Search

Begin New Search Political Geography Global Focus

5941. Will Emerging Markets Escape the Next Big Systemic Financial Crisis?

Author:
Kenneth Rogoff
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
For the past four centuries, emerging market debt crises have broken out like clockwork. In the early period, it was the European countries—the emerging markets of that era—that did the defaulting, with France reneging on its external debt eight times and Spain, the all-time record holder, 13 times (see Reinhart, Rogoff, and Savastano 2003). Over the last two centuries, it is today’s emerging markets, with countries like Brazil and Mexico having defaulted eight times, and Turkey six times. Venezuela leads them all with nine defaults. Defaults were relatively unknown in Asia until the 1990s, though in large part because most of these countries had been too poor until recently to become major borrowers on the world scene. Another factor, of course, is that they have achieved independence only this century. Today, the world seems very different, with credit risk premia on emerging market debt near record lows, and most countries in a position to borrow liberally on international capital markets. Indeed, the idea that emerging market countries cannot borrow in their own currency, which Eichenbaum and Hausman (2002) term “original sin,” seems like a distant memory, with many governments having issued large pools of internal market-based debt, with foreigners freely entering these markets. Even countries like Brazil, which has experienced two hyperinflations in the past 20 years, have succeeded in issuing domestic currency bonds sold directly to international investors. Now some people are even asking if European countries like Italy may soon face higher spreads than today’s emerging markets. Has the world been turned upside down? In this article, I will consider some rather sharply opposing perspectives on the admittedly complex current situation.
Topic:
Debt, Emerging Markets, and Financial Crisis
Political Geography:
Global Focus

5942. The U.S. Dollar and Prosperity: Accidents Waiting to Happen

Author:
Reuver Brenner
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Development in the rest of the world depends on the United States because America continues to be the engine of the world economy and the U.S. dollar is the main reserve currency. In this article, I examine the prospects of America remaining an economic superpower and the dollar maintaining its status as a reserve currency. I also show that unless the United States succeeds financial markets and development around the world will suffer. During the last decade, the U.S. dollar has experienced wide fluctuations. The dollar’s real effective exchange rate relative to the seven major currencies varied from about 80 in 1995 to 120 in 2001, and back to 90 in 2005 (BIS 2005: 91). The dollar was up roughly 30 percent relative to commodity prices between 1997 and 2001. Then, between 2002 and the end of 2004, the dollar fell by about 30 percent relative to gold and commodities. During the first 10 months of 2005, all hard currencies (except the Canadian and Australian dollar) were down by another 15 percent relative to gold. Nevertheless, the bond market still expects a stable dollar over the long haul, as reflected in long-term interest rates. The relative stability of the long-term interest rates offers comfort because the world depends on a predictable value of the dollar. The havoc its demise as reserve currency would provoke is hardly imaginable. The significant upward movement in the U.S. dollar during the late 1990s brought financial, political, and social havoc in countries that either pegged their currencies to the dollar or had currency boards, Argentina’s case being the most prominent. Later, the decline in the dollar between 2002 and 2004 has brought about much antagonism in trade relations around the world and cries for protectionism. Even with the dollar’s volatility around a downward trend since 2002, the euro did not displace the U.S. dollar as the world’s main reserve currency—and will not do so unless drastic events happen, which I do not foresee.1 One such drastic event would be an utter mismanagement of the U.S. dollar. Another would be the European Central Bank (ECB) announcing that it was moving toward targeting the price of gold to manage the euro. The ECB would then become a supranational monetary institution independent of all political pressures. Anchoring the euro to the price of gold would reflect changes in global demands for euro liquidity, functioning as a reserve currency. The reason I do not expect the euro to replace the U.S. dollar as the main reserve currency, unless either of these two events happens, is that the euro is the very first paper currency not backed either by a strong government or by gold. It is a unique experiment. For the euro to become a reserve currency, the eurozone would have to run persistent trade deficits, allowing surplus countries to build up their euro reserves. To achieve that outcome, however, the eurozone countries would have to radically reform their fiscal and regulatory policies, to encourage far more domestic entrepreneurship and consumption than they presently do. This scenario does not seem to be in the cards. Indeed, as Europe’s population gets older, meaningful reform becomes less likely, and I do not see any chance for a strong European government to emerge and tackle the situation. Aging baby boomers, who dominate Europe’s voters, prefer the status quo. In sum, the chances of the euro becoming a serious alternative to the U.S. dollar as a reserve currency are slim, or nonexistent. The Federal Reserve would have to seriously mishandle monetary affairs for this to happen.
Topic:
Currency, Economic Development, and Dollar
Political Geography:
Global Focus and United States of America

5943. Sound Monetary Policy, Credibility, and Economic Performance

Author:
Mickey Levy
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
History is a constant reminder that sustainable healthy economic development requires sound and credible monetary policy. This is true of all nations, industrial and developing. Frequently, economic policy conferences focus on issues that elicit tirades about how everything is going wrong and radical reform is required. But recent trends in the conduct of global monetary policies have been highly favorable, helping to generate dramatic improvement in international inflation and economic performance. My focus in this article is on the key foundations for sound and credible monetary policy, the plusses and minuses of when simple principles are followed or violated, and suggestions for maintaining recent favorable trends. The bottom line is that well-understood principles—such as zero inflation and the importance of maintaining inflation-fighting credibility, transparency, central bank independence, reliance on market-based mechanisms to address undesired imbalances—apply to both developing and industrialized nations, and must be pursued independently of fiscal and regulatory policies. If such independence is impossible—primarily because of the lack of independence between the monetary authorities and the treasury—other institutional arrangements are required to ensure monetary soundness and credibility. A generation ago, around 1980, the circumstances and perceptions about central banks and monetary policy were far different than now. Inflation was very high and economic and financial market performance was poor in industrialized and developing nations alike. Central banks lacked credibility and inflationary expectations were high and volatile. Budget deficits were high and rising, and projections of soaring government debt-to-GDP ratios dominated the fiscal debate. The projected unsustainable rises in debt-to-GDP and the associated “unpleasant monetarist arithmetic” that pointed to eventual debt monetization suggested that monetary policy ultimately may be hostage to irresponsible fiscal policy. On top of the undesirable macroeconomic trends of the day, this perception undercut the implied independence and credibility of the monetary authorities. The potential for improvement seemed remote. Other aspects of monetary policy were also distinctly different, and weighed heavily on central bank credibility. Many monetary authorities— including the U.S. Federal Reserve—either did not have sound objectives that included zero inflation, did not articulate them effectively, or were not credible. Central bank opacity of policies and actions was the rule, as it long had been, with market participants and the public purposely left in the dark. Some misunderstood the rational expectations school to imply that policy surprises, theoretically necessary in order to affect real activity, were somehow desirable. In fact, the key implication, as Milton Friedman, Robert Lucas, and others were early to recognize, is that fine-tuning in order to achieve multiple objectives is ultimately counterproductive. It has not been a smooth ride by any means—there have been supply shocks, several “crises,” including financial upheavals in Mexico and other Latin American nations, the Russian default and Asian tumult of 1997, Long-Term Capital Management in 1998, and the stock market bubble of 1999–2000—but the conduct of monetary policy globally has been significantly transformed for the better, and macroeconomic performance has improved accordingly. By and large, most leading central banks now pursue low inflation objectives and have gained significant credibility. Importantly, most know that this hard-won credibility cannot be taken for granted and must be maintained through adherence to sound principles.
Topic:
Markets, Monetary Policy, Economic Policy, and Credibility
Political Geography:
Global Focus

5944. Monetary Credibility, Inflation, and Economic Growth

Author:
Roger W. Ferguson Jr.
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
By now it must be universally agreed that low and stable inflation is a primary and essential goal for monetary policy, in large part because we believe it brings stability to financial systems and fosters sustainable economic growth over the longer run. In pursuit of this goal, central banks can report some success. According to the 2005 World Economic Outlook from the International Monetary Fund (IMF 2005), consumer price inflation in the advanced economies over the decade beginning in 1997 looks set to come in at an average annual rate of less than 2 percent, down from 3.5 percent for the previous 10 years. The IMF figures for the United States show a smaller but still substantial decline in headline inflation, from about 3.75 percent to 2.5 percent. The drop in inflation for the nonindustrial economies has been more striking, with average inflation falling from double to single digits.1 As someone who started work as a monetary policymaker in 1997, I am happy to acknowledge the accomplishments of many policymakers at the Federal Reserve and in other central banks around the world. Thanks to their success in fighting inflation, the central banking profession enjoys a very high standing. And as a related matter, we might say that monetary credibility, which I would define as the perception in the private sector that central banks will do what it takes to keep inflation under control, is also quite high. This credibility is hard won, however, and can be easily lost. The Federal Open Market Committee (FOMC) at its November 1, 2005, meeting increased the federal funds rate 25 basis points, to 4 percent, and observed: The cumulative rise in energy and other costs has the potential to add to inflation pressures; however, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained. . . . With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability [FOMC 2005]. Unfortunately, however, the story over the past 20 years is not so uniformly positive for growth. Again according to IMF figures, growth among the nonindustrial economies appears to have increased to about 5.25 percent in the decade beginning in 1997, compared with growth of 3.75 percent in the previous 10 years. Growth in the United States has also moved slightly higher over the two periods, from 3 percent to 3.25 percent. However, growth in the other industrial economies has softened, to less than 2.5 percent in the recent decade from more than 3 percent in the previous one. This decline reflects slowing in some of the larger economies—Japan, Germany, Italy, and the Netherlands—as well as the effect of the Asian crisis in 1997 on newly industrialized Asian economies.2 To me, it is axiomatic that monetary credibility, by reducing the level and variability of inflation, lays the foundations for stronger and more sustained economic growth. In this article, I want to discuss anecdotal and academic evidence for the relationship between monetary policy credibility and economic growth and to do so in two segments: first, the link between monetary policy credibility and inflation performance and, second, the link
Topic:
Monetary Policy, Economic Growth, Inflation, IMF, and Credibility
Political Geography:
Global Focus

5945. Building Better Institutions

Author:
Rodrigo de Rato
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
It is a pleasure to be here today at the Cato Institute. I know that Cato believes in competition. Perhaps it is this spirit of competition that led you to schedule today’s conference to coincide with the International Monetary Fund’s research conference and steal the IMF’s managing director and its current and past directors of research as participants. But while you have missed out on our research conference you will not miss out on our research: my talk today is based to a large extent on the findings of our latest World Economic Outlook, which conveniently has the theme “Building Institutions” [IMF 2005a]. My remarks address three questions. First, what have we learned about the importance of institutions in promoting economic development? Second, how we can accelerate the transition to better institutions? And, third, what reforms of international organizations, the IMF in particular, are needed to help this transition?
Topic:
Economics, International Organization, Reform, Economic Development, and Financial Institutions
Political Geography:
Global Focus

5946. International Engagement in Failed States

Author:
Louise Riis Andersen
Publication Date:
10-2005
Content Type:
Working Paper
Institution:
Danish Institute for International Studies (DIIS)
Abstract:
Failed states have made it to the top of the international agenda following 11 September 2001. This paper gives an overview of the debate on 'what to do'. Firstly, it suggests an explanation of where these so-called failed states are coming from: Why do some states self-destruct? Secondly, four different approaches to failed states are presented and discussed - with special emphasis on the dilemmas and predicaments they each hold. The paper concludes that the question of what to do with failed states requires a political answer. Not a technical one.
Topic:
International Relations, Security, Government, and Terrorism
Political Geography:
Global Focus

5947. Restoring American Leadership

Publication Date:
04-2005
Content Type:
Special Report
Institution:
Open Society Foundations
Abstract:
Cosponsored by the Open Society Foundations and the Security and Peace Institute (a joint program of the Center for American Progress and The Century Foundation), Restoring American Leadership: 13 Cooperative Steps to Advance Social Progress offers a starting point for restoring America's international alliances. The papers in the report, written by experts in 13 fields, recommend how President George W. Bush can make progress in areas where his personal commitment to action is needed and where global alliances can help strengthen the national security goals of the United States. Restoring American Leadership covers a wide range of topics, from international cooperation in the war on terror, to curbing proliferation of nuclear weapons, to advancing the rights of women across the globe. Each paper offers a specific set of recommendations for executive action by the president consistent with his stated values, as well as a brief overview of the administration's position on the issue to date.
Topic:
Foreign Policy, Diplomacy, International Cooperation, Leadership, and War on Terror
Political Geography:
United States and Global Focus

5948. Recommendations for Improving the United Nations Counter-Terrorism Committee’s Assessment and Assistance Coordination Function

Author:
Alistair Millar, Jason Ipe, George A. Lopez, Tona Boyd, Linda Gerber, and David Cortright
Publication Date:
09-2005
Content Type:
Special Report
Institution:
Fourth Freedom Forum
Abstract:
The effectiveness of the UN Counter-Terrorism Committee (CTC) depends on its ability to keep pace with transformations in the global security environment. When the CTC was established in the wake of the September 2001 terrorist attacks, the primary target was understood to be Al Qaeda and its international network of related terrorist groups. In order to secure its central role and relevance among multilateral counter-terrorism efforts, the CTC must find more creative ways to collect, assess, and disseminate information about current counter-terrorism capacities and to facilitate the provision of needed technical assistance by potential donors in a timely and sustainable manner.
Topic:
Security, United Nations, and Counter-terrorism
Political Geography:
Global Focus

5949. Making Trade Work: Straight Talk on Jobs, Trade, and Adjustment

Author:
Research and Policy Committee of the Committee for Economic Development
Publication Date:
06-2005
Content Type:
Policy Brief
Institution:
The Conference Board
Abstract:
This report examines the benefits and challenges of developing an effective adjustment policy for workers who lose their jobs because of outsourcing or any other adverse effects of trade. The statement, approved by CED's Research and Policy Committee states, "The most important next step is to recognize that adjustment policy is vital to achieving free trade - which, in turn, is vital to the nation's economic future." The statement concludes that America needs to develop the national will to devise and fund an adjustment policy that will get to "yes" on trade.
Topic:
International Trade and Finance, Labor Issues, and Unemployment
Political Geography:
Global Focus

5950. Multilateralism, Sovereignty And Normative Change In World Politics

Author:
Amitav Acharya
Publication Date:
05-2005
Content Type:
Working Paper
Institution:
Centre for Non-Traditional Security Studies, S. Rajaratnam School of International Studies
Abstract:
This paper examines the role of multilateralism in fostering and managing normative change in world politics, with specific regard to the fundamental norms of state sovereignty. Post-war multilateralism helped to define, extent, embed and legitimize a set of sovereignty norms, including territorial integrity, equality of states and nonintervention. Today, multilateral institutions are under increasing pressure to move beyond some of the very same principles, especially nonintervention, as part of a transformative process in world politics. Without multilateralism, it is highly doubtful that the post-war international order would have been so tightly and universally built upon the norms of sovereignty. And without multilateralism, argues this paper, transition from this normative order now would be difficult and chaotic, as may be already happening as a result of the Bush administrations's challenge to the current multilateral system
Topic:
International Relations, Politics, Sovereignty, and Treaties and Agreements
Political Geography:
Global Focus