Is China really opening the capital account?

Martin Wolf tells us in a recent column that China is opening up its capital account, according to a report from the People’s Bank of China, and that it is taking a gradual approach. Reform will be in three steps:

"The first, to occur over the next three years, would clear the path for more Chinese investment abroad as ‘the shrinkage of western banks and companies has vacated space for Chinese investments’ and so presented a ‘strategic opportunity’. The second phase, in between three and five years, would accelerate foreign lending of the renminbi. In the longer term, over five to 10 years, foreigners could invest in Chinese stocks, bonds and property. Free convertibility of the renminbi would be the ‘last step’, to be taken at an unspecified time."

Wait what? What this says is that they are going to lend more in yuan, given the retreat of American and European banks, and will eventually allow some amount of foreign ownership of assets denominated in yuan. This, by the way, is just trying to expand the international role of the yuan, something aptly called the yuan diplomacy by Kevin Gallagher, who notes that already: "China became the largest source of finance for Latin American governments."

Yet, only the last step, the one to be taken at an unspecified time, would constitute opening the capital account. So basically they announced that they want to increase the international use of the yuan, getting more developing countries to borrow in their currency, while maintaining a strict control of the supply of their currency. In fact, The Economist tells us that Sheng Songcheng, head of the central bank’s research department and the lead author of the study cited by Wolf said that: "If you wait for the exchange rate and interest rates to be fully liberalized ...  you may wait forever." I guess then never is when the capital account will be fully open. That's slow enough, and is a capital account liberalization I would recommend too.

Heterodox Central Bankers III

Raúl Prebisch (1901-1986)

Raúl Prebisch on the adoption of foreign exchange controls by the Argentinean central bank in 1943:

“This capital [short-term capital] went to further inflate the categories of goods or assets that were already inflated, and did not translate, except in very rare occasions, in a real increase in the production of the country… the measures adopted by the government permit to make an exception, to allow the inflow of these capitals if it is shown that these are oriented towards the increase in real production…” (Obras, 1919-1949 Vol. IV, p. 183; General Manager, Central Bank of Argentina, 1935-1943).

In other words, short-term speculative flows should be constrained, but long-term flows for productive activities are fine.

The Colombia FTA: Only Corporations Win

Trade has been a contentious issue in U.S. politics for a very long while. In recent times, free trade agreements have been promoted as essential by the cheerleaders of globalization, and as a threat to good jobs with decent wages and benefits by those who are skeptical about the advantages of the global economy. President Obama, a man of broad views, seems to represent both opinions. On February 12, 2008, candidate Obama made the following argument on this issue:

“It’s a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart. That’s what happens when the American worker doesn’t have a voice at the negotiating table, when leaders change their positions on trade with the politics of the moment, and that’s why we need a President who will listen to Main Street—not just Wall Street; a President who will stand with workers not just when it’s easy, but when it’s hard.”

The previous year, Senator Obama had opposed trade deals with Colombia, Panama, and South Korea, while favoring one with Peru. Facing several critics, even before he won the nomination, Obama clarified that he did not intend to unilaterally revise NAFTA, but would be favorable to having a dialogue about the costs of free trade agreements (FTAs). Once in office, however, Obama seems to have made a 180-degree turn.



Read the rest here.

Who will succeed DSK?

There is a lot of fuss about who should be the next managing director of the IMF. The French have held the position for more than 30 years, and a European has always been at the helm of the IMF. Thus, the voices of protest for a broader representation, more transparency and a democratic process have been raised. Raghuram Rajan, former chief economist at the IMF, has suggested (subscription required) that we need a technical/market economist rather than a politician running the Fund.

“The fund is designed to push tough policies to straighten out countries that have mismanaged finances, not win a popularity contest. When it colludes with politicians to propose politically palatable programs, the IMF fails in its proper role of reforming a country.”

Interestingly enough the idea is that good policies are painful ones. The sadomasochistic vein in mainstream economics runs deep. Rajan means that the IMF is needed to impose fiscal contraction, and it should be independent from politicians, like central banks (I'll leave that for another post). He then suggests that IMF should:

“set up a selection committee of worthies: Larry Summers, Jean Claude Trichet, Ernesto Zedillo, and so on.”

In other words, the independent guys that deregulated financial markets, imposed brutal contraction in the European periphery and commanded over the Mexican Tequila (Zedillo inherited the crisis from Salinas, to a great extent, but shared the neoliberal principles) respectively (among other things). It would be like having Count Dracula in charge of the Red Cross blood donation program.

Further, Mr. Rajan peddles the need for a non-European to head the IMF and cites the usual names (Armínio Fraga, Trevor Manuel, Montek Ahluwalia, Tharman Shanmugaratnam, only missing Agustín Carstens in the lists of developing country’s economists cited for the position). The common denominator is that all of them would maintain policies that are essentially more of the same, and will not push the IMF to revise their adjustment policies. If these are the candidates they might as well appoint a European to do the dirty job!

The question is not so much whether the selection is done by notables (even though one may want less notorious people than the ones in Rajan’s list) or other lesser beings, or even whether the new managing director will come from the colonies (sorry, the developing countries) or Europe. The question is whether the IMF is going to change its ways and understand that pro-growth and employment generating policies should be painful to capital, not labor. We need capital controls and fiscal expansion, to create jobs.

Do what I say not what I do

These days there is a great amount of praise for the IMF's changing views, on everything, from the rethinking of macroeconomics, to their admission that capital controls might be good.  I remain very skeptical, and that's why it was great to read Mark Weisbrot's last piece on the IMF. He reminds us that:

"Unfortunately the IMF's
practice still does not match its rhetoric or even, increasingly, its own
research.  In Greece, Ireland, Spain, Portugal, Latvia and other
countries, the Fund is still involved in the implementation of 'pro-cyclical'
policies that will keep these countries from recovering for a long time."

How do you call a person (or institution) that says one thing, but then does another?!