Download T d th E dSt fGl b l Towards the End

T
Towards
d the
th End-Stage
E d St
off Global
Gl b l
Capitalism?
A Critique of Universal Capital Mobility and
th S
the
Search
h for
f Alternatives
Alt
ti
Prof. Dr. Jan Priewe
Hochschule für Technik und Wirtschaft Berlin –
U i
University
it off A
Applied
li d S
Sciences
i
October 2013
1 Trend towards complete
p
g
global capital
p
flow
liberalization (CFL)
2 Drivers for capital flows
3 Mainstream I: why global CFL is good
4M
Mainstream
i t
II
II: why
h global
l b l CFL iis nott always
l
good
d
5 Old critics and new critics of mainstreams
6 From CFL to universal Capital Account
Management:
g
Beyond
y
Mainstream II
7 Learning from Keynes 1944: from too little to too
much capital mobility
1 Capital flow liberalisation – 2010 halfway reached
towards complete de jure “laisser faire”
Chinn-Ito-index for de jure capital account openness for different country
groups (min -2.5, max 2.5)
2,5
,
0,5
-0,5
-11,55
high income countries
upper middle income countries
l
lower
middle
iddl iincome countries
ti
l iincome countries
low
ti
10
20
08
20
06
04
20
20
02
20
00
20
98
96
19
19
94
19
92
19
90
88
19
19
86
19
84
19
82
19
80
19
78
19
76
74
19
19
72
19
70
-2,5
19
indexx
1,5
1 Trend towards de facto trade and financial openness
Trade and financial openness
total exports and imports (high income OECD,
OECD middle income countries;,
countries;
gross capital in- and outflows* in 23 advanced and 59 emerging economies
70
60
% of GDP
50
trade
40
30
Financial flows
20
10
0
1980
1982
*absolute values
°2010 1
°2010:
1stt h
half
lf
1984
1986
1988
1990
1992
1994 1996
1998
2000
2002
2004
2006
2008
2010
Finance: advanced economies°
Finance: emerging economies°
Trade: high income OECD
Trade: middle income
1 Stocks of assets held abroad
abroad, selected countries
Assets abroad (Financial Account), % of GDP
% of G
GDP
Source: IMF, BOP, WEO, own calculations
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Germany A
Japan A
France A
United Kingdom A
United States A
Switzerland
H k
Hongkong
Si
Singapore
1 Stocks of assets held abroad and liabilities to abroad,
selected countries
Assets abroad and liabilities to abroad,
abroad 1980-2011
800
600
500
400
300
200
100
0
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
% off GDP
700
Germany A
United Kingdom A
Japan L
United States L
Japan A
United States A
France L
France A
Germany L
United Kingdom L
1 Stocks of assets held abroad, selected countries –
6-9 fold increase 1980-2011 – focus on gross
g
flows/stocks
A
Assets
t abroad
b
d (Financial
(Fi
i l Account),
A
t) % off GDP
Source: IMF, BOP, WEO, own calculations
300
% of GDP
250
200
150
100
14-27% of GDP
50
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Germany A
Japan A
France A
United States A
Forex markets – extreme g
growth and huge
g volume
c urrent bill ion US-$
Global daily foreign exchange transactions
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
24 times
global GDP
1989
1992
1995
1998
2001
2004
2007
spot markets
outright forward market
FX swaps
estimated gaps
currency swaps
FX option and others
2010
1 Huge magnitude of short-term
short term financial flows
• Global GDP 2011: 70 trillion USD
• Biggest financial market: global forex market
volume: 1,028 trillion USD (est.), 16 times global
GDP
• 2nd biggest financial market: derivatives
turnover 2011 704 trillion USD (10 times GDP)
• Other
Oth assets:
t 256 ttrillion
illi USD
USD, 3
3.7
7 titimes GDP
• Most of these markets a cross-border
transactions
2 Drivers for financial globalisation
• Pull and push factors often hard to distinguish
• Main push/pull
p
p factors
a) differential growth expectations
b) risk and currency diversification
c)) fluctuating
fl
i risk
i k appetite/degree
i /d
off liquidity
li idi preference
f
d) nominal interest rate differentials
e) safe haven for reserves
f) expected asset price increases
• One ppush factor seems to dominate: risk appetite/degree
pp
g of
liquidity preference/degree of uncertainty
• Hélène Rey: global financial cycle, centre is US
• FDI in stocks of A/L is small: US 2013 (2nd qu.)
qu ) 24.5%
24 5% of ext.
ext
assets, 12.2% of foreign assets in US; Germany: end 2012
16.6% of external assets, 12.8% of external liabilities
3 Mainstream I: why global CFL is good
• Emerged not before late 1970s, mainly from EU countries, and
OECD headquarter (Abdelal 2007)
• Optimal international allocation of capital/finance,
capital/finance analogue to
national free allocation
• Optimal intertemporal allocation of capital, consumption
smoothing
• Risk diversification, reduce average risk of portfolio and take
on higher risk on some investments
• Support of catching-up
• Universal production function
• Pressure on macroeconomic discipline of debtor countries
• Monetary sovereignty can be secured with floating XR regime
• Overall: growth enhancing in world economy
• If this is not visible: „bad governance“ and poor use of capital
inflows, lack of human capital, fixed XR regime etc.
4 Mainstream II: why global CFL is not always good
• IMF 2010ff.: emerging/developing countries may use, under
specified conditions, temporary inflow controls (Ostry et al.
2010 ff
ff.))
• Fear of appreciation in emerging economies
• “Capital
p
controls” applicable
pp
under several restrictive
conditions:
+ first check whether XR are really getting overvalued
+ if so, give
i preference
f
to
t reserve accumulation
l ti
+ if too expensive, try monetary policy (lower interest rates)
+ or tighten fiscal policy
+ check use of prudential regulation (micro & macro)
+ last resort: “capital controls”
• In the long run, emerging economies shall open the capital
accounts completely
• Advanced countries must not use such measures
5 Old critics and new critics
Old critics
- capital/finance should be mainly national (Keynes)
philosophy,
p y, IMF Articles of Agreement
g
- Bretton Woods p
- Free capital flows  floating XR regimes  high volatility
of XR, misalignments  risk of BOP crises  global
imbalances in current accounts
- CFL might make global financial systems more unstable
- Boom-bust-cycles
y
for emerging
g g economies
- Sudden reversals of capital flows (Calvo et al. 1996 and
many others)
- Focus of critique is more on net flows and financial crises
in emerging economies
- Also: critique of „hot money“ in- and outflows, e.g. in
China
Chi
- No robust evidence for economic benefits from free
capital mobility – but some evidence for negative effects
5 Old critics and new critics
New critics
- More attention for mushrooming gross flows
- Include advanced economies and financial hubs
- Big asset bubbles are made internationally
- Derivatives used for bubbles ((e.g.
g commodities)) and carryy trade
- „subprime crisis“ strongly fueled by gross inflows from Europe
- Euro-crisis: supported by asset price speculation of wealth
owners in
i surplus
l countries
ti
- Carry trade: emerging countries faced with strong in- and
outflows caused byy Q
QE is US etc.
- Key factors: too high leverage, false risk perception, too low
liquidity preference, no controls in source countries
- Contagion risks amplified unbridled capital flows
- No „circuit breakers“ to avert risks (e.g. China, India 1997-98)
- More stable global XR regimes needed – global forex markets
are biggest unregulated markets
5 Old critics and new critics
• Rey: evidence for global financial cycle with epicentre mainly in
prime reserve currency country
• Ebbs and floods in risk appetite and monetary policy of Fed –
„global factors are a major determinant of international capital
flows“,, most international capital flows correlated
flows
• VIX („Chicago Board Options Exchange Market Volatility
Index“) – proxy for risk aversion and uncertainty
• Global monetary policy made by Fed
• „impossible trinity“ is out, it‘s a dilemma: with free capital
fl
flows
independent
i d
d t monetary
t
policy
li impossible
i
ibl in
i non-reserve
countries
• „Independent
Independent monetary policies are possible if and only if the
capital account is managed.“ (Rey 2013 in Jackson Hole)
• Option „Capital mobility + sovereign monetary policy“ is
elusive
5 “Impossible Trinity” or dilemma
C
Independent
p
monetary policy
Exchange
rate stability
A
B
Free capital
fl
flows
D
• XR cannot be defended with monetary policy
• Monetary policy cannot ignore strong XR changes
• Hence,
Hence most non-reserve currency countries are pushed
away from options C, A or B towards D – losing both
independent monetary policy and stable XR
6 From CFL to universal „Capital Account
Management“: Beyond Mainstream II
• Little empirical
p
evidence for benefits from free capital
p
mobility
y
 full capital account mobility should be questioned as a goal in
itself
• Unilateral inflow controls in emerging economies may be too
weak
• How to include source countries?
• More comprehensive management necessary, incl. outflow
controls
• Bypassing inflow controls through loopholes need to be
prevented
• Controls should not be a measure of last resort
• Independent
I d
d monetary policy
li is
i not only
l at risk
i k in
i
inflow/outflow surges
g
needed,, targeting
g
g ggross inflows
• Selective inflow management
6 From CFL to universal „Capital Account
Management“: Beyond Mainstream II
Main goals of capital account management
Avoid
excessive XR
volatility
CAM
Avoid
current
account
imbalances
Avoid
speculative
inflows
Enable
independent
monetary policy
Avoid currency &
maturityy mismatch
Avoid contagion risks,
circuit breaker
6 From CFL to universal „Capital Account
M
Management“:
t“ B
Beyond
d Mainstream
M i t
II
Capital Account Management also needed for
advanced countries
p for “bad” ggross capital
p
flows amongg
• Manyy examples
developed countries
• Most arguments pro CAM apply also to advanced
countries
• Special emphasis on management of gross flows 
avoid bubble-seeking flows
• Avoid
A id regulatory
l t
arbitrage
bit
in
i face
f
off differential
diff
ti l
national regulations – absence of global regulation
• Mitigation of XR volatility, avoid misaligned XR
6 From CFL to universal „Capital Account
Management“: Beyond Mainstream II
CAM is direct or indirect control of capital account balance
and
d off specific
ifi inflows
i fl
or ouflows
fl
Policy options
- Foreign exchange interventions,
interventions managed floating
- Reserve accumulation
- Monetaryy policy:
y adjusting
j
g policyy rates
- Macroprudential regulation of banks/nonbanks: cyclically,
structurally (esp. control leverage of financial institutions)
- Market-based
Market based capital controls: tax on inin or outflows; special
required reserve on inflows, Tobin tax
- Administrative capital controls (long-standing or temporary):
prohibitions,
hibi i
permits,
i caps
- Internalization of negative external effects by reserve central
bbankss ((acting
c g ass gglobal
ob ce
central banks)
b s)  co
controls
o s in thee
epicentres
6 From CFL to universal „Capital Account
Management“: Beyond Mainstream II
Policy options for CAM
FX exchange
interventions managed
floating
Reserve
accumulation
Monetary
policy:
p
y
adjusting
policy rates
Microprudential
regulation
l ti off
banks/nonbanks
Market-based „capital
controls“: tax on in- or
outflows; special
required reserve on
inflows
Administrative capital
controls (long-standing
y) or temporary)
prohibitions, permits,
caps
Macroprudential
regulation of
banks/nonbanks
Internalization of
negative external
effects by reserve
central banks
(acting as global
central banks) ???
6 From CFL to universal „Capital Account Management“: Beyond
Mainstream II
• Macroprudential regulation (MPR) often considered
superior and THE alternative to capital controls
• But: Basle 3 cyclical capital buffers apply only to banks,
exclude nonbank financial institutions
• National
N ti
l MPR can h
hardly
dl preventt b
bubble-seeking
bbl
ki iinflows
fl
• MPR is still in a nascent stage, black box
• MPR & „capital
capital controls“
controls need to be combined to bite
• Combine policies & tools flexibly, experimentation needed
• National action needed in absence of g
global jjurisdiction
and different regulations across the globe
• International „coordination“ of regulatory framework
leaves many loopholes,
loopholes even in EMU
• Multilateral guidelines for CAM need to avoid abuses
• International institution for surveillance of capital flows
needed
7 Learning from Keynes 1944: from too little to too
much capital mobility
• 1944: few cross-border capital flows, Keynes‘s focus on
reuscitation
i i off trade;
d no international
i
i l banking
b ki yet
• 2014: no return to 1944, ever mushrooming international
capital
p
flows since 1980;; China and India ante portas
p
to join
j
global finance; forward to complete financial globalisation?
• Alternative:  Rule-based international coordination plus
national CAM,
CAM in emerging AND advanced countries
• Reign in excessive gross capital flows, not beneficial for
output/employment
• … but risky for financial stability
• Higher financial stability risks in wealthy economies with high
stock of financial assets/GDP
• National re-regulation of finance requires international
complement
Appendix
Three “Ages of Globalization” in comparison:
Post Bretton Woods is worst
Three “Ages of Globalization” in comparison:
Post Bretton Woods is worst
From: Bush/Farrant/Wright 2011 (Bank of England)