STILL CRAZY AFTER ALL THESE YEARS
Growing trade protectionism and dwindling precautionary reserve holdings of developing economies are adding to economic vulnerabilities, write and
TEN years ago, deteriorating confidence in the value of American subprime mortgages threatened a liquidity crisis. The United States Federal Reserve injected considerable capital into the market, but could not prevent the 2008-2009 global financial crisis (GFC).
The 2008 meltdown exposed the extent of finance-led international economic integration, with countries more vulnerable to financial contagion and related policy ‘spillovers’ exacerbating real economic volatility. It also revealed some vulnerabilities of the post-Second World War US-centred international financial ‘architecture’ – the Bretton Woods system – modified after its breakdown in the early 1970s.
Robert Triffin, the leading international monetary economist of his generation, had long expressed concerns about the use of a national currency as the major reserve currency. International liquidity provision using the greenback required the US to run balance-of-payments deficits, ensuring US monetary policy spillovers to the world economy while eroding confidence in the greenback.
The Bretton Woods system was under increasing strain from the late 1960s, as then US president Lyndon B. Johnson funded the increasingly unpopular Vietnam War by issuing debt, rather than through higher taxes. The system finally broke down when the Richard Nixon administration unilaterally cancelled the US commitment to dollar (gold) convertibility in August 1971.
What emerged was a ‘non-system’ for Triffin. Since then, the US dollar, issued by fiat, has relied on the greenback’s own credibility and legitimacy to continue as the de facto world currency.
In 1985, Triffin identified three systemic problems of the international financial ‘non-system’. First, “its fantastic inflationary proclivities, leading to world reserve increases eight times as large over a brief span of fifteen years” since the breakdown of the Bretton Woods system.
Second, “skewed investment pattern of world reserves, making the poorer and less capitalised countries of the Third World the main reserve lenders, and the richer and more capitalised industrial countries the main reserve borrowers of the system”.
Third, “crisis-prone propensities reflected in the amplitude” and frequency of financial crises such as the 1980s’ debt crisis causing developing countries’ ‘lost decades’. Other critics have identified further flaws.
First is the ‘recessionary bias’, due to the asymmetric burden of adjustment to payments imbalances. While deficit countries are under great pressure to adjust, especially when financing dries out during crises, surplus countries do not face corresponding pressures to correct their own imbalances.
Second is the cost of the perceived need of emerging and developing countries to ‘self-insure’ against the strong boom-bust cycles of global finance by building up large foreign exchange reserves and fiscal resources, especially after the 1997-1998 Asian financial crisis.
Such precautionary measures enabled emerging market economies to undertake strong counter-cyclical measures during the GFC. But they have huge opportunity costs as such reserves are generally held as presumably safe, liquid, low-yielding assets, such as US Treasury bonds.
Hence, Triffin complained that “the richest, most developed, and most heavily capitalised country in the world should not import, but export, capital, in order to increase productive investment in poorer, less developed, and less capitalised countries… (The) international monetary system is at the root of this absurdity”.
There were renewed calls for reform of global economic governance in the wake of the GFC, especially by the 2009 UN Conference on the World Financial and Economic Crisis and Its Impact on Development.
Governance reform of the International Monetary Fund and World Bank should ensure fairer, more equitable representation of developing countries. This should improve the accountability and credibility of the Bretton Woods institutions, enabling them to better address current financial and economic challenges in the world.
The UN also called for a “multilateral legal framework for sovereign debt restructuring”. Without a fair, legally binding, multilateral sovereign debt workout mechanism, developing countries remain vulnerable to private creditors, including vulture funds.
There were renewed hopes for trade multilateralism and early successful completion of the Doha Development Round of the World Trade Organisation, giving developing countries better access to external markets, seen as vital for balanced global recovery and development. The promise to keep international trade open echoed G20 leaders’ unfulfilled commitment to eschew protectionism.
However, only a few of the modest promised reforms have been implemented, with limited changes in international financial governance, still dominated by G7 economies. After all, every financial crisis is followed by appeals for reforms, with complacency setting in with hints of recovery.
Most developed country governments are now more heavily indebted than in 2008, when they bailed out large financial institutions, but failed to sustainably revive the world economy. Major monetary authorities do not have much policy space left after long pursuing unconventional expansionary policies.
Meanwhile, developing countries have been subject to increasing international integration, e.g., through global value chains, foreign financial institutional investments and increased short-term capital flows induced by the unconventional monetary policies of the US Fed, European Central Bank and Bank of Japan, while debt-sustainability concerns for some are growing again.
These vulnerabilities have been compounded by growing trade protectionism, and dwindling precautionary reserve holdings of many developing economies as global trade has slowed. Even before US President Donald Trump’s election, developed countries had effectively killed the Doha Development Round, not least by opting for bilateral and plurilateral, instead of multilateral free trade deals.
Trump’s more explicit rejection of multilateralism in his efforts to eliminate major US bilateral trade deficits are now expected to further set back prospects for world economic recovery.
It has not been different this last time. A decade after the worst economic downturn since the 1930s’ Great Depression, the world economy remains vulnerable. IPS
Anis Chowdhury, Adjunct Professor at Western Sydney University (Australia), held senior United Nations positions in New York and Bangkok
Major monetary authorities do not have much policy space left after long pursuing unconventional expansionary policies.
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007
avoided owing to the alignment, but stressed that it would take steps to mitigate the impact.
Chief Minister Chow Kon Yeow, in defending the mega projects, had said that despite Barisan Nasional making PTMP, of which the PIL 1 project is a part, a central campaign issue during the recent general election, voters gave a stronger mandate to PH.
“You can say that the people of Penang did not agree with the election strategy by the opposition, to use the votes to cancel all the projects. The answer is very clear.
“But of course, we are open to local communities who may not have prior knowledge of the alignment of the highway,” he had said during a recent briefing on the PTMP for members of parliament and state assemblymen here.
Penangites, however, can rest assured that their concerns about the project, and many others, will still be heard in the august house.
BN’s Sungai Dua assemblyman, Muhamad Yusoff Mohd Noor, who is the newly-appointed state opposition leader, had vowed that he would raise issues affecting the people such as the PTMP, floods, environment and housing.
The other two opposition assemblymen are Yusoff ’s BN colleague, Permatang Berangan’s Nor Hafizah Othman and Pas’ Mohd Yusni Mat Piah, the Penaga assemblyman.
Save for the trio, Penangites also expect to see the other 37 backbenchers they voted into power speak on their behalf as well. After all, these elected representatives have made all sorts of pledges to represent and serve the people during the course of their campaign.
For the backbenchers, this state assembly sitting will be the first real test to see if the state government is indeed serious in fulfilling the promises made to the electorate.
All eyes will be on the assembly sitting which begins today and ends on Friday.
The writer is NSTP Penang bureau chief. She enjoys the sun, the sea and the sand, from which she draws her inspiration