Crisis Talk - The World Bank Group

Crisis Roundup

"It's Alive, It's ALIVE, It's ALLLIIIIVVVE!"

The economics profession may become more mathematical, and friendlier to women.

Unemployment in the US is going to be a problem for a long time.

Commodity prices aren't really based on fundamentals like weather and geopolitics.

Lords of Finance. Best business book of the year.

Brad DeLong ♥ Financial Times.

Surprise! Paul Krugman thinks that the stimulus is working, but wants it to be bigger.

China can't cool down its steel bubble.

There is a large gap between new and existing home sales in the United States.

People are eating out less frequently.

One bit of proof that the recovery is real.

Finally, the recession is taking its toll on California.

What's New in Decoupling?

I recently wondered what the relationship between developed and emerging economies would look like during the recovery phase of the crisis:

Will a robust emerging market rebound boost OECD growth? Or, are we due to see a multi-speed global recovery?

John Authers points out that, thus far, the recovery has been quite heterogeneous:

The grand theory was that decoupling by emerging markets would be good for everyone- they would grow even if consumers in the developed world caught a cold, and help everyone through. The latest data suggest a decoupled world, but that does not seem so positive.

Authers highlights the Reserve Bank of India's recent decision to raise rates and the "stunning" recovery in South Korea. Meanwhile, consumer confidence in the US is awful. He concludes:

Asian economies are already at the point where overheating is the main danger, while US consumers, for all the money thrown at them, are still not feeling any better. This is not encouraging.

Meanwhile, equity indices are down and the dollar is up. Perhaps investors were a bit too sanguine, and are now sobering up?

A Long Way To Go

There is a short but sweet article from All Roads Lead to China on Shanghai's 100 hardest jobs, which looks at the lives of China's poorer workers (who make up the bulk of the country's 1.3bn citizens). The editors conducted over 100 interviews with workers ranging from a cigarette salesman to a watermelon vendor.

I was particluarly struck by an interview with a hat salesman, who reminds the reader of the challenges facing China's underclass

Q: If there was one thing you could change about your job, what would it be?
A: Change? It is such a luxury to me. How can I dream about changing my current status? I want to do my own business, like opening my own restaurant, but who will give me the money? I want to recruit and train my employees, but who will teach me how to manage or run my place? I dare not think of change. I guess my only hope is my son. He is the one (sic) can bring real changes.

The authors note a recurring theme of "hope and opportunity for the next generation".

China's immense population is frequently criticized for saving too much and consuming too little, which makes the country dependent on exports in order to grow. These interviews serve as a reminder that, because many of China's citizens are placing their hopes with the next generation, saving is likely to remain a fact of life in China for a very long time.

(h/t China Law Blog)

Today in Bubbles

The editors of the Financial Times appear to be concerned about bubbles. Three out of today's four op-eds are dedicated to the theme.

First, George Soros argues that the implosion of 2008 was an aggregation of a series of bubbles over the past decades, creating, in his words, a "super-bubble":

The crash of 2008 was caused by the collapse of a super-bubble that has been growing since 1980. This was composed of smaller bubbles. Each time a financial crisis occurred the authorities intervened, took care of the failing institutions, and applied monetary and fiscal stimulus, inflating the super-bubble even further.

Weekend Reading

"Good news for investors who like to lose all their money". LTCM 3.0 is here.

The dangers of ultra cheap money.

Is US Government debt actually "risk-free"?

Historically, a weak dollar has been deflationary.

Great charts from Calculated Risk and Barry Ritholtz.

The average unemployment period in the US is at an all-time high.

Another take on why bankers make so much money.

Is Paul Krugman Panda-bashing?

"If you are going to be doing business in a foreign country, particularly China, it pays to do so legally and it pays to have the right visa."

South-South Trade Tensions

John Authers argues that the newsworthy economic story of late isn't dollar weakness; rather, it is the weak renminbi:

Many, if not most, hopes for global recovery are pinned on China buying goods from countries such as Brazil. Commodity prices, a key driver of equities and forex rates, also move in response to the new orders received by China's manufacturers.

This currency regime makes it far harder for such countries to sell to China. So it is no wonder that currencies are back at the top of the agenda.

China's currency is 15 percent cheaper against the dollar than it was in 1993. Meanwhile, many emerging market currencies are returning to their pre-crisis exchange rates.

China has been building stronger trade relations with the Global South for quite some time. It is now South Africa's top export destination. But many of these partnerships are built around China purchasing commodities, and selling manufactured goods. With a weakening currency, China is likely to purchase fewer non-commidty goods from its trading partners. This may lead to growing trade tensions, particluarly with countries who are not endowed with commodities.

East Asian Production Networks: Beggar Thy Neighbor?

There is an interesting article in Econbrowser by Willem Thorbecke of the Asian Development Bank, which looks at East Asian Production Networks, Global Imbalances, and Exchange Rate Coordination.

Thorbecke highlights the important relationship between exchange rates and production chains in East Asia, arguing for increased policy coordination between the two. The paper presents both good news and bad news regarding East Asia's crisis recovery. First, the good news:

Signs are emerging that East Asian production networks are reviving. Imports for processing and processed exports both collapsed earlier this year. Since then, however, imports for processing have recovered 85 percent of their losses and processed exports 75 percent. Thus trade within East Asian production networks is recovering.

Rising Reserves

One sign of crisis abatement is the downward slide of the US dollar. As the market rediscovers its appetite for risk, the dollar's appeal as a safe haven currency diminishes. Indeed, the dollar has become the de facto carry trade currency. 

The market has renewed its faith in emerging markets, and the US has more tools to repair its trade balance and begin a phase of export-led growth? Is this a win-win situation? Not quite.

Although the dollar may be weakening, this weakening hasn't stopped central banks from accumulating more dollar reserves. In fact, dollar weakness may be accelerating accumulation.

Last week, several emerging market countries intervened in currency markets in order to prop up the dollar (or, rather, to push down their own currencies).  This involves buying dollars: Russia recently picked up $1.4bn in a single day, and $4bn in the same week.  

What are central banks doing with these dollars? Most of them are tucking them away for a rainy day, having seen the benefits of such accumulation during the crisis.

Crisis Roundup

European exports declined by 5.8 percent last month, the biggest drop since last January.

Understanding the European Central Bank means looking at its individual members.

The economic blogosphere really is a remarkable resource.

Bloggers at the IMF's ask, Did Islamic Banks in the Gulf Do Better Than Conventional Ones in the Crisis?

Did economic theory actually do a good job of predicting the crisis?

Greg Mankiw ♥ VAT.

Thoughts on exit strategies from one of China's prominent market economists.

Does China have a dollar problem?

Still confused about the dollar? Why do many of Asia's currency remain weak? Why are the euro and yen so strong, when their respective economies look weak? Bilal Hafeez, global head of foreign exchange research at Deutsche Bank is fielding questions from readers, which he will answer on Monday October 19.

Local Bond Markets: From Strength to Strength

Most emerging markets are having a better crisis than their G7 counterparts. One sign of robustness in emerging markets is the growing importance of their local bond markets. A new paper from Vox by Ismali Dalla and Heiko Hesse (of the IMF) takes a look at how local-currency bond markets are becoming a viable funding alternative for many emerging market issuers.

Not surprisingly, many of the countries that have succeeded in weathering the worst of the crisis (China, India, Brazil, Poland) also have substantial local bond markets:

 

Weekend Reading

Real Time Economics interviews: Hernando de Soto talks about the effects of the crisis on the world's poorest, while our Chief Economist Justin Lin discusses China, the IMF, and stimulus packages.

Paul Kedrosky praises venture capitalists.

One quarter of US jobs are offshorable. It might not matter.

Unemployment is high on Europe's frontiers.

In other unemployment news, Ryan Avent thinks that the stimulus is needed to fight joblessness. Tyler Cowen doesn't.

The US trade gap narrowed last month. It is down almost 50 percent from a year ago. Could it have anything to do with the dollar?

Larry Summers dismisses the idea of a low-growth America.

Our East Asia blog looks at 60 years of China's development, and asks, "Are China's banks having a good crisis?"

Emerging Market Merry-go-Rounds

Paul Kedrosky writes about one of my favorite topics, emerging market decoupling. He cites a new report by HSBC which discusses a "global monetary merry-go-round":

Our optimistic views on the emerging world are also based on what we call the monetary merry-go-round. Low US interest rates typically encourage capital to flow into the emerging world. Attempts by emerging nations to limit the resulting exchange rate appreciation lead to offsetting capital outflows in the form of rising foreign exchange reserves which are often invested in US Treasuries. Higher demand for Treasuries keeps yields low and, hence, leaves US interest rates low, thereby allowing the merry-go-round to repeat, seemingly ad infinitum.

Crisis Roundup

China has replaced the United States as South Africa's largest trading partner.

In other Africa news, the World Bank has released a report on Doing Business in Kenya.

Problems with America's fiscal exit strategy. With a rebuttal.

Is the Fed too hawkish? Maybe because it's easier to be a hawk than a dove.

A pessimist's case for optimism. Plus, the probability of a US recession is diminishing.

But unemployment is looking ugly.  

UC Berkeley Professor Brad DeLong posts his lecture notes on the Great Depression, Keynes, and World War 1.

Free Exchange is hosting an excellent discussion on incentives and public regulators. Guest authors include Simon Johnson, Mark Thoma, and Tyler Cowen.

Finally, a loyal reader of Crisis Talk makes the case for freedom from imprudent risk aversion.

Washington Update

Although much of the Washington-based development community is headed to Istanbul, there is quite a bit of news coming from headquarters.

First, IFC is teaming up with several private sector banks to launch a vehicle to purchase distressed assets in emerging markets. IFC will commit $1.5bn to the fund and is hoping to raise an additional $4bn from the private sector. A particular emphasis will be on Eastern Europe, which was home to 40 percent of pre-crisis foreign capital flows. Further details of the project will be announced in Istanbul. In the meantime, the FT reports:

The idea is to mimic the functions of a "bad bank" at an international level through a number of platforms rather than a single global investment vehicle.

As part of the initiative...the IFC is teaming up with HSBC to purchase and restructure distressed assets, in what it hopes will eventually be  $900m scheme.

IFC's chief executive, Lars Thunnel, is known for having managed Sweden's "bad bank" during its banking crisis in the early 1990s.

China Can't Do It Alone

As rich countries, led by the Untied States, prepare themselves for a tepid recovery, can the BRICs, led by China, pick up the slack?

In a new paper for Vox, Deutsche Bank's Markus Jäger discusses China's prospects for becoming the de-facto engine for global growth. His concussion: China already is the decisive engine for global growth. 

By 2014, assuming things are back to normal, China and the US will account for around 30% and a little over 10% of global growth, respectively – and this assumes relatively optimistically US growth of more than 3% per annum. In this sense, China will be the global growth “engine”. But this is nothing new. China’s contribution to global growth amounted to 20% during the better part of this decade, almost twice size of the US contribution.

China's Crisis Response Goes Global

China has been an essential player in fostering a global economic recovery. As one of the first countries to announce a massive stimulus package last November, China brought increased stability to markets when it was dearly needed. Today's conventional wisdom holds that in order to ensure a stable global recovery, Chinese consumers must increase their consumption patterns to fill the economic void left by their battered American counterparts (see previous post).

Can the Chinese government succeed in boosting domestic consumption? Are there other initiatives that China can take to put the global economy in motion?

The answer to both of these questions is a tentative 'yes'.

Emerging Market IPOs: Leading the way

Two years ago, as financial markets in the United States and Europe began to break down, there was much speculation over whether emerging markets would continue to grow in spite of the woes in the West. A year ago, this idea of decoupling was quickly dispelled.

As emerging markets rebound from the crisis, will there be a new decoupling, where they grow, and OECD economies struggle? It is probably too early to tell, but in one area, IPOs, developed economies are profiting from emerging market successes.

Zoellick's Pittsburgh Prescription

World Bank President Robert Zoellick has given his policy suggestions for this week's G20 summit in Pittsburgh. In an interview with the Financial Times, Zoellick urged world leaders to focus on adopting a responsible approach to global economic growth:

I would like the G20 to talk about responsible globalisation. That would capture balanced global growth, financial stability, climate change, help for the poorest including our proposal for a new facility to help countries cope with economic shocks not of their own making.

Zoellick also called for prudence, warning that a sustained economic recovery is far from certain, even in the brightest patch of the global economy, Asia:

China has expanded credit rapidly. As credit growth is moderated there is a risk that China could turn down again. Conversely, the strong rebound so far in east Asia could lead to increased interest rates that draw in a lot of capital – then what will the governments do in terms of currency policies, inflation policies, interest rate policies?

Sage, rather than sanguine, needs to be the running theme this week.

The Sino-American Economy: Mutually Assured Destruction

This week's New Republic has two interesting articles about China's economic rise, and its implications for the global economy.

In the first piece, This Giant Isn't Sleeping, Zachary Karabell argues that Chinese growth is both sustainable and here to stay, and that doubts about the Chinese economic model are overblown: 

China has produced more growth over the past 25 years than any country, ever (averaging more than 9 percent a year). And after stalling in the fall of 2008 and in the early months of 2009 along with the rest of the world, China has been growing at an astonishing rate in the past six months--manufacturing has been expanding, exports have been surging (more than $20 billion a month to the United States alone), property prices and activity have soared, and stocks are on fire. Interior cities have replaced the coastal provinces as the engine of growth, and that process has barely begun.

Karabell goes on to say that rising commodity prices (the price of copper has doubled over the past six months) mean that the Chinese economic engine is alive and well. 

One Year On

On the one-year anniversary of the Lehman Crisis, the biggest names in financial punditry have been voicing their thoughts and concerns on the most important issues facing the world economy.  Let's take a look:

Martin Wolf, who spent most of the crisis bringing attention to global imbalances, has become a China bull:

China has emerged as the most significant winner from the global financial and economic crisis. At the end of 2008, many questioned whether China would achieve its growth target of 8 per cent in 2009. Who now dares to do so?

Doing Business 2010: Reforming through Difficult Times

The World Bank Group has released its annual Doing Business Report, which provides quantitative measures of regulations of the life cycle of a small or medium-size enterprise. Regulations related to registering property, employing workers, dealing with construction permits, and paying taxes are measured. Getting electricity and worker protection were added to this year's metrics.

In spite (or because) of the crisis, governments worked hard at improving the business climates within their borders:

In 2008/09 more governments implemented regulatory reforms aimed at making it easier to do business than in any year since 2004, when Doing Business started to track reforms through its indicators. Doing Business recorded 287 such reforms in 131 economies between June 2008 and May 2009, 20% more than in the year before.

Reformers focused on making it easier to start and operate a business, strengthening property rights and improving the efficiency of commercial dispute resolution and bankruptcy procedures.

Wall Street's Premature Exuberance

I've been wondering lately if investment banks are experiencing a bout of irrational exuberance with respect to a recovery. Bullish advice on China comes to mind in particular.

There is growing momentum behind the idea that many banks are getting the recovery wrong. From Bloomberg: 

Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery.

The US Dollar: The worst choice (except for every other option)

Barry Eichengreen has written a piece in this month's Foreign Affairs outlining the difficulties of replacing the dollar with an alternative reserve currency (subscription required).

Professor Eichengreen sets the stage with the usual talking points over the dollar's weaknesses:

• Confidence in the US-championed global financial system is waning
• The US government will continue to issue staggering amounts of debt
• In order for central banks to acquire dollars, the US must run a current-account deficit, which aggravates global imbalances and puts further downward pressure on the dollar
• The political logic for supporting the dollar has weakened, as the US is no longer seen as the military protector of Europe and Asia

In spite of this cocktail of structural weaknesses, there is an "inconvenient truth" to the dollar: its global importance hasn't changed as a result of the crisis. Based on the Federal Reserve's holdings of US Treasuries on behalf of its foreign counterparts, "foreign authorities have continued to accumulate dollars, and even accelerated their purchases in the first half of the 2009."

What gives? Why stick to a currency that is so clearly flawed? Why buy into a system that many respected economists warn is destined to fail?

Credit Suisse: Where's the Asian Bubble?

Credit Suisse has released a new report (Asia: Show me the bubble) claiming that concerns of an Asian bubble are overblown:

It has become fashionable to argue that Asia’s monetary conditions are too loose and that too much domestic liquidity is creating asset price bubbles. Reflecting prevailing “wisdom” among market analysts, The Economist last week declared that (1) “Asia’s monetary conditions are too loose,” (2) “capital is already rushing in,” (3) “[central bank] foreign exchange intervention to hold down their currencies causes domestic liquidity to swell,” and (4) “the obvious solution is to let exchange rates rise.”

There is nothing “obvious” about any of the above, in our view. The entire region is being painted with a China-brush, which does not wholly apply.

Crisis Roundup

The end of an era for the rich?

The view from Jackson Hole; or, the case against Bernanke. 

Is the United States following in the footsteps of Japan? Michael Mandel believes we are in the midst of a lost decade:

I think we need to wrap our minds around the fact that we’re not having a boom followed by a bust…we’re having a bad decade followed by a slow digging-out process.

IMF Weighs in on Recovery; World Bank Discusses Finance in Africa

The IMF and World Bank have both released reports discussing their latest thoughts on the global and regional effects of the financial crisis. 

Olivier Blanchard, the IMF's chief economist, has published his views on Sustaining a Global Recovery, arguing that the path out of the crisis for emerging markets is much simpler than in developed economies:

If past is prologue, the world economy likely will return to its past growth rate. But, especially in advanced countries, the period of above-average growth, characteristic of normal recoveries, may be short-lived or nonexistent.

Blanchard exposes two caveats to recent good news about growth:

Today in China: Panda Put or Cliff Dive?

In light of yesterday's 6 percent drop in the Shanghai composite, there is increasing speculation about the sustainability of the buildup in Chinese equity markets (see recent post).

China’s stimulus efforts, led by increased bank lending, have caused the economy to look more and more frothy:

Is there a China bubble brewing?  If so, will the Chinese government intervene to avoid a crash (the panda put option)? Or are we in for a sharp correction?  Let's see where the market pundits stand:

Making Goods vs Making Money: China, finance and rent-seeking

Simon Johnson has written an excellent essay contrasting the growth of traditional industry in China with America's fastest growing sector in the past 40 years: finance. 

Johnson argues that America's current bloated financial system absorbs more money than it produces, transforming it into a rent-seeking industry:

Finance in its modern American form is not productive.  It is not conducive to further sustained economic growth.  The GDP accruing from these activities is illusory – most of finance is simply a tax on what is done by more productive members of society and a diversion of talent away from genuinely productivity-enhancing activities.

Finance is rent-seeking.  The sector has devoted great resources to tilting all playing fields in its direction.  Consumers are taken advantage of; consumer protection is vehemently opposed.  And great risks are taken, with the downside handed off to the government (and the consumers again, as taxpayers).  This downside protection allows an overexpansion of debt-financed finance – reaching the preposterous levels seen in mid-2008 and now re-emerging.

Fear and the Dollar: A New Relationship?

There is growing speculation that we have reached the end of an era for the US dollar. Out with the dollar as an instrument of market safety in tough times; in with the dollar as a pulse of the strength (or weakness) of the American economy. 

That's right, Bloomberg and the FT both ran stories yesterday which argue that the relationship between the dollar and the euro is beginning to be based more on economic fundamentals, and less on risk appetite. 

Previously, when bullish investors looked for higher yields, hot money would flow into emerging markets. This flow resulted in a weakening of the dollar, often at the expense of the euro (and GBP and CHF).

These patterns may have been fundamentally altered by the crisis.

China: Bubble on the Horizon?

A new paper has been released by former Morgan Stanley Analyst Andy Xie that is garnering much chatter in the blogosphere. It addresses two of my favorite issues, China and the dollar. Surprisingly, the author is bearish on the former and bullish on the latter. 

The paper, via Big Picture, is well worth reading in its entirely. Xie's assertions are quite harsh:

Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast

This Week in China

In honor of this week's US-China Strategic and Economic Dialog, today's Crisis Talk is dedicated to the latest discussions on Sino-American economic relations.

To start, Brad Setser has three excellent articles on Chinese-American monetary relations:

• The first article points out that the PBoC's balance sheet totals 70% of GDP, compared to the Fed's, which recently hit 15% (and was 6% before the crisis).
• The second asks, "Doesn’t a smaller (external) deficit mean less dependence on (external) creditors, including China?" Setser thinks so, and I agree.
• Third, for all its concerns about a weak dollar, China has been allowing its own currency to depreciate lately. 

Simon Johnson analyzes Tim Geithner's China strategy:

Any country that runs such a current account surplus is implicitly taking a great deal of currency risk – China was in effect deciding to take the biggest ever official long-dollar position.  The idea that the US government should spend time reassuring them is somewhere between quaint and not good strategy.

Today's FT has two commentaries on China and the dollar. The titles speak for themselves:

• Washington risks taking China too seriously
• Chatter about a new global currency is overblown

Finally, China Law Blog gives advice on how to avoid getting kidnapped in China.  The solution: "Plan in advance or go home."

Emerging Market Wrap Up

Today's FT has a comprehensive summary of the current state of emerging markets. Not surprisingly, China and India are the clear winners, while the picture in the rest of the world is more murky. Perceived government mismanagement has steered investors away from Argentina and Venezuela, while Central and Eastern European nations, particularly Russia, continue to suffer the most.

The article, "Developing nations shine amid the crisis gloom", is well worth the read, and has some excellent quotes from leading emerging market investors, like this one from Robert Buckland, global head of equity strategy at Citigroup:

The financial crisis has been the making of the emerging markets in that they are no longer some kind of super-cyclical play.  It is no longer the case that if you downgrade US GDP by 1 per cent, the emerging market GDP will be downgraded by 2 or 3 per cent.  The balance sheet management of the emerging markets has been better in this crisis than the developed world.

Decoupling, anyone?

Demystifying the Collapse in World Trade

Last week I pondered whether Europe was the biggest loser in the crisis. It appears that collapsing world trade volumes are giving the Old Continent a run for its money. 

In the first quarter of 2009, year-on-year nominal trade volumes dropped by 30 percent. World trade has fallen by 15 percent during the same period. 

What has happened?

A new paper by Caroline Freund (who is also a contributor to Crisis Talk) aims to explain why trade has suffered so much over the past year. Freund reexamines the relationship between trade and income, uncovering an important explanation. 

Friday Crisis Roundup

Here are some of this week's highlights, from inside and outside the World Bank:

Does easy money and capricious legislation fuel commodity speculation? (Baseline Scenario)

Or is it a curse in general? (The Big Picture)

The World Bank's East Asia blog gives a roundup of the region, arguing that Asia will lead the world out of the crisis.

Meanwhile, our Africa blog ponders success in South Africa.

The European Central Bank has released a report on the international role of the euro...

...with Alea giving us the highlights. Bottom line:

The international role of currencies tends to be relatively stable over time.

Crisis Roundup

Here's a roundup of some of the more interesting crisis-related discussions in the blogosphere:

1.  Simon Johnson, former Chief Economist of the IMF, summarizes his main points from last week's World Bank conference in Seoul, "Lessons from East Asia and the Global Financial Crisis":  

If the size, nature, and clout of finance is the problem, then the official view is nothing close to a solution. At best, pumping resources into the financial sector delays the day of reckoning and likely increases its costs. More likely, the Mother of All Bailouts is storing up serious problems for the near-term future

2.  Should we be promoting access to finance in the developing world, even in the midst of a financial crisis? CGAP Microfinance

3.  Is the next bubble in emerging markets? FT Alphaville

4.  Nouriel Roubini discusses China's waning dollar appetite...

Our creditors' nervousness about the eventual debasement of the US dollar has some increasing validity.

5.  ...while others are less convinced.

Samuelson on the Recovery

Paul Samuelson has a nice article on the dangers of sounding too optimistic about a possible recovery late this year in the United States. His main point: the recovery is predicated on printing dollars and selling them to China. The moment China changes its mind on buying dollars, both the US and the world economies are in trouble. For a few years.

Over time, Americans will learn to save more and the Chinese will learn to spend more. Until then, cautious optimism at best.

Micronesia Disclosure Bill Vetoed: How to Overcome Concerns about Separation of Powers and Privacy?

We have recently witnessed how the financial crisis has prompted the extension of disclosure requirements for government officials and corporate executives in Russia, China and Hong Kong (China). My prognosis was that more and more disclosure was coming up.
 
However, no wave comes without a retreat. On April 27, the President of Micronesia cited infringement of the separation of powers and of privacy in vetoing the disclosure bill, passed by the country’s Congress a month earlier. The bill required public disclosure of assets, income and business interests by holders of the country’s top political offices, such as the President, Vice-president, members of the Congress, ministers, Chief Justice of the Supreme Court, Public Auditor and members of the board of directors of the Development Bank of Micronesia. The disclosure requirements also covered immediate family members of officials. The administration of disclosure was to be vested with the country’s election authority. 

Buiter on Emerging Markets

Willem Buiter is among the foremost European monetary economists who is providing commentary on the unfolding crisis. (Charles Goodhart and Martin Hellwig round up the top-3). Here is what Buiter wrote recently on his blog:

The prospects of the emerging markets depend:

• First, on their dependence on external demand
• Second, on their dependence on external finance and,
• Third, on the scope for expansionary domestic demand management and the ability of the authorities to use it intelligently and flexibly.

Where Economic Freedom is Still in Fashion

In the East and South. With the advent of the economic crisis, Western pundits have immediately jumped on the "capitalism is dead" story. Things French are in fashion - and not only French kissing.
 
Yet in Eastern Europe, where I have travelled extensively over the past few months, the opposite is true. Policymakers are even more determined to divest the state from the remaining state-owned enterprises, the remaining subsidies to inefficient sectors. No one is talking about the death of capitalism, and certainly no one is talking about state ownership of banks. According to Arvind Subramanian, the same sentiment is prevalent in India and China.
 
Why is that? First, because only a decade ago Eastern Europe underwent a big "adjustment," and in many countries this was blamed on the corruption and incapacity of state-owned institutions. This changed society in two ways: the average citizen considers herself a freemarketeer in economics issues, and a new class of politicians came about, espousing free markets. 

Obama’s Trade Policy Test

A special safeguard case against imported tires from China, initiated by the United Steelworkers (USW), was announced this week. Under China's WTO accession agreement, members are permitted special safeguards until 2013. This is the first such case filed under the new administration. The U.S. International Trade Commission has 60 days to rule on the petition and make a recommendation. If it rules in favor, President Obama will have 90 days to decide on a remedy. 

During the previous administration, six special safeguard cases were filed, four went to President Bush, but none were acted on. Bush cited standard free trade principles in declining to act.

Japan Tries Again

Stung by the label of a lethargic stimulator during the 1990s, Japan is competing with the US for how much money to put out now. The third stimulus package, at 150 billion dollars, is the latest of a series to come (see the BBC story).
 
The new money mostly goes into incentives to buy fuel-efficient cars and consumer electronics. As such, it is a subtle Buy Japanese package. Nothing wrong with that. Similar packages have emerged in nearly every car-producing economy. The plan also provides some extra security for temporary workers.
 
The government plans to finance it with a new issuance of bonds.

Searching for Bright Spots in Trade

I have been following the decline in trade closely. The numbers for February are a disaster. Trade is down over 30 percent relative to the same month last on average across a wide range of countries (for detailed data, click to read Trade Collapses in the New Year: Update). The only consolation is that February is just slightly worse than January. 

I decided to look for some bright spots, no matter how small. Taking U.S. and Japanese import data at the 6-digit level (more than 5000 products), there are bound to be some. While over 75 percent of categories in both countries declined in February, there are indeed a handful of bright spots in important categories. 

The View from Hong Kong (China)

I spent the last couple of days in Hong Kong (China), talking mainly with academics, but also with people closer to the markets. The recession (or is it already a depression?) has hit Hong Kong (China) quite hard, with exports dropping substantially. This has actually resulted in the challenge to find storage space for empty ship containers; well, as many ships idle in the port anyway, empty containers can just be left on the ships. Unemployment has increased, though still in the single digits. There has not been as much of an impact on peoples’ lives as perhaps in the U.S., as the savings rate is quite high and people can live off reserves.

One wonders, however, how long this will hold. Housing prices have already dropped by 20%, but with maximum loan-value ceilings of 70% – imposed by the regulators – this will not lead to immediate distress in the banking sector. The recipe applied so successfully after the East Asian crisis – export yourself out of the crisis – will be much harder to apply, as the target markets are certainly less willing customers this time around, which also makes a quick recovery unlikely. As In Europe, the Lehman insolvency has also left its mark in Hong Kong (China), with bearers of Lehman’s mini-bonds losing their shirt, and consumer complaints of sales techniques rising. Rather than bailing out customers, however, the Hong Kong (China) approach seems to force more transparency in the sales process, including audio-taping sales conversations. Of course, this might just lead to a migration of certain conversations towards bars and coffee shops.

China: Government Officials' Property Declarations Published

On February 17, 2009 the Chinese government announced that senior public officials in the Altai district, Xinjiang province, are the first in China to publish their property declarations on the Internet. This is the start of a pilot on officials' disclosure reform, which has been on the agenda for some time.

The 4 trillion RMB ($586 billion) stimulus package in China gives national and regional government officials greater powers to select projects for investment, thus increasing the risks of misuse of authority for personal benefit. "[In this context] the issue of publicity of officials' personal property raises a heated discussion in the whole society," reports China News, a major online agency.

The Chinese government is testing the disclosure reform in Xinjiang province before extending it to the whole country. The declarations published in the Altai district contain information on all types of material benefits received by officials, including salary, consultancy and author fees, gifts and sponsored holidays or celebrations. More than 1000 declarations by senior government officials at the district level are being made public. Information on assets, including real estate, vehicles, bank deposits, stocks and bonds, and liabilities, is also declared but kept confidential.

Li Chengrui, former Director of the National Statistics Bureau and one of the proponents of the reform, says that it "does not need preparation and re-preparation." The financial crisis, it seems, has become an opportunity for promoting greater disclosure by politicians.

Indonesia's Stimulus Package

The government received approval from the House of Representatives to launch the stimulus package on February 24, 2009. Of the total Rp 73.3 trillion ($6.3 billion) stimulus package, Rp 12.2 trillion is allocated to infrastructure projects and empowerement programs for people living in rural areas. Finance Ministry head of fiscal policy Anggito Abimanyu said the Rp 2 trillion increase (the government had initially asked for Rp 71.3 trillion) would be allocated to build roads in villages and municipalities, and irrigation schemes, which “can quickly generate employment." Another 4.8 trillion rupiah (400 million dollars) is dedicated to energy-saving investments.

Bambang Susantono, the deputy minister to the coordinating minister for the economy, in charge of infrastructure, said the government would launch the stimulus in early March, although it “still depends on the projects.” He said the government had also worked with the International Labour Organization (ILO) to generate more employment.

To reduce the burden of low- to mid-income workers, the government will also introduce an income tax cut to workers having a monthly income of less than Rp 5 million. Overall, the tax stimulus is worth 56.3 trillion rupiah and also consists of reduced corporate and value added taxes.

The stimulus package is expected to increase the 2009 budget deficit to 139.5 trillion rupiah ($11.62 billion) from 51.3 trillion rupiah ($4.27 billion), or to 2.5 percent of GDP.

China's Stimulus

The stimulus package, announced November 9, 2008 and worth $586 billion, includes a $73 billion reduction in the tax burden on firms and individuals, mainly through a VAT cut; $173 billion for building low-income housing and upgrading the national railway and road system, and spends $130 billion on reconstruction in regions affected by last year's earthquake in Sichuan Province.

On March 17, the prime minister indicated that additional stimulus would be available if the economy needs it. "We have prepared contingency plans to handle greater difficulties. We have prepared enough ammunition and we can launch new economic stimulus policies at any time."

Time to Unite

Editor's Note: Charlotte Nan Jiang is an analyst on the Doing Business team and currently works on the Paying Taxes indicator.

The Washington Post published a timely op-ed last Friday, Recovery Rides on the ‘G-2’, by Robert B. Zoellick and Justin Yifu Lin, about how a strategic partnership between China and the U.S. could shed light during this dark crisis.

In their view, the two economic powerhouses must cooperate to drive the Group of 20 so as to help the world’s economy to recover. They pointed out that the broader international payment imbalances are fueled by both over-saving in China and over-consumption in the U.S. If the two countries join forces to launch stimulus packages and economic dialogues that address those imbalances, it will “go a long way towards reducing the risk of global economic turmoil.”

Summers on Global Imbalances

Larry Summers in the Financial Times: "The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now. There's no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda." See commentary here.

Assessing the Trade Finance Situation

It is difficult to find reliable information on how severe the trade finance problem really is. There are a lot of numbers circulating, all of questionable quality. Take, for example, the figure on the importance of trade credit. Recent news reports state that 90 percent of the US$14 trillion in world trade is financed by trade credit (see, for example, the International Herald Tribune, Forbes, and the WTO). But, where does this “90 percent” come from? I traced the number from various WTO documents, and it appears to come from a 1998 paper by Malcolm Stephens at the IMF. However, the statement in the paper is quite different: “90 percent of world trade is conducted on the basis of cash or short-term credit” [p.5, emphasis is mine]. 

An additional reason the number is suspect is because of the growing share of trade between a parent firm and its affiliate. This so-called intrafirm trade is unlikely to use external financing. The OECD reports that approximately one-third of trade for the US and Japan (countries for which data are available) is intrafirm. More than two-thirds of Austria’s imports from Eastern Europe are intrafirm. This makes the 90 percent even harder to swallow.

Another number that has been circulating in these articles is a $25 billion “liquidity gap” in financing by the private sector. This is the "market's estimate" - $25 billion is less than two-tenths of one percent of the value of trade, so it is quite small in the grand scheme of things. How can trade finance be a major issue in the stunning decline in trade (trade was down about 15 percent from the previous year in November and December, and available data for January looks worse) if the liquidity gap is just 0.16 percent?

In order to diagnose and improve the trade finance situation (if necessary), we must first measure it.  Given the market's failure at quantifying assets, liabilities, and risk, we cannot rely on its estimate of the trade finance gap without any supporting data. It is unfortunate that reliable data from banks working in trade finance have not been made available.

Korea Plans to Introduce More Labor Flexibility

Reading through the stimulus packages, one consistent theme (no, it's not bailing out rich bankers) comes out. Countries are trying to ease the environment for doing business.
 
Korea's package is quite explicit. "The government is to streamline and reduce excessive regulations regarding environment, land use, and labour issues." More specifically, "Revision bills on labour market flexibility to be submitted to the National Assembly soon, after consultations with stakeholders. The government aims to submit the amendment within this year."
 
Indeed, recent research has shown that flexible labor regulations reduce informality. See, for example, Djankov and Ramalho's paper in the latest Journal of Comparative Economics issue. No wonder the Korean government is trying to prevent a rush to informality as a result of the crisis.