Sav­ings and tech­nol­ogy

Dünya Executive - - FINANCIAL CORNER -

In the early 2000s, the clas­si­cal mech­a­nism worked like this: As a re­sult of cross-bor­der in­flows, con­sump­tion of both trad­ables and non-trad­ables in­creased in EMs. Since non-trad­ables ought to be pro­duced lo­cally, la­bor flowed from the trad­ables sec­tor to the non-trad­ables sec­tor. Phys­i­cal mar­ginal pro­duc­tiv­ity of la­bor fell in the non-trad­ables sec­tor and rose in the traded sec­tor.

Since, in equi­lib­rium, the value of the mar­ginal prod­uct of la­bor needs to be equal across sec­tors, the price of non­traded goods in terms of traded goods must in­crease, i.e. real ex­change rate ap­pre­ci­a­tion.

This is the con­se­quence of what was called the global sav­ings glut. Be­cause lo­cal cur­ren­cies ap­pre­ci­ated, and be­cause in­fla­tion tar­get­ing/cen­tral bank in­de­pen­dence kept mon­e­tary pol­icy in con­trol, in­fla­tion fell through­out. In­ter­est rates be­gan to fall af­ter­wards.

Con­sump­tion de­mand for trad­ables would there­fore ex­pand more than de­mand for non-trad­ables, and the trade bal­ance would de­te­ri­o­rate. The re­sult­ing trade deficit, trans­lated into the cur­rent ac­count deficit, would be fi­nanced through the part of cross-bor­der in­flows not claimed by the gov­ern­ment.

This is how the cor­po­rate sec­tor was able to pile up a huge FX-de­nom­i­nated debt, and banks of­fered fi­nance cred­its at a rate much higher than lo­cal de­posit growth would have al­lowed.

In the end, such de­pen­dence on de­vel­oped coun­tries’ sav­ings, i.e. cap­i­tal in­flows that show up in the fi­nan­cial ac­count, specif­i­cally en­tails a squeeze of trad­able pro­duc­tion that is likely to be­come a long-term fea­ture of the econ­omy. It took a long time to build, but now it has taken its toll, fi­nally. There­fore, it isn’t just the rate of in­ter­est or the Fed com­ing closer to an eas­ing cy­cle, etc., that ex­plains things. Well, rates will be cut ev­ery­where but we have seen this be­fore. It won’t change much un­less tech­nol­ogy and cap­i­tal – not debt - play a gen­uine role in any growth story. Just look­ing at rates, and in­fer­ring how much there may be room for eas­ing can only high­light a cou­ple of months into the fu­ture.

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