Prebisch After ECLAC and UNCTAD

My talk at the Universidad Nacional de Colombia last Friday, in Spanish of course. Part of the argument is that Prebisch, contrary to what is often assumed, moved from an argument that emphasized the role of the external constraint in leading to underdevelopment during his United Nations years, to one that put the emphasis on the patterns of domestic consumption, and its negative impact on the surplus, following the literature on stagnation, in his last book on peripheral capitalism. I suggest that the change is problematic.

UNCTAD INET-YSI Summer School 2020

Register here. I will be talking about Myths about monetary policy, inflation targeting and central banks.

UNCTAD report shows the size of austerity

The last Trade and Development Report has been published a while ago. As always, a must read. The graph below shows the change in real government spending and also compares the actual real government spending with long-term government spending growth.

The report says: "on the whole, governments in developed countries adopted contractionary fiscal stances from mid-2010 to the end of 2013, when compared with the long-term trend." My only surprise was that France is not in the austerity group. The European periphery, and the US, are actually leading the austerity effort.

PS: In the US spending peaked in the 3rd quarter of 2009, and then it has been basically contracted ever since (here).

Development and Change Forum 2014

All papers are, at least for now, open for download here. Codrina rada's assessment of UNCTAD's Trade and Development Report 2012 is, for example, available here. Guy Standing's discussion of the precariat is here. Enjoy!

More on Argentina and the Vulture Funds and the sanctity of contracts

So the Argentine government decided to negotiate with the Vulture Funds to avoid a default, which is eminent if no agreement is reached, well, basically today. This is not necessarily bad news, given the potential consequences of a default. It is also one of the frustrating results of the decision of the very Conservative (and pro-bussiness) Roberts Supreme Court. To preside over the negotiations Judge Griesa chose a Wall Street lawyer (who boasts in his CV to have sued Elliot Spitzer for exceeding his authority in investigating Wall Street fraudsters). Argentina is trying to pay today to the ones that renegotiated, but whether that will happen is still not clear (apparently without success).

Note that the consequences of the default could be dire indeed. It would put more pressure on the exchange rate, lead to further depreciation that would be both inflationary, and contractionary, since it would basically reduce real wages. The economy would be forced to continue to grow at very low levels, as it has done since 2011, to avoid a current account crisis. In part, the problem exists even if Argentina does NOT default. Meaning the current account is already close to its limit and the reserves are not sufficiently high (around US$ 28 billions or so), and that's the reason the government has tried to finish negotiations with creditors that did not enter the previous debt reschedulings, including the Paris Club.

The notion is, arguably, that in a world with significant amounts of liquidity, and the chance that low rates of interest in international markets will continue for a while, access to international financial markets would be a reasonable solution for the Argentinean current account constraint. In fact, Brazil has financed a larger current account deficit with little or no problem (maybe the rate of interest is too high, and could be lower, but that's another discussion).

This does not necessarily mean that the Kirchner government has backtracked on previous policies, at least not completely. Reducing foreign indebtedness, after the default and the renegotiation, was the rational choice, and the commodity boom basically provided the policy space for it and for the accumulation of reserves. But borrowing in international markets, when the current account and reserves do not allow for continuous growth, might be fine too if borrowing is done on a sustainable basis. In other words, if the Argentinean government manages exports and imports (import substitution here plays a role as much as export promotion) to allow for the service of debt.

Also, renegotiation of debts (and default might be just a phase in a renegotiation process) are common, and do not show that (as some angry and, quite frankly, not very informed readers suggest in comments on posts on the default, not just in this blog) Argentina is a "deadbeat country and nobody should ever lend to them again." Note that defaults are actually quite common in history.

For example, Cipolla (1982) describes the bankruptcy of the banking houses of a developed country associated to the default of a developing and 'deadbeat' country. What countries are these, you ask. England and Italy, and of course England is the deadbeat one. According to Cipolla (1982: pp. 7-8):

“The large companies of the dominant economy (Florence), which operate in the underdeveloped country (England), have a vital interest in securing the local raw material (wool) for the home market. By logic of events they are led to grant increasingly larger credits to the local rulers, on whose benevolence the licenses for the export of raw material ultimately depend. The rulers of the underdeveloped country, however, instead of using the credit to finance productive investment, squander the funds in war expense and are soon forced to declare bankruptcy.”

So in the mid-fourtenth century the banking houses of Bardi and Peruzzi were brought down by the sovereign default in England and, hence, Florence, more accurately than Italy, was hit by the default. And there are several other countries that would now be considered developed (e.g. Germany) that defaulted before, without being excluded forever from financial markets.

Most countries that default do pay eventually, just at a new rate with extended periods. Renegotiations are normal, and the basis for them is the ability to repay, since it would be better for creditors to receive something. Note also, that creditors (as a whole, not an individual creditor per se) seldom make losses, and that is why all countries after a shorter or longer spell come back to international financial markets. The reason is not difficult to understand, since developing countries pay risk premiums well above the safe assets (Treasury bonds), the advantage of holding developing country debt even for a short while is sufficient for compensating default risks. And besides most savvy investors try to get out before the default (or in the case of Vultures, enter afterwards, to buy debt at the bottom, and make a kill in the courts; it is a good business model, if nothing else).

Changing the terms of contracts, which is basically what a default and renegotiation does, is not new and not the privilege of debtors. In fact, when the credit card company sends a "change of terms notice" to their cardholders, increasing fees or directly the interest rate, it is basically renegotiating unilaterally your contracts. So that is a normal market practice, and Argentina is not violating the sanctity of contracts, and is at least trying to honor its debts, as it has done for the last two hundred years.

Finally, beyond Argentina the consequences of the Robert's Court for international financial markets have been well summarized by UNCTAD, namely:

• First, by removing financial incentives for creditors to participate in orderly debt workouts, the rulings will make future debt restructuring even more difficult, in particular for outstanding bonds without a Collective Action Clause, the actual amount of which is unknown but is likely to be large.
• Second, obligating third-party financial institutions to provide information about assets of sovereign borrowers will have a significant impact on the international financial system as it forces financial service institutions to provide confidential information on the sovereign borrower's global financial transactions to facilitate the enforcement of debt contracts for the creditors.
• Third, the ruling will erode sovereign immunity.

In other words, reduces the chances of debt renegotiations, and of sovereign governments to manage its international reserves, reducing policy space. The question here is not if or whether Argentina should pay, which it was already doing, but at what cost, and who would benefit. The Robert's Court went with Wall Street, and that's no surprise. Interestingly this might hurt even Wall Street. Oh well.

Reference:
Cipolla, C. (1982), The Monetary Policy of Fourteenth-Century Florence. Berkeley: University of California Press.

Commodity dependence in comparative perspective

Last weekend at the Eastern Economic Association Meetings in Boston Bilge Erten presented her work, together with José Antonio Ocampo, on the commodities super-cycle (see here). The figure below (click to enlarge) was on her power point (not in the paper) and is from UNCTAD's State of Commodity's Dependence 2012.

Note that much of Sub-Saharan Africa has levels of commodity exports as a share of total exports of between 80 and 100%. South America is not too far. China has only 8%, even if one can arguably suggest that some of the manufactured goods exported by China, which are highly standardized, are commodified. That would also explain why Mexico and some Central American economies depend less on commodities, i.e. the export of manufactured goods from 'maquilas.' South Korea is also low at 12%. A few Asian countries do better than most of Africa and Latin America in this respect. That is, they would be less vulnerable to changes in commodity prices.

Akyüz on the Global Crisis and Trade Imbalances

Yilmaz Akyüz, ex head of the macroeconomic and development division at UNCTAD, and chief economist at the South Centre has a new post on global imbalances. He says:

International trade has been the single most important channel of transmission of contractionary impulses from the financial crisis and recession in the US and the EU. After growing at an average rate of some 7 per cent per annum, the volume of imports by Advanced Economies (AEs) first decelerated sharply in 2008 and then fell by 12 per cent in 2009, largely because of the decline in imports by the US. It bounced back in 2010 due to a broad-based recovery, but lost momentum as Europe went into tailspin. Growth of total volume of imports by AEs barely reached 1 per cent in 2012. In order to avoid a sharp deceleration of growth, Developing Countries (DCs) have had to rely on their own markets or South-South trade. In fact, given the widespread economic downturn in AEs, the latter have also sought expansion in developing country markets in order to kick-start recovery.

Read the rest here.

John and Richard Toye on the Prebisch-Singer hypothesis: or did Prebisch wholly rely on Singer's work?

Prebisch (center) presiding over an early meeting at ECLA

(Furtado second from the right)

John and Richard Toye paper (subscription required) on Prebisch's contribution to the Prebisch-Singer Hypothesis has had a significant impact on the accepted view about the development their theory. They argue that in their view:

“of the events surrounding the United Nations Economic Commission for Latin America (ECLA) conference in Havana in May 1949 reveals that Prebisch did not discover independently that the terms of trade of primary products were secularly declining, but relied wholly on the previous work of Singer” [italics added].

In other words, they argue that while Prebisch is more well-known in many respects it was the work of Singer that was essential and original in determining the eponym hypothesis. Toye and Toye (2003, p. 443) do NOT argue that Prebisch was unaware of falling commodity prices, but they do suggest that he thought of this as being merely short run phenomena. In their words:

“He [Prebisch] published an article in 1934 arguing that "it is a well-known fact that agricultural prices have fallen more profoundly than those of manufactured articles," and that Argentina had to export 73 percent more than before the depression to obtain the same quantity of manufactured imports (Prebisch [1934] 1991, 341). However, Prebisch was merely noting a fact, and did not provide any theoretical analysis of it (Magariños 1991, 63-64). He saw it as a feature of depression economics, that is, as a short-run cyclical problem. He believed that the remedy was to be found in expansionist economic policies, not, as the Prebisch-Singer thesis would later imply, in major changes in the structure of the international economy” [italics added].

In other words, Prebisch's notion of a structural problem that required a radical change, industrialization, rather than just anti-cyclical macroeconomic policy, basically "wholly relied" on Singer. This is why they believe the first draft of Prebisch's famous Development Manifesto was changed, as accounted by Celso Furtado in his memoirs.

Note, however, that Prebisch was from the early 1930s starting a long trajectory of rethinking his orthodox (somewhat eclectic, but essentially marginalist) views of the functioning of the economy, one in which the fluctuations in the periphery where for the most part accounted by an connected to the oscillations on the central economies. He was also keenly aware of the changes in the hegemonic positions of the US and the UK, and the tribulations of the international financial system.

In a series of papers with Esteban Pérez Caldentey, I have argued that Prebisch was developing a dynamic theory, that would be developed fully in his classes at the University of Buenos Aires, before his Manifesto was conceived in 1949, in which cycle and trend are seen as parts of the same economic impulses. In Prebisch's discussion of the cycle in Argentina, as early as 1934, Prebisch does show awareness of the consequence of a fall in the trend of commodity prices. In the paper we note that:

“The events of the year 1929 were viewed as a further extension of the 1927-1928 cycle. Initially he dated the ascending phase of the cycle between May 1927 and September 1928 (RP, Vol, I. p. 587). Later on however, once the effects of the year 1929 were visible in the Argentine economy he states that the descending phase of the cycle started during 1929 with some symptoms appearing by the middle of 1928 (Ibid. p.613). This point is also emphasized in his 1934 article 'The Present Moment of Our Economy.' He states (RP, Vol. II., p. 158): 'If we were to judge the year 1933…by the evolution of our agricultural exports, we would only be able to say that it was an additional year of contraction adding to those that have …the Argentine economy since 1929.' Prebisch came to realize the distinct character of the Great Depression when he became aware of the profound contraction in agricultural prices. The contraction was so sharp that the agricultural price index reached levels that it had not witnessed since the nineteenth century. As he put it (Ibid., p.346-347 and also 135): 'The collapse in prices…does not constitute the usual phenomenon of cyclical reaction…rather an intense and pertinent decline to positions each time farther away from the level on which developed the relations of production and credit.' And (p. 135) 'It [the decline in agricultural prices] is not a simple return to a previous situation, but of an accentuated and progressive contraction of values, that violently upsets the economic structure of the country'” [italics added].

In other words, it is a matter of trend not cycle, and hence an antecedent of the Prebisch-Singer hypothesis, which is in fact based on his theoretical development of a type of dynamic foreign trade-multiplier story of the cycle.

Also, a careful reading of Furtado's discussion of the writing of the Manifesto suggests that what the Singer paper provided was NOT the empirical basis for a new and radical theory, but the incentive for a more militant and pro-industrialization version of the report. A change in political tone, rather than a significantly different understanding of the problems of development in Latin America, which as we have argued with Esteban, where quite solidified by this time.* As result, I would suggest that Prebisch's fame as the key thinker behind the famous hypothesis is well-deserved, and that the notion that he wholly relied on Singer is hyperbolic at best.

* However, as noted by Mallorquín, Prebisch would put on hold his more radical ideas during his long sojourn in the United Nations system, at ECLAC and then UNCTAD.

PS: For more on Prebisch go to ECLAC's website about him and his legacy here.

Wage Participation and Unemployment in Developed Countries

It is well known that real wages in the developed world have stagnated in the last 4 decades. The figure below shows that wage participation in GDP has fallen too (source here).

This has been associated to higher levels of unemployment. A reduction of around 3% in compensation has been associated to an increase of about 5% in unemployment. The connection is the Kaleckian (Marxist) notion (see Kalecki, 1943) that higher unemployment weakens the bargaining power of workers. The advanced economies do look wage-led, in this simple graphical representation.

Chávez and the left in Latin America

Chávez has passed away, and there will be a lot of reviews on his tenure, much of it biased and incorrect I'm afraid. As noted by Mark Weisbrot not long ago: "such is the state of misrepresentation of Venezuela – it is probably the most lied-about country in the world – that a journalist can say almost anything about Chávez or his government and it is unlikely to be challenged, so long as it is negative."

Growth performance, after the failed coup in 2002 and the oil strike, was reasonably good, and the recovery from the 2009, was not the best in the region, but has been steady. The average growth rate between the debt crisis in the early 1980s and the election of Chávez was around 2%, while in the post-Chavéz era it was around 2.3%. If one takes the post-crisis period, starting in 2004, with the commodity boom, growth was around 5.5% or so (see graph below). Mark provides a good analysis of the Venezuelan economy here.

More importantly, the oil boom allowed space for redistribution policies. Chávez was the central figure in what has been termed natural resource nationalism, which has been central in the rise of left of center governments in South America. One characteristic of these governments is that functional income distribution improved as a result of increasing social transfers. As noted in UNCTAD's last Trade and Development Report: "the share of wages increased significantly in Chile (during the 1990s), the Bolivarian Republic of Venezuela (since 1997) and Argentina (since 2003), although it did not return to its previous peaks" (see graph below).

That does not mean that everything is fine with the Venezuelan economy. The limits of a model based on the exploitation of natural resources are difficult to overcome, and some authors like Leonardo Vera, had noted the problems of low labor productivity growth, particularly in the industrial sector.

A balanced view of Chávez would probably have to admit that he did reasonably well. But you might read a lot about the end of the dictatorship, and the return of democracy. For that it's worth remembering what Mark noted (in the same piece quoted above): "here is what Jimmy Carter said about Venezuela's 'dictatorship' ...: 'As a matter of fact, of the 92 elections that we've monitored, I would say that the election process in Venezuela is the best in the world'."

Trade and Development Report 2012

The United Nations Conference on Trade and Development has just published the TDR 2012, on growth and inequality. Not surprisingly the TDR says that "rising inequality is [not] a necessary condition for sound economic growth." The table below shows the regional evolution of inequality since the 1980s.

As the report shows: "Empirical evidence shows that increasing income inequality has been a feature in the world economy since the early 1980s. However, in the 2000s in Latin America and in parts of Africa and South East-Asia income inequality fell in a context of improved external conditions. The evidence suggests that the relationship between growth and inequality is complex and can be altered by proactive economic and social policies."

State of the World Economy: A South Centre's Perspective

During last Rio+20 Conference the South Centre organized a session with some local economists on the state of the world economy, which to a great extent reflects the views of their chief economist Yilmaz Akyüz (hat tip to Butch Montes for the link). Their views tend to be very pessimistic about the possibilities of sustained growth in the periphery and the continuity of the so-called double speed recovery, fast in the periphery and slow in the center.

For them the boom in the periphery in the New Millennium was caused by the commodity boom, and that, in turn, was dependent on China's exceptional growth record, which was heavily dependent on exports to developed countries. So the castle of cards is about to fall.

My views are slightly different (see here and here). I tend to think that Chinese growth may very well slow down, but may continue on the basis of domestic demand, and the structural transformation of the economy that will have to incorporate hundred millions in the next decades in the urban centers. Also, although the commodity boom eased the external constraint in other parts of the periphery, a lot of the growth was the result of the expansion of domestic demand too.

Also, as noted by the last Trade and Development Report by UNCTAD the expansion in several parts of the periphery has been based on higher rates of wage expansion, in other words, it has been based on an improvement of income distribution and higher domestic demand, in contrast to the stagnating wages in the center.

Finally, it is important also to note that commodity prices may also respond to speculation (as noted in the TDR report above), which explains the volatility of prices in the last decade, but also, as noticed in a recent paper by Franklin Serrano the supply conditions, and may for that reason be less vulnerable to a slowdown in China. In his view, part of the explanation of higher prices is the result of the revival of natural resource nationalism in a large number of developing countries, which has increased the state control of oil reserves and substantially raised the royalty rates and, the absolute rent component of the price of production of commodities.

So, perhaps China will still grow at a reasonably fast rate, and commodity prices might continue at relatively high levels, and there will still be some space for developing countries that do not decide, by doing fiscal adjustments of their own (yes I'm thinking about Latin Americans in particular), to cool down their economies to continue to grow. Sure enough a collapse of the euro, and of world trade, and a run for quality (towards dollars) might as well, as Abraracourcix feared, imply that the sky will fall on our heads, par Toutatis!

Happy ending at UNCTAD XIII

Or at least for now, is what Deborah James says. Note that the contentious paragraph on UNCTAD's mandate that the US State Department didn't like reads tha UNCTAD would:

"continue, as a contribution to the work of the UN, research and analysis on the prospects of, and impact on, developing countries in matters of trade and development, in light of the global economic and financial crisis."

Yep, that is unacceptable indeed. After all you ask, what crisis?

Globalization and development

UNCTAD's Globalization and Development: Facts and Figures, 2012 has been published. You can read the whole report here.

The IMF with a thorn on its side

By Martin Khor

A serious impasse emerged in the preparatory committee of UNCTAD XIII, which is tasked with preparing the draft outcome document that Ministers are scheduled to adopt at the end of UNCTAD XIII in Doha on 21-26 April.

While the previous two or three conferences were rather tame affairs, it looks like UNCTAD XIII (whose general theme is development-centred globalization) will be more difficult, with the organisation’s future scope of work and influence at stake.

UNCTAD was set up in 1964 to support developing countries to strengthen their weak position in international economic structures, and to design national development strategies.

It became a kind of secretariat on behalf of developing countries, providing a small pro-development balance to the huge organisations dominated by the developed countries, such as the OECD, the IMF and World Bank.

Read the rest here.

Also read this piece by Martin Khor too.

Saving UNCTAD

Last week, guest blogger Robert Wade sounded the alarm about efforts on the part of some developed country governments to severely restrict the mandate of the UN Conference on Trade and Development (UNCTAD) at the organization’s April 21-26 ministerial conference in Doha, Qatar. We follow up on that post with a sign-on letter from former UNCTAD senior staff members urging that the institution’s broad mandate be maintained, as a critical source of heterodox economic thinking and policy analysis. We reprint their letter and signatories below.

Read the letter here.

Fiscal austerity threatens a global recession

Check out UNCTAD's new publication here. From the conclusion:

"There is a very real risk of new economic crises erupting and, in today’s highly integrated world economy; their impact will not be limited to specific sectors or to well-defined regions. The G-20 initially recognised this fact, but recent actions have not been consistent. In particular, the fiscal restraint in the countries with current account surpluses and very low long-run interest rates in Europe, point precisely in the wrong direction. A fragile global economy has a significant interest in the implementation of expansionary, rather than contractionary fiscal policies in key economies. Only the former can open a path towards lower fiscal deficits and falling public debt ratios. A “lost decade” for the world economy would risk the development gains achieved during the recent years, and throw into question the ability of democratic governments to tackle the most urgent challenges of our age."

Fiscal austerity in the center, not bubbles in the periphery, are the real risk for the global economy.

UNCTAD against fiscal austerity

The Trade and Development Report (TDR, 2011) has been published.  It says many important things, but I think that what stands out in the the current environment is its defense against fiscal austerity.  It says:

"The current obsession with fiscal tightening in many countries is misguided, as it risks tackling the symptoms of the problem while leaving the basic causes unchanged. In virtually all countries, the fiscal deficit has been a consequence of the global financial crisis, and not a cause. (...) Policymakers should not focus only on debt stock. They need to consider the relationship between the stock of debt and the flow variables, including interest rates and fiscal revenues that affect a country’s ability to support its debt. A major factor that influences changes in the burden of public debt is GDP growth: it is virtually impossible to lower high debt-to-GDP ratios when an economy is stagnant, unless the debtor obtains a significant debt reduction. Hence, the level of a country’s fiscal deficit (or surplus) needs to be viewed from a more holistic and dynamic perspective, in the context of its impact on the sustainability of a country’s financial position and on its economic stability and growth prospects."

Economic growth is the way out of debt, and that should be done with more deficits now.

PS: The NYTimes has a story citing Heiner Flassbeck the head of the Division that writes the TDR report.