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31. China’s FDI in Europe and Europe’s Policy Response

Author:
Pyoung Seob Yang, Cheol-Won Lee, Suyeob Na, Taehyn Oh, Young Sun Kim, Hyung Jun Yoon, and Yoo-Duk Ga
Publication Date:
04-2021
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
China’s investment in the European Union (EU) increased significantly during the European financial crisis, but has been on the decline in recent years. The surge of Chinese investment has raised concerns and demands for analysis on the negative effects it could have on the EU companies and industries. In this context, the present study aims to analyze the main characteristics of Chinese investment and M&A in Europe, major policy issues between the two sides, the EU’s policy responses, and prospects of Chinese future investment in Eu-rope, going on to draw important lessons for Korea. To summarize the main characteristics of China's investment in Europe, the study found that the EU's share of China's overseas direct investment has continued to increase until recently. Second, investment in the Central and Eastern European Countries (CEECs) is gradually increasing, although it is still insignificant compared to the top five destinations in the EU: Netherlands, Sweden, Germany, Luxembourg and France. Third, China's investment in the EU is being made in pursuit of innovation in manufacturing and to acquire high-tech technologies. When it comes to China's M&A in Europe, the study found that the proportion of indirect China's M&As (via third countries (e.g. Hong Kong) or Chinese subsidiaries already established in Europe) was relatively higher than direct ones. Empirical factor analysis of investment also shows that China's investment in the EU is strongly motivated by the pursuit of strategic assets. Other factors such as institutional-level and regulatory variables are found to have no significant impact, or have an effect contrary to expectations. This suggests that China's investment in the EU is based on the Chinese government's growth strategy, and accompanies an element of national capitalism Today, It is highly expected that the COVID-19 pandemic will have a reorganizing effect on the global value chain (GVC) and Foreign investment regulation in the high-tech sector motivated by national security is emerging as a global issue as the US and the EU are tightening their control. As Korean companies are not free from the risk of falling under such regulations, a thorough and careful response is required. And for the Korean government, it is necessary to prepare legal and institutional measures regulating foreign investment in reference to the US and the EU.
Topic:
Foreign Direct Investment, Financial Crisis, European Union, Economy, Economic Growth, Global Value Chains, and COVID-19
Political Geography:
China, Europe, Asia, Korea, and United States of America

32. The Long Search for Stability: Financial Cooperation to Address Global Risks in the East Asian Region

Author:
C. P. Chandrasekhar
Publication Date:
03-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Forced by the 1997 Southeast Asian crisis to recognize the external vulnerabilities that openness to volatile capital flows result in and upset over the post-crisis policy responses imposed by the IMF, countries in the sub-region saw the need for a regional financial safety net that can pre-empt or mitigate future crises. At the outset, the aim of the initiative, then led by Japan, was to create a facility or design a mechanism that was independent of the United States and the IMF, since the former was less concerned with vulnerabilities in Asia than it was in Latin America and that the latter’s recommendations proved damaging for countries in the region. But US opposition and inherited geopolitical tensions in the region blocked Japan’s initial proposal to establish an Asian Monetary Fund, a kind of regional IMF. As an alternative, the ASEAN+3 grouping (ASEAN members plus China, Japan and South Korea) opted for more flexible arrangements, at the core of which was a network of multilateral and bilateral central bank swap agreements. While central bank swap agreements have played a role in crisis management, the effort to make them the central instruments of a cooperatively established regional safety net, the Chiang Mai Initiative, failed. During the crises of 2008 and 2020 countries covered by the Initiative chose not to rely on the facility, preferring to turn to multilateral institutions such as the ADB, World Bank and IMF or enter into bilateral agreements within and outside the region for assistance. The fundamental problem was that because of an effort to appease the US and the IMF and the use of the IMF as a foil against the dominance of a regional power like Japan, the regional arrangement was not a real alternative to traditional sources of balance of payments support. In particular, access to significant financial assistance under the arrangement required a country to be supported first by an IMF program and be subject to the IMF’s conditions and surveillance. The failure of the multilateral effort meant that a specifically Asian safety net independent of the US and the IMF had to be one constructed by a regional power involving support for a network of bilateral agreements. Japan was the first regional power to seek to build such a network through it post-1997 Miyazawa Initiative. But its own complex relationship with the US meant that its intervention could not be sustained, more so because of the crisis that engulfed Japan in 1990. But the prospect of regional independence in crisis resolution has revived with the rise of China as a regional and global power. This time both economics and China’s independence from the US seem to improve prospects of successful regional cooperation to address financial vulnerability. A history of tensions between China and its neighbours and the fear of Chinese dominance may yet lead to one more failure. But, as of now, the Belt and Road Initiative, China’s support for a large number of bilateral swap arrangements and its participation in the Regional Comprehensive Economic Partnership seem to suggest that Asian countries may finally come into their own.
Topic:
Regional Cooperation, Bilateral Relations, Financial Crisis, Central Bank, IMF, Liberalization, Financial Globalization, and Financial Integration
Political Geography:
China, Asia, and United States of America

33. Central Banks Caught Between Market Liquidity and Fiscal Disciplining: A Money View Perspective on Collateral Policy

Author:
Jakob Vestergaard and Daniela Gabor
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Despite much attention to unconventional monetary policies after the financial crisis, the collateral policies of central banks are rarely discussed. And when they are, the haircuts applied to assets pledged to access central bank liquidity tend not to be analyzed. An exception to these trends is the recent work by Nyborg (2017), who argues that the collateral policies adopted by the European Central Bank (ECB) aggravated the sovereign debt crisis and put the survival of the euro at risk. Taking our point of departure in the money view literature (Mehrling 2011), we argue however that Nyborg’s critique of the ECB’s crisis response is misguided and that his proposal to deepen and reinforce the ECBs role in the fiscal disciplining of member states would be procyclical and destabilizing. Through our analysis of Nyborg’s work and the ECBs crisis response, we identify core principles for countercyclical collateral policies suitable for market-based financial systems.
Topic:
Monetary Policy, Financial Crisis, Finance, and Banking
Political Geography:
Global Focus

34. Regional Financial Cooperation in East Asia from a New Perspective

Author:
Sungbae An and Subin Kim
Publication Date:
12-2021
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Following the Asian financial crisis of 1998, there was a need to improve regional financial cooperation, including liquidity support. The Chiang Mai Initiative Multilateralization (hereinafter, CMIM) and the Asian Bond Market Initiative (hereafter, ABMI) are two of the outcomes, but it is difficult to find countries that are actively using these mechanisms. Against this backdrop, we will first examine the limitations of existing systems and propose ways to overcome those limitations, as well as new ways to strengthen East Asian financial cooperation. We suggest three ways to strengthen financial coopera-tion in East Asia from a new perspective: 1) monetary cooperation through Central Bank Digital Currency (CBDC) 2) establishment of development financial institution in Northeast Asia 3) financial cooperation with Central Asia and Mongolia. Of course, more precise planning is required to implement these alternatives, and it is also recognized that the topics covered in this study represent only a subset of regional financial and monetary cooperation. However, by overcoming the limitations thus far, it is hoped that it can be a contribution that provides at least a glimmer of thought, which can hopefully become more concrete in future studies.
Topic:
Development, Regional Cooperation, Monetary Policy, Financial Crisis, and Finance
Political Geography:
Central Asia and East Asia

35. Low inflation bends the Phillips curve around the world: Extended results

Author:
Jami Forbes, Joseph E. Gagnon, and Christopher G. Collins
Publication Date:
09-2021
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
This paper revises and extends PIIE Working Paper 20-6. It continues to find strong support for a Phillips curve that becomes nonlinear when inflation is "low"—which our baseline model defines as less than 3 percent. The nonlinear curve is steep when output is above potential (slack is negative) but flat when output is below potential (slack is positive) so that further increases in economic slack have little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. When inflation is high, the Phillips curve is linear and relatively steep. These results are robust to placing the threshold between the high and low inflation regimes at 2, 3, or 4 percent inflation or for a threshold based on country-specific medians of inflation. In this nonlinear model, international factors play a large role in explaining headline inflation (albeit less so for core inflation), a role that has been increasing since the global financial crisis.
Topic:
Economics, Financial Crisis, Inflation, and Philips Curve
Political Geography:
Global Focus

36. Ups and Downs in Finance, Ups without Downs in Inequality

Author:
Olivier Godechot, Nils Neumann, Paula Apascaritei, István Boza, and Martin Hällsten
Publication Date:
11-2021
Content Type:
Working Paper
Institution:
Max Planck Sciences Po Center on Coping with Instability in Market Societies (MaxPo)
Abstract:
The upswing in finance over the past several decades has led to rising inequality, but do downswings in finance lead to a symmetric decline in inequality? In this paper, we analyze the asymmetry of the effect of ups and downs in financial markets, as well as the effect of increased capital requirements and the bonus cap on national earnings inequality. We use administrative employer–employee linked data on earnings from 1990 to 2017 for twelve countries. Additionally, we use data on earnings from bank reports, from 2009 to 2017 in thirteen European countries. We find a strong asymmetry in the effects of financial ups and downs on earnings inequality, a mitigating effect of rising capital requirements on the contribution of finance to inequality, and a restructuring effect of the bonus cap for the earnings of financiers, while neither policy affects absolute levels of earnings inequality.
Topic:
Financial Crisis, Regulation, Inequality, and Finance
Political Geography:
Europe

37. How Govenrment Outflow and Public Debt Affect Inflation: Evidence from See Countries

Author:
Ereza A. Arifi
Publication Date:
09-2021
Content Type:
Journal Article
Journal:
Journal of Liberty and International Affairs
Abstract:
The study aims to address public debt and government outflow affecting inflation in some of the countries of Southeast Europe, observing a combination of factors both theoretically and econometrically. The investigation included six (6) SEE countries, including the 2006-2020 timeframe, with 90 observations. The dynamic approach, the fixed effect, and the Arellano/Bond estimator were used to check the parameters considered in the study using panel data. Furthermore, the study also applied diagnostic tests such as the Sargan over-identifying restrictions and Pedroni test for cointegration. The results of the fixed effect and Arellano / Bond estimation demonstrate that public debt, current budget outflows, and capital budget outflows affect inflation, while overall budget outflows are insignificant. For further studies, it would be useful to apply other dynamic models by applying other specific factors, which will be considered as a useful contribution to the academic, research, and policy-making structures.
Topic:
Financial Crisis, Governance, Finance, Inflation, and Public Debt
Political Geography:
Global Focus

38. The Soft Touch of International Financial Regulation: Status, Flaws and Future

Author:
Niall O'Shaughnessy
Publication Date:
06-2021
Content Type:
Journal Article
Journal:
The Goettingen Journal of International Law
Institution:
The Goettingen Journal of International Law
Abstract:
The 2008 global financial crisis focused attention on the relationship between the behaviour of international financial institutions and the rules they follow. Many banks in the US and Europe failed, in part, due to their inability to absorb the fallout of the US mortgage market collapse. If international financial institutions could not protect themselves from the cycles of the market, how come regulators were unable to do so either? The most relevant instrument of international financial regulation for understanding the 2008 crisis is the Basel Accords, the rules that specify how much capital a bank should always hold in reserve. However, these rules are ‘soft law’ and so, non-binding. It is a myth of course that soft law is the only way to regulate international finance, as many scholars argue. Despite numerous rounds of reform, the Basel Accords have always been inadequate. The purpose of this paper is to account for the flaws of the Basel Accords and the role that soft law plays in creating those flaws. This paper also analyses the competing theories behind the rise of soft law within financial regulation and the ‘political economy’ explanation is endorsed. The final section of the paper discusses the future of financial regulation and soft law, as well as highlighting innovations from outside the hard/soft law dichotomy and outside the Global North. This paper concludes by stating that the theory behind soft law does not play out in practice within finance and that it remains in place because it suits the interests of large institutions and powerful states. At the same time, a return to Bretton Woods or a new World Financial Organization is problematic and, as such, we must look beyond the hard/soft law debate and embrace the work of the Global South and East.
Topic:
Markets, Financial Crisis, Regulation, Capital, and Banking
Political Geography:
Global Focus

39. Lebanon’s Pandemic in Context

Author:
Ziad Abu-Rish
Publication Date:
06-2021
Content Type:
Special Report
Institution:
Center for Contemporary Arab Studies (CCAS)
Abstract:
ADF Fellow Ziad Abu-Rish takes a deeper look at COVID-19’s spread in Lebanon and how it intersects with the country’s ongoing crises.
Topic:
Poverty, Financial Crisis, Crisis Management, Unemployment, Public Health, Pandemic, and COVID-19
Political Geography:
Middle East and Lebanon

40. Fiscal Policy as Credit Policy: Reassessing the Fiscal Spending vs. Private Debt Trade-Off

Author:
Etienne Lepers
Publication Date:
01-2021
Content Type:
Working Paper
Institution:
City Political Economy Research Centre (CITYPERC), University of London
Abstract:
This paper revisits the dominant narrative that explains the substantial household credit boom as a substitute to fiscal redistribution, i.e. the “substitution” hypothesis, according to which fiscally-constrained governments substituted public safety nets by private credit. I argue instead that the credit and welfare state constituencies may not necessarily be the same and that far from fiscally constrained, governments have been actively using “fiscal policy as credit policy”. I provide two sets of empirical evidence for such account: First, I find a positive within-country relationship between household debt and fiscal spending. Second, compiling a unique dataset of 550 fiscal subsidies adjustments in 50 countries since 1980, I show that fiscal and tax subsidies have been instrumental in driving household credit. These dynamics have distributional and financial stability implications as such tax subsidies typically favour higher income households and household debt booms have proven more dangerous than corporate ones.
Topic:
Debt, Financial Crisis, Welfare, Financialisation, Subsidies, Household, and Public Finance
Political Geography:
Global Focus