CEPR: Latin American Growth in the 21st Century - The 'Commodities Boom' That Wasn't

By David Rosnick and Mark Weisbrot

This paper looks at whether the data support such a conclusion. It finds that there is no statistically significant relationship between the increase in the terms of trade (TOT) for Latin American countries and their GDP growth. There is, however, a positive relationship between the TOT increase and an improvement in the current account balance. It may be that this allowed countries to avoid balance of payments crises or constraints.

Read rest here.

Don’t Cry for Argentina--Not Yet!

In the new issue of Dollars & Sense my short article on the Argentine crisis. Subscription required. Previous post on the same topic here, here and here.

Gennaro Zezza: Fiscal and Debt Policies for Sustainable U.S. Growth

New paper by Gennaro Zezza

From the abstract:

In our interpretation, the Great Recession which started in the United States in 2007, and propagated to the rest of the world, was the inevitable outcome of a growth trajectory based on fragile pillars. The concentration of income and wealth, which started rising in the 1980s, along with the stagnation in real wages made it more difficult for the middle class to defend its standard of living, relative to the top decile of the income distribution. This process increased the demand for credit from the household sector, while deregulation of financial markets increased the supply, and the U.S. economy experienced a long period of debt-fueled growth, which broke down first in 2001 with a stock market crash, but at the time fiscal and monetary policy managed to sustain the economy, but without addressing the fundamentals problem, so that private (and foreign) debt kept increasing up to 2006, when a more serious recession started. At present, the long period of low household spending, along with personal bankruptcies, has been effective in reducing private debt relative to income, and, given that the problems we highlight have not been properly addressed yet, growth could start again on the same fragile basis as in the 1990-2006 period. In this paper, adopting the stock-flow consistent approach pioneered by Wynne Godley, we stress the need for fiscal policy to play an active role in (1) modifying the post-tax distribution of income, which along with new regulations of financial markets should reduce the risk of private debt getting out of control again; (2) stimulate environment-friendly investment and technological progress; (3) take action to reduce the U.S. external imbalance, and (4) provide stimulus for sufficient employment growth.

Read the rest here.

Balance of Payments Adjustment and the Euro Crisis

It is worth remembering that according to Eichengreen (1996, p. 25) “the most influential formalization of the gold-standard is the price-specie flow model of David Hume. Perhaps the most remarkable feature of this model is its durability: developed in the eighteenth century, it remains the dominant approach to thinking about the gold standard” (for a critique go here).

The idea is that, at least in a fixed exchange rate regime, inflation and deflation do all the work of adjusting the balance of payments (BOPs). Modern versions add credibility and all that (which includes austerity) for the stabilizing flows of capital to work. Why do I bring this up? Because of Martin Wolf's column (subscription required) in the Financial Times today, which has the graph below.

Note that the countries in crisis, Greece, Ireland, Italy, Portugal and Spain have already adjusted their BOPs (in this case their trade balances). Yet the adjustment is more Keynesian than Humean, or to be more precise, it follows the analysis of A.G. Ford, who argued that peripheral countries, like Argentina, adjust their current account deficits with a good old recession not by lowering domestic prices. And yes, Wolf is right, the specie-flow would only work in a parallel universe.

The Politics of Accounting

To anyone familiar with basic balance of payments accounting, it will come as no surprise that income from foreign investments are included under current account transactions. To students learning balance of payments accounting however, this can be quite confusing. Why should the foreign investment be considered part of the financial account, but the income from the investment be included in the current account? After all, a capital gain or loss will be recorded in the financial account, why not interest and dividend income?

The typical answer provided in most textbooks is that the supply of capital can be thought of as the provision of a service (a very contentious proposition in the history of economic thought one might add!). But if “supplying capital” is a service, why is not included in services? 

I have recently been reading Cheryl Payer’s (old) book, “The Debt Trap: The International Monetary Fund and the Third World” (available from Monthly Review Press here). She offers another suggestion as to why investment income is included among the items in the current account. She argues that:

“Placing investment income firmly in the ‘goods and services’ section of the balance of payments ensures that restrictions on payments to foreign investors cannot legitimately be imposed under IMF rules, while its inclusion in the capital account would allow them.”

Payer is referring here to the well known “asymmetry” in the regulation of current and capital transactions as written into the IMF Articles of Agreement. While there are options available for countries to place controls on capital, “no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions” (Article VII, section 2). This reflects the view that the control of capital was central to the maintenance of international economic stability, a view held by both Keynes and White at Bretton Woods. Since then of course, the IMF has made attempts to resolve this asymmetry by encouraging countries to not exercise controls on the movement of capital (recent changes in tone aside).

In Payer’s view then, the placement of investment income in the current account functions to protect this income from possible regulation or restriction. And of course,  for many of the low and middle income countries net interest payments have been increasingly negative:

Income payments and Receipts for low and middle income countries: