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Rise of non-tariff protectionism amid global uncertainty

Submitted by Julia Oliver, co-authors: Mariem Malouche on Tue, 01/31/2012 - 01:00

A troubling phenomenon is occurring in large, emerging economies: the gates are closing. Governments, skittish about global economic trends, are introducing new policies to limit imports and exports. The aim is to protect domestic industry in tough times, but the tools governments are using threaten to make their economic problems worse.

A December World Bank analysis documents a trend of creeping protectionism in countries such as Argentina, Brazil and Indonesia – all countries with burgeoning industry. Instead of tariffs, other more indirect policies are being used to hinder free commerce between countries. The Bank analysis, based on World Trade Organization (WTO) monitoring reports and data from the Global Trade Alert, a network of think tanks around the globe, found that the number of non-tariff measures (NTMs) –including quotas, import licensing requirements and discriminatory government procurement rules –showed an increasing trend in the first two years post-2008, and rose sharply in 2011. India, China, Indonesia, Argentina, Russia, and Brazil together accounted for almost half of all the new NTMs imposed by countries world-wide.

The measures take various forms. In December, amid a political shake-up, Indonesia announced its intention to

The Day After Tomorrow: Fiscal Quality

Submitted by Otaviano Canuto, co-authors: Marcelo Giugale on Thu, 10/14/2010 - 12:41

This is the second in a series of blogs where we take a look at the issues and the countries that will be at the forefront of the development agenda, not now, not next year, but over the next 2 to 5 years—as we discuss it in more detail in the recently released book The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World.

Most advanced countries face a post-crisis period in which fiscal adjustment will be the norm. They need more revenues and less expenditure. Their priority is quantity. In contrast, developing countries came in and out of the crisis with relatively strong fiscal positions, and see a horizon of solvency, especially those that export commodities. This gives them an opportunity to improve the functioning of fiscal policy—their priority is quality. There are several reasons to believe that many of them will seize the opportunity.

First, fiscal policy may start leaning more “against the wind,” that is, may become more countercyclical. This is not just because of the proliferation of “medium-term budget frameworks,” “fiscal rules,” and “fiscal responsibility laws,” many of which were in place before the crisis. There are also the political rewards that accrued to leaders that had previously accumulated funds and could spend them at the outset of the global recession. Think Chile’s former President Bachelet. Imitation is likely.

From Bubble to Bubble: Government Policy Blunders

Submitted by Raj Nallari on Mon, 08/30/2010 - 12:58

Greedy speculators in housing and private bankers, financial innovation and failure of risk models, regulators and credit rating agencies were all deservedly blamed for the recent financial crisis. Behind this all is public policy that worsened the problems.

Long before the greed of speculators and bankers went wild and long before there were sub-prime housing loans, there was the US Government involvement in the form government subsidies as reflected in (i) the existing tax-deductibility of home-mortgage interest payments; (ii) Federal Housing Administration programs which provide credit to first-time home buyers and permit up to 97 percent leverage at origination and also permit cash-out refinancing that resulted in 95percent leveraging (take-out of $520 billion each year by households through re-financing); and (iii) government financial subsidies through federal home loan bank lending for owning ‘an American dream’ and directing credit to low-income communities in line with the spirit of Community Reinvestment Act of 1977 and establishment of quasi-government agencies such as Frannie Mae and Freddie Mac. In addition, there is ever increasing moral hazard in the financial sector over the past century in the form of deposit insurance, reduction in capital adequacy ratios, implicit and explicit guarantees for bank bailouts to all types of financial institutions, including the too big to fail institutions. These policies combined with Fed policy of cheap money by keeping interest rates low to help economic recovery from the dot-com bubble burst of early 2000s only fueled credit growth and exacerbated the speculative bubble in housing market. From Iceland to Ireland to other European countries and USA housing bubbles were spawned in this fashion.

Policies for Growth E-learning Course - Apply by September 17, 2010

Submitted by Ihssane Loudiyi on Fri, 07/16/2010 - 12:00

What? E-learning course on
“Policies for Growth”
When? October 1-31, 2010
How to Apply? Please follow this link
 

Tentative Agenda
 

The story of growth and poverty reduction is much debated in an ever-changing world. The challenge in the 1960s was how to lift low-income countries from a low-growth trap to a reasonably high-growth path. Fifty years later we have many fast-growing emerging economies but also over a hundred countries unable to move away from low-growth and high-poverty traps.

Between 1960 and 2010, 3 major shifts impacted how we think about growth and poverty. These big shifts were from state-directed ‘commanding heights’ to market-driven approach, from structural issues of deregulation, liberalization and privatization to sectoral sources of growth, particularly agriculture and financial services, and from macroeconomic to microeconomic (and now macro-micro) approaches to growth. Somewhere along these shifts, there was a recognition that poverty reduction is a goal in itself and does not have to depend on how fast or slow a country is growing. The new wave of globalization that has swept the world during the past two decades has aided growth and poverty reduction in the developing world but the ongoing global economic crisis threatens to undo all those gains and much more.

For policy makers, practitioners and students who want to learn more about growth and poverty reduction in development economics today, the World Bank Institute is offering an e-learning course on Policies for Growth. 

The application deadline is September 17, 2010. Please note that a nominal fee of $250 will be assessed for accepted participants.

Fiscal Stimulus: Too Little or Ineffective? What Next?

Submitted by Raj Nallari on Tue, 07/06/2010 - 08:00

All over the world, countries have put in place fiscal stimulus packages as a response to the global crisis. In the US and UK, despite the large fiscal stimuli, the economies are stalling and unemployment rates are still high. Now, Paul Krugman is advocating a second $800+ billion stimulus as he is worried of a Third Depression (i.e. 1873-4, 1929-30 and now) or at best a low job creation and low GDP growth for the short to medium term. According to Krugman, low growth and high unemployment are shorter term problems that have to be resolved before fiscal austerity and debt reduction (which are longer term issues as bond financiers are still buying US securities). Others of conservative leanings, such as John Taylor and Gary Becker, are of the opinion that the Bush tax relief of 2008 did not work and that the Obama stimulus may not work because of small “fiscal spending multiplier”, and as the package is badly designed.

Carmen Reinhart and Rogoff document eight centuries of financial crisis and come to the conclusion that almost all the time it ends in tears with “deficits, debts and defaults.” Reflecting this view, leaders at the recent G-20 meetings pledged for fiscal austerity as the fiscal stimulus packages are quite unpopular in the western world.

The Next Wave of This Crisis

Submitted by Raj Nallari on Wed, 06/30/2010 - 16:52

After all is said and done, this crisis had its genesis in US and European countries living beyond their means. This was reflected in large current account deficit which was financed by emerging economies of China, Russia, Brazil, Korea and others. This was in contrast to economic theory which tells us that advanced economies are supposed to generate savings and hence have current account surpluses while developing countries should be borrowing to finance their deficits (as they need foreign capital to finance their infrastructure and other needs).

The world is in the midst of extreme political risk – defined as not only wars and coups but governments rushing in with quantitative easing, banking bailouts, and large fiscal stimulus packages, embarking on industrial policies, and trying to re-regulate without fully understanding the unintended consequences of their actions. These expansive domestic policies have increased sovereign debt risk and raised stock prices in a large number of countries. Governments are trying to find domestic solutions to global problems of market volatility – volatility as reflected in descent of euro vis-à-vis the dollar, large movements in stock market indices, and swings in commodity prices. Markets in turn are looking at how governments are coping with big problems, such as the sovereign debt problems in Greece, Spain and other European countries. California could default on its debt obligations – what then for the global economy?

Recoupling or Switchover

Submitted by Otaviano Canuto on Tue, 06/01/2010 - 17:30

The current recovery in advanced economies is now exhibiting several signs of fragility. Their medium term growth prospects also look difficult. In this environment two questions arise: Will developing economies experience a renewed downward “recoupling” as a result of a low-growth scenario in advanced economies? Or, on the contrary, could developing countries “switchover” to become locomotives in the global economy, providing a countervailing force against an otherwise slowing-down train? As discussed in my new paper, here are some of the factors pushing in these two opposite directions.

Several factors point to a medium-term reduction of both actual and potential growth in most advanced economies. First, sooner or later fiscal consolidation will become a major issue among advanced economies once—or even before—recovery is fully established. Future fiscal contraction negatively affecting the private sector will be the price paid for the role of fiscal stimulus in helping rescue advanced economies from the brink of the abyss during the crisis.

Secondly, the process of US households’ balance-sheet deleveraging and adjustment is far from complete. Consumption spending growth is likely to remain weak and/or wobbly in the absence of large renewed hikes in asset prices.

A third aspect to weigh against a return to a high-growth path is the likely jobless nature of the current recovery in many high-income countries. Slow-to-reverse shocks—a financial crisis combined with a house price bust, cross-sector differentiated job creation/destruction—have been in play and continued macroeconomic uncertainty is also countering employment growth.

The Perennial Crisis in Governance

Submitted by Raj Nallari on Tue, 05/18/2010 - 17:11

What do we learn from the troubles of Goldman Sachs, British Petroleum, Enron, Satyam, and other modern day corporations? These are the most sophisticated corporations ever formed yet victims of their own governance failures.

Public sector governance problems are known from time immemorial. The first description of governance problems of the state in the form of bribery, corruption, and other mis-governance is attributed to Patanjali who lived in India around 53 A.D. Corporate governance problems are relatively recent. With the industrial revolution came the need for a corporation to organize and manage capital and labor. The Board of Directors by law is given the full authority in a corporation. In the initial days of industrialization, the family-owned corporations had family members on its Board. However, over time as the corporations became more complex, the management team of chief executive officers and financial officers have managed to gradually erode the power of the Board and made the Board an ‘overseer.’ This is the problem of principal-agent, where the agent (management team) usurps power from the principal (Board of directors and share holders). Even this function of overseeing has been diluted because of complexity of business transactions and provision of inadequate and often ‘obfuscating’ information by the managers. In addition, more and more Boards are stacked with ‘insiders and friends.’ As a result, we have reached a stage in several ‘big and small’ corporations where there is a crisis in corporate governance. The recent financial crisis is but one manifestation of this corporate crisis, where complexity is deliberately created under the name of financial innovation, just to deliberately obfuscate information to Board of directors, stakeholders and public at large.

Managing Bubbles

Submitted by Raj Nallari on Tue, 05/11/2010 - 18:39

In 21 industrial economies during 1970-2008, there have been about 47 housing price busts and about 90 stock price collapses. Sometimes they both overlapped, other times not. There is now concern that stock markets in Emerging Markets have expanded rather rapidly since their lows at end-2008. There are worries that the fiscal stimulus packages and monetary easing policies that we put in during the crisis months of October 2008 to June 2009 may have sowed the seeds of the next bubble as private sector credit has increased sharply in several emerging economies.

In several of these episodes of busts, in the run up to the asset price bubbles, there has been a rapid growth in the credit. In the recent crisis, not only in the industrial economies but also in the emerging economies, particularly Emerging Europe, housing prices rose sharply in the run up to the crisis and were often associated with a rapid credit growth resulting in an escalation of household leverage and debt. So asset price rises were accommodated by credit booms. In turn, the credit booms were associated by an increase in capital inflows. Credit booms, in turn, drive increases in housing prices and/or stock prices, and/or exchange rates. There is therefore a feedback loop, that fuels increased household and financial firms’ leverage, and lowering of lending standards (as reflected in the sub-prime loans in the United States). The longer the credit boom goes on the higher the probability that it will end up in a financial crisis.

Re-thinking Fiscal Multipliers

Submitted by Raj Nallari on Tue, 04/20/2010 - 13:33

Keynes is best known for suggesting fiscal stimulus policies and programs to increase aggregate demand to get out of a deep recession. Since the marginal propensity to consume is positive and less than one; the bigger it is, the larger the fiscal multipliers will be and the faster we will get out of a recession. Conventional Keynesian multipliers are meant for closed economies (no leakages from demand through imports and the effect of the fiscal expansion on the exchange rate further reduced multiplier) and do not consider the total debt position of the country. More generally, the fiscal multipliers of an expansionary fiscal policy will be bigger if the leakages are minimized, an accommodative monetary policy is implemented, and the fiscal position of the country is sustainable after the initial change in fiscal policy. Historically, multipliers on government spending are estimated to be in the range of 1.5 to 2, while tax-cut multipliers can be much smaller, say 0.5 to 1.

But the world is a drastically changed place, particularly during this global crisis, ant the various multipliers are likely to be much smaller because of leakages in a globalized world in the form of higher imports from rest of the world. Also, the various multipliers may work at cross purposes and the cumulative effect may be much smaller as shown in Vegh et al. (2009). The full effect of fiscal policy multipliers in the first round is smaller in models that incorporate a sensitivity of the private investment to the interest rate. Public investment might crowd-out private investment in implementation of fiscal stimulus packages. The crowding-out is the result of an expansionary fiscal policy causing the interest rates to increase and thereby reducing the private investment as financing becomes expensive.