Emerging Market Downgrades: Panic at the Disco?

When it rains, it pours. For emerging markets, the downpour has come in the form of credit rating downgrades by the big three global ratings companies. Fitch, Moody’s, and S&P took a record 1,971 negative rating actions on emerging market sovereign and government-related entities in 2016. Emerging economies are right to be concerned. With a ‘good’ credit rating (AAA), a sovereign state can borrow at very low rates of interest from investors. A poor rating could force states to pay significantly higher borrowing costs. Rating downgrades could have negative ripple effects throughout the affected economies, raising the cost of borrowing for banks and firms, and, in turn, consumers.

Infrastructure projects, business ideas, and consumer credit extensions, become unprofitable due to the higher cost of credit to banks, businesses, consumers, and governments. If a country is downgraded to ‘junk status’ (more formally known as ‘non-investment-grade’ or ‘speculative-grade’), it risks the mass exodus of investors from its bond markets. As the cost of borrowing for governments increases, this can lead to a dangerous downward spiral as borrowing and spending dries up business and consumer activity declines.

Getting back on course
So what is the best set of policies for emerging markets to recover their credit ratings? On one side are economists who argue for ‘austerity’. In their view, recovering from a ratings downgrade requires sharp reductions in state spending, even if this results in poor conditions in the short term. The benefits are twofold: It can reduce inflation and prices, thereby helping restore a country’s price competitiveness in international markets; and it can enhance the credibility of a government when it comes to containing profligate spending.

Former British Prime Minister David Cameron called this philosophy ‘expansionary austerity’. The problem is that there is not much evidence to support this idea. The EU enforced austerity among its member states in response to the 2007 financial crisis, until it helped propel a ‘double dip’ recession in 2011/12. Following this largely unsuccessful adventure with austerity, the EU turned towards more pro-growth policies, which supported expansions in infrastructure and fixed-capital investment, with notable success.Read More »

The Financialization Response to Economic Disequilibria: European and Latin American Experiences

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Book review of N. Levy-Orlik & E Ortiz (2016), The Financialization Response to Economic Disequilibria: European and Latin American Experiences, Edward Elgar Publishing: Cheltenham UK

Levy and Ortiz’s The Financialization Response to Economic Disequilibria is a timely book. It critiques mainstream economic theory and its limitations in explaining how economic conditions change or the transition from one state of equilibrium to another. Its analyses rely on Keynes, Kalecki, Kaldor, Minsky, Prebish, Furtado, and Marxists such as Luxemburg, Marini and Lapavitsas. Macroeconomic teachers interested in a heterodox approach may benefit from Levy and Ortiz’s book as complementary material with experiences showing the dysfunctionality of the global economy from the specific prism of financial disequilibria.

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An Economic Strategy for The Gambia?

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I was privileged recently to spend a little time in The Gambia, whose people recently overthrew a megalomaniacal, authoritarian and in many respects vicious President, Yahyeh Jammeh, in an extraordinary democratic moment, due to their courage and the timely supportive action of other countries in West Africa (and very little if at all due to support from major powers, apart from their role in placing some effective limits on prior abuses and eventually supporting a Security Council resolution that helped to legitimize the ECOWAS action).

I was able to observe a moving event in which members of the country’s diaspora, from Alaska to Taiwan and from Cape Verde to Sweden, most of whom were active in opposition (and quite a number of whom were highly educated professionals successful in the countries to which they have departed) assembled to meet the new President and to express their pleasure at the New Gambia as well as their sincere hopes for the future. Conversations with ordinary Gambians reveal general relief and enormous optimism. Arguably, the current juncture provides the first opportunity since the country’s independence in 1965 for a broad ranging public conversation on the ends and means of development.Read More »

Hazards of a Tourist Boom

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by Silla Sigurgeirdottir and Robert H. Wade

Iceland is surfing a tourist boom. From 440,000 tourists in 2008, numbers started surging in 2011 to reach 1.3 million in 2015 and 1.8 million in 2016. The resident population is 330,000 in an area over 40% that of the United Kingdom. Having experienced the sharpest crash of all the OECD economies in 2008-2009 Iceland regained the pre-crash level of average income by late 2014. GDP grew super-fast at over 6% in 2016, and forecasts suggest annual growth of almost 5% between 2017 and 2019, one of the fastest in the OECD.

Pre-tax salaries rose nearly 10% a year in both 2015 and 2016. Foreign exchange reserves are ample. Inflation is low, at less than 2% through 2016. Household debt to income is low. The state is paying down public debt fast; the current level is around 50% of GDP. The banks have passed stringent stress tests, with unusually low leverage ratios, low loan to value ratios, strong liquidity positions (especially in foreign currencies) and high capital ratios (close to 30%). A repeat financial crash is very unlikely.

So what is not to like? Given what is happening in Europe and the United States, political leaders elsewhere would love to have Iceland’s problems. Still, those problems could develop badly for the population at large.Read More »

How India can benefit from FDI: lessons from China

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by Ilan Strauss and Vasiliki Mavroeidi*

With the launch of India’s Make in India campaign, Karl P. Sauvant and Daniel Allman asked in their recent Perspective: “What can India learn from China?”, focusing on attracting FDI. However, the issue is not only attracting FDI, but benefitting from it fully. Liberalization alone will not enable Make in India to transform India into a manufacturing hub. Targeted industrial policies are required to ensure that FDI upgrades domestic capabilities.

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Consequences of Deindustrialization in Brazil and South Africa, and Potential Remedies

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In a previous post, I wrote about the global trend of premature deindustrialization; the trend towards lower levels of industrial employment, and a shift away from industrial employment at lower levels of per capita income, and how the effects on human well-being of these trends are not yet clearly understood. An important question in understanding the impact of these changing structural patterns on individuals’ well-being is to whether either a lifting of the living standards of those not in formal employment, or the generation of employment to replace the manufacturing employment, is taking place.

In a recent working paper, I illustrated how combining a household level indicator of well-being with decomposition of change analysis can shed light on these questions by focusing on two specific episodes of growth; South Africa from 1996 to 2007 and Brazil from 1991 to 2010. Using Census data from IPUMS, I created indices of well-being on a scale of 0-100, using indicators such as child survival rate, access to clean water and electricity, and educations levels, culled from census data. Next, each household was assigned to a “type” based on sectoral employment of the household head and urban/rural location, and average household scores were calculated for each type. A decomposition of change analysis was then used to assign improvement in well-being to improvement within the types and shifts in population between these types.Read More »

Premature Deindustrialization and its Consequences for Human Welfare

Seagate_Wuxi_China_Factory_Tour.jpegRecent research suggests that late industrializers have not been following previously observed patterns in terms of sectoral change and employment, but the effect of these changing structural patterns on well-being and the distribution of gains from growth has not yet been systematically examined. There is a global shift towards both lower employment in industry at all levels of income per capita and de-industrialization, the shift from manufacturing to service employment, taking place at significantly lower levels of income (See work by Timmer, de Vries, and de Vries; Subramanian; and Rodrik here, here, here and here).

Deindustrialization, Employment Generation, and the “Precarization” of Global Labor
There are many reasons why these new patterns may have negative effects on inclusive development; some recent research emphasizes the important role that periods of high levels of manufacturing employment have played in now wealthy countries, and the dearth of wealthy countries that have skipped such a phase; there are concerns about the effects of lower levels of manufacturing output on both growth and employment generation ( See again Timmer, de Vries, and de Vries and Rodrik).Read More »

The Trouble with Sub-Saharan African Debt

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 »