments. Housebuilders want a continuation of the present holiday on stamp duty to get the housing market re-started. Readers might like to comment on the merits of each.

But there are two ideas from the Get Fair campaign that I really like.

First, immediately invest £4bn in measures to halve child poverty by 2010. Child poverty costs at least £25 billion each year in losses to the Exchequer and in reduced GDP, according to research from the Joseph Rowntree foundation. So spending tax revenue on eliminating child poverty now would actually save public money in the future. Surely a good idea.

Second, Get Fair says improve the take-up of existing benefits: they estimate that this would help 500,000 pensioners out of poverty. Here in the UK we have just had Remembrance Sunday, a day on which we remember those who gave their lives to defend Britain – especially in the Two World Wars. A 20-year old in 1940, is now 88. Helping our pensioners now, especially those in poverty (2.5 million of them) will be one of our last chances to thank their generation.

So, over to you Darling.

Who to help in the current financial crisis?

29 September, 2008

Who to help in this financial crisis? On the FT web site I argue that the 37 million Americans in poverty (about 12% of the population) should be first in line for help (for US poverty statistics go here).

Many Americans on low-incomes have been sucked into loans that they cannot now service as house prices collape. African Americans will be hit hard (their poverty rate, 24.5%, is twice the average). And the relentless rise in US inequality will continue (see the graph here). The financial services industry feasted for years on selling mortgages to people who wanted to own the roof above their heads. The scandal of teaser-rate mortgages will run and run.

And the financial crisis is causing unemployment to jump. As Ken Rogoff in the FT says:

“A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending”.

The history of financial crises demonstrates two common outcomes. First, bank crises almost always become fiscal crises – as public money has to be used to keep the credit wheels turning. Second, capital gets help first, and labour last (see for instance Mexico’s ‘peso’ crisis of the mid-90s). Will history repeat itself?

Coping with Global Inflation

29 September, 2008

Our readers don’t need reminding that Inflation has been on the rise globally (although the present financial crisis could knock that on the head). The poor are being hit hard by rising food prices – the price of rice in Asia has doubled, causing real distress in countries without effective social protection. Africa is scrambling to respond.

Macro-economists in central banks and finance ministries are worried people. Today looks alarmingly like 1979-81: inflation pushed up by the second oil price spike and recession looming. That combination of inflation and recession – stagflation – is the worst scenario for policymakers. Inflation requires demand restraint, recession requires demand expansion – and policy-makers have a difficult time in choosing which direction to go down. The early 1980s are a warning of what can happen. Real interest rates (the interest rate minus the inflation rate) turned from negative to positive – pushing up the real cost of borrowing for firms already hit by weakening sales. Eventually the oil price collapsed, bringing inflation down with it, but also distress for over-borrowed oil producers such as Mexico and Nigeria. That then set the stage for the debt crisis that took a full decade to work itself out, with massive social fall out, and poverty spiking higher (the 1980s were Latin America’s “lost development decade”).

So what should today’s policy-makers do? The Centre for Development Policy and Research at SOAS has a new Development Viewpoint out on global inflation. The author, Terry McKinley, argues that they must be clear on the causes, otherwise the response could make the situation worse. Since the sources of recent oil and food inflation are ‘globalised’, developing countries cannot hope to maintain low domestic inflation by the standard practice of raising domestic interest rates, argues Terry. Such a misguided “monetarist response” would only heighten the risks of recession, he concludes. Go here for the paper, a timely contribution to the present debate — and a warning from the past.

US Financial Crisis Hammers the Poor

18 September, 2008

Former IMF chief economist, Ken Rogoff worries that the dollar is headed for another dip in today’s FT (go here). He says:

“If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring”.

Instead the dollar has strengthened over the last month. But he doesn’t think this will continue. Rogoff is worth listening to: over the summer he said a major US financial institution would fail before the end of the year (reported here). And this has now come to pass (with more on the way?).

What does the financial crisis mean for the poor? Earlier in the year we commented on the big rise in the number of people using America’s food banks (see our February and US archives). The US government buys surplus food for distribution through organizations like America’s Second Harvest — and these are facing heavy demand in areas worst hit by the house-price collapse.

Given the US slowdown, unemployment will rise further. With few if any savings, plus the cost of health care (and the fact that many Americans are uninsured), unemployment can quickly push people into poverty. The US prides itself on social mobility (the rags-to-riches story that all those self-help books play upon). But only 6% of children born to parents with a family income at the very bottom move to the very top (see the Economic Mobility Project here). It’s actually a very static society, especially for African Americans.

Unemployment is, in turn, pushing up the default rate in the already hard-pressed mortgage market. This adds to pressure on mortgage-bonds and the balance sheet of the financial sector.

Putting in place effective safety nets for those on low-incomes could help establish a floor under house prices (and thereby indirectly help the dollar, which is Ken Rogoff’s concern). Since many low-income families were lured into mortgages they cannot now afford through so-called ‘teaser rates’ (low interest rates to suck them into debt) they deserve as much help as the banks — if not more.

But we fear that any help will be squeezed out by the fiscal costs of the financial crisis itself (not to mention the continued cost of Iraq: see Joe Stiglitz here on the ‘three trillion dollar war’). And it is very likely that the US will exercise even less voice in international development, since its bilateral and multilateral aid commitments will come under budgetary pressure as any new administration (be it democratic or republican) will focus on domestic priorities first. The bottom line: it’s not just America’s poor who are hammered, but the world’s poor as well.

Property Refuses to Dance

29 August, 2008

Talking of politics trying to cope with capitalism’s erratic moves (see our last post), UK Chancellor Alistair Darling has come up with another wheeze to try and save Britain’s collapsing property market — now on the floor after a speculative frenzy to the tune of easy credit. Repossessions are dramatically up, not least in Manchester, a city often labeled as the ‘UK’s debt capital’.

First, the Chancellor tried to encourage the banks to clear up their own mess — with a bit of public money. Interesting isn’t it how (private) banking crises always try and turn themselves into (public) fiscal crises? And in both rich and poor countries, too (see Jay Rosengard on East Asia hereWillem Buiter’s blog, and Managing a Bank-Specific crisis: A UK perspective from the Bank of England, no less).

Now, the Chancellor is going to help local authorities and housing associations buy up unsold properties and help people facing repossession with mortgage rescue schemes. We leave it to our readers to figure out whether this is good or bad social policy (it’s good for the banks since the schemes reduce their bad debts: that fiscal connection again). It certainly reflects the political battering the government is taking. Today’s Times — with a nice photo of the ‘Chimney Pot’ regeneration in Salford — sums it all up:

“This latest strategy highlights the increasing influence of Vince Cable, the Liberal Democrats’ Treasury spokesman, a man as deft at articulating the concerns of Middle Britain as he is at the paso doble in the ballroom”.

Meanwhile, the UK property market seems unable to get to its feet. Dance on.

China in Africa — More Light, Less Heat, Please

6 February, 2008

Much heat, but not enough light, is being generated by recent commentary on China’s economic and political drive into Africa. Here are 7 thoughts (maybe they add light, or just more heat — let us know):

1. China’s investment. Much needed: jobs and growth will flow. But also disquiet. Investment snapshots: China is now Zimbabwe’s biggest foreign investor (Mugabe has a friend); China has lent Gabon US$ 83 million for a hydro-electric dam (we await an environmental assessment); China is taking stakes in some of Africa’s biggest investors — Rio Tinto is the latest (hope this doesn’t weaken corporate social responsibility). Africa needs more investment, but China must act responsibly.

2. China is to get copper and cobalt in a loan deal with the DRC. Hmm, the murky world of foreign investment in the Congo — say no more. Plenty of western nations haven’t practiced what they preach in the DRC. Can China do better? Will countries that received debt relief from the OECD-DAC donors under the HIPC Initiative (and then the MDRI) again build unsustainable debt positions — this time with loans from China? Helmut Reisen over at the OECD Development Centre finds no evidence of ‘imprudent lending’ by China to debt relief beneficiaries — so far. But this is one to watch.

3. Aid. The World Bank has hitched its wagon to China — a real sign of the times. China helped replenish the World Bank’s soft-loan arm (the International Development Association) last year — the first time it has contributed to IDA. And World Bank President Robert Zoellick wants more joint project lending with China (and Justin Yifu Lin has been appointed as the Bank’s new chief economist). This is all good news. Now that China is a Bank partner its aid stands a chance of being more rigorously assessed. And this moves China closer to bringing its aid within the OECD-DAC framework (see Richard Manning). More transparency might result. But it’s early days still.

4. Human rights. Oh Dear. One positive: China watered down support for Mugabe last year (Mugabe has a fickle friend). A big negative: Darfur (Sudan has oil, Zimbabwe does not). China is a permanent UN Security Council member. It needs to live up to the associated responsibilities (not helped when the other members don’t, notably the present US administration — see John Bolton’s latest fulmination against the UN here — but only if you must).

5. The Chinese Development ‘Model’. African commentators have been talking up China as a model. Seems more appealing than the policies the western donors pushed for years. And who can ignore growth rates of 10% year on year (even if the numbers look a might suspect to us)? China has lifted the largest number of people out of poverty in history — and Africa could sure use a lot of that. But fans forget (i) China has an enormous internal market — so import substitution is a more viable strategy than in tiny African countries (Africa needs an EU-style free trade zone to get anywhere near the economies of scale that Chinese companies enjoy). (ii) China is very good at mobilizing public revenues from growth — and Africa’s tax systems are mostly awful (iii) China’s one party state can force its way through development blockages that Africa’s young democracies cannot — and woe betide any Chinese who protest too vigorously (most African government’s don’t monitor access to the Internet in the way China does: Mugabe excepted). (iv) China’s model has involved stupendous environmental damage — we don’t need any Three-Gorges style projects in Africa, thank you.

6. Authoritarian regimes can retain political power if they ride a vigorous private sector — delivering rising living standards to keep (most) people happy. This is China’s political model. It appeals to some African leaders (notably Ethiopia and Rwanda). But to succeed you have to limit your ‘take’ — not a lesson likely to find favour with Africa’s long-stranding authoritarians but one that Africa’s next generation of political leaders might note (hopefully democrats, but also new authoritarians overthrowing the old).

7. That ‘other China’ — Taiwan — offers a model of how to make a successful transition to democracy while retaining (and strengthening) a vigorous maket economy. Taiwan is one of development’s great poverty success stories — a point that gets lost amidst the clamour of praise for its big brother neighbour. Taiwan is also aiming to win African friends.

That’s my 7 points. A good source of information on China in Africa is the Centre for Chinese Studies at the University of Stellenbosch. They do a weekly briefing, where some of the news cited here comes from. For China itself go to the Centre for Chinese Studies at Manchester University. And remember what Chou En-lai said when asked about the effects of the French Revolution — “its too early to tell”. Maybe that’s the case for China in Africa.

Bamako – the Movie

5 December, 2007

Bamako, capital of Mali, is again in the news, this time with the DVD release of the movie Bamako by Artificial Eye in association with Christian Aid and Q-News, the UK’s leading Muslim magazine. The plot intertwines the story of bar singer Melé and her husband Chaka (whose relationship is breaking under the strain of unemployment) with the bigger story of the IMF and the World Bank in Africa. We’ll be reviewing the DVD has soon as we get our hands on a copy. In the meantime, check out the video file of Christian Aid’s Deborah Burton talking about the movie.

IMF warns of vulture funds undermining debt relief

23 November, 2007

The IMF warned last month that ‘legal action worth almost £1bn by “vulture funds” against some of the world’s poorest countries poses a threat to the debt cancellation deal agreed by the G8 at Gleneagles in 2005’. A report by IMF staff found that 11 out of 24 poor countries approached said that they were involved in litigation, worth a total of $1.8 bn with 46 creditors.

Read the Guardian’s report here.