Economics

Emerging Markets

  • Emerging Markets
    The Outsized Impact of the Fall in Commodity Prices on Global Trade
    Global trade has not grown since the start of 2015. Emerging market imports appear to be running somewhat below their 2014 levels. Creeping protectionism? Perhaps. But for now the underlying national data points to much more prosaic explanation. The "turning" point in trade came just after oil prices fell. And sharp falls in commodity prices in turn radically reduced the export revenues of many commodity-exporting emerging economies. For many, a fall in export revenue meant a fall in their ability to pay for imports (and fairly significant recessions). For the oil exporters obviously, but also for iron exporters like Brazil. Consider a plot of real imports of six major world economies: Brazil, China, India, Russia, the eurozone and the United States, indexed to 2012. The underlying data isn’t totally comparable. I used seasonally adjusted real goods and services imports from the National Income and Product Accounts (NIPA) data for Brazil, India, Russia and the eurozone. For China I used an index of import volumes, and smoothed it by taking a four quarter average (necessary, alas as the seasonality overwhelms the trend, even though it doesn’t make the data for China fully comparable with the data for the others countries). And for the United States I wanted to take out oil imports, and the easiest way to do that is to look at real non-petrol goods imports. I see five things in this data: (1) The 20-30 percent fall in Brazilian and Russian imports from their 2012 levels, which rather obviously is mostly tied to changes in their terms of trade. Brazil and Russia are fairly large economies, and these are giant falls. (2) An adjustment in India that followed the now almost forgotten taper tantrum (I didn’t adjust for gold imports). (3) A slowdown in import growth in China that started in 2014 and was quite pronounced in 2015. And more generally, relatively slow growth in import volumes relative to China’s reported GDP growth. Pick your favorite explanation. The most obvious is that the most import-intensive parts of the Chinese economy have slowed the most. The imported content of domestic consumption is low. And China is producing more and more electronic components. Manufactured imports have been trending down relative to China’s GDP for some time. (4) Decent import volume growth, rather surprisingly, from the eurozone. Admittedly, this is a recovery from a really low base. But the slow recovery in the eurozone that took hold a few years ago has flowed through to demand for the goods of the rest of the world. (5) Decent import growth in the United States until 2015 if you remove the impact of the tight oil revolution. Rising U.S. oil production from 2012 to 2015 obviously led to a reduction in oil import volumes, which is natural if there a big increase in supply in one of the world’s largest importers. And over the last several quarters, U.S. import growth, rather mysteriously, has slowed. The best explanation I think is that weakness in investment feeds through more strongly into imports than ongoing growth in domestic consumption, but I concede the weakness in imports in the face of dollar strength is a bit of a mystery.
    Blog Post by Brad W. Setser July 15, 2016 Follow the Money
  • Technology and Innovation
    Women in Tech as a Driver for Growth in Emerging Economies
    Overview As the world transitions to an increasingly digital economy, many low- and middle-income countries face an obstacle: most emerging economies lack qualified people to fill critical information and communication technology (ICT) jobs, a shortage that is exacerbated by the low representation of women in these industries. The gap between the demand for ICT workers and the supply of job seekers with the necessary technical skills threatens the ability of those countries to participate in a powerful driver of growth in the twenty-first century—the digital economy. As the CFR Discussion Paper "Women in Tech as a Driver for Growth in Emerging Economies" argues, increasing the participation of women in the ICT labor force would help bridge this gap, but women are not yet able to take full advantage of this growing sector. While a degree in computer science or engineering is necessary for most professional-level careers in ICT, the share of women graduates in these fields is slipping in many parts of the world. Although researchers and policymakers have focused on closing the gender divide in ICT jobs in the United States and Europe, far less attention has been focused on emerging economies, which increasingly rely on local labor forces to drive growth. Globally, ICT sector jobs are transitioning from Organization for Economic Cooperation and Development (OECD) countries to non-OECD countries because of the rapid growth of ICT markets in emerging economies. According to a 2012 report by the International Telecommunications Union (ITU), "China is by far the largest producer and exporter of ICT goods today, while India is the largest exporter of computer and information services." The demand for ICT skills has also grown outside of the ICT sector, as digital technologies are applied across other sectors to improve productivity. Additionally, development policy faces an existential crisis. Dramatic advances in automation and artificial intelligence are rapidly replacing low-skilled and routine jobs and closing the traditional path of development through industrialization. Factories, agriculture, and call centers—traditional stepping stones to the middle class for low-wage workers—increasingly require fewer human hands. The global trend toward offshoring is even showing early signs of reversal because increased automation has made the cost of labor less significant. In this upheaval, the ITU notes, "more women than men have been displaced due to increased automation and computerization of workplaces." Expanding women's access to ICT jobs would not only advance economic opportunities for women, their families, and their communities, but it would also help address the shortage of skilled workers for these jobs and grow the digital economy. As women become increasingly active users of technology, their participation in designing and developing tech products and services will help to enhance technology's relevance for women as consumers, further boosting innovation and economic growth. Working together, the public and private sector should address the multiple barriers women and girls face, particularly in low- and middle-income countries whose economies stand to gain the most from greater participation of women in vital ICT jobs.
    Report by Ann Mei Chang and Catherine Powell July 5, 2016 Women and Foreign Policy Program
  • Americas
    Five Questions on the Panama Canal Expansion With Geraldine Knatz
    As the first ship goes through the expanded Panama Canal, the Development Channel sat down with Geraldine Knatz, former director of the Port of Los Angeles and now a professor of policy and engineering at the University of Southern California’s Price School of Public Policy. Dr. Knatz talked about changes in the shipping industry, trends affecting U.S. ports, and what the canal expansion will mean for trade globally.   1)  What will the Panama Canal expansion mean for the shipping industry and for global trade? The biggest change with an expanded Panama Canal is that it will allow larger ocean carriers to pass through. Pre-expansion, the canal was limited to containerships that could handle about 5,000 TEUs (one TEU is equivalent to a twenty-foot long container). The expanded canal will allow ships of up to 12,000 TEUs to transit. Shipping companies will be able to unlock economies of scale by sailing these bigger ships, and the cost of moving goods from Asia to the East Coast of the United States will drop. In addition to industries that rely on containers and big ships to move their goods, other types of commodities can benefit from more capacity through the canal, such as grain exports and liquid and natural gas (LNG) exports. The Panama Canal expansion will also create more routing options for ocean carriers bringing containerized goods to North America. Currently there are three main routes for goods moving from Asia to the United States. From China and northeast Asia, most goods come across the Pacific to a West Coast port where they are offloaded, transferred to rail, and then carried to the Midwest—roughly an eighteen-day trip. Or, cargo can move via the all-water route from Asia, go through the Panama Canal, and enter the United States through an East Coast port like Savannah or Charleston, which can take as long as twenty-six days. The second all-water route is from Asia through the Suez Canal—a twenty-eight day trip to the East Coast, with cargo often ending up in the Port of New York. In the past, goods from Southeast Asia and India took this route, but as ships got bigger and fuel prices dropped, some north Asian cargoes also started transiting to the U.S. East Coast through the Suez. One of the first things that will happen when the expanded canal opens is North Asian cargoes moving in larger ships through the Suez will switch back to the Panama Canal for cargo coming from north Asia. And the West Coast will try to prevent losing market share to the East Coast. 2) How has the shipping industry changed in recent years and what are other trends to watch going forward? To fully understand how the canal expansion will affect shipping and trade we have to first look at what has happened to the ocean carrier industry. Two major trends have affected it—the increased size of vessels and the consolidation of the ocean carriers. After losing money for years because of overcapacity and industry one-upmanship, ocean carrier companies started transitioning to bigger and bigger ships to achieve economies of scale (and these bigger ships are what the expanded Panama Canal is counting on for business). Then, because big ships only make money when they sail at full capacity, the competing ocean carrier companies formed alliances to share space on ships. Some ocean carriers have also merged. So a port that may have once courted twenty ocean carrier lines may now only have four big customers. Just recently, there was an announcement of a new alliance forming: the Ocean Alliance. If approved by the Federal Maritime Commission, the European Union (EU), and China, the Ocean Alliance will control 35 percent of the Asia-to-Europe market, and nearly 40 percent of trans-Pacific trade. For the ports, consolidation has had a big effect on business. The ports of Los Angeles and Long Beach have thirteen container terminals that serve numerous lines. As the alliances pool their cargo on larger ships, they will seek to call at the larger and most efficient terminals. That means when a container port loses a customer, they lose big. This industry consolidation has weakened the ports’ bargaining power and hurt their individual market share. It also makes it difficult for ports to finance major terminal improvements. In the past a port would typically enter into a thirty-year lease with an ocean carrier company to ‘lock in’ its cargo. And once ports had a thirty-year commitment, they had the flexibility to go out and finance improvements. Now the alliances seek short-term arrangements, maybe three years, and ports are in constant negotiations to keep the business. Meanwhile, the alliances are constantly seeking terminals with high productivity and threatening to go to the port next door. We can see the effects of the changes in the industry and the decreasing leverage that ports have by examining what has happened at the ports of Seattle and Tacoma. Both had lost market share in recent years, and rather than continuing to spend billions going after the same business and using predatory pricing practices to shift cargo back and forth—which did nothing to boost the regional economy or create jobs—they merged their cargo operations, and created a new entity. Tacoma and Seattle realized the market power of their customers was stronger than their own and they took strategic steps to try and deal with that. The hope is that their new collaboration, called the Northwest Seaport Alliance, will have better leverage in negotiating with the alliances. It will be interesting to watch what actions other ports take to address their decreasing leverage. 3) Who will be the winners and losers in the Panama Canal expansion? The biggest winner may be the Panama Canal Authority (ACP), which makes the largest share of its revenue money from container traffic. As long as traffic goes up, the ACP will be poised for growth. The ocean carrier companies are also well positioned. After the expanded canal opens, they will shift even more to bigger ships and improve their economies of scale. For the ports the question will be: where will the big ships stop? A lot of East Coast ports are vying for that business. Since the canal expansion was approved in 2002, there has been a perception that it will benefit all ports—large or small—and many have made improvements to get ready. But big ships make money at sea and not at port, where they want to spend as little time as possible. On the West Coast, large vessels call at two, maybe three ports. The carriers will adopt the same pattern on the East Coast once the expanded canal opens. Inevitably, some East Coast ports are going to lose vessel calls. The economy of scale driving ocean carriers will make that happen. 4) After the Panama Canal expansion, what will a U.S. port need to do to win business? Ports use the term “big ship ready,” which means they can handle the large ocean carriers. That usually requires having at least a fifty-foot navigation channel. Channel-depth is not the only factor that makes a port “big ship ready” however. There are other major investments needed to upgrade port facilities and infrastructure. For example: in addition to deepening the channel, wider ships need new cranes to reach and offload cargo. These longer-reach cranes are heavier than the old ones, so the port then has to upgrade the wharf—another major expense. And once the port facilities are in shape, the containers need to get from a port to their final U.S. destinations, which requires a good rail system. Given shipping companies take all of these factors into consideration when deciding where to drop their goods, ports should also consider the regional infrastructure when deciding how to invest. 5) What U.S. policies are being implemented so that U.S. ports and the broader public can capitalize on the Panama Canal expansion? When the canal expansion construction started, it was a wakeup call for U.S. ports to get ready. It was also a wake-up call to the federal government on policy changes necessary to expand and invest in U.S. ports. One example of government action is the Obama administration’s “We Can’t Wait” initiative that prioritized the dredging of new channels, expedited the modernization of five ports, and allocated investment to upgrade transportation. Another is new funding from the Department of Transportation (DOT), particularly the Transportation Investment Generating Economic Recovery (TIGER) grant program, which allowed ports to apply directly to the DOT for funding. The Federal Maritime Commission—which for many years was an organization that only a port’s attorney might deal with—has also stepped up to be more active, especially in dealing with port congestion. Finally, the latest surface transportation legislation, the Fixing America’s Surface Transportation (FAST) Act, created a dedicated fund for freight infrastructure. It also created a program for monitoring port performance by the Bureau of Transportation Statistics that will report to Congress annually. However, there is still a need to re-examine the way the U.S. government decides which ports to invest in—and in particular, which channels to dredge. Now the process is managed by the Army Corps of Engineers, which runs economic models to look at the “federal interest,” or the maximum benefit for spending federal money that results in reduced transportation costs. But the shipping companies now wield the power. They are less concerned with where the U.S government spent money dredging a port, and more with lowering their own costs. At the same time, ports have a have a hard time securing financing because they are not able to lock in business and customers for long terms. For both lenders and the U.S. government, investing in ports is getting riskier. Ultimately, the U.S. government should decide which ports to invest in according to the long-term commitments from multinational ocean shippers the port is able to secure. Using this criteria, instead of focusing on helping ocean carriers save on each container they move, would ensure the investments pay off.  
    Blog Post by Guest Blogger for Shannon K. O'Neil June 27, 2016 Development Channel
  • Americas
    This Week in Markets and Democracy: Ericsson Corruption Probes, EU Spurs Antigraft Action, Modi Courts FDI
    Corruption Probes Spook Ericsson Investors Both U.S. and Greek authorities are taking on Ericsson AB, one of the world’s biggest telecoms companies, for alleged corruption. The United States is investigating its operations in both China and Romania for potential Foreign Corrupt Practices Act (FCPA) violations. The Greeks summoned seven current and former executives over whether the Swedish multinational bribed government officials to win a $597 million defense contract in 1999. These inquires come at a time when the company faces stiff competition, declining sales, and falling share prices. Ericsson is now trying to ease investors’ concerns, hoping the revelations do not get worse. EU Membership Spurs Anticorruption Action The European Union’s (EU) anticorruption requirements are shaping rules for current and would-be members. In Serbia they have prompted antigraft activism as the nation pushes to enter the union. Authorities arrested eighty current and former officials for corruption and financial crimes late last year. And its courts just sentenced Miroslav Mišković, a politically-connected billionaire, to five years in prison for tax evasion. EU membership also likely helped keep Romania from backsliding, as the recent effort to decriminalize public official corruption—rejected by Romania’s constitutional court—would have violated its EU obligations. The move came after the nation’s anticorruption prosecutors took on a record 1,250 cases, convicting over 90 percent, including twenty-one members of parliament and the former prime minister. India’s Modi Courts Foreign Investment Despite India’s size and global heft, it so far has failed to capture its fair share of foreign direct investment (FDI). In 2015 it brought in $44 billion compared to demographically similar China’s $136 billion, and Brazil’s $65 billion. This matters, as studies show FDI brings jobs, new technologies, and can help emerging economies increase the value added in their production and exports. Now Prime Minister Narendra Modi’s government is easing many restrictions on investment. New rules allow foreign investors to fully own defense, aviation, and food companies. They also lower domestic content laws for consumer goods, making it easier for companies like Apple and Ikea to open stores in India. It remains to be seen whether these efforts will be enough to offset the still complex tax system and strict labor rules (that often require government approval for layoffs), to bring in foreign companies and dollars.
    Blog Post by Shannon K. O'Neil June 24, 2016 Development Channel
  • Emerging Markets
    Hard to Pay for Imports Without Exports (BRICS Trade Contraction)
    Over the past twenty years, the biggest shocks to the global economy have come from sharp swings in financial flows: Asia; the subprime crisis and the run out of shadow banks in the United States and Europe; and the euro area crisis. All forced dramatic changes in trade flows. Emerging Asia went from running a deficit to a surplus back in 1997. The global crisis led to a significant fall in the U.S. external deficit. The euro area crisis led to the disappearance of current account deficits in the euro area’s periphery. And one risk from Brexit is that it would cause funding for the U.K.’s current account deficit to dry up, and force upfront adjustment. The biggest shock to the global economy right now though has come not from last summer’s surge in private capital outflows from China, large as the swing has been,* but rather from an old fashioned terms-of-trade shock. Oil, iron, and copper prices all fell significantly between late 2014 and today. Yes, oil has rebounded from $30, but $50 is not $100 plus. $50 versus $100 oil means the oil-exporters collectively have something like $750 billion-a-year less to spend—either on financial assets, or on imports—than they did a couple of years ago. Add in natural gas and there has been another $100 billion plus fall in export income for the main oil-exporting economies. The fall in traded iron ore prices has had a big impact on Brazil and Australia, but in absolute terms oil’s impact dwarfs that of iron. Brazilian and Australian iron receipts in the balance of payments are down a total of $30 to $40 billion. Big, but not the huge impact of oil. And the old fashioned terms-of-trade shock has had a much bigger global impact than I suspect is commonly realized. Consider a plot of non-oil imports of the “BRICS” (the world’s large emerging economies). The dips in Brazil and Russia in particular are crisis-like. 2015 imports—excluding oil—are down 20 to 30 percent in Brazil and Russia. And both Brazil and Russia are significant economies. A few years back, when their currencies were stronger, their economies were in the $2 to $3 trillion range—only a bit smaller than the British economy. With some notable exceptions, commodity-exporting economies, writ large, have adjusted to the global terms-of-trade shock by reducing their imports rather than by selling assets or increasing their borrowing. A negative terms-of-trade shock implies a fall in trade. A country that cannot get paid what is used to on its exports cannot import (as much). It is a simple point, but still an important one. The adjustment in commodity exporting economies is a very important reason—along with China’s pivot away from imports—why global trade flows have been weak. The BRICS combined GDP is roughly that of the United States, or the full European Union. Their combined non-oil imports fell by a bit over 10 percent in 2015. Excluding commodities, China’s imports in 2015 were down around 8 percent. The non-petrol imports of the other four BRICS were down over 15 percent. To be sure, the data here—the year-over-year change in the trailing 12 month sum—moves slowly. It tells a story about the past, not the present.** The big drops have already taken place. Higher frequency data points to a stabilization. And even though I took petrol out of the data, the data here is nominal. The fall in actual volumes (the "real" data) is a bit smaller, particularly for China. Chinese goods import volumes were down about 2 percent in 2015. Brazil’s goods and services import volumes were down about 15 percent. And Russia’s goods and services import volumes were down about 25 percent. A big change for countries whose real imports on average increased 10 percent a year from 2004 to 2013. *The private financial outflows from China replaced the buildup of official assets, and then were offset by reserve sales. The swing has not forced a major adjustment in China’s exchange rate (to date) or macroeconomic policies (indeed the intensification of outflows was in response to a surprise swing in China’s exchange rate policy rather than vice versa) that led to a big change in China’s trade balance. The rise in China’s surplus in some ways preceded the exchange rate move last August. ** To take an example: the change in the trailing 12 month sum will show a big fall in the U.S. petrol import bill. But with U.S. production now dropping, crude imports rising and a near-certain rise in import prices from these lows, the U.S. petrol deficit is almost certainly now starting to rise again. The United States incidentally paid less than $30 a barrel on its imported oil in the first few months of this year.
    Blog Post by Brad W. Setser June 21, 2016 Follow the Money
  • Monetary Policy
    A Bit More on Chinese, Belgian and Saudi Custodial Holdings
    Marc Chandler asked why I chose to attribute Belgium’s holdings to China rather than any of the other potential candidates—notably the Gulf and Russia. The answer for Russia is pretty straightforward. Russia’s holdings of Treasuries (and in the past Russia’s holdings of both Treasuries and Agencies) tend to show up in the U.S. custodial data. Russia holds around $275 billion in securities in its reserves, and it holds a relatively low share of its reserves in dollars (40 percent still?). $85 billion in Treasuries (in March) is more or less in line with expectations. There are maybe a few billion missing, but there also is no need to search for large quantities of missing Russian dollar-denominated reserve assets. Differentiating between the Gulf and China is a bit harder. Both are to a degree “missing” in the custodial data. Both China’s and the Gulf’s custodial holdings are a bit lower than would be expected based on the size of their reserves, and for the Gulf, the size of their reserves and sovereign fund. Both are big players, so both could conceivably account for one of the key features of Belgium: the rapid rise and then the rapid fall in Belgian’s custodial holdings. So why China? Consider a plot of Saudi Reserves—looking only at the Saudi Arabian Monetary Agency’s (SAMA) holdings of securities. I also plotted the change that would be expected if say 75 percent of SAMA’s securities were in dollars, just as a reminder that the full change is the upper limit. SAMA also has a lot of deposits, but they aren’t relevant here. It is fairly clear that the changes in Belgium’s custodial holdings are a loose fit at best for SAMA’s security holdings. The big run-up in the Belgian account actually came when the pace of Saudi reserve growth was slowing. And the drawdown in Saudi reserves started a bit before the drawdown in Belgium, and has been more steady. Now consider a plot of changes in Belgium’s holdings against estimated changes in China’s dollar reserves (including all reserves throws off the scale), assuming a roughly 65 percent dollar share of reserves. Adding the change in Belgium’s holdings to the change in China’s holdings significantly improves the fit over the last four years. This is not proof of course. But it provides the basis for my adjustment.* If you plot China and Belgium’s combined holdings against China’s estimated dollar reserves, the overall fit is reasonable. The change in Belgium occurs at the right time and is of the right magnitude to match a thesis that the Chinese have kept the Treasury share of their reserves constant, and the Treasury share of their dollar reserves constant. Incidentally, the Treasury has released past “survey” data for all of the Gulf countries. The Saudis do hold a decent amount of U.S. equities—$52 billion last June. But Kuwait and the Emirates—with their large sovereign funds—hold more. Kuwait had just over $135 billion. No surprise there. A plot of the Saudi’s custodial holdings of all U.S. bonds and equities against SAMA’s holdings of securities in its reserves over time is still interesting. The Saudis, it seems, joined the Chinese and Russians in piling into Agencies just before the global crisis (quietly adding to the pressure to recapitalize them?). And even if all the Saudi assets in the TIC data, including the equities, are assumed to come from SAMA and even if deposits are left out of the analysis, there is a bit of a gap between the Saudi TIC holdings and what you might expect. Private fund managers? European custodial accounts (there are options other than Belgium)? Fancy financial engineering? Wealthy Saudis also of course have a global investment portfolio: back in 2002, Saudi’s total holdings in the U.S. data exceeded SAMA’s reserves. But Saudi private assets are even less less likely than SAMA to register cleanly in even the new and improved U.S. data. One last point: thanks to Concentrated Ambiguity , we now know the best answer to Dan Drezner’s question “where are Saudi’s reserves” is in "dollar-denominated bank deposits in London." The heavy concentration of bank deposits in dollars make sense. The Saudis do peg to the dollar after all. London isn’t exactly a surprise either. * I also erred on the side of simplicity, in part to make my estimates for China easy to verify. Adding Belgium’s long-term holdings of Treasuries to China’s is more straightforward than estimating China’s share of total Treasuries in Belgium, Luxembourg and Switzerland, excluding the Swiss National Bank’s estimated Treasury holdings. The goal is to produce the best possible estimate with the fewest possible adjustments. But it is ultimately a judgement, one subject to constant revision.
    Blog Post by Brad W. Setser June 20, 2016 Follow the Money
  • Economics
    $6 Billion Financing Gap Holds Back Indonesian Women Entrepreneurs
    Voices from the Field features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is authored by Rubin Japhta, SME Banking and Gender Finance Specialist for the East Asia and the Pacific region at International Finance Corporation, a member of the World Bank Group. Women entrepreneurs across the developing world often face the same roadblock: lack of capital. Without access to finance, women are excluded from full and productive participation in the global economy. A growing number of Asian countries, however, are taking steps to ease the process—but significant hurdles still remain to improving women’s access to finance. In China, for instance, in interviews with International Finance Corporation (IFC), women entrepreneurs say loan officers don’t treat them with dignity or may claim they aren’t knowledgeable about the banks’ products and services, making women feel unwelcome at banks. In the Philippines, women entrepreneurs say they prefer pawnshops to banks because they receive loans almost instantly, with very little paperwork. Unlike banks, the pawnshops also accept moveable assets as security, which makes it easier for women to borrow. Similar problems persist in Indonesia. IFC recently commissioned a study that showed that more than half of all small businesses and about a third of medium-sized enterprises in Indonesia are owned by women. The impressive data, however, were overshadowed by another statistic that showed that women-owned businesses faced a $6 billion shortfall in financing needs. The study highlighted the challenges that women businesses owners face in getting loans—although they make significant contributions to the Indonesian economy by creating jobs and boosting growth. In interviews with more than six-hundred entrepreneurs, the study—Women-owned SMEs in Indonesia: A Golden Opportunity for Local Financial Institutions—found that women lose out on financing from formal banking channels because banks continue to rely on traditional means of credit assessment, including ownership of land and buildings. Indonesian women typically don’t have those assets in their names, so banks are reluctant to lend to them. Negative experiences with banks prevent women from approaching formal financial institutions, which hinders efforts to improve women’s access to financial products and services. Indonesian banks need to address these challenges because women-owned businesses are a viable source of revenue—they represent half the market share and many want to borrow more to invest in their operations. In addition, female entrepreneurs should be ideal clients for financial institutions: women typically have lower default rates compared to their male counterparts. Banks can improve women’s access to finance by introducing simple changes. For instance, they could modify financial products to include flexible repayment schedules and moveable assets, such as vehicles, as security. Banks could also reduce the paperwork for getting loans and speed up the turnaround time for loan approvals. Women would also benefit from greater access to financial literacy services, including seminars on networking skills and business training. In addition, banks could explore alternative channels—such as mobile and internet banking—to improve access to finance for women entrepreneurs. Women’s access to finance is a priority for IFC. We are working with banks across the world for greater financial inclusion of women. IFC currently has thirteen projects in which it advises banks to improve their market research, implement innovative credit-linked products for women, and develop non-financial services. Gender inequality is not only unjust, it is also bad economics. Closing the credit gap can significantly increase the economic output not only in Indonesia, but also in economies across the world. At IFC, we are proud to be part of efforts to improve women’s access to finance and boost prosperity for all Indonesian people.
    Blog Post by Guest Blogger for Women Around the World June 15, 2016 Women Around the World
  • Emerging Markets
    This Week in Markets and Democracy: International Labor Conference, Brazil’s Corruption Resignations, Politicians vs. the Press
    Fast Fashion Still Exploits Workers While multinational retailers such as H&M, Gap, and Walmart can get a swimsuit or sundress from the factory floor to customers’ closets within weeks, new reports show they still do not protect the workers that make this possible. Three years after Bangladesh’s Rana Plaza building collapse, which killed over a thousand workers and injured another 2,500, Walmart refuses to disclose details on factory safety inspections. Documents from a more forthcoming H&M show nearly 80,000 Bangladeshi workers make their clothes in workrooms without basic safety measures such as fire exits. And Gap has balked at Cambodian worker demands for a living wage—they now earn as little as $5 a day. At this week’s International Labor Conference in Geneva, unions and other groups will try to force measures to improve workers’ rights by holding multinationals more accountable. Corruption Brings Down Ten Percent of Brazil’s Two-Week-Old Cabinet Just two weeks into his interim term, Brazilian President Michel Temer has already lost two ministers—or 10 percent of his cabinet—to corruption. His planning minister, Romero Juca, stepped down after a recording emerged of him plotting to obstruct the Lava Jato corruption investigations. Temer’s transparency minister, Fabiano Silveira, resigned after a second recording caught him advising Senate President Renan Calheiros on how to evade prosecution. And Brazilian authorities are actively investigating another six ministers. These scandals weaken Temer’s already limited legitimacy, leading some to postulate Dilma Rousseff could return. Politicians Try to Silence the International Press Already having cowed or repressed local reporters, angry leaders in Malaysia and Venezuela are going after the Wall Street Journal for exposing their (alleged) crimes. In Malaysia, Prime Minister Najib Razak ordered police to investigate the paper for illegally publishing classified documents. This comes after the Journal uncovered the transfer of up to $1 billion dollars from the state investment fund 1MBD to Najib’s personal bank accounts, and then reported on government whitewashing of the subsequent official investigation. In Venezuela, the former head of the national assembly, Diosdado Cabello, filed a libel suit over a 2015 Wall Street Journal story reporting he was under U.S. investigation for running an extensive money laundering and drug trafficking ring. In harassing a free press, Cabello may give them an even juicier story—opening up sealed U.S. government evidence in the case.    
    Blog Post by Shannon K. O'Neil June 3, 2016 Development Channel
  • Monetary Policy
    Is the Fed Losing Credibility? A Response to Kocherlakota.
       
    Blog Post by Benn Steil and Emma Smith June 3, 2016 Geo-Graphics
  • Monetary Policy
    Dan Drezner Asked Three Questions
    He gets three half answers. Drezner’s first question: “Just how much third-party holdings of U.S. debt does Saudi Arabia have?” Wish I knew. The custodial data doesn’t really help us out much. $117 billion—around 20 percent of reserves—certainly seems too low. So it is likely that the ultimate beneficiaries of some of the Treasuries custodied in places like London, Luxembourg or even Switzerland (Swiss holdings are bit higher than can be explained by the Swiss National Bank’s large reserves) are in Saudi Arabia or elsewhere in the Gulf. The Saudi Arabian Monetary Agency (SAMA) is generally thought to be a bit of a hybrid between a pure central bank reserve manager (which invests mostly in liquid assets, typically government bonds) and a sovereign wealth fund (which invests in a broader range of assets, including illiquid assets). So there is no reason to think that all of SAMA’s assets are in Treasuries. There are a couple of benchmarks though that might help. If you sum the Treasury holdings of China and Belgium in the Treasury International Capital (TIC) data (Belgium is pretty clearly China, not the Gulf) and compare that total with China’s reserves, Treasuries now look to be around 40 percent of China’s total reserves. Other countries have moved back into agencies, so Treasury holdings aren’t a pure proxy for a country’s holdings of liquid dollar bonds. But this still set out a benchmark of sorts. And if you look at the IMF’s global reserves data (sadly less useful than it once was, as the data for emerging economies is no longer broken out separately), central banks globally hold about 65 percent of their reserves in dollars. This also sets out a benchmark. Countries that manage their currencies tightly against the dollar would normally be expected to hold a higher share of their reserves in dollars than the global average, though this imperative dissipates a bit when a country’s reserves far exceeds its short-term needs. One other thing. The Saudis have a lot of funds on deposit in the world’s banks. $188 billion or so, according data the Saudis disclose. That is large compared to the just under $400 billion in securities the Saudis report. A large share of those deposits are likely in dollars, though they do not appear to be in U.S. banks. The short-term TIC data shows around $60 billion in bank deposits from all of the Gulf. That said, I would not be surprised if the Saudis had a hundred billion dollars or so more in dollar bonds than shows up the TIC data. Enough to make it hard to move rapidly into other assets. Drezner’s second question: “Why did the United States Treasury choose to reveal the $116 billion figure this month?” Wish I knew. A few guesses: 1) It got asked. Bloomberg created a constituency for raising the question internally. 2) It is consistent with the Treasury’s broader push for transparency on reserves and exchange rate intervention. If the Treasury wants China and Korea to report actual intervention in the market, the Treasury couldn’t really be holding back data itself. There was a reason to say yes. 3) The Saudis have quietly increased their reserve transparency. A few years back they started reporting their full reserve portfolio—not just a narrow liquidity tranche—in the IMF’s international financial statistics. And recently they signed on to the Special Data Dissemination Standard (SDDS) disclosure standards. The times are a-changing. The Saudis here are acting more like other countries, making it a bit easier to treat Saudis a bit more like other countries. 4) The original reason for the aggregation of Asian oil has long disappeared. Ted Truman of Peterson is absolutely right on this. The “Asian oil” category was a relic of the ‘70s and early ‘80s. And it is quite clear that the actual U.S. custodial holdings were not hiding any real secret, and releasing the data would not move markets. The reality was that even with the data aggregation, the Gulf was not making heavy use of U.S. custodians. The Saudis at their peak had close to $750 billion in reserves. The Kuwait Investment Authority likely has around half a trillion in foreign assets. Abu Dhabi’s various funds are comparable if not larger in size. Qatar built up a significant sovereign wealth fund. All peg to the dollar, more or less. Yet the survey data never showed much more than half a trillion in U.S. custodial holdings—split roughly equally between Treasuries and equities. If you do the math, the U.S. data never held the secret to the Gulf’s portfolio. Now my question for the foreign policy specialists: did this modest shift in Treasury policy require a broader shift in U.S. policy toward Saudi Arabia, or was this something that the broader foreign policy community did not care that much about? Drezner’s third question: “Given Saudi Arabia’s myriad political and economic difficulties, what can we divine from this information?” Not much. The change in headline reserves, and the change in the “fiscal reserves” that SAMA reports monthly matter much more than the details of the Saudi portfolio. The basic challenge for the Saudis is that spending now significantly exceeds current revenues, and will for a long time barring a further increase in the price of oil. Imports are also higher than can be supported by current export revenues. The underlying gap has to be closed by running down reserves, selling off assets, or borrowing from the rest of the world. And the size of the gap is quite different if the long-run price of oil is $40 versus $60. Saudi Arabia’s current account breakeven oil price (the external break even is the price where imports and exports balance) looks to have been around $70 in 2015, a bit higher than the IMF estimated. While I am on the topic of the world’s biggest exporter of oil, one final thought: Shouldn’t Saudi Arabia figure out how it plans to tax oil production before it tries to privatize Aramco, even in part? Most oil exporters that allow private production out of low cost fields have a production tax, and many also have an export tax. Some have a corporate income tax as well. Yes, this means acknowledging that oil supports the budget and will continue to do so for some time, but managing oil revenue dependence is part of life as an oil exporter.
    Blog Post by Brad W. Setser May 25, 2016 Follow the Money
  • Monetary Policy
    It Has Been a Long Time
    I stopped blogging almost seven years ago. My interests have not really changed too much since then. There was a time when I was far more focused on Europe than China. But right now, the uncertainty around China is more compelling to me than the questions that emerge from the euro area’s still-incomplete union. Some of the crucial issues have not changed. The old imbalances are starting to reappear, at least on the manufacturing side. China’s trade surplus is big once again—even if the recent rise in the goods surplus (from less than $300 billion a couple years back to around $600 billion in 2015) has not been matched by a parallel rise in China’s current account surplus. The U.S. non-petrol deficit is also big, and rising quite fast. But some big things have also changed. The United States imports a lot less oil, and pays a lot less for the oil it does import. That has held down the overall U.S. trade deficit. Oil exporters have been facing a gigantic shock over the last year and a half, one that is putting their (sometimes) considerable fiscal buffers to the test. Even if oil has rebounded a bit, at $50 a barrel the commodity exporting world is hurting. Looking back to 2006, 2007, and 2008, one of the most surprising things is that Asia’s large surplus coincided with rising oil prices and a large surplus in the major oil exporters. High oil prices, all other things equal, should correlate with a small not a large surplus in Asia. The global challenge now comes from the combination of large savings surpluses in both Asia and Europe rather than the combination of an Asian surplus and an oil surplus. And, well, China’s surplus is rising not because its exports are growing fast, but rather because its imports are falling more than its exports. And not just its petrol import bill. Actual imports. For 2015, and looking only at goods, China’s import volumes were down 2 percent year over year. Export volumes were flat year over year. China’s manufacturing surplus is stable, but at a high level (just under $1 trillion a year). China’s commodity import bill is falling fast, and that has pushed the goods surplus back up to record levels. A huge (and to my mind hugely suspicious) surge in tourism spending though has offset some of the rise in China’s goods surplus in the current account. The global challenges that come from a large surplus that reflects weakness rather than strength are in some ways more complex. The fix for China’s outsized trade surplus back in 2007 was conceptually simple: China had to stop intervening and let its currency appreciate. China’s economy was over-heating, so a stronger currency would have helped maintain domestic balance. Back in 2007 and 2008, China clearly had the capacity to take its foot off the various brakes it was applying to domestic activity if it got less support from exports. Now if China stopped intervening its currency would likely fall and its already-large trade surplus would—assuming that the second order effects of the resulting depreciation on the rest of the world were not too big—rise even more. And the policy tool that most obviously would bring China both toward internal and external balance—expansionary fiscal policy done by the central government and on its balance sheet—still faces internal opposition. Borrowing by the central government to provide policy support for household consumption isn’t the same thing as borrowing by local governments to finance a splurge in investment or borrowing by a state firm to build new steel capacity. But sometimes those differences seems to get lost. It is easy to say that the solution to too much debt is not more debt. But sometimes the solution to too much debt in one part of the economy is more borrowing in another part of the economy. And, well, the techniques that helped me “see” the global flow of funds across borders back when a large share of global flows were being intermediated through the balance sheets of a small number of emerging market central banks, which were reliably adding $1 trillion plus to their reserves a year, no longer work that well. Back when the PBoC was buying a lot of U.S. treasuries and agencies, it was in a deep sense too big to hide. “Belgium” almost certainly didn’t buy $200 billion in U.S. treasuries between the end of 2012 and the end of 2014, and it equally didn’t sell $200 billion in U.S. treasuries last year. Chinese citizens are on net still buying a lot of foreign assets, even if China’s government sold reserves in 2015 at a pace that was almost as fast as it once bought the reserves.* That is what a $300 billion a year current account surplus means. And I suspect some of the surge in spending by Chinese tourists is going into financial assets, and thus the real current account surplus is a bit higher. But private capital outflows from China—and for that matter private flows from other important economies, like Russia—never have really showed up cleanly in the TIC data. So to an important degree I now feel like I am flying blind. Flows through banks are a bit harder to track than flows through the bond market. I am excited to be back at the CFR, and to restart this blog. I hope that there is still an audience for opinionated, but hopefully (largely) data-driven analysis of the global economy and the global flow of funds. *In dollar terms the pace of sales was a bit faster in 2015; as a share of GDP, the purchases back in 2007 and 2008 were far larger.
    Blog Post by Brad W. Setser May 18, 2016 Follow the Money
  • Human Rights
    Empowering Women Will Drive Economic Growth
    Voices from the Field features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is authored by Cherie Blair, wife of the former British Prime Minister Tony Blair, and founder of the Cherie Blair Foundation for Women. Eleanor Roosevelt once wrote, “What you don’t do can be a destructive force.” In other words, apathy is deadly. I was reminded of this sentiment last week, as I took part in a panel discussion at the Milken Institute’s Global Conference, on the issue of how to sustain growth in emerging markets. The question is timely: after enjoying years of success, emerging markets are entering a less sanguine era, with 2015 marking their fifth consecutive year of slowing growth. The International Monetary Fund (IMF) warns that emerging and developing economies will converge to advanced economy income levels at less than two-thirds the pace it had predicted a decade ago. In the words of Christine Lagarde, a “new economic reality” has emerged. Clearly, change is needed. There is no better time for Eleanor Roosevelt’s rallying cry. I believe that one solution lies with women. Specifically, we need to bring more women into the workforce in developing and emerging markets. Over the last three decades, women’s participation in the global workforce has hovered at around 51 percent, dipping as low as 21 percent in the Middle East and North Africa. Where women are engaged in employment, they tend to be concentrated in lower productivity sectors, often working in precarious, under-paid, and unprotected conditions. Swelling the ranks of women in the workforce allows an economy to make full use of its human capital. It will be crucial to sustaining growth in emerging markets in the long term. Research by the International Labour Organisation (ILO) shows that economies with high female labor force participation rates are more resilient to economic shocks and suffer from slowdowns in economic growth less often. Last year the McKinsey Global Institute put an astonishing monetary value on women’s work, claiming that achieving global gender parity in economic activity could add $28 trillion to annual global GDP in 2025—with almost $3 trillion added to India’s GDP alone. Bringing more women into productive work is also a powerful anti-poverty device, since research shows that women plough the majority of their income back into the health and wellbeing of their families. I also believe there is a special role to be played by women entrepreneurs, and particularly women owners of small and medium-sized enterprises. This is the focus of the work of my foundation. We empower women in developing and emerging markets to grow their enterprises beyond the micro level because we believe the SME sector has huge potential to drive job creation and fuel growth in local economies. Over the last year my foundation has supported the creation of 2,100 new women-owned businesses and 2,200 new jobs. Women are a huge untapped source of economic growth. Unlocking their full potential will require concerted action by both public and private sectors. Governments, for example, can implement policy changes which make childcare more affordable, and flexible working more accessible, allowing women to balance their family responsibilities with work. Tax incentives can also help boost women-owned businesses. In Turkey, women entrepreneurs have benefited from state provision of interest-free loans, with their first businesses being free from taxes for the first three years. Banks also have a huge role to play in extending women’s access to the financial services they need to establish and grow businesses. They can do this by designing products specifically for women, providing flexible and longer repayment periods on loans, and easing collateral requirements in recognition of the fact that women often struggle to provide evidence of assets such as land and property ownership. There is a huge range of actions that can catalyze the economic potential of women. But recognition must come first. Recognition that leaving the economic status quo unchallenged and unchanged is not an option. All too often, efforts to realize gender equality are seen as an ‘add on,’ rather than integral to macroeconomic policy. If we are to sustain growth and drive down poverty across the world’s emerging markets, this mindset must change.   This article appeared originally on LinkedIn.
    Blog Post by Guest Blogger for Women Around the World May 12, 2016 Women Around the World
  • Americas
    This Week in Markets and Democracy: Protectionism Rises, Mexico Anticorruption Bill Delayed, How Corruption Affects Business
    Protectionism by the Numbers It is not just anti-trade rhetoric spreading on both sides of the Atlantic; it is also policies. The Global Trade Alert, an online index that monitors trade policy, reports a rapid rise in protectionist measures worldwide since 2008. The database documents over 5,000 new barriers to trade, including import quotas, stricter rules for migrant workers, and local content requirements. The United States leads this turn toward protectionism, creating more than eighty new rules in the last year alone. These measures are one of the main causes slowing global trade. Mexico’s Anticorruption Legislation Delayed  As Mexico’s Congress ended its spring term, the bill to make the new National Anti-Corruption System a reality remains pending. President Enrique Peña Nieto’s Institutional Revolutionary Party (PRI) and Green Party together blocked passage of the Ley3de3 legislation that would better define corruption, give greater tools to those going after it, and require Mexican public officials to reveal their assets, tax returns, and potential conflicts of interest. Though garnering more than 630,000 public signatures, the parties both question its constitutionality and the outcome—suggesting that opening their accounts to scrutiny would spur a political “witch hunt.” Though Congress will likely return in July for an extraordinary session, some doubt the citizen-led initiative will survive. Corruption Limits Investment in the BRICs Corruption risks loom large in the BRIC countries, according to a Dow Jones survey of hundreds of multinationals. China and Russia—along with Iran—top the list of countries with the greatest compliance concerns; Brazil and India make the top twenty. The survey also finds the U.S. Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act strongly shape corporate behavior, affecting where they invest and with whom they partner. And most companies don’t mind these laws. Instead, they see benefits for their own reputations and for leveling the playing field vis-à-vis competitors.
    Blog Post by Shannon K. O'Neil May 6, 2016 Development Channel
  • China
    The World Economy is Running on Monetary Fumes
       
    Blog Post by Benn Steil and Emma Smith May 6, 2016 Geo-Graphics
  • Venezuela
    Venezuela’s Descent Into Crisis
    In my May monthly, I make the case that the crisis in Venezuela has intensified to the point where a chaotic default is a question of when, not if. Economic activity is falling sharply and the seeds of hyperinflation have been planted, a downward spiral reinforced by political paralysis, widespread electricity shortages, and a breakdown in social order. Reserves are falling sharply, driven by capital flight and a fiscal deficit that has swelled to over 20 percent of gross domestic product (GDP). Although the government has made enormous efforts to continue making debt payments, a default now appears likely sooner rather than later, and possibly even ahead of large debt service payments due this fall Absent a dramatic change in the political environment, there would need to be a change in government, and a green light from the United States, before officials from the International Monetary Fund (IMF) would board a plane to Caracas to begin negotiations on a rescue program. By then, the chaos could be severe. An IMF-backed adjustment program should include a float and unification of the exchange rate, as there will not be adequate reserves to allow intervention, and an extended period of capital controls to stem flight; a multistep increase in domestic energy price to world prices, allowing prices to be flexible going forward in response to market developments; a tighter fiscal policy consistent with available resources; a targeted safety net, replacing the pervasive and inefficient subsidies now in the system; a comprehensive restructuring of the banking system, which is likely to be quite costly given reports of deep-seated corruption; and broad measures to address corruption and rule of law. In my base case scenario, debt would soar to unsustainable levels, and the cash flow needs of the country likely will outstrip what the official community was willing to provide. While new IMF lending rules provide a fair degree of discretion in highly uncertain, high-access cases (“grey zone”, in Fund-speak), it looks increasingly likely that a comprehensive restructuring, with significant cash flow relief, ultimately will be needed. China’s role in Venezuela’s debt restructuring will be critical and precedential. As Venezuela’s largest creditor, China has extended nearly $60 billion in loans over the last ten years, mostly backed by oil. China has reportedly already provided material cash flow relief to Venezuela, but would need to be a part of any debt restructuring effort both because its claim is so large and because private creditors would want China to share the burden if asked to restructure. In an earlier blog post, I argued that restructuring the Chinese debt owed by Venezuela is best done by China joining the Paris Club of official creditors, and agreeing to restructure on comparable terms to other official creditors. But short of such a decision, China could still participate in a financing package in parallel to other creditors. Whatever China decides in Venezuela will likely set a precedent for other countries that owe China much debt and have been battered by low commodity prices and slow global growth—countries that will seek restructurings in coming years. The decisions made in this case will be consequential. Markets are too sanguine about the risk of a disruptive default in Venezuela. If it happens, the IMF will need to move quickly to assemble a comprehensive financing package. China’s support for that package, and any related debt restructuring, will be critically important for the package to be credible and to provide appropriate incentives for participation by other creditors.
    Blog Post by Robert Kahn May 5, 2016 Macro and Markets