PSD Blog - The World Bank Group

Today in Capital Controls

Yesterday I suggested that emerging market economies, rather than the United States, were better poised to criticize China's currency policy. It looks like, rather than criticizing China's policy, many are simply trying replicate it. Brazil and Taiwan are leading the way:

Asian currencies came under pressure on Thursday as a move from Brazil to further curb foreign inflows sparked fears that other countries would follow suit. Brazil moved overnight to close a loophole that had allowed investors to avoid a 2 per cent tax on foreign investment in equities and bonds announced last month.

Speculative flows have now reached the point where many emerging market currencies have hit levels that threaten to undermine their export sectors.

So far most emerging market economies have managed the problem by intervening in currency markets to slow the appreciation of their currencies. However, Brazil and Taiwan have taken more dramatic action, imposing capital controls designed to limit the appreciation of their currencies.

Speculation has risen that other countries will follow their lead.

“Recent measures from Brazil and Taiwan curbing capital inflows send a clear signal: emerging market policymakers are far away from accepting a sustained reallocation of portfolio capital from the west, and its liquidity and currency implications,” said David Bloom at HSBC.

Taiwan's decision to ban foreigners from putting money into time deposits seems to be working. Investors have pulled out roughly 12 percent of this 'hot' money. Taiwan's success, and Brazil's apparent determination, are likely to encourage others to take a more assertive stance.

Low interest rates in the West, coupled with a fixed renminbi and weaker dollar, have left many emerging markets somewhere between a rock and a hard place. They now must try to avoid excessive currency appreciation without appearing hostile to the foreign investment that is fueling much of their growth.

The global economy is unlikely to reach any sort of equilibrium for a very long time.

Is the US the appropriate renminbi critic?

Free Exchange has observed over the past few days that the blogosphere, financial press, and political punditry have put forth a plethora of opinions about Chinese economic policy. Let's take a look at some of the latest:

Bill Owens argues for closer cooperation in just about everything:

The US-China relationship is a vital interest for the two countries and the world. Throughout history, great powers have tended to become adversaries. Now, for a few years, we have a chance to break that cycle. It will take strong and enduring commitment on both sides. But a new and engaging relationship is imperative for our common good

Martin Wolf puts wishful words into the mouth of Barack Obama:

At a time of such weak global demand, yours is a 'beggar thy neighbor' policy. You complain about the protectionist actions I have implemented. But their impact will be trivial compared with China's 'exchange rate protectionism'. This policy will shift the costs of adjustment on to China's trading partners.

Responsible Finance: The Case of the Philippines

Yesterday I attended a presentation at CGAP on responsible finance, which featured three excellent guest speakers, including Fe de la Cruz, Director of Corporate Affairs, Central Bank of the Philippines (the other guests included a former member of the Brazilian Central Bank, and Daryl Collins, co-author of Portfolios of the Poor). The presenters discussed their interpretations of responsible finance, and outlined how specific government programs are spurring its development.

In essence, responsible finance is driven by three primary actors:

1. Governments, who provide consumer protection and regulation
2. Providers of finance
3. The clients themselves, who need to posses a certain degree of financial literacy

Fe de la Cruz outlined how the Philippine government is actively supporting the responsible finance agenda.

One third of Filipinos live in poverty, and only 30 percent of the total population have formal bank accounts. The government is attempting to address these issues by pushing financial education at an early age. Children in grades 1-6 (ages 6-11) are now given instruction in financial literacy. Because many of the country's poorer children drop out of school once they reach puberty, the government has decided to focus its financial education efforts on the very young. The result is that over 12 million students are given some sort of lesson in financial responsibility.

The BRIC Temptation

My final posts on Crisis Talk addressed issues concerning capital flows and emerging markets (see here and here). As most of the world emerges from the crisis, the demand for 'safe' investments, such as American and European government bonds, has diminished. This has been exacerbated by negligible interest rates in mature economies, which generate low investment yields and inexpensive lending. As Nouriel Roubini observed, this is the perfect recipe for borrowing cheaply in dollars, and investing outside the United States, primarily in emerging markets. This is likely to go on for some time: dollar depreciation continues to look like a one-way bet, and the Fed has indicated that low interest rates are here to stay.

Meanwhile, emerging markets have gone from strength to strength. China is leading the world out of the worst financial crisis since the Great Depression. Brazil is increasingly feted as one of the Western Hemisphere's most dynamic economies, with a diverse economic base ranging from aircraft production to vast hydrocarbon reserves. India has emerged from the crisis relatively unscathed. Even Russia, long considered by many as the black sheep of the BRICs, is looking up. Oil prices are on the rise (and may get much higher), while the rouble has been the best performing major currency against the dollar since the start of September.

Yet, I can't help wondering if this is all too good to be true. To me, the question isn't, "are emerging markets overheating?" Rather, I tend to ask myself, "to what degree are they overheating, and what risk (if any) does this exceptional growth pose to the global economy, particularly as it emerges from the crisis?"

China stat of the day; plus, a turnaround in Zimbabwe?

While IFC is strengthening its involvement in India, China is deepening its economic ties in Africa.

In his opening speech at this week's Forum on China-Africa Cooperation in Egypt, Chinese Prime Minister Wen Jiabao announced Beijing's latest commitment to its African trading partners, which includes $10bn in fresh loans (on top of $5bn already pledged in 2006):

We will help Africa build up its financing capabilities...we will provide 10 billion US dollars for Africa in concessional loans... China is ready to deepen practical cooperation in Africa.

China will also set up over 100 clean energy programs, and relieve or cancel the debt of 31 countries. Chinese direct investment in Africa has increased from nearly $500m in 2003 to $7.8bn in 2008.

Wen claims that this latest round of assistance comes with no strings attached:

Africa is fully capable of solving its own problems, in an African way

There is one story floating around the blogosphere that seems to highlight an African economy solving its own problems. The Telegraph is reporting an economic turnaround in Zimbabwe, which has been buoyed by the dollarization of the local economy:

Weekend Reading: Unemployment Edition

Can development workers win wars?

Is transport infrastructure the most important aspect of urban evolution?

The Treasury's courtship of the blogosphere.

Is China's changing worldview bad for business?

America's largest retailer: it's not Wal-Mart.

Why are some marathons more volatile than others?

The EU's role in reducing state fragility in Sub-Saharan Africa.

Thoughts on migration: Kosovo edition.

Unemployment

What America can learn from Europe about unemployment.

Other difficulties that arise from high unemployment.

Plus, unemployment charts galore from Calculated Risk.

A less pessimistic take on today's numbers (it's still ugly).

Why employment is down and GDP up? It's all about productivity.

Weekend Reading

Zimbabwe's inflation ranks as the second worst in history. Who's first?

Cool graph on the commitment to development of specific countries. Sweden comes on top.

The two Koreas.

Rural to urban migration in China has reached 1.5 million people per month.

Happy Halloween.

A Chinese Marshall Plan?

Geoff Dyer explores the idea of using China's massive foreign exchange reserves to form an investment vehicle for emerging markets. He has assembled a series of proposals from leading Chinese thinkers, including some from within the government.

For example:

• Hu Xiaolian, deputy governor of the central bank, has proposed the idea of a "supra-sovereign wealth investment fund" which would invest in developing countries so that "these countries (can) serve as new engines in global recovery and growth."
• World Bank Chief Economist Justin Lin thinks that "Chinese companies should step up investment in Africa and south-east Asia, including outsourcing some low-end manufacturing, to boost consumer demand."
• And finally, Xu Shanda, former head of China's federal tax bureau, has "called for the creation of a ($500bn) Chinese 'Marshall Plan' to lend money to Africa, Asia and Latin America to boost living standards in those regions and create demand for Chinese products to replace struggling US and European customers."

I find myself in agreement with Dyer's take on the idea:

If China can channel even a modest portion of its vast liquidity to the developing world in a responsible way that boosts demand without creating new, suffocating debt burden, it will be pushing on a door that is already opening.

China's revolution in access to finance

China looks set to see a boom in access to finance since the passage in 2007 of the Property Rights Law. Last week, the Financial Times reported on the newfound ability of farmers to monetise their land. Some farmers are selling to larger, more efficient companies, while others are taking advantage of the opportunity to use their land as collateral:

...the application of a monetary value to land usage rights is creating fertile ground for the spread of financial services to the poorest. Most farmers have never had access to loans but Beijing is backing a flurry of initiatives to change this. To dramatise the point, Wen Jiabao, the premier, recently had an impromptu, televised chat with a somewhat startled, straw-hatted, 67-year-old farmer, Pan Jinmu, who had walked into his local bank in Zhejiang province to get a Rmb5,000 ($732, €499, £461) unsecured loan.

Should the public sector guarantee private sector financing for PPPs?

The financial crisis and subsequent credit crunch has greatly reduced the options available to governments regarding PPPs. The reason is very simple: There is no longer enough money available for long-term private infrastructure investment. However, I see this as a temporary situation, as the rationale for PPPs remains as strong as ever. 

In the meantime, governments in many countries are in the middle of procuring large PPPs and therefore in need of solutions to the temporary dislocation in credit markets. More and more governments have been turning to public sector guarantees of private sector loans for PPP projects as a way to overcome shortfalls in available financing.

The question is: Is this solving the problem? There are voices that say this doesn’t make sense, why should the public sector guarantee a loan by the private sector? Isn’t the rationale behind PPPs to get the private sector to put its own capital at risk?