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111. Is “High Inflation” Always and Everywhere an Exchange Rate Phenomenon?

Author:
Tural Yusifzada, Hasan Cömert, and Kagan Parmaksiz
Publication Date:
10-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
After decades of stable and low levels of inflation throughout the world, the recent global upsurge in inflation has once again triggered extensive debate among economists about the underlying reasons for the rising trend in inflation. This study aims to contribute to this ongoing discussion by exploring a potential channel that could be fundamental to our understanding of the high inflation levels common across a large number of countries. Drawing upon a rich historical dataset spanning from 1961 to 2023 and employing a random effects panel probit model, our research reveals that the nominal exchange rate depreciation emerges as a strong predictor of “high inflation” episodes across different economies and time periods. Notably, this predictive capability extends to countries with varying income levels, with high-income, upper-middle-income, and lower-middle-income nations exhibiting success rates of 70%, 77%, and 63%, respectively, in forecasting “high inflation” based solely on exchange rate depreciation. Furthermore, food and energy prices also emerge as other important contributors to inflation. These findings have important implications for recognizing exchange rate depreciation as a vital early warning signal for high inflation not only facilitates more timely and effective policy interventions but also emphasizes the critical role of historical exchange rate dynamics and supplyside factors in comprehending the complexities of “high inflation.”
Topic:
Economy, Inflation, Exchange Rates, Early Warning, and Panel Probit Model
Political Geography:
Global Focus

112. The Profitability of Bank Capital and Household Debt

Author:
Hyun Woong Park
Publication Date:
08-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
When does the banking sector profitability exceed the industrial sector profitability? In a benchmark, counterfactual scenario where banks lend to industrial firms only, the industrial profitability exceeds the bank profitability unless the banks’ financial intermediation technology is sufficiently advanced and the industrial sector’s leverage ratio is sufficiently high. In a more realistic scenario where the banks lend not only to the industrial firms and but also to households, which rely on bank loans for housing, vehicle, education, etc., the bank profitability exceeds the industrial profitability when the household sector’s total debt services are sufficiently large, regardless of the levels of the banks’ financial technology and the industrial sector’s leverage ratio. It suggests that the households’ debt and interest payments are potentially a important source of the bank profitability exceeding the industrial profitability. That is, the bank capital beat the industrial capital in terms of profitability by exploiting the households’ financial conditions that force them to rely on debt for their full reproduction. Lastly, this result is empirically confirmed through the ARDL cointegration analysis with the U.S. quarterly data for 1984–2020.
Topic:
Debt, Economy, Capital, and Banking
Political Geography:
Global Focus

113. Crafting a Robust U.S. Carbon Border Adjustment Mechanism

Author:
Sanam Rasool, William Alan Reinsch, and Thibault Denamiel
Publication Date:
08-2024
Content Type:
Policy Brief
Institution:
Center for Strategic and International Studies (CSIS)
Abstract:
The introduction of a carbon border adjustment mechanism (CBAM) in the United States presents an intricate policy challenge at the intersection of climate action and international trade. With countries around the world integrating climate considerations into their trade policies, the United States is under growing pressure to develop and implement its own CBAM. This policy tool, already adopted by the European Union, is geared toward leveling the playing field for domestic industries while promoting global climate action and accountability. A future U.S. CBAM could serve as a vital instrument in the nation’s transition toward a net-zero economy, encouraging domestic carbon footprint reduction and driving trading partners to adopt cleaner practices. However, crafting and rolling out such a mechanism comes with knotty challenges, ranging from choosing optimal carbon accounting methods and pricing to warding off potential trade disputes and garnering global collaboration. As the United States charts its course through this complex policy landscape, it has the opportunity to shape global climate action while safeguarding its economic interests.
Topic:
Climate Change, International Trade and Finance, Economy, and Carbon Border Adjustment Mechanism (CBAM)
Political Geography:
North America, Global Focus, and United States of America

114. Driving Change: How EVs Are Reshaping China’s Economic Relationship with Latin America

Author:
Ilaria Mazzocco, Ryan C. Berg, and Rubi Bledsoe
Publication Date:
09-2024
Content Type:
Policy Brief
Institution:
Center for Strategic and International Studies (CSIS)
Abstract:
Countries in Latin America and the Caribbean (LAC) are navigating a new geopolitical moment. Some LAC countries are benefitting from increased access to low-cost, high-quality electric vehicles (EVs) and new investment throughout the value chain from China that can help meet governments’ climate and economic objectives. However, this comes with risks, as dependencies on Beijing may be exacerbated at a time when China’s economy is underperforming and geopolitical competition with the United States is on the rise. Washington should find new ways to engage with the region to find solutions that address local demands and simultaneously mitigate U.S. geopolitical risk.
Topic:
Global Markets, Economy, Innovation, and Electric Vehicles
Political Geography:
China, Asia, and Latin America

115. Economic prosperity and public backing for transparent and accountable governance in Africa

Author:
Nnaemeka Ohamadike and Emmanuel Chukwuebuka Orakwe
Publication Date:
04-2024
Content Type:
Working Paper
Institution:
Afrobarometer
Abstract:
Popular demands for social justice in Africa, as in the rest of the world, are often embedded in calls for better governance (Gray & Khan, 2010), which often include transparency and accountability. Przeworski, Stokes, and Manin (1999) define political accountability as the capacity of citizens to exert control over their leaders through institutional sanctions, especially through elections. Lindberg’s (2009) attempt to simplify the concept of political accountability resonates with Ohamadike (2022), who defines political accountability as the link between citizens (the principal) and government or public officials (the agents) tasked with safeguarding the rights and aspirations of the populace. This link forms a social contract upon which the agents (government or public officials) can be held accountable for their actions, with the principal having the privilege to impose sanctions on the agents, which can include removing them from their positions of power. Political transparency and accountability complement one another, but popular support for these ideals varies widely at the country level in Africa. Both ideals can be considered “matching parts” in governance (Hood, 2010). Transparency entails making government information accessible to the public, which gives citizens the knowledge needed to hold officials accountable. Accountability, on the other hand, requires that public officials justify their actions and decisions, which can be done by adhering to the citizens’ demands (Armah-Attoh, Ampratwum, & Paller, 2014). Addressing citizens’ demands is important for government to remain popular and relevant to the people. Although experts have long connected transparency and accountability with strong government performance, citizens vary in how much they prioritise or even support these concepts. One factor that might impact how citizens form these attitudes is economic well being. This question – the impact of economic performance on attitudes about accountability and transparency – is underexplored. We argue that lower levels of economic development are associated with higher citizen support for accountability and transparency. Due to the pervasive poor economic outlook in most African societies, much of the citizenry is gruelingly aware of deep-seated government corruption and poor government responsiveness to citizen needs, which they often feel powerless to tackle (Franz, 2012). Citizens of less-prosperous economies might perceive transparent and accountable governance as a means to address urgent economic issues, allowing them to get more from their government. Conversely, economic prosperity can incentivise individuals to back a government that seems to be achieving results independently, diminishing citizens’ insistence on changes, such as government transparency and accountability. This perspective emerges from trust in the government’s competence, which could cultivate complacency regarding the necessity of transparency and accountability. To test this hypothesis, we conduct a multilevel logistic regression analysis using data from the Afrobarometer Round 8 survey. We find that economic factors significantly influence attitudes. Citizenship in a prosperous African country is associated with lower support for transparent and accountable governance, whereas living in a less affluent country is associated with heightened prioritisation. This paper is structured as follows: Part 2 discusses the research methodology, covering the data, data sources, and analytical techniques. In the results section, findings from a sample of 48,084 Africans are presented. Concluding discussions follow in Part 4.
Topic:
Governance, Economy, Accountability, Transparency, and Public Banking
Political Geography:
Africa

116. Argentina's President Milei Aims for Economy "Shock Therapy"

Author:
Bartłomiej Znojek
Publication Date:
01-2024
Content Type:
Working Paper
Institution:
The Polish Institute of International Affairs
Abstract:
Dealing with the deepening economic crisis is the top priority for the government of ultraliberal President Javier Milei, who took over in Argentina on 10 December 2023. The scale of the challenge and the lack of a parliamentary majority will complicate the implementation of his plans, which include the dollarisation of the economy and the elimination of the central bank. In foreign policy, Milei promises to prioritise relations with the U.S. and Israel, among other goals. Although he cancelled the previous government’s decision to join BRICS, it is doubtful whether he will limit relations with key partners such as China.
Topic:
Foreign Policy, Economy, BRICS, Economic Crisis, and Javier Milei
Political Geography:
Argentina

117. Alternatives to the U.S. Dollar as a Global Currency Face Brick Walls

Author:
Piotr Dzierżanowski
Publication Date:
04-2024
Content Type:
Working Paper
Institution:
The Polish Institute of International Affairs
Abstract:
In the wake of a series of economic and political crises, including developing countries’ external debt crisis and Russian aggression against Ukraine and related sanctions, there has been speculation about the possible replacement of the U.S. dollar (USD) in the global economy. This could take place through the emergence of a new global currency or a shift to settlements in the currencies of the transacting parties. Either of these solutions involves political and economic difficulties and is not currently realistic. It is advisable that Poland, in its foreign policy, assumes the continuation of the dominance of USD in the global economy.
Topic:
Debt, Economy, Currency, and Dollar
Political Geography:
Poland and Global Focus

118. Growth, Decarbonisation, Security: a Recipe for Strengthening the EU's Economic Condition

Author:
Melchior Szczepanik and Jolanta Szymańska
Publication Date:
10-2024
Content Type:
Working Paper
Institution:
The Polish Institute of International Affairs
Abstract:
Mario Draghi and Enrico Letta, in their reports on the economic condition of the EU, urge the organisation to double down on its objectives formulated in recent years: stimulating growth in a manner consistent with climate policy and reducing dangerous economic dependencies. The most controversial issue is how the recommended measures will be financed. Their implementation also will require striking a balance between several priorities—not entirely compatible—both within EU economic policy and in relations with main economic partners.
Topic:
Security, Climate Change, European Union, Economy, Economic Growth, and Decarbonization
Political Geography:
Europe

119. Hidden Champions of the Chinese Economy: Implications for Korea

Author:
Seungshin Lee
Publication Date:
08-2024
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
This paper reviews China's policy of nurturing small and medium sized enterprises. The Chinese government is expanding its establishment of national manufacturing innovation centers necessary to promote national strategies. It plays a very important role in the financial support process for these hidden champions. This is because the government certification process to identify hidden champions is linked to direct and indirect financial support using government and private capital. This paper attempted to analyze the management situation and export competitiveness of listed hidden champions. As a result of analyzing the trade statistics of materials, parts, and equipment from 2012 to 2022, when China's policy of cultivating foster hidden champions was fully implemented, the global trade balance of the China's materials, parts, and equipment industry increased significantly from a deficit of $55.6 billion in 2012 to a surplus of $264.1 billion in 2022. The improvement of China's competitiveness in the fields of materials, parts, and equipment can also be seen as a change in the trade specialization index (TSI) of these industries. Looking at China's global trade specialization index for materials, parts, and equipment, it was import-specialized at -0.033 in 2012, but rose to 0.100 in 2022, improving export competitiveness. Korea should recognize the changes in the trade and industrial structure between Korea and China and form a new paradigm of economic cooperation to overcome the limitations of economic exchanges between the two countries. China, which used to be seen as a manufacturing base for other countries, must now be seen as an advanced country in new industries with which the current structure of economic cooperation structure must be modified accordingly.
Topic:
Economy, Business, Innovation, Trade, and Capital
Political Geography:
China, Asia, and South Korea

120. Economic Impacts of the Sanctions on the Russian Economy and Stabilization Measures for Economic Cooperation between Korea and Russia

Author:
Minhyeon Jeong
Publication Date:
06-2024
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
There are concerns that the economic sanctions imposed by the West on Russia will continue even after the end of the Russia-Ukraine war, which began in 2022 and has since prolonged. This is because the nature of the war encompasses a multifaceted structure that cannot be easily explained by the mere clash of interests between Russia and Ukraine, the primary parties involved. Therefore, it may be overly optimistic to expect that the Western sanctions against Russia will be fully lifted following the conclusion of the war. If there is a high likelihood that the Western economic sanctions against Russia will be prolonged, it is necessary to systematically analyze the long-term impact of these sanctions on the Russian economy. Even though Russia's economic growth rates in 2022 and 2023 were more favorable than anticipated by the West, it cannot be definitively stated that the long-term effects of the sanctions will be negligible. This is because the intrinsic nature of the sanctions against Russia is to "impose economic isolation," suggesting that the prolonged duration of these sanctions is likely to have structurally adverse long-term effects on the Russian economy. Meanwhile, the Government of the Russian Federation is devising and establishing various domestic and international strategies in order to minimize the structural adverse impacts on the economy. By thoroughly re-viewing these domestic and international strategies, it is essential to systematically understand the direction of development within the Russian economy and the demand for international economic cooperation. This understanding will allow for the rapid restoration of economic cooperation between Korea and Russia, and the enhancement of cooperative synergy amid prolonged sanctions. Given this backdrop, this manuscript aims to summarize three key conclusions from the work of Jeong et al. (2023). First, we provide a theoretical and empirical analysis of the long-term impact of Western sanctions on the Russian economy. Second, we review the foreign and domestic policies of the Russian Federation in response to the prolonged sanctions following the war. Third, based on the findings of the first and second analyses, we explore measures to stabilize economic cooperation between Korea and Russia under the anticipated prolonged sanctions.
Topic:
Sanctions, Economy, Economic Cooperation, and Stabilization
Political Geography:
Russia, Asia, and South Korea