Martin Wolf - Entrega 6 Marzo

China is right to open up slowly

By Martin Wolf

The next big global financial crisis will emanate from China. That is not a firm prediction. But few countries have avoided crises after financial liberalisation and global integration. Think of the US in the 1930s, Japan and Sweden in the early 1990s, Mexico and South Korea in the later 1990s and the US, UK and much of the eurozone now. Financial crises afflict every kind of country. As Carmen Reinhart of the Peterson Institute for International Economics and Kenneth Rogoff of Harvard have remarked, they are “an equal opportunity menace”. Would China be different? Only if Chinese policymakers retain their caution.
Such caution permeated last week’s report that the People’s Bank of China has recommended accelerated opening up of the Chinese financial system. Given what is at stake, in both China and the world, it is essential to consider the implications. Maybe the world will then do a better job of managing this process than it has done in the past.

This plan was published by Xinhua, the state news agency, not on the PBoC’s web site. Moreover, it was published under the name of Sheng Songcheng, head of the statistics department, not that of the governor or a deputy governor. This must mean that it is more an exercise in kite-flying than a policy. Nevertheless, this was published with the PBoC’s approval and, quite possibly, with that of people much higher up still.
The article lays out three stages for reform. The first, to occur over the next three years, would clear the path for more Chinese investment abroad as “the shrinkage of western banks and companies has vacated space for Chinese investments” and so presented a “strategic opportunity”. The second phase, in between three and five years, would accelerate foreign lending of the renminbi. In the longer term, over five to 10 years, foreigners could invest in Chinese stocks, bonds and property. Free convertibility of the renminbi would be the “last step”, to be taken at an unspecified time. It would also be combined with restrictions on “speculative” capital flows and short-term foreign borrowing. In sum, full integration would be indefinitely delayed.

What are the implications of this plan? The answer is that it seems sensible. In reaching that view, one has to take into account the benefits and risks of financial “reform and opening” for China and the world.
The arguments for such opening up to the world are closely connected to those for domestic reform. Indeed, the former cannot be undertaken prior to the latter: opening up today’s highly regulated financial system to the world is a recipe for disaster, as Chinese policymakers know. It is for this reason that full convertibility would come in the distant future, as this plan suggests.

Happily, arguments for domestic reform are powerful. Dynamic financial markets are an essential element in any economy that wishes both to sustain growth and to begin rivalling rich countries in productivity, as China surely aspires to do. More immediately, as Nicholas Lardy of the Peterson Institute for International Economics notes in a recent study: “Negative real deposit rates impose a high implicit tax on households, which are large net depositors in the banking system, and lead to excessive investment in residential housing. Negative real lending rates subsidise investment in capital-intensive industries, thus undermining the goal of restructuring the economy in favour of light industries and services.”*
Yet, as Mr Lardy also knows, this distorted financial regime is part of a wider system for taxing savings, promoting investment and repressing consumption, which has led to huge interventions in foreign currency markets and vast accumulations of foreign currency reserves. The deeper case for reform is that this system no longer contributes to a desirable pattern of development. But it has become so deeply entrenched in the economy that reform is politically fraught and economically disruptive. The question is even whether such reform is politically feasible. It is surely likely to be a slow process.

How would the PBoC’s proposed moves towards opening up then fit with such a cautious reform? Presumably, the greater freedom for capital outflows envisaged for the next five years would partly substitute for accumulations of foreign currency reserves. Yet if this went with suggested moves towards higher real interest rates, China’s savings and current account surpluses might explode, worsening the external imbalances.

This point underlines just how big a stake the rest of the world has in the nature of China’s reform and opening up of the financial sector.
China’s gross savings are running at an annual rate of well over $3tn, which is more than 50 per cent larger than the gross savings of the US. Full integration of these vast flows is sure to have huge global effects. China’s financial institutions, already enormous, are also almost certain to become the biggest in the world over the next decade. One need only think back to Japan’s integration in the 1980s and subsequent financial implosion to recognise the possible dangers. We should be pleased, therefore, that China is taking a cautious approach.

The world has a huge interest in a shift of China’s economy towards more balanced growth. It has a parallel interest in the way China manages its domestic reform and opening up of the financial system. A whole range of policies need to be co-ordinated, particularly over financial regulation, monetary policy and exchange rate regimes. If this is done well, today’s high-income countries’ crisis will not be promptly followed by the “China crisis” of the 2020s or 2030s. If it is done badly, even the Chinese might lose control, with devastating results.

The PBoC suggests a timetable of reforms that would fit with China’s and the world’s needs. But if this is to happen, thorough discussion of all the implications must now occur. China’s policies do not matter for the Chinese alone. That is what it means to be a superpower – as the US should note.

Liam Fox -- Entrega Martes 28 de Febrero.

The pressing case to cut both taxes and spending
By Liam Fox

There is a problem with the British economy. Debt and an inability to compete have been worsened by debilitating regulation and a lack of belief in sound money. And while the so-called “emerging” world has continued to grow apace following the financial crisis, the UK has failed to take advantage. This is true horror of the government’s inheritance. We must assess why and act urgently.
David Cameron and George Osborne have long understood that everything possible had to be done to prevent the interest rate rise that could have pushed the fragile UK economy into the sort of tailspin witnessed by European countries with similar public finances. The coalition government has created enough credibility with international creditors and investors to buy time.

But there are questions that must be answered if growth is to accompany deficit reduction, and there are issues of inflation and credit expansion that will need to be addressed in the longer term.
The UK is a long way behind countries we deride in our ability to sell to the world, and in some cases, behind these countries’ in terms of living standards. Despite a 25 per cent devaluation of sterling, UK exports to Asia in the last three years have grown at a slower rate than those from Greece and Spain. In 2011, per capita gross domestic product in Ireland was greater than that in the UK. Meanwhile, the role of the state in the UK economy has grown and taxes have risen. Inflation is reducing our living standards.

The budget must confidently assert that capitalism works. But it doesn’t work if failure is rewarded as if it was success. That is why proposals such as the benefits cap should be welcomed. Risk, effort and achievement must all be incentivised. A focus on these could have stopped the bank bonuses debate from fostering anti-business sentiment. The real debate should have centred on how, between 2000 and the start of 2012, the return to owners of Barclays shares was minus 9 per cent compared to 23 per cent for the FTSE 100 as a whole. For the Royal Bank of Scotland, the return was more like minus 86 per cent, its total pay increase from 2008 to 2010 was 55 per cent. No one should resent bonuses being paid to those who achieve success for some of our most important financial institutions or those digging them out of their holes. But for years we have been rewarding failure to the detriment of competitiveness and returns to pension savers.
More generally, individual risk and effort is not rewarded when the UK government share of GDP has risen from 38 per cent in 1999 to 51 per cent in 2011, the effective top rate of tax is over 50 per cent, and CPI inflation for the last five years has averaged 3.5 per cent.
To restore Britain’s competitiveness we must begin by deregulating the labour market. Political objections must be overridden. It is too difficult to hire and fire and too expensive to take on new employees. It is intellectually unsustainable to believe that workplace rights should remain untouchable while output and employment are clearly cyclical.

The Left must be given an unequivocal moral challenge: it is utterly unacceptable to condemn a generation of our young to unemployment by maintaining all the rights and privileges of those currently in work. That would be the unavoidable outcome of failing to hold our own in a highly competitive global marketplace.
It also needs to be cheaper for companies to increase the size of the workforce. There is a strong argument for further public spending reductions, not to fund a faster reduction in the deficit, but to reduce taxes on employment. Although the coalition agreement may require the chancellor to raise personal tax allowances (which should be paid for with spending restraint not new taxes) he should use the proceeds of spending reductions to cut employers’ national insurance contributions across the board. If that is deemed impossible, he should consider targeting such tax cuts on the employment of 16 to 24-year-olds, making them more attractive to employers.

There are other fundamental economic issues that will need to be challenged in the times ahead, including the long-term effects of the debauchery of our currency that has occurred over the past generation.

In the coming budget, the chancellor has an unenviable task. Above all he needs to be very frank that the UK economy is undergoing a structural correction that will last a decade or more. But the prize is to rescue the next generation from the economic horrors we have inherited and to provide a springboard for opportunity, prosperity and national resurgence.

The writer is MP for North Somerset and former UK defence secretary

Artículo Martin Wolf - Entrega Martes 21 de Febrero

Much too much ado about Greece

By Martin Wolf

Why does Greece – a country with little more than 2 per cent of the eurozone’s gross domestic product – cause such headaches? On a daily basis, people living as far apart as Beijing and Washington read stories of promises not kept and conditions not met. Would it not be better, they must wonder, to let Greece default and exit from the eurozone, rather than persist in paying such attention to its largely self-inflicted plight?

That Greece might indeed exit is now far from unthinkable. In a co-authored note published last week, Willem Buiter, chief economist of Citi and a devoted adherent of the euro project, judges that the likelihood of a Greek exit over the next 18 months is now as high as 50 per cent. “This is,” the authors add, “mostly because we consider the willingness of [eurozone] creditors to continue providing further support to Greece, despite Greek non-compliance with programme conditionality, to have fallen substantially.” But they also believe that the costs to the rest of the eurozone of a Greek exit are lower than before. The likelihood that this would be allowed to happen has, they suggest, risen correspondingly.

Let us consider the questions any sensible person should ask about the fraught negotiations with Greece.
First, can Greece agree with creditors over debt restructuring or “private sector involvement”, with the “troika” – the European Commission, the International Monetary Fund and the European Central Bank – over the latter’s participation, and with official creditors over a second bail-out? Can all this also happen prior to the next bond redemption, on March 20?
The likelihood is: yes. If so, a disorderly default would at least be postponed. One can identify three reasons for this outcome: despite popular rage, Greek politicians overwhelmingly agree on the desirability of staying inside the eurozone; despite by now pervasive mistrust, the eurozone’s powers that be fear a disorderly default and probable exit; and, finally, the IMF believes that a programme founded on strong structural reforms rather than massive further fiscal contraction or headlong privatisation could work, at least in theory.

Second, is it likely that such a programme would work at all well? The answer is no, as the Citi paper notes. “This is, first, because any restructuring agreed ... is most unlikely to bring the Greek sovereign to a 120 per cent of GDP gross general government debt stock by 2020 – a declared objective of the second Greek bail-out package – and, second, because even if, by some miracle, Greece were to achieve 120 per cent of GDP general government debt by 2020, this would be far too heavy a ... burden for the Greek sovereign to carry.” It is near certain then that more debt reduction would be needed in the years ahead, even if everything went perfectly. It will not.

Greece has made progress since the crisis broke, albeit largely as a result ofausterity. Its primary fiscal deficit (before interest payments) has shrunk from 10.6 per cent of GDP in 2009 to an estimate of just 2.4 per cent in 2011. This is a big fall, given the scale of the recession. The Greek government is now close to the point at which it needs to borrow only to roll over debts and cover its debt service. But this is not enough. Greece also still needs substantial inflows of foreign exchange, to cover its current account deficits, even if one ignores the external interest on its government debt. In 2011, for example, its current account deficit, before the interest on the debt owed by the government, was still as much as 4.6 per cent of GDP, despite the deep slump.

Would the structural reforms envisaged generate a sufficiently dynamic economy and, above all, the improvements in net exports needed to finance the imports demanded at anything close to full employment? The answer, despite improvements in competitiveness, is: not quickly, even if it can be done at all.
Third, is such a programme in Greece’s own interest? The Greek policymaking elite believes it is. The alternative – a disorderly default and probable exit from the eurozone – would be a step into the unknown. The country would have to introduce and then operate at least temporary exchange controls. It would have to manage a complex restructuring of its public and private debts. It would have to cope with an enormous depreciation of a new drachma and so soaring inflation. It would have to renegotiate its position inside the European Union. It would, finally, suffer huge falls in GDP and real incomes. Would all this be better than soldiering on? Probably not, though who can be sure?

Fourth, would the additional Greek programme be in the interests of the rest of the eurozone and indeed the world? The answer is: probably yes, but not certainly so. The arguments in favour are that a disorderly Greek default, plus exit, could still generate panic elsewhere in the eurozone and that the costs of preventing this by helping Greece are not large, set against the costs of such disorder. The argument against this position is that the eurozone has the means to halt the spread of panic even after a Greek meltdown, particularly if the ECB and the governments were willing to act decisively, in response to any runs on banks and sovereigns elsewhere. Yet another argument against, not to be taken that lightly, is that it would be better to end the pretence that the programmes with Greece will work and so make clear that failure does have consequences.

Finally, what does the Greek epic tell us about the eurozone? Greece itself, though an important irritant, cannot be decisive for the future of the currency area. Yet the fact that this small, economically weak and chronically mismanaged country has been able to cause such difficulty also indicates the fragility of the structure. Greece is the canary in the mine. The reason it has caused such difficulty is that the country’s failings are extreme, not unique. Its plight shows that the eurozone still seeks a workable mixture of flexibility, discipline and solidarity.
The eurozone is in a form of limbo: it is neither so deeply integrated that break-up is inconceivable, nor so lightly integrated that break-up is tolerable. Indeed, the most powerful guarantee of its survival is the costs of breaking it up. Maybe that will prove sufficient. Yet if the eurozone is to be more than a grim marriage sustained by the frightening costs of dividing up assets and liabilities, it has to be built on something vastly more positive than that. Given the economic divergences and political frictions revealed so starkly by this crisis, is that now possible? That is the most difficult question of all.

Martin Wolf, Para el Martes 14 de Febrero

Crisis must not change India’s course

By Martin Wolf

What do the financial and economic crises of the high-income countries mean for emerging and developing countries? I addressed this in New Delhi last week, at a discussion sponsored by the Federation of Indian Chambers of Commerce and Industry (FICCI), the Consumer Unity & Trust Society (CUTS) and the Financial Times. The conclusion I drew was that the crisis is dangerous. But this is not so much because of its direct effects. It is far more because of the lessons that might be drawn. The right lessons have to be drawn, not the wrong ones.
In the years since the financial crisis broke upon the high-income countries, the economic performance of the biggest emerging countries has been remarkable. Even allowing for the slowdown forecast for 2012 in the International Monetary Fund’s recent World Economic Outlook update, India’s gross domestic product is set to rise by 43 per cent between 2007 and 2012. This is below China’s rise of 56 per cent. But it is far superior to the high-income countries’ 2 per cent.

This is a revolution. It also shows a large measure of decoupling. We learnt in late 2008 that a big shock in high-income countries would adversely affect developing economies. But the Asian giants were relatively unaffected. They found ways of offsetting the shock.
Would that be the case again? The worst likely shock might be a combination of an oil-price jump – perhaps following conflict in the Gulf – with the collapse of the eurozone. The latter would temporarily disable, if not destroy, the eurozone’s financial system. That would generate large global shocks, via trade, remittances, finance and pervasive uncertainty.

One can also identify risks inside big emerging economies. China, in particular, might be unable to offset another deep recession in the high-income countries with a huge rise in credit-financed investment, as it did three years ago. According to the economist Andy Xie, fixed asset investment has reached 65 per cent of GDP. It is almost impossible to imagine the investment rate could be raised further, without risking a huge overhang of unneeded capital and a subsequent investment bust.
Another global “bust”, possibly worse than that of 2008 would also damage the Indian economy. In its January Global Economic Prospects, the World Bank noted that “conditions today are less propitious for developing countries than in 2008”. India has high fiscal deficits and a high rollover rate for public debts. With a current-account deficit of close to 4 per cent of GDP in 2010, it would be vulnerable to another big global shock.

Yet such direct threats should not be exaggerated, for two reasons. First, the scenarios are possible, but far from probable. Downside risks are large, as the IMF notes, but they are just that: risks. The eurozone may do the right thing, in the end. Similarly, conflict with Iran may be avoided. Second, a vast and relatively poor country, such as India (with GDP per head, at purchasing power parity, only a 12th of US levels), can still generate rapid growth by catching up on the world’s richest countries, almost regardless of the global environment.
Thoughtful Indian observers are well aware that the principal obstacles to rapid economic development are internal, not external. Among obvious constraints are failures of governance, including wasteful spending on subsidies at all levels of government, a dire record on the provision of education and health to the bulk of the population, rigid labour laws, inadequate infrastructure and costly restrictions on efficient use of land. Much of this is laid out in an excellent collection of essays by Shankar Acharya, former chief economic adviser to the government of India. Yet such failings are also opportunities. Given how well India has performed despite these disadvantages, consider how well it might do without them.

The biggest danger from a further global shock would be indirect, not direct. It would come via backsliding on reforms. I can see two threats.
The first and least important would be a consequence of global responses. So far, however, the regulatory response, at least in finance, seems unlikely to damage India. The Indian financial system would, for example, be no worse for adopting the emerging global norms, and probably better. A bigger threat would come from imitating external protectionism. But so far, nothing too serious has occurred in that area, though the risks certainly exist.
The second and far greater threat would be undiscriminating embrace by Indians of the “capitalism-in-crisis meme”. In the same way, it might be remembered, one of the worst consequences of the 1930s Great Depression was the embrace of anti-trade and anti-market policies in much of the developing world after the second world war. It would be a catastrophe if any such response occurred, when “reform and opening up”, as the Chinese call it, has begun to work so well, even in India.

The crucial point is that what has happened is not a crisis of the market economy, but of mistaken ideas about it. Appropriately supported and regulated, competitive markets remain incomparably the most successful means of generating sustained increases in wealth. This is as close to a proven fact as we are likely to obtain in social sciences.

For India, where so many markets are unnecessarily and disastrously distorted by counterproductive government interventions, this remains overwhelmingly true. But by doing what they should not do, Indian governments have too often failed to do what they should do: to create the conditions for sustained and broadly shared growth. The reforms listed above remain essential. Nothing has changed that.
So what should a country such as India learn from the crisis in forming its own policies? I suggest two big lessons. First, the financial system is capable of generating huge instability and needs to be watched. Second, the integration of India into the global financial system has to be managed carefully. Huge crises may be socially and economically manageable for high-income countries. They would be grossly irresponsible for a country like India.

What, then, are the conclusions? First, India’s fate rests mainly in its own hands. Second, the reforms that made sense before the crisis make as much, if not more, sense now. Third, India must proof itself against big macroeconomic risks, particularly from excessive fiscal deficits, ill-managed integration with the global financial system and, in the longer run, out-of-control domestic credit. Last, Indians should resist the notion that the crisis proves market economies do not work. They should recall that the adversely affected economies are still the high-income countries, for a reason. Learn from the mistakes. Remember the reason.

Artículo Martin Wolf

Europe is stuck on life support

By Martin Wolf

Economic decision-makers are more optimistic than two months ago. The main reason is the belief that the European Central Bank, under the shrewd leadership of Mario Draghi, has eliminated the risk of a financial implosion in the eurozone. As Mark Carney, the respected governor of the Bank of Canada and Mr Draghi’s successor at the Financial Stability Board, remarked at the World Economic Forum in Davos: “There is not going to be a Lehman-style event in Europe. That matters.”

Spreads on credit default swaps on Italian and Spanish banks have fallen since the introduction of the ECB’s three-year long-term refinancing operations in December. Spreads between yields on debt of some vulnerable sovereigns and German Bunds have also eased.

Does this mean the eurozone crisis is over? Absolutely not. The ECB has saved the eurozone from a heart attack. But its members face a long convalescence, made worse by the insistence that fiscal starvation is the right remedy for feeble patients.

Last week’s downgrading of its forecasts by the International Monetary Fund shows the dangers. The IMF now forecasts a recession in the eurozone this year, with a decline of 0.5 per cent in overall gross domestic product. GDP is forecast to fall sharply in Italy and Spain, and stagnate in France and Germany. This is a terrible environment for countries seeking to cut fiscal deficits. Forecasts are far from satisfactory for other high-income countries. But the eurozone is the most dangerous part of the world economy: only there do we see important governments – Italy and Spain – menaced by a loss of creditworthiness.

Elsewhere, governments of high-income countries can continue to support their economies, largely because they possess a central bank and an adjustable exchange rate. This combination has given them the ability to run large fiscal deficits. In post-crisis conditions, such deficits are both the natural counterpart and the principal facilitator of necessary private sector deleveraging.

The eurozone has no such internal mechanisms. When private external financing dried up, as happened to a number of countries, affected members needed both financing – in the short run – and a mechanism for adjusting their external accounts – in the longer run – other than via deep slumps. The eurozone lacks both capacities. It has turned out, as a result, to have limited ability to cope with the global financial disease. As Donald Tsang, chief executive of Hong Kong, remarked in Davos: “I have never been as scared as I am now.” Astute observers have a sense that little stands between them and a wave of sovereign and banking defaults inside the eurozone, with ghastly global repercussions.

The ECB has reduced the risk of an immediate collapse of the banking sector. But the demand of informed outsiders is for stronger firewalls against the possibility that a collapse of, say, Greece, perhaps including its exit from the eurozone, would lead to a panic over prospects for far more important countries. Christine Lagarde, managing director of the International Monetary Fund, made that one of her three imperatives, along with stronger growth and deeper integration, in a courageous speech in Berlin last week.

What these outsiders want to see is a commitment that vulnerable eurozone countries will be given the time and the treatment they need to recover. Naturally, they also want to see a commitment of resources by the eurozone that makes clear the determination of its members to secure this outcome. Only then would it make sense for an enhanced IMF to add its own contribution. Why indeed should a relatively poor country, such as China, be expected to contribute to rescuing a eurozone that has shown little will or ability to heal itself?

Alas, the problem is not just one of will. It is one of a lack of a correct diagnosis. This is a problem the ECB cannot correct. Germany, as creditor country, opposes a “transfer union” and insists that fiscal discipline is everything. It is right on the first point and wrong on the second.

A long-term transfer of resources to uncompetitive members would be a disaster, enfeebling recipients and bankrupting providers. But fiscal indiscipline is not all. Just as it was not the dominant cause of the collapse, but rather sloppy lending and improvident private borrowing, so fiscal discipline is not the cure. This attempt to vindicate the catastrophic austerity of Heinrich Brüning, German chancellor in 1930-1932, is horrifying.

The perspective embodied in the fiscal compact – itself an attempt to revive the failed stability and growth pact – lacks the necessary understanding of the dependence of output in one member country on demand in others, of the role of payments imbalances and of the fact that competitiveness is always relative. If Italy and Spain are to become more competitive within the eurozone then Germany or the Netherlands must become less so.

Moreover, if the private sector is running a structural financial surplus to lower its debt, policymakers can eliminate structural fiscal deficits if and only if the country runs a structural current account surplus. Germany should understand this because that is precisely what it is doing. Countries hit by financial crises almost always have large structural private sector financial surpluses. If these countries are indeed to eliminate structural fiscal deficits, they, too, must run structural current account surpluses, just like Germany. Yet every country cannot run such surpluses, unless the eurozone as a whole is to do so.

It is impossible for individual countries to heal without offsetting changes elsewhere. As Ms Lagarde said in Berlin: “Resorting to across-the-board, across-the-continent, budgetary cuts will only add to recessionary pressures.” Fiscal tightening must be selective. More important, the indication that the adjustment process is working – so making unnecessary the long-term fiscal transfers Germany rightly detests – would be buoyant demand in the core of the eurozone, with inflation well above the eurozone average – a mirror image of what happened before the crisis.

The strongest note of optimism on the eurozone I heard in Davos rested on the dire results of a break-up. Yet desperate people do desperate deeds. Members now need the time and the opportunity to adjust. Strong firewalls should give the time, but only shifts in competitiveness will give the opportunity. Without both, the crisis will surely return.