Category: Finance

Using Minsky to Better Understand Economic Development – Part 1

Vitor Mello3 Comments

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This year the global system has seen two major shocks: Brexit, and Trump. What these events have in common is their populist rhetoric that promised to bring back jobs, while also making xenophobic statements. These elections have tapped into growing anxiety over job security, which has not been addressed by most governments and has given room for demagogues to tap into the anger of the people. They reflect a problem that transcends the boundaries of any single nation: the global economy has been in a slump for almost a decade. Governments need to create jobs, and public fiscal stimulus is the way to do so. To allow it, we must rethink that system.

To understand why we have to consider the international system in which nation states currently operate in. Its current characteristics present challenges for developed and developing economies alike. There are two important features to consider: first, the system creates a deflationary bias by requiring recessionary adjustments and hoarding of the international mean of payment (i.e. dollars). Second, it lacks mechanisms to offset the chronic surpluses and deficits between nations, thus breeding financial instability. In a nutshell, it leads to poor creation and distribution of demand that is managed through capital flows. Instead of propping up demand, the global economic system props up debt.

This post will be split into two parts. This first part will employ the theories of Hyman Minsky to explain the features of our current global economy. Next week, we will follow up to discuss  an alternative system that would allow for a better distribution of demand among countries and would support emerging economies’ development by freeing them from the swings of international markets.

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The Trouble with Sub-Saharan African Debt

Ingrid Harvold Kvangraven2 Comments

By Aleksandr V. Gevorkyan and Ingrid Harvold Kvangraven

Over the past decade, the Sub-Saharan African countries’ ability to draw on new debt in international capital markets has become a central characteristic of their development experience. Yet, the determinants of their borrowing costs are driven by external factors where investor perception plays a key role. This raises concerns over the sustainability of the current development model.

In the mid-2000s, 30 African countries received substantial debt reduction through the International Monetary Fund (IMF) and World Bank’s Heavily-Indebted Poor Country (HIPC) Initiative. Only a decade later, many of the same countries are again facing debt distress. The African Development Bank recently warned its members of the dangers of rising debt obligations, while the IMF has called for an “urgent need to reset” the region’s growth policies.

In our new paper entitled “Assessing Recent Determinants of Borrowing Costs in Sub-Saharan Africa” in the November 2016 issue of the Review of Development Economics, we trace the latest round of borrowing back to 2006 with Seychelles as the first sub-Saharan African (SSA) country to issue a sovereign bond, with the exception of South Africa, in 30 years. Since then, DR Congo, Gabon, Ghana, Côte d’Ivoire, Senegal, Angola, Nigeria, Tanzania, Namibia, Rwanda, Kenya, Ethiopia and Zambia have all followed suit, accumulating over $25 billion worth of bonds, with a principal amount of more than $35 billion (see Figure 1 for totals by country).Read More »