From left to right: Dr. Y.V. Reddy, Dr. Peter Dittus, Mrs. Yuefen Li, Dr. Yılmaz Akyüz and Dr. Richard Kozul-Wright.
A South Centre debate “Another Crisis in the Making?” on the state of the global economy and finance took place on 10 November 2017 at the Palais des Nations, UN Office in Geneva, Switzerland. It was held on the occasion of the book launch of Playing with Fire, Deepened Financial Integration and Changing Vulnerabilities of the Global South authored by Dr. Yılmaz Akyüz, Chief Economist of the South Centre, published by Oxford University Press. The meeting was moderated by Mrs. Yuefen Li, Special Advisor on Economics and Development Finance of the South Centre, with presentations by Dr. Richard Kozul-Wright, Director of the Division on Globalization and Development Strategies (GDS), UNCTAD, Dr. Y.V. Reddy, South Centre Board Member and Former Governor of the Reserve Bank of India, and Dr. Peter Dittus, Former Secretary General of the Bank for International Settlements (BIS). Dr. Yılmaz Akyüz, the author, responded to various comments and observations made by the panellists.
“Playing with Fire is a comprehensive account of financial integration of emerging and developing countries supported by a wealth of data and information. It also includes discussion of new vulnerabilities to external financial shocks. The book aids understanding of destabilizing interactions between key international markets for emerging and developing countries through a new concept of commodity-finance nexus. It takes a critical look at foreign direct investment.” (Oxford University Press).
Mrs. Yuefen Li opened the meeting with a brief introduction of the South Centre, noting that it undertakes research in several areas of interest for developing countries including global macroeconomic and financial issues. She noted that the speakers attending the debate have all published recently important books on the topic of the debate. Advice and Dissent: My Life in Public Service by Dr. Reddy; Revolution Required: The Ticking Time Bombs of the G7 Model by Dr. Dittus, co-authored with Dr. Hervé Hannoun, former Deputy General Manager of the BIS; and UNCTAD’s latest Trade and Development Report prepared under the guidance of Dr. Kozul-Wright also discuss similar issues. Speaking on the topic of the debate, Mrs. Li said that 20 years from the Asian financial crisis and 10 years from the subprime crisis, there is now a significant build-up of financial fragility in the world economy and the book Playing with Fire is extremely timely. It provides a wealth of data and information and most importantly, it has in-depth and insightful analysis of the integration of emerging and developing economies into the global financial system, the problems they have encountered in the process and the vulnerabilities entailed.
Dr. Richard Kozul-Wright welcomed Dr. Akyüz’s book as it brings new and challenging insights to the discussions on development policy. The UNCTAD economist noted that Playing with Fire provides a comprehensive treatment of global financial linkages of emerging and developing economies and the vulnerabilities they entail. In this regard, the book describes two sets of linkages. First, the institutions, innovations and policies that propelled finance to its vanguard role in what Dr. Akyüz describes as finance-led globalization or what UNCTAD calls “hyper-globalization”. Secondly, the linkages which trace the impact of financialization in the world economy.
Focusing his presentation on the linkages, Dr. Kozul-Wright enumerated three key relations raised in the book; namely, the finance-inequality nexus, the finance-commodity nexus and the nexus between finance and foreign direct investment, and provided a brief analysis of each of the three topics.
On the finance-inequality nexus, there is a huge literature in the past decade on the rise of finance and financialization in the world economy and the increasing of inequalities and its consequences, Dr. Kozul-Wright said, giving the example of the work done by Stiglitz and Piketty. He recalled that already in the 1990s the issue was first brought to attention by UNCTAD in its Trade and Development Reports, prepared under Dr. Akyüz’s guidance, addressing the relationship between rising inequality and growing dominance of finance. What is different in this book is that Dr. Akyüz links it to the debate that has surfaced in the post-crisis period about the potential danger of secular stagnation, emphasizing the role of inequality and underconsumption. He emphasizes globalization, financialization and the shift towards more neoliberal policy regimes as the key factors reducing the bargaining power of labour, rather than the technological challenges and demographic pressures or more traditional explanations of secular stagnation.
This is also an issue covered in this year’s Trade and Development Report, which shows that the rise of finance has been a leading factor in the rising of inequality and has been, as consequence, a major source of fragility and crisis in many economies since the late 1970s, Dr. Kozul-Wright noted. Policy measures adopted in crisis and post-crisis periods strongly influenced by finance failed to trigger a strong recovery while increasing inequality in various ways.
Dr. Y. V. Reddy noted that Dr. Akyüz’s book combines important elements of academic work, policy and institutions. He stressed that the two books Playing with Fire and Revolution Required of the panel speakers are important readings for the topic of the debate as they illustrate well the current situation and challenges ahead. He read some key passages from Revolution Required in comparison with the central themes of Playing with Fire:
“The global financial system remains fragile. The world economy struggles to recover. Climate change accelerates. Digitization and globalization depress wages. Income inequality is on the rise. Geopolitical turbulences are spreading. Lies are presented as truths. Truth remains unspoken. And people are angry. Karl Marx thought that capitalism was sowing the seeds of its own destruction, eventually leading to a revolution. We believe that rather than anonymous forces, it is the policies of the G7 countries that are now undermining the foundations of the market economy. The G7 policies in the domains of monetary policy, fiscal and macroeconomic policy, prudential policy, defence and climate change policy have a common feature: They are lax, reckless, and irresponsible”.
“A monster has been created which is still not under control. Increasingly it seems as if the 2008 Great Financial Crisis may only have been a dress rehearsal for a worse crisis which lies ahead. It will come as the result of the excessive use of the money printing press, the build-up of asset price bubbles, the debt accumulation encouraged by low or negative interest rates.”
Dr. Peter Dittus said that Playing with Fire is a very timely book because it analyses some of the fragilities that will make the next crisis very difficult to deal with. The book has a very compelling logic as it describes and examines in depth and with richness the financial integration between emerging and developing countries and advanced economies.
Looking at the detailed analysis of the book one can see that vulnerabilities of emerging and developing economies have actually increased today. This, despite the fact that many countries have moved to floating exchange rates, accumulated large amounts of reserves and pursued much better fiscal policies. The fragility and potential exposure to a crisis in the world has actually increased, and policy options to deal with it have decreased. This is an important message of this book.
Dr. Yılmaz Akyüz, responding to some of the comments made by the panellists, noted that there are many common grounds between the two books, Playing with Fire and Revolution Required, even though they were written independently and they focus on different parts of the world – the Global South and advanced economies, respectively. This may be partly because they both draw on data, information and research provided by the BIS.
Playing with Fire is about the financial integration and vulnerabilities of the Global South. Integration accelerated in the new millennium after a series of crisis. It has been greatly facilitated by monetary and financial policies in advanced economies, notably the US. These policies are designed to generate debt-driven growth in the face of a chronic demand gap created by growing inequality and underconsumption. The US Fed has pursued progressively looser monetary policy since the 1980s, creating a downward bias in interest rates and upward bias in debt, not only at home but also globally. This policy generates boom-bust cycles in credit and asset markets. These in turn aggravate the demand gap by increasing inequality, and reduce supply capabilities by distorting resource allocation, thereby necessitating even bigger bubbles to sustain growth.
The policy of rapid liquidity expansion and low interest rates has given rise to a search for yield and greater appetite for risk. It has therefore played a key role in the growing international lending and investment in emerging and developing economies. External financial liberalization in these economies themselves also played an important role. Some of the measures taken were designed with the objective of reducing external vulnerability. However, in reality they have created new sources of vulnerability without removing the old ones.
Many of these economies have taken certain measures to increase their resilience to financial shocks, as mentioned by Dittus. However, useful as they are, these can prove inadequate in the face of a severe external financial shock and massive and sustained exit of capital. It is not possible to anticipate when and how this might occur, but the credit and asset bubbles under way for almost a decade do not look sustainable.
Playing with Fire provides an empirical account of deeper integration of emerging and developing economies into the global financial system and discusses its implications for stability and growth, focusing on the role of policies in the new millennium in both emerging and developing economies and the United States and Europe. (Oxford University Press)
Author: Adriano José Timossi is Senior Programme Officer of the Global Governance for Development Programme (GGDP) of the South Centre.