Sunday, 29 December 2013

Selected Pickings from the ASSA/AEA 2014 Preliminary Programme

Like most of you, I won´t be in Philadelphia, on 3-5 January 2014, for the economists´ annual get-together. Which is a shame. The ASSA/AEA website looks interesting for readers of this ShiftingWealth blog, at least for some policy relevant contributions of which I copy-paste the abstracts below (highlights are mine):

1.       What's Natural? Key Macroeconomic Parameters after the Great Recession (E1)       
Natural Rate of Growth              
John Fernald (Federal Reserve Bank of San Francisco)
Charles I Jones (Stanford University)
What is the U.S. economy's underlying pace of growth in the aftermath of the Great Recession and subsequent slow recovery? Though the mid-2000s, there was considerable optimism about the contribution of information technology to longer-run productivity growth though, even then, growth in working-age population was forecast to slow. We explore the implications of simple growth models that assume technology growth is either exogenous or endogenous. Preliminary calibrations suggest that growth in GDP per worker is likely to exceed the relatively anemic 1973-1995 period because of continuing faster technology growth in producing equipment. But with much slower growth in working-age population, overall GDP could well underperform any 15-year period since the Great Depression.

2.       Exploration of New and Existing Macro Data for the Chinese Economy
The Quality of Chinese GDP Statistics 
Carsten Holz  (Stanford University)
The quality of China's official statistics is frequently being questioned. From the 1998 'wind of falsification' to China's output performance during the U.S. financial crisis, researchers and the media alike rarely trust Chinese official statistics. This paper reviews past and ongoing suspicions of Chinese GDP data and concludes that there is little (if any) evidence for falsification of Chinese GDP data or for systematic biases in the data. The paper furthermore asks the question of which specific national income accounts data China's National Bureau could possibly falsify without being detected, and provides two significant checks of such potential data falsification.

Chinese Capital Flight: Questions of Data and Policy   
Frank Gunter  (Lehigh University)
Since 1985, the foreign debt of the Peoples' Republic of China has increased at a greater rate then would be explained by changes in the country's current account, foreign direct investment and reserve holdings. This pattern is consistent with the large-scale outflow of financial capital, commonly referred to as capital flight. This study provides a range of estimates for capital flight from the PRC for the period 1984 through 2010 using both Cuddington's balance of payments and the more inclusive residual measures. These measures are adjusted to reflect the legitimate assets of the PRC banking industry, mis-invoicing of PRC trade with its major trading partners (especially Hong Kong), and the failure of official debt data to capture certain bank transactions. Based on these estimates, 2010 capital flight was about $201 billion while accumulated PRC capital flight since 1984 is approximately $2.1 trillion with over 50% of this total occurring in the most recent six years. Since this capital flight has occurred during a period of rapid economic growth, appreciating currency, and improved perception of political stability, the most likely cause is high transaction costs in China´s financial markets.

3.       Macro Policy and Financial Stability in the Age of Turbulence (B5)      

Shadow Banking and Credit Driven Growth in China    
Yan Liang (Willamette University)
Credit flow outside of traditional bank lending, or the "shadow banking", has quadrupled since 2008 and reached $3.2 trillion or 40 percent of GDP at the beginning of 2013 in China. The shadowing banking system is acclaimed by some commentators as a welcome supplement to bank lending, which increases access to credit for those that are shunned from the state‐dominated banking system. In addition, shadow banking institutions, such as trusts, and their issuance of wealth management products provide a viable venue for households to place their savings. However, the growth of the shadow banking may pose high risks for China's financial stability due to the lack of regulations and the opaque underlying assets of these wealth management products. Furthermore, a large share of shadow banking credit flows to the property market, leading to the overheating of property price. This paper will investigate the recent surge of shadow banking in China and analyze its impacts on China's financial stability and macroeconomic performance.

4.       Finance and Development/ International Finance (G2)

Finance and Growth: Time Series Evidence on Causality
Oana Peia (Université de Cergy-Pontoise)
Kasper Roszbach  (Sveriges Riksbank and University of Groningen)
This paper re-examines the empirical relationship between financial and economic development while (i) taking into account their dynamics and (ii) differentiating between stock market and banking sector development. We study the cointegration and causality between the real and the financial sector for 26 countries. Our time series analysis suggests that the evidence in support of a finance-led growth is weak once we take into account the dynamics of financial development and growth. We show that causality patterns depend on whether countries' financial development stems from the stock market or the banking sector. Stock market development tends to cause growth, while a reverse or bi-directional causality is present between banking sector development and output growth. We also bring evidence that causality patterns differ between market-based and bank-based economies suggesting that financial structure influences the causal direction between financial and economic development. Thus, the relation between financial and economic development is likely to be more complex than suggested in earlier studies.

5.       African Economic Growth and Development (O1)        

Analysis of Chinese Investment in the ECOWAS Region            
Jane Karonga  (United Nations)
The development landscape in ECOWAS is changing, with the emergence of partners from the South or the BRICS as they have become widely known. China has emerged as a salient source of investment in ECOWAS region, but questions remain on the impact and implications of that investment for growth and structural change in ECOWAS countries. This paper discusses trends in Chinese investment in the ECOWAS region, and analyzes its impact on trade, infrastructure, growth and structural change in member countries. It also reviews the investment policies of ECOWAS countries toward Chinese investors, and proposes mechanisms by which member countries can take full advantage of Chinese investment. The growing trade and investments in ECOWAS are often supported by grants or concessional loans from the Chinese government, as part of the country's "Going Global" strategy. This strongly enhanced engagement is partly the outcome of the increased economic role and power of China on the global stage, and partly the result of China's interest in Africa's robust natural resource base to fuel its surging economy The proposed paper is important because there is an ongoing debate on the impact of Chinese investment in Africa in general, and ECOWAS in particular. Some scholars argue that much of Chinese investment in Africa is directed toward energy and minerals. These are sectors with little or no linkages with the rest of the economy. Other analysts contend that Chinese investment in large-scale infrastructural projects such as roads, dams, and power plants helps spur growth and structural change. Chinese investment is also believed to be an important source of technology and skills for Africa. The paper hopes to contribute to the ongoing debate on Chinese investment in ECOWAS by using data-driven evidence, as well as fixed-effects panel regressions. Moreover, China's impact on African economies and indeed ECOWAS has started to reach beyond narrow infrastructure for-resources deals and now touches upon a wide array of sectors and development issues. For example, the creation of Chinese-operated Special Economic Zones in several ECOWAS countries has the potential to provide a remarkable boost to the manufacturing capacity of many ECOWAS countries. In this context, it is timely to take stock of China-ECOWAS relations and discuss in detail the opportunities and challenges for both sides.

 6.       Capital Controls and Macro-Prudential Policies (F4)    

 Capital Controls: Myth and Reality - A Portfolio Balance Approach      
Nicolas Magud (International Monetary Fund)
Kenneth Rogoff (Harvard University)
Carmen M. Reinhart (Harvard University)
The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success" and (iv) the empirical studies lack a common methodology-furthermore these are significantly "overweighted" by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to "standardize" the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing capital controls on short-term flows. We find that there should exist country-specific characteristics for capital controls to be effective. From this simple perspective, this rationalizes why some capital controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-capital control are conditional on the level of short-term capital flows.

Capital Controls or Macroprudential Regulation?         
Anton Korinek  (Johns Hopkins University and NBER)
Damiano Sandri  (International Monetary Fund)
This paper analyzes the role of capital controls and exchange rate intervention as an insurance device in emerging economies where financial markets are underdeveloped and factor mobility across sectors is imperfect. Emerging economies frequently experience large fluctuations in exchange rates, e.g. because of capital inflow surges and reversals or because of fluctuations in the prices of their main exports. Exchange rate fluctuations lead to significant redistributions between factor owners in the traded and non-traded sectors, especially workers and small firms that cannot easily move across sectors. Since these agents often have imperfect access to insurance markets, income fluctuations generate significant reductions in their welfare. Stabilizing the exchange rate via capital flow management measures acts as a second-best insurance device and substitutes for formal risk markets. We present evidence that many countries that have recently imposed capital controls or accumulated reserves were primarily motivated by concerns about redistributions between the tradable and non-tradable sectors rather than by the standard efficiency considerations emphasized in the existing literature. We also analyze how increased factor mobility or the introduction of new insurance mechanisms such as better social insurance systems reduce the need for capital flow management measures.

Friday, 13 December 2013

Europe and the IMF

Europe has traditionally stood for multilateralism and greatly benefited from a rules-based international economy.  This is at stake now. The multilateral system risks balkanisation if IFIs do not become representative – and fast! My remarks at a recent conference organised by the DIE/GDI, G24, FES and the Bretton Woods Project therefor focused on the stumbling blocks in Europe and Germany toward improved representation at the IMF in particular.

A fact check at the IMF Executive Directors and Voting Power page revealed that at end 2013 the two-thirds of the world population that lives in Asia commands just 20% of IMF voting rights (14% if Japan – which closely follows the US script - is excluded). This results from adding the IMF executive directorates led by Indonesia (3.93), China (3.81), Korea (3.62) and India (2.81). European countries, by contrast, collectively hold about 30 per cent of the votes on the board –so they have an effective blocking minority unless the supermajority threshold is reduced to 70% and below. Europe still runs 9/24 Executive Directors (including Switzerland, so 8 EU and 6 EZ), with each UK, France and Germany having one-country seats by right.

Interpreting democracy to mean one person one vote would suggest that it is this South China Sea-centred part of the world that gets to determine world leadership in global economic governance. Like it or not.

Europa can make room for Asia and gain clout at the Fund nonetheless. A move by the EU to single representation would have the advantage of improving global governance by increasing the involvement and thus the accountability of the emerging economies. Single EU (or euro zone) representation, if set on the same level as for the US (a little under 17 percent at the IMF) would carry more clout than the current sum of EU representatives (around 30 percent).

There have been some attempts by France and Germany to unblock the situation. In 1999, when Lafontaine and Strauss-Kahn were finance ministers, they sought to reduce US weight by combining their memberships in the International Monetary Fund into a single seat to bring more balance to an organization that both described as dominated by the United States. In 2010, Germany tried again and suggested another deal:  The US should give up its veto over important decisions in the International Monetary Fund in return for Europe accepting a smaller say. Currently important decisions require a supermajority of 85 per cent of votes, and the US has a 17 per cent share.

However, many EU governments remain strongly opposed to concrete steps: moving to a single representation would involve redistributing power within the European countries’ group. In particular, the larger countries would need to relinquish, at least on paper, part of the clout they currently wield, in their capacity as G7 members for example, whereas smaller countries who are not G7 members are even more fearful of losing clout to larger countries[1].

Just like for the Eurozone, the polity does not deliver the political solution it needs as countries jealously their national and budget sovereignty: Catch 22, in the words of Ulrike Guerot. A new bestselling book by Bonn University historian Dominic Geppert, insists on Europe´s “real strength”: diversity and democracy[2]. With such a Europe, do not expect too much for more representative IMF governance. It does not “make room”[3].

 What about Germany leading Europe into its ´successful decline´ at the Fund? In contrast to most of the countries in the IMF, Germany makes the central bank and its president, rather than the finance ministry and its minister, its principal national representative at the organization. Any situation in which this prerogative would be diluted could be expected to meet with strong resistance from the Bundesbank. More generally, the navel gazing in recent coalition talks, which were more on Mautgebühren than on  urgent Eurozone requirements point to a bad asymmetry: Europe looks to Germany, but Germany could not seem to care less.


[1] Pier Carlo Padoan, 2008, “Europe and Global Economic Governance”, EU Diplomacy Papers 2/2008, Bruges: College of Europe.
[2] Dominik Geppert, Ein Europa das es nicht gibt, Europa-Verlag, 2013. Translated: „A Europe That Does Not Exist“.
[3] As requested by DGAP director Eberhard Sandschneider in his excellent book „Der Erfolgreiche Abstieg Europas: Heute Macht abgeben, um morgen zu gewinnen“, Hanser, 2011. The title translates into „Europe´s Successful Decline. Relinquish Power Today, Win Tomorrow“.