Download Presentation - Stephany Griffiths-Jones

The Politics of Appropriate Policy
Responses by G-8 and Others for
Stabilising the World Economy
Background for Presentation at Policy Network:
Global Economic Imbalances - A Need for Global
Governance beyond the G-8?
Professor Stephany Griffith-Jones
Email: [email protected]
Website: www.stephanygj.net
Tel: 0044 (0) 1273 305819
The nature of the challenges for world
stability and sustained growth
I.
A.
B.
Global Imbalances
Increased growth of unregulated financial institutions
(e.g. hedge funds) and instruments (derivatives)
What can be done? By the G8? By
others?
II.
A.
B.
To avoid threats of economic slowdown and of costly
financial crises
To mitigate potential effects on poorer countries and
peoples of slowdowns or crises.
A. Global Imbalances
1.
Scale of US Deficit
2.
US Current Account deficit far larger than Chinese
surpluses with US. China has deficits with rest of
Asia. Importance of OPEC surpluses
2005
(millions of dollars)
China
160,818
OPEC countries
257,057
OPEC Countries +
Russia
340,221
3.
US increasingly becoming a net debtor: by 2004, US
holding of foreign assets (US$10 trillion) far lower than
foreign holding of US assets, US$12.5 trillion (d’Arista
and Griffith-Jones, 2006)
4.
5.
6.
Risk: non-insignificant probability that, in the
foreseeable future, there could be a disorderly and
costly global economic adjustment. This would be
damaging for world economy and especially
developing countries
Negative impact on developing countries could be both
via trade and financial channels and possible
perverse interactions; the latter two could be through
highly leveraged institutions (HLIs) and derivatives
instruments, where positions have grown exponentially
(see below)
Risks could be via abrupt financing of the US current
account deficit
a.
b.
•
•
By private actors (role usually under-estimated)
By Central Banks
East Asia, especially China
OPEC countries
B.
Exponential Growth and opaqueness of
unregulated financial institutions (like hedge funds) and
instruments (derivatives)
1.
For example, since 1999, hedge fund assets
under management grew more than five-fold
and are estimated to total $US1.6 trillion (FSF,
2007). In the last four years, share managed in
Europe doubled to 24%
2.
It is estimated that hedge funds accounted for
45% of trading in emerging market bonds, 58%
in credit derivatives
3.
They play, via derivatives, a major role in the
“carry trade” amongst developed economies
e.g. Japan, but also increasingly in developing
countries e.g. Brazil, Chile
Table 2
National Amounts over-the-counter
outstanding of derivatives (US$ trillion)
Dec 2004
Dec 2006
Total
257
415
Foreign Exchange
29
40
Source: B.I.S.
Table 3
4.
5.
Derivatives largely unregulated, as much of
it done off-shore (though usually linked to
G-8 financial centres) and opaque
Rapid innovations and complexity of
products may imply excessive risk taking.
This could lead to far greater uncertainty,
potential large reduction of systemic
liquidity in times of stress (Trichet, 2007)
and thus systemic risk. True globally, for G8 and for developing economies
II.
What can be done? By G-8? By
others?
To avoid threats of sharp economic
slowdown and financial crises
A.
Imbalances
1.



Key role for US to decrease its current
account deficit
G-8 wrong forum to discuss China, as this
major country not a member
Chinese appreciation could make US
deficits more difficult to fund
1.
Imbalances cont.






If China floated and liberalised capital account,
Yuan could actually weaken
Key that Europe further increases its growth, as
US slows down
Further changes to reduce deflationary bias of
the Growth and Stability Pact
AVOID tightening of European monetary policy
Developing countries, with tight monetary policy,
to be less stringent
Promote study of major reforms of global reserve
system to make it more stable and more
equitable as well as reflecting new realities
2.




Unregulated Financial Actors and instruments
Increased transparency of hedge funds and derivatives
essential (as Germany and Financial Stability Forum ,
May, 2007 pointed out)
Transparency of key variables (size, distribution and
concentration of risks) essential first step as Trichet 2007
points out
Regulation to reduce systemic risks globally and in
countries (including developing) essential. New
challenge: avoid speculation impact on macro-economic
variables not linked to fundamentals, by financial actors
Regulation needs to be comprehensive, including of offshore centres and of all transactions. Poses political and
technical problems but doable. Need for political will and
research
2. Unregulated Financial Actors (cont)


New challenges linked to direct and indirect risk. For
example, indirect implies risks from indirect market
liquidity effects from liquidation of positions or insufficient
funding liquidity to meet margin calls by actors like
hedge funds (FSF 2007 Report)
Key role for G-8 where most major financial centres are
and with links to off-shore centres
B.
1.
2.
To mitigate potential effects on poorer countries
and people
Risk of possible slowdown or crisis may not
unfortunately be avoided
Need to mitigate risk of negative impacts



Encouraging further borrowing by developing
countries in local currencies. Both through own
financial markets or with support of World Bank and
regional development banks
Support developing countries borrowing in GDPlinked bonds. This could be encouraged by
developed countries setting an example and/or by
support of WB and RDBs
Could be attractive for Islamic investors, given GDP
linked bonds seem particularly compatible with Sharia
law .Example of sukuk financing for infrastructure,
including in Germany
2. To mitigate potential effects on poorer
countries and people (cont.)



Local currency and GDP-linked bonds reduce risk of crises,
default and facilitate counter-cyclical policies
Allow developing countries to curb excessive short-term
capital inflows
Expand IMFs contingent lending against external shocks
(such as slowdown of world economy). Implies sufficient nonconditionality IMF lending available for terms of trade shocks;
automatic and sufficient access for emerging economies hit
by contagion, if they have good performance in IMF Article IV
consultations
Essential to make global economic governance more
democratic and representative as pre-condition to achieve
global economic management that is effective and legitimate.
Seems to imply clear need to broaden G-8