Egypt's CBE issues EGP5b FRN T-bonds    EHA launches national telemedicine platform with support from Egyptian doctors abroad    Madbouly reviews strategy to localize pharmaceutical industry, ensure drug supply    Egypt's real estate market faces resale slowdown amid payment pressures    Al-Mashat tells S&P that Egypt working to reduce external debt, empower private sector    Cairo's real estate market shows resilient growth as economy stabilizes: JLL    Egypt's Foreign Minister, Pakistani counterpart meet in Doha    Egypt condemns terrorist attack in northwest Pakistan    Emergency summit in Doha as Gaza toll rises, Israel targets Qatar    Egypt renews call for Middle East free of nuclear weapons، ahead of IAEA conference    Egypt's EDA, Korean pharma firms explore investment opportunities    Egypt's FM heads to Doha for talks on Israel escalation    Egypt advances plans to upgrade historic Cairo with Azbakeya, Ataba projects    Egyptian pound ends week lower against US dollar – CBE    Egypt hosts G20 meeting for 1st time outside member states    Lebanese Prime Minister visits Egypt's Grand Egyptian Museum    Egypt to tighten waste rules, cut rice straw fees to curb pollution    Egypt seeks Indian expertise to boost pharmaceutical industry    Egypt prepares unified stance ahead of COP30 in Brazil    Egypt recovers collection of ancient artefacts from Netherlands    Egypt harvests 315,000 cubic metres of rainwater in Sinai as part of flash flood protection measures    Egyptian, Ugandan Presidents open business forum to boost trade    Al-Sisi says any party thinking Egypt will neglect water rights is 'completely mistaken'    Egypt's Sisi warns against unilateral Nile measures, reaffirms Egypt's water security stance    Egypt's Sisi, Uganda's Museveni discuss boosting ties    Egypt, Huawei explore healthcare digital transformation cooperation    Greco-Roman rock-cut tombs unearthed in Egypt's Aswan    Egypt reveals heritage e-training portal    Sisi launches new support initiative for families of war, terrorism victims    Egypt expands e-ticketing to 110 heritage sites, adds self-service kiosks at Saqqara    Palm Hills Squash Open debuts with 48 international stars, $250,000 prize pool    On Sport to broadcast Pan Arab Golf Championship for Juniors and Ladies in Egypt    Golf Festival in Cairo to mark Arab Golf Federation's 50th anniversary    Germany among EU's priciest labour markets – official data    Paris Olympic gold '24 medals hit record value    A minute of silence for Egyptian sports    Russia says it's in sync with US, China, Pakistan on Taliban    It's a bit frustrating to draw at home: Real Madrid keeper after Villarreal game    Shoukry reviews with Guterres Egypt's efforts to achieve SDGs, promote human rights    Sudan says countries must cooperate on vaccines    Johnson & Johnson: Second shot boosts antibodies and protection against COVID-19    Egypt to tax bloggers, YouTubers    Egypt's FM asserts importance of stability in Libya, holding elections as scheduled    We mustn't lose touch: Muller after Bayern win in Bundesliga    Egypt records 36 new deaths from Covid-19, highest since mid June    Egypt sells $3 bln US-dollar dominated eurobonds    Gamal Hanafy's ceramic exhibition at Gezira Arts Centre is a must go    Italian Institute Director Davide Scalmani presents activities of the Cairo Institute for ITALIANA.IT platform    







Thank you for reporting!
This image will be automatically disabled when it gets reported by several people.



Beggaring the world economy
Published in Daily News Egypt on 08 - 10 - 2010

CHICAGO: Global capital is on the move. As ultra-low interest rates in industrial countries send capital around the world searching for higher yields, a number of emerging-market central banks are intervening heavily, buying the foreign-capital inflows and re-exporting them in order to keep their currencies from appreciating. Others have been imposing capital controls of one stripe or another. In recent weeks, Japan became the first large industrial economy to intervene directly in currency markets.
Why does no one want capital inflows? Which intervention policies are legitimate, and which are not? And where will all this intervention end if it continues unabated?
The portion of capital inflows that is not re-exported represents net capital inflows. This finances domestic spending on foreign goods. So, one reason countries do not like capital inflows is that it means more domestic demand “leaks” outside. Indeed, because capital inflows often cause the domestic exchange rate to appreciate, they encourage further spending on foreign goods as domestic producers become uncompetitive.
Another reason that countries do not like foreign capital inflows is that some of it might be “hot” (or dumb) money, eager to come in when foreign interest rates are low and local asset prices are rising, and quick to leave at the first sign of trouble or when opportunities back home beckon. Volatile capital flows induce volatility in the recipient economy, making booms and busts more pronounced than they would otherwise be.
But, as the saying goes, it takes two hands to clap. If countries could maintain discipline and limit spending by their households, firms, or governments, foreign capital would not be needed, and could be re-exported easily, without much effect on the recipient economy. Problems arise when countries cannot — or will not — spend sensibly.
Countries can overspend for a variety of reasons. The stereotypical Latin American economies of yesteryear used to get into trouble through populist government spending, while the East Asian economies ran into difficulty because of excessive long-term investment. In the United States in the run up to the current crisis, easy credit, especially for housing, induced households to spend too much, while in Greece, the government borrowed its way into trouble.
Unfortunately, though, so long as some countries like China, Germany, Japan, and the oil exporters pump surplus goods into the world economy, not all countries can trim their spending to stay within their means. Since the world does not export to Mars, some countries have to absorb these goods, and accept the capital inflows that finance their consumption.
In the medium term, over-spenders should trim their outlays and habitual exporters should increase theirs. In the short run, though, the world is engaged in a gigantic game of passing the parcel, with no country wanting to take the habitual exporters' goods and their capital surpluses. This is what makes today's beggar-thy-neighbor policies so destructive: though some countries will eventually have to absorb the surpluses and capital, each country is trying to avoid them.
So which policy interventions are legitimate? Any policy of intervening in the exchange rate, or imposing import tariffs or capital controls, tends to force other countries to make greater adjustments. China's exchange-rate intervention probably hurts a number of other emerging-market exporters that do not intervene as much and are less competitive as a result.
But industrial countries, too, intervene substantially in markets. For example, while US monetary-policy intervention (yes, monetary policy is also intervention) has done little to boost domestic demand, it has spurred domestic capital to search for yield around the world. The US dollar would fall substantially — encouraging greater exports — were it not for the fact that foreign central banks are pushing much of that capital right back by buying US government securities.
All this creates distortions that delay adjustment — exchange rates are too low in emerging markets, slowing their move away from exports, while the ease with which the US government is being financed creates little incentive for US politicians to reduce spending over the medium term.
Rather than intervening to obtain a short-term increase in their share of slow-growing global demand, it makes sense for countries to make their economies more balanced and efficient over the medium term. That will allow them to contribute in a sustainable way to increasing global demand.
China, for example, must move more income to households and away from its firms, so that private consumption can increase. The US must improve the education and skills of significant parts of its labor force, so that they can produce more of the high-quality knowledge and service-sector exports in which the US specializes. Higher incomes would boost US savings, reducing households' dependence on debt, even as they maintained consumption levels.
Unfortunately, all this will take time, and citizens impatient for jobs and growth are pressing their politicians. Countries around the world are embracing shortsighted policies that cater to the immediate needs of domestic constituencies. There are exceptions. India, for example, has eschewed currency intervention thus far, even while opening up to long-term rupee debt inflows, in an attempt to finance much-needed infrastructure projects.
India's willingness to spend when everyone else is attempting to sell and save entails risks that need to be carefully managed. But India's example also provides a glimpse of what the world could achieve collectively. After all, beggar-thy-neighbor policies will succeed only in making us all beggars.
Raghuram Rajan, a former Chief Economist of the IMF, is Professor of Finance at the Booth School of Business, University of Chicago, and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy. This commentary is published by Daily News Egypt in collaboration with Project Syndicate, www.project-syndicate.org.


Clic here to read the story from its source.