International Economic Policy

  • Energy and Environment
    Interactive: Oil Exporters' External Breakeven Prices
    The 2014 fall in global oil prices, from over $100 a barrel to around $50 a barrel, reduced the export proceeds of the world’s main oil- and gas-exporting economies by about $1 trillion. After a decade of largely uninterrupted high oil prices, this dramatic swing has tested the economic resiliency and political adaptability of oil-exporting countries. One of the best single measures of the resilience of an oil- or gas-exporting economy is the oil price that covers its import bill—the external breakeven price. var divElement = document.getElementById('viz1506436295499'); var vizElement = divElement.getElementsByTagName('object')[0]; vizElement.style.width='1150px';vizElement.style.height='920px'; var scriptElement = document.createElement('script'); scriptElement.src = 'https://public.tableau.com/javascripts/api/viz_v1.js'; vizElement.parentNode.insertBefore(scriptElement, vizElement);   A plot of external breakeven prices helps illustrate the relative vulnerability of different oil-exporting economies. An external breakeven below the global oil price indicates a potential for either additional budget spending or currency appreciation; a breakeven price above the global price indicates an underlying pressure for budget cuts or currency depreciation.  Most analyses of oil-exporting economies focus on their fiscal breakeven price—the oil price that allows the government's budget to balance. This measure is intuitive but suffers from important limitations: budget revenue from oil is not always transparently reported, spending is often kept off-budget, and the actual calculation is country-specific, impeding accurate comparisons across countries. In contrast, external breakevens can be calculated in a consistent way across time and across countries, using data that is relatively easy to verify. Changes in external breakeven prices have consequences for the geopolitical positions of the major oil exporters. Rising oil prices can enable the pursuit of the strategic aims of major oil-exporting economies as financial assistance to allies is easier to provide, and internal stability can be maintained through generous budgets. Conversely, falling oil prices can make it more difficult to generate the resources needed to sustain an active foreign policy and can limit a government’s ability to deliver the services and jobs that help to assure political stability. var divElement = document.getElementById('viz1494259696315'); var vizElement = divElement.getElementsByTagName('object')[0]; vizElement.style.width='1054px';vizElement.style.minHeight='629px';vizElement.style.maxHeight='929px';vizElement.style.height=(divElement.offsetWidth*0.75)+'px'; var scriptElement = document.createElement('script'); scriptElement.src = 'https://public.tableau.com/javascripts/api/viz_v1.js'; vizElement.parentNode.insertBefore(scriptElement, vizElement); For further analysis of the implications of the breakeven price data and methodological details see the accompanying discussion paper "Using External Breakeven Prices to Track Vulnerabilities in Oil-Exporting Countries."
  • Global Governance
    What's at Stake at the G20 Summit
    Will the leaders' gathering in Hamburg find consensus on pressing global economic issues? Experts from many of the group's member states assess prospects.
  • Donald Trump
    Creating Jobs
    Podcast
    CFR's Ted Alden and Bob Litan join Jim Lindsay to talk about cultivating new job skills, automation, and American competitiveness. 
  • Gender
    Building Inclusive Economies
    A new report from the Women and Foreign Policy program, launched this week, highlights the undeniable connection between women's economic participation and prosperity.    Over the past two decades, a growing number of international organizations and world leaders have recognized that the economic empowerment of women is critical to economic growth and stability. Multilateral bodies such as the Group of Twenty and the Asia-Pacific Economic Cooperation forum have ratified agreements to promote women in the economy as a means to stimulate growth, and governments from the Ivory Coast to Rwanda to Japan have adopted reforms to increase women's ability to contribute to their economies. These developments have fueled mounting international recognition of the importance of women's economic advancement to poverty reduction and economic growth, manifested most notably in the landmark Sustainable Development Goals (SDGs) adopted at the United Nations in September 2015. The SDG framework specific targets to improve women's economic participation, including equality in property ownership and inheritance and access to financial services, natural resources, and technology—the first time for a global development agenda.        Yet despite this growing recognition, national and international economic leaders continue to make and measure policy in ways that undervalue women's work and do not capitalize on women's economic participation. Serious proposals to address critical barriers that limit women's economic contributions remain absent from mainstream economic policy discussions. The ways in which gender affects time use, human development, and access to assets and markets are too often ignored in policy dialogue. Women's work in the informal economy and inside the home is uncounted or undercounted. Structural and cultural barriers continue to inhibit women's participation in higher-wage sectors and occupations, and gender wage gaps persist everywhere in the world.   The Donald J. Trump administration has expressed support for easing barriers to women's economic participation and, correspondingly, should take steps to grow the U.S. commitment to unlocking their economic potential. Even in an era of tightening budgets, Washington can reprogram existing economic development funding to promote women's economic empowerment as a tool to accelerate growth and reduce poverty. The new report from the Women and Foreign Policy program suggests that, to this end, the administration should incentivize legal and policy reform; increase women’s access to capital and financial services; create an economic inclusion challenge fund; promote technology and innovation; support research and data collection, and enact domestic polices to lead the world by example.   By strengthening its focus on women's economic participation, the United States can improve the returns on its economic development efforts and promote cost efficiency by investing in a proven driver of economic growth.   Read the full report here >>  
  • Global Governance
    Facebook Live: What to Expect from the G7 Summit
    To preview the Group of Seven (G7) Summit, which will be held in Italy from May 26 to 27, I sat down with my friend and CFR colleague James M. Lindsay, senior vice president and director of studies. We discussed the significance of the G7 and major issues on this year's agenda, which include climate change, migration, terrorism, and trade.  You can check out the video of our discussion below or on Facebook. You can also learn more about the G7 by reading the CFR backgrounder.
  • China
    Can China Finance One Belt One Road Without Jeopardizing Its Own Financial Stability?
    The answer, I think, is yes.  Even after Moody's downgrade.  At least so long as China's ambitions for scaling up what seems to have been a roughly a $15 billion-a-year financing program are reasonable. I still remember a time not so long ago when China was adding $500 billion a year to its reserves and shadow reserves and was channeling $300 or more billion a year into the U.S., mostly by buying bonds (Not selling reserves and selling U.S. assets, as it did in 2016.  The swing from 2013 to 2015-2016 was large).  I still have a great deal of respect for the raw financing capacity of China’s state. China saves a ton, the raw material for a large current account surplus is still there—see Martin Wolf Estimates of the cost of One Belt and One Road vary—in part because the initiative’s scope is relatively elastic (is Yamal LNG part of OBOR? Chinese investment in Swiss seed companies? Chinese investment in Sudan and Angola?). But a common estimate is around $1 trillion (some have higher numbers, but the top end of the range seems implausible to me). Not all of that necessarily will be borne by China. Bradsher and Perlez of the New York Times report that China’s actual commitment at the summit in Beijing was around $120 billion—on top of $50 billion that already has been disbursed (over four years). Add in China’s commitment of paid-in ($10 billion)  and callable capital ($40 billion) to the Asian Infrastructure and Investment Bank and its commitment to the New Development Bank ($10 billion) if you want.  And there may be investments from state firms that aren't funded by the New Silk Road Fund or the development banks.   That brings China's existing commitments up to around $200 billion. If that is right, the balance will either be financed by other sources (including banks in the countries hosting the projects), or simply not done — at least not in the next five years. I certainly would worry (very much) if China ever committed so much foreign exchange to financing the Belt and Road that it found itself short on reserves. China still has plenty of reserves in my view, but not so many that can completely ignore potential risks. But I also suspect $200 billion over five years—a sum in line with China's reported actual financial commitment, though not with common estimates of the overall size of the program — is something that China can manage fairly comfortably.  Why? Simple: it is in line with the state banks recent pace of external lending, and consistent with China's balance of payments. Best I can tell, China’s state banks have been adding about $100 billion a year to their “illiquid” long-term external loan portfolio in the past few years. The $10-15 billion a year ($50 billion over 4 years) current pace of lending to One Belt One Road projects reported by the New York Times remains well below their current overall pace of external lending.* Projecting out the current growth of China's external lending over five years would generate roughly $500 billion in financing. And if the bonds China now is purchasing from abroad (over $50 billion a year in the last four quarters of data, with the state banks accounting for much of the buying) are added to the external lending of the state banks that sum rises to $750 billion over five years. The bulk of those bonds appear to have been purchased the the state banks. So the more modest accounting provided by the New York Times of China’s commitments to One Belt One Road does not imply anything that is wildly out of line with the current pace of growth in the balance sheet of its state banks —though it might imply Chinese banks have a bit less to lend to Chinese firms looking to buy New York real estate, or to Latin America. Now look at the sums being tossed around from the point of view of China’s balance of payments.  This is a complementary view to the analysis of the state banks: the banks right now are either a vector for moving China’s current account surplus abroad, or a draw on China’s stock reserves—the legacy of past current account surpluses. China ran a current account surplus of $200 billion in 2016. The surplus has been coming down in the last two quarters, but I suspect it is likely to go back up as China reigns in its credit stimulus—especially given the recent fall in oil and iron prices. ** It though is a bit unrealistic to assume that all of China’s surplus all goes to funding state lending, let alone all to the One Belt One Road countries. In 2015 and 2016 the surplus wasn't large enough to finance private outflows and the increase in state lending (hence the draw on reserves).   So if private outflows are large, China could have a bit more of a problem funding its commitments out of its current account. Private outflows from China have been going to Australia, Canada, the United States, and the like. Not to Central Asia. On the other hand, private outflows have slowed significantly this year.   The combination of the yuan’s stability against the dollar, and China’s controls seem to be working.  Finally, what would happen if China had to dip into its reserves to meet its commitments (this would be the case if net private outflows are equal to its current account surplus)? I personally think could China could safely draw on a small portion of its $3 trillion in reserves. China has a bit more than $3 trillion actually, the central bank’s $125 billion in “other foreign assets” are for all intents and purposes reserves.*** With around $750 billion in short-term debt, China could $500 billion of its reserves to finance lending to One Belt One Road (over 5 years) and still cover its short-term external debt three times over. So, I do not see any real constraint that would preclude China from raising its current $10-15 billion a year in lending to the Belt and Road (and equity investment from state funds in related projects) to $40 to $50 billion a year —assuming China’s doesn’t lose control of its financial account. On the other hand $100 to 200 billion annually ($500 billion to a trillion over five years) would be a stretch, as it would imply the bulk of China's current surplus would need to flow toward the One Belt One Road countries. Or, if private outflows resume, China might need to dip heavily into its reserves There is another possibility as well — one highlighted by Christopher Balding. China could start raise most of the funds it needs for its external lending by borrowing  —through its state institutions — in global markets. Chinese led multilateral institutions, like the Asian Infrastructure and Investment Bank, are certainly likely to do so. China could thus try, in a sense, to draw on Japanese—or European—savings to fund its strategic ambitions.   To be clear, though, that doesn't appear to be how the state banks have funded the recent growth in their external lending. The balance of payments suggests that the net external position of China's state banks has actually moved into a substantial surplus in recent years, as the banks continued to lend abroad while repaying their "carry trade" related external liabilities.**** Yet China also needs to be at least somewhat cautious. The external borrowing of any state institution is effectively a claim on China's reserves.  China has a bit of leeway —a country with China's characteristics (little short-term external debt and a current account surplus) would be fine with less than $3 trillion in liquid reserves — but not much leeway that it is freed from any budget constraints. There is a second reason why the low-end of estimates of One Belt One Road financing seems far more reasonable than the high-end estimates. There are limits on the ability of Central and South East Asia to absorb massive inflows over the next five years. Even sums that are closer to $200 billion than to $1 trillion (over five years) would imply large current account deficits in some fairly small economies.   The combined GDP of the main economies of central Asia is about $300 billion. The combined GDP of Laos, Cambodia and Myanmar is about $100 billion.  If India stays out, the combined GDP of the main economies of South Asia is $600 billion (Pakistan is the biggest).   Obviously expanding the set of countries to cover some larger economies would help. But it isn't clear Russia, which now runs a current account surplus, particularly wants to be financially dependent on China.  And the main economies of southeast Asia and the Gulf do not lack access to market financing and do not necessarily need to rely on China to fund their infrastructure. Would $200 billion from China over five years be enough to create Asia’s equivalent of Chicago (a brilliant analogy that comes from Paul Krugman), with China enjoying stronger transportation links to Central Asia, South Asia (Pakistan at least), and South East Asia than any of these geographic regions enjoy with each other?  To be honest, I do not know. And I think Krugman's analogy could be extended to cover oil and gas pipelines as well as roads and railways — though invariably that also raises the Russian angle. More on that at a later time. * I should note that China could expand its lending capacity by capitalizing offshore financial intermediaries that fund themselves in global markets. That is the model of the AIIB—though it isn't the model of the China Development Bank, which historically has funded itself domestically. ** The U.S. need not worry that there won’t be spare savings globally to fund the U.S. current account deficit if China’s surplus is channeled towards its neighbors. The combined surplus of Japan, the Asian NIEs, and Europe is over $1 trillion. And the world economy really would be more healthy if the U.S. (along with Mexico and Canada) wasn’t the one absorbing the bulk of the world’s spare savings—the resulting trade deficits put a huge strain on workers in the U.S. manufacturing sector. *** In addition to $3 trillion in reserves and $125 billion in reserve-like assets (the PBOC's other foreign assets), China has $550 billion in external loans and $350 billion in portfolio debt and equity (mostly state owned in my view, with the debt held mostly by the state banks and the equity by the CIC and a few others).  The total foreign assets of the Chinese state are closer to $4 trillion than to $3 trillion, and the most illiquid parts of the state’s portfolio in my view are held outside of SAFE’s formal reserves.  See this post. **** Cole Frank and I used the line items "currency and deposits" and "loans" in "other" in the balance of payments to construct this graph.  That leaves out trade credit, and other, other assets (other, other is the banks assets with the PBOC, e.g. the balance of payments line item that maps to the PBOC's other foreign assets). The stock is estimated from cumulative flows.
  • United States
    GDP and Economic Policy
    Economists who want to compare the living standards of countries often use GDP, but the calculation and usefulness of the measurement remains controversial.
  • Trade
    Is the WTO Dispute Settlement System Fair?
    Daniel J. Ikenson and Robert E. Lighthizer debate the mechanism for adjudicating trade arguments.