Tuesday, 31 May 2011

Dreaming with…BRINCS

Reading my IHT over breakfast this morning, I find Jeffrey Sachs, director of the Earth Institute at Columbia University,  so enthused about Nigeria’s prospects that by the end of the decade he thinks we will be dreaming of…BRINCs. The week of President Goodluck Jonathan’s inauguration he feels that Africa’s most populous country (almost 160 million inhabitants) is on the verge of economic takeoff. (Recall that eight years ago, Goldman Sachs set investors on Dreaming with BRICs. No African country featured in that list, as the “s” stood for plural, not for South Africa.)
Sachs lists “five solid reasons for optimism” on Nigeria:
  • reform has paved the way for a restoration of civilian rule and the strengthening of critical institutions, including the National Assembly and state and district governments;
  • the president’s democratic mandate is not in doubt, even if tensions linger in Nigeria’s traditional north-south ethnic divide;
  • the rise of China and India is reshaping the world economy, and providing solid support for Nigeria’s growth. Nigeria can expect to sell not only its vast hydrocarbon deposits at good prices, but also a wide range of agricultural products and manufactured goods. Moreover, China is determined to be a major partner, financing core infrastructure — highways, rail and power grids — and developing major industrial capacity;
  • the fourth reason is the “age of convergence,” the tendency of developing countries like Nigeria to make unprecedented economic advances through the deployment of best practices and advanced technologies;
  • finally, Nigeria’s commitment to tackling extreme poverty and disease throughout the nation, including a bold mechanism to transfer federal funds to state and local governments in a robust and accountable manner. All over the country, schools, clinics and water points are being built.

Indeed, the forthcoming  African Economic Outlook 2011, to be released on 6th of June in Lisbon,  shows real GDP growth at around seven percent for the recent past and over the next two years. What is more, the source of growth is increasingly agriculture, rising by more than five percentage points to 37.2% over the past five years – thanks to good weather and cheaper agricultural credit.

Make no mistake: Oil-rich Nigeria, until recently the quintessential showcase for the havoc wrought by  the resource curse, faces huge challenges. The 2010 Human Development Index ranks Nigeria number 142 out of 169 countries, placing her firmly in the Low Human Development category. Infant and under-five mortality rates and the prevalence of HIV/AIDS tear the country down. Nigeria’s education system, while reporting better primary-  and secondary-school enrolment scores, faces disarray in the state university system through strikes and long closures. Un- and underemployment, especially amongst Nigerian youths, remain serious concerns; they will be the ultimate yardstick on which President Jonathan will be judged at the end of his mandate.

Wednesday, 25 May 2011

IMF: Is Lagarde Avantgarde?

On 25 May, Christine Lagarde, the French finance minister, formally launched her bid to become the next managing director of the International Monetary Fund. Mrs. Lagarde has strong support from European heavyweights, such as Germany and the UK. A day earlier, Press Release No. 11/195 was posted on the IMF website: Statement by the IMF Executive Directors Representing Brazil, Russia, India, China and South Africa on the Selection Process for Appointing an IMF Managing Director. Its major points:
  • The convention that the selection of the Managing Director is made, in practice, on the basis of nationality undermines the legitimacy of the Fund.
  • The recent financial crisis which erupted in developed countries, underscored the urgency of reforming international financial institutions so as to reflect the growing role of developing countries in the world economy.

Despite Shifting Wealth, the first point carries more weight than the second.
The growing role of developing countries in the world economy is well-documented and undeniable. But it is often exaggerated by the common use of world GDP shares adjusted for purchasing power parities (PPP) rather than based on nominal dollars, Euros or SDRs. PPP adjustment makes sense when comparing living standards or PROSPECTIVE shares in world GDP, as poor countries’ currencies are undervalued but tend to appreciate once countries converge to advanced-country levels. But PPP adjustment makes little sense when comparing economic weights TODAY. Such a comparison requires to relate GDPs through current nominal dollar, Euro or SDR values.
According to latest IMF data, world GDP in 2011 is estimated to total US$ 68.7 trn. (One trillion –trn – ist 1000 billion – bn). Of that product, 64.6% is attributed to advanced countries, 35.4% to the rest, the group of emerging and developing countries. So while the role of developing countries has been growing (especially over the last decade), the group of advanced economies still stand for roughly 2/3 of world GDP. On that account then, a European managing director looks still like a natural choice, as Europe totals a higher share (46.8%) than North America combined (40.7%) within the advance-country group.
The first point made by the BRICS executive directors - that the selection of the Managing Director if made, in practice, on the basis of nationality will undermine the legitimacy of the Fund – carries much more weight. The rise of regional funds that could obscure the IMF role as a global economic enforcer is particularly notable in Southeast Asia, which now holds the bulk of the world’s reserve assets. In that region, the push toward economic integration raises the prospect of an Asian Monetary Fund as Southeast Asian leaders develop a centralised fund known by its acronym as the CMIM, the Chiang Mai Initiative Multilateralisation. Asia could find regional rules more appealing than those of supranational organizations like the IMF  if its leadership remains dominated by developed nations. In Martin Wolf’s words “this would Balkanise management of the global economy, to no one’s true long-term advantage”. 
To sum up: Christine Lagarde as IMF head is more Ancien Régime than Avangarde.

Wednesday, 18 May 2011

Global Rebalancing: A Modest Role for the RMB

At the forthcoming Franco-Chinese colloquium  Croissance et déséquilibres mondiaux. Approches chinoises et européennes, I plan to argue that growth-oriented global rebalancing on current accounts can – and should - rely to only a very limited extent on RMB appreciation. That role has almost certainly to be smaller than most economists assume, so my thesis is likely to stir debate.

First, consider the history of US-Sino imbalances. As large emerging countries integrated for earnest into the world economy over the past 20/30 years, a global convergence process started – Shifting Wealth. This process depressed low-skill goods prices and wages (through the Stolper-Samuelson effect). The corresponding super cycle in raw material prices shifted purchasing power and wealth toward oil, iron ore and copper exporters. The switch from net debtor to net creditor positions of many emerging countries, based on oil or sweat, depressed US treasury rates as most of the underlying trade surplus was invested in the deepest, most liquid financial market.

The US Federal Reserve led by Alan Greenspan clearly misread Shifting Wealth as cheap goods and cheap savings from China & Co nourished the illusion of permanently depressed inflation. So while the natural interest rate – the real return on capital – was rising in a world of Shifting Wealth, the capital market rate was falling. Austrian overinvestment theories*  from Knut Wicksell to Friedrich August von Hayek provide two reasons for a fall of the capital market rate below the natural rate: First, the central bank supplies more liquidity at unchanged rates via money creation, underestimating future inflation. This allows for accelerating credit growth of the banking sector and low capital market rates. Second, the banking sector (or capital market) keeps interest rates low via money creation, thanks to financial deregulation in the US. The consequence of this configuration was a strong drop in US household savings that started in the mid 1990s. China’s current account meanwhile remained fairly balanced until the early 2000s, from when reserves started to explode.

Second, consider the  size of US-Sino imbalances, in other words the size of the transfer problem in order to get current account rebalancing. In 2006, the China’s surplus on the current account was equivalent to 8% of its GDP, the US deficit 6%. In 2010, both countries have been running a surplus, resp. deficit, closer to 3% of their respective GDP. This rebalancing has mostly been caused by the crisis; debt limits on further rises in US household consumption; and China’s  huge fiscal stimulus to cope with the global crisis and temporary export slump.  While China is gradually correcting its (far from outlandish) currency undervaluation, most of the remaining US-Sino imbalances are arguably of structural nature: US credit culture and financial system; China’s surplus household and corporate savings. Overall, however, the graph shows clearly that global imbalances have become less US-Sino centric. All these considerations point to a modest role for RMB appreciation, mostly to lower its corporate savings surplus.

Third, for global rebalancing to be growth-conducive, the speed and size of RMB appreciation has to be slow and low, best driven by further income convergence. Homi Kharas, in his excellent
OECD Development Centre Working Paper No. 285The Emerging Middle Class in Developing Countries” (2010) has made two crucial points. He didn’t link them to the RMB debate but they can be used in the context of RMB appreciation and global rebalancing:
  • Strong currency appreciation in the convergence process usually picks up once countries reach 30% of US per capita income levels. China is at half that level. It is a country much poorer than Germany and Japan were in the 1970s when their currencies appreciated 40, resp 60% against the dollar.
  • The debt-limited US consumer can be replaced by the emerging middle class in China and elsewhere, provided these countries are allowed to grow fast enough to transfer their poor segments to the middle class, defined as > 10$_PPP/day/capita.
Further reasons that growth and rebalancing can hardly be reconciled with strong RMB appreciation is Dani Rodrik’s (2010) finding that currency undervaluation stimulates growth more in China than in other developing countries. RMB appreciation translates into more competitive currency valuation elsewhere, but there it tarnslates into lower growth than it did in China. And as OECD Development Centre research has recently shown, China has become the growth engine to emerging and developing countries alike during the past decade, replacing the G7 countries.

* Schnabl, G. and A. Hoffmann (2008), “Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View”, The World Economy,  Vol.31.9, pp 1226-52.

Saturday, 14 May 2011

Jean-Philippe Stijns on "Emerging Partners: Anything but Rogue Aid"

Dear Helmut,
I meant to respond to your post earlier but I was myself tied up with the drafting of our own forthcoming report about Africa and its Emerging Partners, prepared for the 2011 edition of the African Economic Outlook. The report is under embargo until its official launch on June 6 in Lisbon at the occasion of the annual meetings of the African Development Bank, so I won’t comment on it. However, I can allow myself to share a few personal opinions.
I very much support the major points you make, especially that it’s not ‘rogue’. The following is thus a matter of nuances. You are quite right to points that out emerging partners, China but also typically all other emerging countries engaging African countries, do tend to take a more holistic approach to promoting the export-oriented industries and cooperating with fellow southern countries. Consequently, and even more so since they tend to use different funding modalities, it is difficult to identify and even more so quantify how ‘aid’ these emerging countries provide, say, to African countries.
But as you also rightly point out, the number of these new ‘donor’ countries has been rising steadily. Interestingly, as they mature, these emerging donors tend to adopt some of the practices of the older donors. For instance, South Africa is considering the establishment of a South Africa Development Partnership Agency (SADPA) during the last quarter of 2011. The key is that as these emerging partners are confronted with similar challenges than those of traditional donors, they will naturally try some of recipes that have helped traditional partners to cope with the same challenges. If you want to monitor and control where your cooperation money goes, whether you want to call it ‘aid’ or not, you will quickly realize that you need an agency that does that…
My point is that it does not matter whether you or I or they want to call it ‘aid’ or not. “L’argent n’a pas d’odeur” as Emperor Vespasian told his son who was shocked to see his dad collecting money on public toilets. Yes, some of the aid money that emerging donors give takes the form of concessional conditions on otherwise commercial lending. But so does, Western aid money too in some cases, and this concessionality component in lending to developing countries for development-related purposes is estimated and counted as aid by the good old DAC itself.
So, why do Southern donors typically insist as much that their money not be labeled as aid as western donors insist that it be? It’s not as much an ideological tendency rooted in some cooperation culture that does not want to infringe on the sovereignty of fellow Southern countries. Southern countries can play hard ball with each other and do not refrain to attract attention to their cooperation efforts when there is a good diplomatic reasons to do so.
The real reason is that they are countries that still have a large chunk of their own population that is poor. In other words, they still developing countries themselves. They are therefore not so keen to make it obvious to their own poor citizens that some of their tax money is spent abroad for ‘altruistic’ purposes. Rather, they are more comfortable to argue that it is not a giveaway but a win-win transaction and that they are pursuing their own development / national agenda in doing so…
So, I would argue that while there important differences between DAC and non-DAC aid / cooperation that may warrant the use of a different term, such as perhaps ‘international development cooperation’, aid it still is and we should try to avoid falling victim to the emerging countries’ effort to cast themselves as less altruistic than they actually are J
That’s it for now. Some other thoughts may come later.
Have a great week-end!

Jean-Philippe Stijns, Ph.D.
Economist, EMEA Desk
Tel. :  33 (0) 1 45 24 99 93
Fax. : 33 (0) 1 44 30 61 30
Mailing address
2, rue Andre-Pascal
75775 Paris Cedex 16, France
Visiting address
"Le Seine Saint-Germain"
12, boulevard des Iles - Building B
92130 Issy-les-Moulineaux, France


Tuesday, 3 May 2011

Emerging Partners: Anything but ‘Rogue Aid’

Moisés Naím, the former editor of Foreign Policy magazine and currently a fellow at the Carnegie Endowment for International Peace, a fortnight ago received Spain' s prestigious Ortega y Gasset Award for Journalism. Let’s hope for the Award jury that he did not get the prize for his 2007 Foreign Policy article  “Rogue Aid”, which has become infamous as a blatant misnomer for the cooperation of emerging partners, above all China, with poor countries. Emerging partners neither provide  ‘aid’ nor is it ‘rogue’, it turns out.
At its April 2011 Senior Level Meeting, the old Western aid donor cartel - the OECD Development Assistance Committee (DAC) -  sounded almost enthusiastic (or a touch subservient?) in its  declaration WELCOMING NEW PARTNERSHIPS IN INTERNATIONAL DEVELOPMENT CO-OPERATION” , acknowledging the essential role that major nations from beyond their membership have had in global progress towards the Millennium Development Goals.

Doesn’t sound that rogue, does it? It is not aid either.

As another sign of ‘Shifting Wealth’, the number of non-DAC countries that today provide development cooperation rose steeply to more than 30 during the first decade of the twenty-first century. The shift manifests itself mostly in decreasing OECD shares in bilateral trade, export credits and direct foreign investment.  Joint with migration and technology transfer, all these integration vehicles are increasingly South-South.

There are critical differences in the way development cooperation is provided by traditional and emerging partners. For the latter,  aid is only one element of a broader economic engagement toolbox. Whereas the Western “charity” model is focused on the notion of “assistance” seeking primarily a reduction in poverty, the “Asian” model emphasises to a larger extent the partner’s potential seeking to create mutually beneficial cooperation, just as Japan cooperated with China* in the past, in a investment-for-resources swap, and as China, India, Korea, Malysia, or Turkey practice these days.

Chinafrica: Change of Ownership!

Until recently, a collection of blames against China’s and other new partners cooperation programmes, including by the DAC  invariably warned that they amounted to

violation of corporate and national governance standards
free riding on debt relief
unfair company competition
scramble for extraction rights and resource curse.
These accusation smelled sour grapes as the ‘chasse gardée’, as the cartoon visualises nicely, had been opened by the appearance of new players. Moreover, the growing relevance of ‘Eastern donors’ is weakening the efficiency of Western soft-law standards in the field of development co-operation and raises the question of how compliance with these standards can be assured in a changing donor landscape. 

Experts give a cautious but rather positive assessment about the impact of the emerging partners on poor countries' development*. There is increasingly less evidence to suggest that the new players are hindering poor countries' industrialisation, debt sustainability or governance. Prospects have improved for the transfer of technology, diversity of financing sources and policy space.It can be expected that poor countries will also find more voice in global governance as the world is moving to multipolar governance under the headline of US-Sino rivalry.

* Paulo, Sebastian and Helmut Reisen (2010), "Eastern Donors and Western Soft Law: Towards a DAC Donor Peer Review of China and India?," Development Policy Review, Overseas Development Institute, vol. 28(5) 535-552, 09.

Sung Jin Kang , Hongshik Lee , Bokyeong Park (2010),Does Korea follow Japan in foreign aid? Relationships between aid and foreign investment”, Japan and the World Economy 23 (2011) 19–27.

UN OSAA, 2010. Africa’s Cooperation with New and Emerging Development Partners: Options for Africa’s Development. New York: United Nations Office of the Special Adviser on Africa.

UNCTAD, 2010a. South South Cooperation - Africa and the New Forms of Development Partnership. Economic Development in Africa Report 2010. Geneva: United Nations Conference on Trade and Development.