May & Nölke: Capitalism in Large Emerging Economies and the New Global Trade Order

From the Introduction:

Large emerging economies have increased their share of the global economy quite substantially over the last decades. Whereas discussions regarding the international political economy previously were focused on the US, EU and Japan, today this focus would be difficult to uphold anymore. In particular China, India and Brazil easily surpassed the established economies in terms of GDP growth, trade growth and industry value added growth during the last 30 years.

Although these figures fluctuate quite substantially on a yearly basis, there are no sound reasons to assume that this long-term tendency is likely to reverse any time soon. Correspondingly, countries such as Brazil, China and India increasingly have to be counted as heavyweights regarding the future of the global economy. Moreover, the large emerging markets recently have begun to organize themselves, in order to coordinate their activities regarding the global economic order. Examples for this coordination include the institutionalized cooperation between India, Brazil and South Africa (IBSA), the BASIC alliance (also including China), or the BRICS grouping, additionally comprising of Russia. In the long term, we thus may assume that we do not only witness a shift in economic importance in favor of large emerging economies, but also a conscious effort by the latter in order to influence global economic rules.

The likely consequences of the rise of the large emerging economies for the global economic order have been discussed widely during recent years (e.g., Cooper et al. 2007; Hurrell 2006; Subacchi 2008). However, the large emerging markets so far have focused on getting a seat at the table (e.g. larger voting rights in the Bretton Woods-institutions, participation in the Basle Committee), and have only just begun to outline their demands regarding specific policies. Thus, on the substance of this new global economic order, many of the existing accounts are either heavily speculative or, in contrast, purely descriptive and thus unable to make any substantial statement regarding the likely future course of events.

In order to overcome this state of affairs, our approach is based on the assumption that we need to develop clear analytical perspectives on the behavior of large emerging economies regarding the global economic order, if we want to surpass a state of discussion that is overly descriptive and/or speculative. The specific perspective that we are developing in this contribution is a “second image” one, in the terminology of Waltz (2001), i.e. we are highlighting the importance of domestic economic structures for the explanation of global economic policies. In contrast to liberal theories of international relations (Moravcsik 1997, Schirm 2012), however, we do not focus on the interactions between domestic societal interest groups and governments, but rather study the broad capitalist structures that have evolved in large emerging markets. The reason is twofold: On the one side, we are interested in the long-term evolution of emerging markets’ positions on the global economic order, a research interest that does not lend itself well to the demarcation of the issue-specific preferences of particular interest groups in individual countries, the usual approach of these liberal theories. On the other side, we are deeply skeptical regarding the application of conventional liberal-pluralist models of democratic policy-making to countries such as China, but also Brazil and India. Instead, we assume – in a more historical-institutionalist perspective – that the type of capitalism dominating in the large emerging economies will also determine their long-term preferences regarding the global economic order, i.e. they will want to make sure that global economic rules do not inhibit the functioning of their domestic economic order (Fioretos 2011). More specifically, we are situating our analysis in the approach of critical institutionalism within comparative capitalism (May and Nölke 2013), i.e. we are comparing national capitalist institutions from a perspective that is highlighting the historical evolution of specific forms of capitalism, based on their mode of integration into the global political economy and on domestic class struggles. Form this perspective, we are arguing that there are important commonalities between the national varieties of capitalism that have developed in the large emerging markets, and that this new type of capitalism is an important determinant of the future global economic order.

Available for download here.

Miles: Inflation, Employment and Monetary Policy – Objectives and Outcomes in the UK and US Compared

ABSTRACT:

This paper explores how sensitive is monetary policy to the precise preferences of the central bank (or of those that set its objectives) over inflation and economic activity. It does so in order to address a puzzle – which is that the US Fed and the Bank of England appear to have quite different objectives and yet have adopted strikingly similar policies in recent years. I use a calibrated model to assess how policy might be sensitive to attaching different weights to output and the output gap in central bank objectives. I find that a wide range of weights can give rise to rather similar monetary policies.

Available for download here.

Zhang: Financing Problems and Solutions of SMEs

ABSTRACT:

SMEs (Small and medium-sized enterprises) make great contributions for the development of the Chinese economy, but it’s very hard for SMEs to get capital raising service from stock markets and banks when they need money for its operation. This paper tries to analyze the external and internal reasons for this phenomenon and gives some suggestions for possible solutions.

 

Available for download here.

Andersson. Bolton & Samama: Hedging Climate Risk

ABSTRACT:

 

We develop a simple dynamic investment strategy that allows long‐term passive investors to hedge climate risk without sacrificing financial returns. Our proposed hedging strategy goes beyond a simple divestment of high carbon footprint or stranded assets stocks. This is just the first step. The second step is to optimize the composition of the low carbon portfolio so as to minimize the tracking error with the reference benchmark index. We show that tracking error can be almost eliminated even for a low carbon index that has 50% less carbon footprint. The low carbon portfolios in existence that have been constructed in this way have so far matched or outperformed their benchmark. And the low carbon indices that have not yet been launched have similar performance based on back testing. By investing in such an index investors are holding, in effect, a “free option in carbon”: as long as the introduction of significant limits on CO2 emissions is postponed they are essentially able to obtain the same returns as on a benchmark index, but the day when CO2 emissions are priced the low carbon index will outperform the benchmark.

Available for download here.

Sun: What Measures Chinese Monetary Policy?

ABSTRACT:

This paper models the People’s Bank of China’s operating procedures in a two-stage vector autoregression model to search for a valid good policy indicator for Chinese monetary policy. The model disentangles endogenous components in changes in monetary policy that are driven either by demand for money or the liquidity management needs arising from foreign exchange purchases. There are four main findings. First, the PBC’s procedures appear to have changed over time, and hence no single indicator represents Chinese monetary policy well for the 2000-2013 time period. Second, its operating procedure is neither pure interest-rate targeting nor pure reserves targeting, but a mixture. Third, a set of indicators all contain information about the policy stance. It is hence preferred to use a composite measure to measure Chinese monetary policy. Finally, we construct a new composite indicator of the overall policy stance, consistent with our model. A comparison with several existing measurement approaches suggests that the composite indices, rather than individual indicators, perform better in measuring Chinese monetary policy.

 

Available for download here.

Gao Yan & Qian Pu: Evaluation and Analysis of Administrative Monopoly in China's Oil Industry

ABSTRACT:

China’s oil and petrochemical industry is under administrative monopoly. Administrative monopoly, according to the Unirule Institute of Economics, refers to trade monopoly from concessions granted and the monopolistic power conferred by administrative departments through administrative documents on business entities—enterprises or administrative institutions that are also engaged in profit-making activities. Administrative monopolies come in various forms, including barriers to entry, special privileges and price regulation, which lead to multi-level monopolistic powers and status. The administrative monopoly in China’s oil and petrochemical industry has evolved from the previous planned economy. Although the central government has the motivation to reform state-owned enterprises to increase revenue, which has been mainly from taxation, it lacks the impetus to break the administrative monopoly. This article shows that the barriers to entry form high monopoly prices and transfer the consumer surplus into business profit, which is unfair and distorts income allocation. After analysing the forms and origins of administrative monopoly in China’s oil and petrochemical industry, the article demonstrates that administrative monopoly causes distorted factor prices, compromises fair trade, reduces efficiency and causes loss of social welfare and degradation of business ethics. This article also proposes judicial, administrative and market-oriented reform solutions.

 

Available for download here.

A Very Bad Idea: A New Bill Would Politicize Reviews of Foreign Investment in the US

Stroock, Stroock & Lavan reports:

The DeLauro bill, HR 5581, would extend the scope of CFIUS reviews to include not only an assessment of the national security impact of a merger, takeover, acquisition by or with a foreign person, but also the “net benefit” of the transaction – namely, the effect of the transaction “on the level of economic activity” in the United States, including “the level and quality of employment” (among other factors) and “the effect of the proposed or pending transaction on productivity, industrial efficiency, technological development, technology transfers, and product innovation,” as well as the compatibility of the proposed action with U.S. “cultural policies,” and the “effect on the public health, safety, and well-being of United States consumers.” HR 5581 would also, for the first time, extend reviews to “construction of a new facility in the United States by any foreign person,” regardless of whether the investment entailed a merger, acquisition, or takeover.

This is a terrible idea.  US companies (and our own trade representatives) fight hard to make sure that such laws don’t impact US investments in foreign enterprises; now, this bill would politicize our own review process, and perhaps even take it beyond the most egregious examples of such protectionist “net benefit” legislation that we see in other countries.  At a time when CFIUS should become more transparent, more predictable, and less politicized, we get this proposed regulation.  Hopefully it will die quickly.

 

 

Asongu: On Taxation, Political Accountability and Foreign Aid – Empirics to a Celebrated Literature

ABSTRACT:

The Eubank findings on taxation, political accountability and foreign aid have had an important influence on academic and policymaking debates. Eubank has warned that his findings should not be generalised across Africa until they are backed by robust empirical evidence. This paper puts some empirical structure to the celebrated literature. The empirical evidence which is based on data from 53 African countries for the period 1996-2010 broadly confirms the Somaliland-based Eubank hypothesis that in the absence of foreign aid, the dependence of government on local tax revenues provides the leverage for better political governance.

 

Available for download ($) here.

Brown: Lessons from the Efforts to Manage the Shift Away from Defined Benefit Plans to Defined Contribution Plans in Australia, the United Kingdom, and the United States

ABSTRACT:

This Article examines what lessons may be learned from examining how Australia, the United Kingdom, and the United States have tried to manage the shift away from defined benefit plans towards defined contribution plans.  This shift has fundamentally changed the relationship between workers and the financial industry.  While defined contribution plans provide employees with some advantages over defined benefit plans (e.g., portability, early vesting, greater autonomy), they also force employees to manage certain risks (longevity risk, investment risk) that they are ill prepared to manage.  In addition, the differences in the way funds in defined contribution plans and defined benefit plans are managed affects the distribution of funds within financial markets that is potentially damaging to the economy.  For example, these differences can lead to decreases in efficient allocation of investments and the creation of asset bubbles. These factors played a role in the recent financial crisis and, if left unaddressed, may contribute to future financial crises.

 

Available for download here.

Garcia-Cicco & Kawamura: Central Bank Liquidity Managemen tand “Unconventional” Monetary Policies

ABSTRACT:

This paper presents a small open economy model to analyze the role of central bank liquidity management in implementing “unconventional” monetary policies within an inflation targeting framework. In particular, the paper explicitly models the facilities that the central bank uses to manage liquidity in the economy, which creates a role for the central bank balance sheet in equilibrium. This permits the analysis of two “unconventional” policies: sterilized exchange-rate interventions and expanding the list of eligible collaterals accepted at the liquidity facilities operated by the central bank. These policies have been recently implemented by several central banks: the former as a way to counteract persistent appreciations in the domestic currency, and the latter as a response to the recent global financial crisis in 2008. As a case study, the paper provides a detailed account of the Chilean experience with these alternative tools, as well as a quantitative evaluation of the effects of some of these policies.

Available for download here.