PSD Blog - The World Bank Group

Weekend Reading

Regulatory failure, special interests, and financial sector lobbying: European Union edition.

Negative interest rates on T-bills: This time is different.

"The fact that oil is trading at $80 a barrel in this climate should tell you that it is trading more as a financial asset than on supply/demand imbalances".

California is doing its part in the fight against deflation, one university at a time.

The recession is having quite an impact on migration trends in the United States. Plus, our People Move blog looks at new remittance data.

Tyler Cowen describes these two posts from Paul Krugman and Brad Delong as "critically important stuff and two of the best recent economics blog posts, in some time."

War is brewing in the financial blogosphere.

Matthew Yglesias thinks that Chinese leverage over the US is overblown.

More emerging market attempts to stop the appreciation of their currencies.

Finally, as the US gets ready for the Thanksgiving holiday, Adam Gopnik analyzes our hunger for cookbooks.

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.

The Lure of Local Bonds

IFC announced yesterday that it will issue a $43m local currency bond in Central Africa, a first for the World Bank institution, and also a first for a non-local financial institution. This is IFC's second local currency bond in Sub-Saharan Africa, following its issuance of a West African Kola Bond in late 2006:

The 20 billion Central African francs ($43 million equivalent), five-year tenor bond will be listed on the regional exchange in Libreville and on the Doula Stock Exchange. It will be tax-exempt in all six countries in the Economic and Monetary Community of the Central African zone. The countries are Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, and Gabon. All proceeds will be reinvested in the zone.

IFC's timing is quite prescient. As the recovery from the crisis continues to be lopsided, strongly favoring emerging markets, there should be substantial outside investor interest in these types local-currency bonds (see previous post).

Furthermore, increased dollar volatility will enhance the attractiveness of local currency bonds in two ways. First, judging by the market's negative reaction to Ben Bernanke's dollar reassurances, foreign investors should be more willing to take on local currency risk, as they remain convinced that dollar depreciation will continue for some time.

Second, while foreign investors seem sanguine about the dollar's weakness, local investors from fragile emerging markets, such as those in Central Africa, are more likely to recall the dollar's upside potential. Should another crisis occur, triggering a flight to safety along the lines of what we saw in the aftermath of last year's crisis, emerging market currencies will be the first to fall. Local currency bonds offer a layer of insurance against the damage that such a precipitous outflow of capital can cause, making them an attractive option for local businesses and investors alike. 

World Bank Events Shout-Out

The World Bank and IFC are featuring several excellent events this week that are well-worth attending.

On Thursday and Friday, a Conference on Entrepreneurship and Growth will be held in at the World Bank's main headquarters. Topics range from "Promoting Business Formalization and Growth" to "Firm Dynamics and Size". Dozens of speakers will be featured, from both inside and outside the Bank.

Next, Infoshop will be hosting a discussion this Thursday with Robert Skidelsky, who has just finished his latest book, Keynes: The return of the master. I am especially fond of Skidelsky, and look forward to hearing his thoughts on how Keynesianism is back with a vengeance as a result of the financial crisis. The conversation begins at 12:30pm EST.

All events are open to the public. If you are not in the Washington area or are unable to attend, fear not! I will be Tweeting highlights from each event as they unfold. (If you missed this morning's conference on achieving scale in entrepreneurship, you can view a summary on Twitter).

Weekend Reading

The FT profiles each of the Federal Reserve's doves and hawks.

Plus, the case for Fed independence.

Does car sharing take cars off the road? Or just put walkers into cars?

Another PR disaster for Goldman.

Paul Krugman praises the German labor market, while Yves Smith takes it one step further.

Hong Kong's leader, Donald Tsang, thinks that the United States is following in Japan's footsteps.

Ghost Towns in China. Or, the flaws of GDP.

"Excluding OPEC and China, America's balance of trade has improved". A weaker dollar/stronger yuan can help the latter, but may end up exacerbating the former.

Where the jobs aren't.

Will freer trade create stable food prices?

Finally, The World Bank is having a Conference on Entrepreneurship and Growth throughout next week, which is open to the public. Recommended.

Guest Post: Euro Area Sovereign Risk During the Crisis

Editor's Note: Silvia Sgherri is a Senior Economist at the International Monetary Fund, where she has contributed to recent editions of the Regional Economic Outlook for Europe. Her views do not represent those of the IMF.

While the use of public resources is critical to cushion the impact of the financial crisis on the euro-area economy, it is key that the entailed fiscal costs not be seen by markets as undermining fiscal sustainability. From this perspective, to what extent do movements in euro area sovereign spreads reflect country-specific solvency concerns? A recent IMF Working Paper suggests that euro area sovereign spreads tend to co-move over time as they are mainly driven by a common time-varying factor, mimicking global risk repricing. Since October 2008, however, there seems to be evidence of increased financial market awareness about the potential fiscal implications of national financial sectors’ frailty and future debt dynamics.

Business as usual

Felix Salmon links to Andrew Ross Sorkin, who analyzes the dearth of remorse on Wall Street: 

One of the frustrating parts of researching my book came when I finally got to ask the question of Wall Street chief executives and board members that you just raised: Do you have any remorse? Are you sorry? The answer, almost unequivocally, was no. (Or they just didn’t answer.) They see themselves as just one part of a larger problem, with many constituencies to blame.

Salmon adds:

If bank executives (with the notable exception of John Reed) see no need to apologize for destroying the global financial system, they are still part of the problem and are very unlikely to be part of the solution. Which bodes ill for the future.

Between the exuberant rush to emerging markets, rising commodity prices, a weaker dollar, and a renewed hubris in the financial sector, it's beginning to seem like it's 2007 all over again.

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?"

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.