October 2015 The Bulletin Vol. 6 Ed. 9 Official monetary and financial institutions▪ Asset management ▪ Global money and credit Fed falters Yellen’s wavering

Meghnad Desai on US interest rate nerves Mojmir Hampl on why Europe needs Britain Kingsley Chiedu Moghalu on Buhari’s challenges Rakesh Mohan on US and Brics IMF roles David Owen on restructuring Europe David Smith on Pope Francis’ economic voice Global Louis de Montpellier [email protected] +44 20 3395 6189 ConneCt Into aPaC Hon Cheung [email protected] +65 6826 7505 amerICas Carl Riedy the network [email protected] +1 202 429 8427 Connect into State Street Global Advisors’ network of expertise, tailored training and investment excellence. emea Benefit from our Official Institutions Group’s decades-deep experience. Our service Kristina Sowah [email protected] is honed to the specific needs of sovereign clients such as central banks, sovereign +44 20 3395 6842 wealth funds, government agencies and supranational institutions. From Passive to Active, Alternatives to the latest Advanced Beta strategies, the Official Institutions Group can provide the customised client solutions you need. To learn more about how we can help you, please visit our website ssga.com/oig or contact your local representative.

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EUMKT-3892_Connect Into The Network Ad.indd 1 25/03/2015 10:41 Contents International monetary policy Fed falters The Federal Reserve’s reluctance Change is overdue for IMF governance Rakesh Mohan 7 to raise interest rates – a result of fears about an emerging markets Why international coordination matters Rakesh Mohan 9 slowdown, especially in China – has considerable systemic Fed sets the stage for lift-off later this year Darrell Delamaide 10 implications. America’s monetary policy-makers are taking Risk aversion is risky Meghnad Desai 11 seriously the world outside the US . The same attention needs Europe to be paid to global economic governance. Not only the ECB shifts towards transparency Frank Westermann 5 developing countries but also the US need a higher IMF quota. Restructuring Europe in interests of all David Owen & David Marsh 12 Europe would be the loser. ▪ Overshadowing Greece and refugees Mojmir Hampl 13 Greece starts debtor v. creditor campaign David Marsh 13

Emerging markets

Now Buhari’s hard work really begins Kingsley Chiedu Moghalu 14 Papal voice on economic stage David Smith 17

Book review

An unholy mixture William Keegan 18 Eichel spells out ECB options

n unusual Anglo-German alliance Book review on new policies for the European William Keegan finds Capitalism: A Central Bank has been forged with an Money, Morals and Markets by FT intervention at an OMFIF meeting in journalist and OMFIF Chairman London by Hans Eichel, German finance John Plender a ‘beautifully written’ and rigorous examination minister 1999-2005. of capitalism. Eichel, who was in government in the Plender lines early years of the euro under Chancellor up former Gerhard Schröder, was responsible for Fed Reserve economic restructuring under the Agenda Chair Alan 2010 programme. Lending proposal: Hans Eichel and OMFIF’s Greenspan for At a workshop on ‘New ways forward European Central Bank report serious criticism, for the European Central Bank’ on 29 and reaches a September Eichel urged the ECB to focus and small businesses have been voiced damning verdict its €60bn-a-month QE programme on by Adam Posen, a former independent on his faith in the efficiency of supporting infrastructure projects and member of the Bank of England monetary markets. Politicians, particularly small and medium-sized businesses. policy committee, and Paul Marshall, a those who repealed the Glass- Eichel’s plan, which he has advocated hedge fund owner in London. Steagall Act, attract only slightly privately for several months, is similar Eichel proposed that the ECB should less censure. Unlike some critics, to the ‘People’s QE’ proposals by Jeremy lend to public sector and regional he does not lay all the blame at the Corbyn, the new UK Labour Opposition banks, targeting areas of the economy doors of the banks – at least not party leader, for the Bank of England that can accelerate growth, possibly the commercial banks. Keegan’s directly to fund government-directed using infrastructure assets and other verdict: ‘A delight to read’. ▪ investment in infrastructure. similar securities as collateral, as a way Similar ideas for targeted central bank of increasing the effectiveness of its efforts to spur lending for infrastructure quantitative easing efforts. ▪ Vol. 6 Ed. 9

October 2015 3 Official Monetary and Financial OMFIF Advertising & subscriptions Institutions Forum Promoting dialogue for world finance For advertising and subscription 30 Crown Place details, contact: London The Official Monetary and Financial Institutions EC2A 4EB Forum is an independent platform for dialogue and [email protected] United Kingdom Diary dates and meetings research. It serves as a non-lobbying network for T: +44 (0)20 3008 5262 worldwide public-private sector interaction in finance A full list of past and forthcoming F: +44 (0)20 7965 4489 and economics. Members are private and public meetings is available on sector institutions worldwide. The aim is to promote www.omfif.org @OMFIF exchanges of information and best practice in an atmosphere of mutual trust. Forwww.omfif.org/meetings more information on meetings,

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Company Number: 7032533 EDITORIAL Governance and growth on Lima agenda

here is plenty to occupy minds at the October annual by the rest of the FOMC rate-deciding committee) does not bind her Tmeetings of the International Monetary Fund and World hands for the rest of the year. Meghnad Desai, co-author with David Bank in Lima. China has implanted itself in the top echelons of Marsh of a blunt 31 August commentary listing 10 points why the the world economy and finance, yet has been at the centre of perturbation over what appears to be a larger-than-expected over ‘lift-off’ was a mistake that heightens the danger of another economic slowdown. 2008-styleFed should crash.lift rates He now, calls writeson readers flatly to that prepare the Fed’s for anervousness coming storm. Showing a degree of sensitivity to global economic We list the protagonists in the forthcoming debtor versus developments that many critics (wrongly) claim it never hitherto creditor skirmish in Europe over the Greek bail-out package, where embodied, the Federal Reserve is still prevaricating over what the overall aims, but not individual steps towards implementation, appears to be an inevitable rise in interest rates, nine years after the last one. Europe has stabilised after a lull in the summer outbreak Tsipras will be exploring new methods of maximising access to of Greek thunder and lightning – although all parties accept that fundshave been while agreed. minimising Newly a reconfirmedfurther economic Prime squeeze. Minister Alexis bad weather will resume again before the sun shines. Fresh challenges are on display elsewhere. Kingsley Chiedu We devote the October 2015 Bulletin to the interplay of forces between world governance and the still fragile progress of the months of waiting – by Nigerian President Muhammadu Buhari. world economy. The Fed’s hesitation over interest rate ‘lift-off’ may PopeMoghalu Francis comments has visited on the the first US, cabinetunderlining appointment his wish to– after make a deep imprint on the global economic stage, the subject of a penetrating commentary by David Smith. fullhave view, been can justified be much on monetarymore readily grounds; transmitted from a to psychological others. David Cameron, the UK prime minister, is preparing for a pointIn aof masterful view, it was historical a flawed summary decision, of since the imbalances the Fed’s fears, over now on referendum by 2017 on whether Britain will remain in the EU. individual economies’ size and IMF representation, Rakesh Mohan, David Owen and David Marsh write that restructuring the EU into executive director for India at the Fund, sets out the reasons why a euro bloc and a wider grouping enshrining the principles of the Europe, in particular, needs to relinquish voting weight in coming single market would be a helpful policy not just for the UK but for years. ‘The centre of gravity of the global economy is shifting back the rest of the EU. towards Asia from the North Atlantic. Yet there is little evidence Mojmir Hampl, deputy governor of the Czech National Bank,

governance, where we see a stalemate over the international for the whole continent. William Keegan explains how OMFIF of this change reflected in the framework of global economic Chairmanwarns that John Britain’s Plender’s decision latest will book have shows significant that capitalism repercussions the advanced economies’ reluctance to countenance broader governancefinancial institutions,’ changes, despite he writes. these ‘The momentous impasse seems shifts.’ to indicate seeds of its own recurrent crises. Of this truth, in Lima and beyond, Darrell Delamaide emphasises that Yellen’s ‘No’ (heavily backed therecontains will not be sono muchshortage the ofseeds evidence. of its own ▪ destruction; more the ECB shifts towards transparency Data release clarifies key indicator on balance of payments Frank Westermann, Advisory Board

he European Central Bank has decided to release data on intra- are a key indicator of Europe’s balance of payments position and a Teuro system claims and liabilities among national central banks barometer of financial stability. that had accumulated since the 2007 financial crisis under the Target-2 In October 2011, the Institute of Empirical Economic Research at system, which reached a peak of more than €1tn for crisis-hit countries. Osnabrück University started collecting data from NCBs based on their The Target-2 claims and liabilities have attracted controversy since published monthly balances, released in different formats and according summer 2011, when Hans-Werner Sinn, president of Germany’s to varying schedules. Only a few NCBs explicitly identified the Target-2 Munich-based Ifo research institute, started a debate on the ECB’s role in balances. The Bundesbank initially included them in a composite balance Europe’s financial crisis. Pointing towards these claims and liabilities on sheet position called ‘other items’. NCB balance sheets, he argued there was a ‘stealth bail-out’, unnoticed Although the Institute was able to report the number with relatively by the general public and ignored by European parliaments. high precision, some of the values relied on estimates and others The lack of a common database was a major shortcoming in the differed with respect to the publication date. Also the data lacked the subsequent debate. In a research article, Sinn and his Ifo colleague authority of an official institution, needed for research and business use. Timo Wollmershäuser were the first to illustrate how data from the This shortcoming has now been rectified. As of September, the ECB is International Monetary Fund can be used to approximate the Target-2 providing these numbers in a common data base. ▪ balances. However, these data came with a delay of several weeks and were accessible only to subscribers to the IMF’s statistical database. Frank Westermann is Professor of International Economic Policy and Regardless of which side observers and analysts take in the debate, Director of the Institute of Empirical Economic Research, Osnabrück the ECB step is a welcome move towards transparency. The balances University.

October 2015 5 Monthly review

ADVISORY BOARD Omfif welcomes a new member to the advisory board, David Suratgar. His appointment takes the number of Advisory Board members to 171.

David Suratgar is an international lawyer and banker with more than 40 years of experience. He has advised governments, central banks, privatisation commissions and state agencies, with a focus on Africa and Latin America. He is a former

He serves as chairman of Masawara, as chairman of the Emerging Markets Managed Accounts, and as a member of the Advisorydeputy chairman Board, XPV of Deutsche Capital, the Morgan Canadian Grenfell, investment where he company ran the forproject the water finance industry. and international advisory departments.

REPORT LAUNCH Experts discuss ECB future OMFIF launched its ‘Future of the European Central Bank’ report at a

ministerroundtable called on 29 on September the ECB to inrefocus London. its quantitativeThe report clarifies easing programme six key questions on lendingon the role for ofinfrastructure the ECB. At the projects launch and Hans small Eichel, and formermedium-sized German businesses finance

(see p. 3). For a copy of the report please email [email protected]. CITY LECTURE Mohan favours IMF quota reform for US, Brics The US and developing countries should expand each have a larger share of the global economy their International Monetary Fund quotas and than the US by 2060 (graph, right). He criticised voting power at the expense of Europe, Rakesh delays in the US Congress in implementing IMF Mohan, executive director at the IMF for India, structural changes as showing the ‘reluctance of Sri Lanka, Bangladesh and Bhutan, said in an advanced economies to transferring power to OMFIF City Lecture in London on 4 September. emerging market economies’. For a shortened Mohan showed that China and India would version of the lecture see p. 7, 8 and 9.

SEMINAR The role of GPIs in enhancing African development n 15 September OMFIF held its inaugural Africa Public OInvestors Meeting at Innholders’ Hall in London. A total of 43 delegates heard from panel experts and took part in discussions.

harnessing Africa’s natural resources in the interests of wider Sessions included the role of public investors in Africa; future precepts for improving the effectiveness of investments andprosperity; accelerating bridging structural Africa’s change. infrastructure financing gap; and Global Public Investors hold about $29tn in assets under

Africa both in terms of size and long-term stability. management, and represent a potentially significant input into The meeting echoed the sentiments expressed at the OMFIF Second Meeting in Africa, held in Port Louis in November 2012, where participants focused on the potential that global capital

could have on the development of African nations if continental, African investment: Louis Kasekende, Deputy Governor, Bank of Uganda flows from sources of long-term stable finance like pension funds (left), with Mthuli Ncube, Senior Adviser to the President, Eastern and proposition. In a low yield, low interest-rate environment Southern African Trade and Development Bank regional and national bodies could make a sufficiently attractive are actively examining investment in Africa. In a post-QE and Asian markets. Large sovereign funds and some Canadian environment,where there is hedge difficulty funds securing and asset reasonable managers returns, have found executives that public pension funds had moved into infrastructure and were increasingly examining and investing in frontier emerging is less appealing, demonstrated in recent weeks by declines in US markets and illiquid assets a trend that was likely to continue. the traditional path of geographical diversification for investment – 6 www.omfif.org International monetary policy Change is overdue for IMF governance Why Brics countries and US need greater representation Rakesh Mohan, IMF Executive Board Member

he world is on the cusp of an epochal of the European countries, which retain Chart 1: USIMF Quota holds Share veto(%) position

Tchange in global economic power, not disproportionate weights in the IMF despite Current IMF quota shares seen during the past 200 ̶ 250 years since the a shrinking share of global GDP (Chart 2). US start of the industrial revolution. leadership of the international institutions The centre of gravity of the global economy remains of great value, and it is important Brazil 2% is shifting back towards Asia from the North that the US retains its dominant position. US 18% Russia Atlantic. Yet there is little evidence of this The Bretton Woods institutions owe their 2% change being reflected in the framework of founding to US vision after the second world India global economic governance, where we see war. US financial markets continue to be the 2% a stalemate over the international financial most dominant in depth and efficiency – and China the dollar is the dominant reserve currency Other Members 4% institutions, in particular the International 71% Monetary Fund. The impasse seems to and will remain so for the foreseeable future. South Africa Although the role of the emerging economic 1% indicate the advanced economies’ reluctance powers is increasing, their soft power is not to countenance broader governance changes, rising at the same pace, underlining the despite these momentous economic shifts. importance of keeping US leadership. Source: IMF The international financial organisations Source: IMF the backdrop of the North Atlantic financial remain dominated by the advanced economies. IMF reforms have been held up Economic weight shifts crisis that originated with US sub-prime by the US administration’s inability to obtain The global economic structure was troubles in mid-2007. approval from Congress for doubling the IMF’s broadly stable from 1945 until the turn of the The crisis has led to stagnation and quota resources, and changes in its voting millennium. The advanced economies’ share weakness in the mature economies, whereas and quota structures that the IMF’s board in global GDP was around 60% through that emerging economies recorded strong growth, period though there were changes in relative of governors agreed under the 2010 review albeit with some recent moderation. weights among the advanced economies process (the Fund’s 14th). The Brics countries, particularly China and This congressional blockage is doubly themselves, particularly related to Germany and Japan (Tables 1 and 2). India, are acquiring large economic weights unfortunate because the US was the principal because of population size, despite relatively architect of the 2010 accord. The US has Change since 2000 has gathered pace, low per capita incomes. Greater participation 17.7% of IMF quota shares and hence an with economic weight shifting from the North in global economic governance will require effective veto over important decisions that Atlantic to Asia. This is expected to accelerate require a ‘super-majority’ of 85% (Chart 1). further over the next couple of decades. So greater assumption of responsibility. The The creation of new institutions led changes in global economic governance will transfer of governance roles needs to be by emerging and developing economies, have to be more substantive than the current tempered by the relative lack of sophistication particularly by the Brics countries (Brazil, incremental change envisaged. and size of economic institutions in these Russia, India, China and South Africa), such as The global GDP shares of emerging and aspiring countries. But we can expect that this developing economies is expected to increase the Asian Infrastructure Investment Bank, the gap will be bridged before too long. from 40% in 2000 to over 60% by 2020 in New Development Bank Brics and Currency Financial globalisation is unlikely to be Reserve Arrangement, is indicative of these purchasing power parity terms and from 20 to 40% in market exchange rate terms. The reversed. As the world recovers from the countries’ dissatisfaction with the framework. 2008–09 turbulence, other crises will erupt. Prospective changes in quotas and voting G7 countries’ share in global GDP (PPP) is As normalisation takes place from the shares would lead to reduction in the shares expected to fall from about 44% in 2000 to about 30% by 2020, with a corresponding unconventional excessively accommodative Chart 2: Divison% share of of world global GDP (PPP GDP, 2013) increase in the share of Brics from 19% in policies practised in much of the developed % share of world GDP (in PPP terms) 2013 2000 to 33% in 2020 – part of much bigger world, and the large debt overhang that exists, changes expected up to 2060 (Chart 3). the eruption of financial instability in some The emerging economies’ demand for parts of the world would not be surprising in

EU better representation must be seen against the near and medium term. 18% GDP and quota shares: growing imbalances Rest of world Table 1: The case for a larger share for Brics countries 30% GDP shares and current and proposed quotas 3 Proposed Quota 2013 Data Update Current Quota US Share 14th Review2 17% Share (20081) Calculated GDP (PPP) GDP (MER) (2010) 4 Source: IMF Quota Share Share share US 17.7 17.4 14.5 16.7 22.1 Brics European Union 32.0 30.4 27.6 17.9 23.8 30% BRICS 11.5 14.8 20.0 29.5 21.0 Japan 1. Existing quota share last adjusted in 2003. 3. Data update based on latest data available for 2013.

Source: IMF Source: IMF 5% 2. Yet to be implemented. 4. Calculated quota share based on formula used for 14th review.

Source: IMF October 2015 7

1/ Existing Quota Share, last adjusted in 2008

2/ Yet to be implemented 3/ Data update based on latest data available for 2013 4/ Calculated Quota Share based on formula used for 14th Review International monetary policy

As the emerging economies have Union, Norway and Switzerland) taking a Chart 3: Brics nations overtake G7 grown individually and collectively, and as third of board seats, and more than a third of ProjectedProjected global structure economy of the global economy2014–60 2014-2060 international financial markets have become board voting power: the relative constancy of 50 49 45 more interconnected, resolving successive their quota shares is striking, since their share 41 40 38 crises will need large international resources. in GDP is falling consistently (Chart 4). 33 30 The IMF is likely to be more not less necessary Furthermore, the Bretton Woods 30 for its roles in preserving financial stability institutions since inception have been headed Percent 20 and as a lender of last resort. To perform by European nationals in the IMF and US effectively, the Fund must have adequate nationals in the World Bank. This pattern has 10 permanent quota resources to retain and continued for almost seven decades now. It 0 enhance its credibility and legitimacy. appears that there was an informal agreement 2014 2030 2060 G7 BRICS So it is essential that its quota resources that the World Bank would be headed by a Source:Source: IMF IMF are increased regularly, in line with the US national, and the implicit understanding The best way out of this impasse would expanding size of the global economy and was that the IMF would be headed by a be for the US to retake leadership in the IMF financial markets. Moreover, such regular non-US national; somehow, over time, this and global economic governance through quota reviews would got transformed to an immediate congressional approval of the also ensure that the The US is most a European national long-postponed 14th review. emerging powers get heading the IMF on If the US believes that the IMF is important their rightful share in under-represented a continuous basis. for the smooth functioning of the global the IMF’s governance, in the Fund in relation to its Thus, nationality has economy, in which it has a large stake, it must extending its evolution share of GDP – mirroring turned out to be the make it clear that it is in favour of discussions since 1950 (Table 1 and guiding criterion to on and consequent approval of the next 2). Decisions on IMF developing countries head the Bretton five-year review (the 15th), which should in governance and the use “ Woods organisations normal circumstances have been approved of IMF resources can no longer be made in the and nationals of other countries, irrespective by end of 2015. And the US should support clubs of the G7 and G10: some of the action of merit, have been excluded. This must be other such quota reviews in the years and has already shifted to the G20. corrected. Other institutions such as the decades to come. Further ahead, reviews of The IMF’s governance structure has World Trade Organisation have shown the IMF quotas and governance need to be more to become more inclusive. The US needs way; there is no reason why the Fund cannot radical – with significant implications for to retain its role, in its own as well as the find procedures that could result in the same overall quota and voting shares. In addition wider international interest. As US Secretary outcome. to the under-representation of the Brics, the of the Treasury Jack Lew noted in March country that is most under-represented in 2015: ‘A well-resourced and effective IMF is US needs to retake leadership relation to its share in global GDP is the US. indispensable to achieving our economic and Global economic governance is at a Whereas the GDP shares of the US and EU national security interests, protecting the crossroads. The economy has become more are broadly comparable (16.7 and 17.9% in health of the US economy and enhancing the complex and interconnected, as international PPP terms, respectively), the calculated quota prosperity of America’s workers.’ trade has become virtually free across the share of the US, based on the latest 2013 data, European countries remain overweight, board as a consequence of multilateral trade would be 14.5%, compared with 27.6% for the with the ‘advanced Europe’ group (European rounds, and as capital accounts open further. EU (based on the current quota formula). Correction of this imbalance in favour of Table 2: Advanced countriesIMF quota remain shares in(%): lead top holders in IMF changes since 1950 the US is important in obtaining congressional IMF quota shares (%) for top 13 nations approval for future quota reviews. The 1950 1980 2000 2012 existing quota formula will need revision to accomplish this. If an appropriate correction is 1 US 32.0 US 21.2 US 17.6 US 17.7 carried out, it would postpone by some years 2 UK 15.1 UK 7.4 Japan 6.3 Japan 6.6 the prospect of the US quota share dropping 3 Taiwan 6.4 Germany 5.4 Germany 6.2 Germany 6.1 below the important 15% threshold. This 4 France 6.1 France 4.8 France 5.1 France 4.5 provides a further reason why protecting the 5 India 4.7 Japan 4.2 UK 5.1 UK 4.5 US quota share should be a priority – a matter 6 Canada 3.5 Canada 3.4 Italy 3.3 China 4.0 that concerns not simply the US, but also the entire international community. 7 Netherlands 3.2 Italy 3.1 Saudi Arabia 3.3 Italy 3.3 ▪ 8 Belgium 2.6 China 3.0 Canada 3.0 Saudi Arabia 2.9 Professor Rakesh Mohan is an Executive 9 Australia 2.3 India 2.9 Russia 2.8 Canada 2.7 Director on the IMF Board, representing 10 Italy 2.1 Netherlands 2.4 Netherlands 2.4 Russia 2.5 India, Sri Lanka, Bangladesh and Bhutan, 11 Brazil 1.7 Belgium 2.2 China 2.2 India 2.4 and a member of the OMFIF Advisory Board. Based on Rakesh Mohan and 12 South Africa 1.2 Australia 2.0 Belgium 2.2 Netherlands 2.2 Muneesh Kapur, ‘Emerging Powers and 13 Mexico 1.0 Saudi Arabia 1.7 India 2.0 Belgium 1.9 Global Governance: Whither the IMF?’, IMF Source:Sources: IFS, IFS, IMF IMF Working Paper (forthcoming 2015).

8 www.omfif.org International monetary policy Why international coordination matters

An interconnected world needs a resilient IMF s global economic, monetary and Chart 4: EU nations’European share Union: of global quotas GDP and falls GDP but(shares IMF in quota world total)remains static A financial systems have evolved over the European Union quotas and GDP (shares in world total) IMF’s history of 70 years, and as dominant western economic policy orthodoxy has 40 changed, so has the role of the IMF, writes 35 Rakesh Mohan. But the need for the Fund as a central coordinating institution remains 30 as strong as ever. A prime factor has been 25 much freer capital flows from the 1990s 20 onwards, opening of capital accounts and overall financial liberalisation in advanced Percent 15 as well as emerging and developing 10 economies. The result has been an increase in financial interconnectedness – and, with 5 this, larger rescue programmes (Chart 5). 0 In 1981, India needed a programme of only about $5bn to solve its economic crisis at 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 that time. Recent IMF programmes for small Source: IMF Quota GDP (PPP) GDP (Market Exchange Rate) countries like Portugal, Ireland and Greece have each exceeded $25bn. These countries IMF member countries could be grouped the economy, ending up with the 2008 crisis. have needed so much money that European Source:in two IMF relatively distinct categories: debtor The upheaval is often dubbed as a global institutions have had to supplement IMF countries (most emerging economies) financial crisis. But it originated in the North resources, so that the IMF has been much the and creditor countries (mostly advanced Atlantic economies; other economies were junior partner in these programmes in terms of economies). It was natural that the advanced not its source, although they were hit by it. resources, and possibly in programme design. grouping would have a more dominant This enhanced interconnectedness has raised When the IMF was founded in 1944, governance role. These distinctions were the need for international coordination. The international financial flows were mainly blurred at times, but have become more so gold standard was an anchor before the first related to trade financing: private sector since 2008. There have been more than 20 world war, characterised by free capital flows financial flows were of limited scope and systemic banking crises since 2008, mostly and fixed exchange rates. But the successful importance. The Bretton Woods system did in advanced countries. Consequently, many pursuit of the gold standard needed implicit not envisage free capital flows. Until the 1980s, emerging market economies are now counted global cooperation among the major economic there were relatively few financial, banking and among the creditors, and advanced economies powers. The difficulties were perhaps lowered debt crises: the drawing of IMF resources by among the debtor countries group. by the need to organise cooperation among a member countries was limited to 100% of their relatively small group comprising the European respective quotas, and only 25% in one year. Weakness of inflation targeting countries and North America. The rest of the With the breakdown of Bretton Woods in In addition, the North Atlantic financial crisis world did not matter and was, in any case, 1973, and the advent of floating exchange called into question the dominant economic under colonial domination. rates and free private capital flows, and the paradigm – characterised by the ‘Washington The system broke down between the wars, oil price rises of 1973 and 1979, the frequency consensus’ of free cross-border capital flows, characterised by hyperinflation in Germany, the and seriousness of financial crises increased. fully flexible exchange rates, and complete Great Depression, beggar-thy-neighbour and Between 1970 and 2011, according to Jack faith in the efficacy of markets and capitalism. protectionist policies, and ascendancy of fiscal Boorman, a former IMF adviser, there were It highlighted, too, weaknesses in the dominant policy. This period of economic chaos provided 147 systemic banking crises, 218 currency paradigm of macroeconomic management for an impetus towards developing a robust global crises, and 66 sovereign debt crises. Until 2007, central banks – inflation targeting. economic order for high and stable growth. the vast majority of these crises occurred in Inflation-targeting regimes led to central The Bretton Woods conference, dominated emerging and developing economies. banks focusing only on a narrow objective by the US and UK, provided a forum for these (price stability defined low and stable inflation discussions, which led to the creation of three Chart 5: The cost of crises increases major international financial institutions – the rates) for monetary policy supported by IMF, the World Bank and later, the General Size of IMFSize rescue of IMF rescue packages packages ($USbn): historical a single instrument (policy interest rate). In the process, other key complementary Agreement on Tariffs and Trade and the World 30000 central banking responsibilities – like financial Trade Organisation. World economic thought 25000 regulation and supervision and public debt and economic dynamics have changed. But the principles behind the IMF’s creation remain 20000 management – were either entrusted to specialised authorities outside the central bank valid more than 70 years later. 15000 ▪ or were given relatively little attention. Strong 10000 microprudential supervision was believed to The views expressed in these two articles 5000 contribute to effective financial stability at are those of Prof. Rakesh Mohan and do not necessarily represent the views of the IMF, 0 the macro level. For nearly two decades, this was a period of the Great Moderation – a its Executive Board, or IMF management, or Source: IMF time in which financial imbalances built up in of the authorities he represents. Source: IMF October 2015 9 International monetary policy Fed sets the stage for lift-off later this year Hawks, doves seem united on taking action soon Darrell Delamaide, US Editor

onventional wisdom is that the Federal Chart 1: Developing economiesCurrent account poised balance for ($USbn) impact of a US rate hike CReserve will take its initial step in raising Current account balance ($bn) rates at one of the policy-making meetings followed by a press conference, so that Fed 400 chair Janet Yellen can provide context. 350 This is why anticipation was high for the September meeting, and inaction then has 300 now shifted the focus to December, the next 250 Federal Open Market Committee meeting with a press conference scheduled to follow. 200

But Yellen has been at pains to provide the 150 context for the rate hike ahead of time and it is conceivable that lift-off will take place $USbn 100 in October, even without a scheduled press 50 conference. If she felt a need to communicate further context, she could do so via a 0 conference call with journalists or an ad hoc -50 press conference. It seems from her remarks and those -100 made by other Fed policy-makers after the -150 September meeting that they have been taken Brazil China India Indonesia Russia South Africa Turkey aback by the negative reaction to the panel’s Source: IMF 2012 2013 2014 2015 non-decision. There has been a growing unison across the hawk–dove spectrum that it is time RichmondSource: IMF Fed President Jeffrey Lacker was than later for most of this year, emphasised to begin the process of normalisation. Though the lone dissenter at the September meeting. In in a presentation in St. Louis that ‘once Yellen indicated in her September press a comment explaining his dissent, Lacker noted normalisation begins, policy will remain conference that market volatility resulting from that real short-term rates are below negative extremely accommodative through the lower growth prospects in China gave the Fed 1%. ‘Such exceptionally low real interest rates medium term’. He complained that judging by pause, recent remarks from policy-makers are unlikely to be appropriate for an economy the market reaction the Fed’s failure to act in suggest that this concern will not keep them with persistently strong consumption growth September ‘created rather than reduced global from acting. A number of developing countries, and tightening labour markets,’ he said. ‘Even macroeconomic uncertainty’. even those with current account deficits that after a quarter-point increase, interest rates The case for normalisation is strong, need financing, appear to be resigned to Fed would remain exceptionally low, providing he argued, for the simple reason that ‘the action (Chart 1). In any case, Yellen has set the ample support for economic growth.’ committee’s goals have essentially been met, stage for lift-off with her nuanced remarks at He acknowledged that the recovery has but the committee’s policy settings remain the September press conference and in a major been ‘disappointing’ compared to historical stuck in emergency mode’. address at the University of Massachusetts in averages. ‘Nevertheless, US economic And even John Williams (voter), the head of Amherst toward the end of the month. conditions have improved quite significantly the San Francisco Fed who is as dovish as they What her Fedspeak boils down to is that the over the last six years,’ he said. ‘It’s time to come, came down in favour of action soon, central bank feels the need to overshoot the recognise the substantial progress that has dismissing some of the ‘hand-wringing’ over mark on lowering unemployment in order to been achieved and align rates accordingly.’ China as ‘downright apocalyptic’. speed up the process of bringing inflation up St. Louis Fed chief James Bullard (non- ‘I don’t see the situation as dire,’ he said in to its 2% target. At the same time, it cannot voter), who has urged action sooner rather New York. On the US front, he noted ‘we’re in delay monetary tightening too long because it a very different place now than when we first wants to proceed at a measured pace and not Chart 2: Time for a rise? instituted extremely accommodative policy in The Fed rate 2000–15US Federal funds rate be forced into more abrupt – and disruptive – 2009’. Given that there are long and variable action if inflation catches up too fast. 8.00 lags in monetary policy, ‘an earlier start to So, Yellen said in her Amherst speech, FOMC 7.00 raising rates would allow us to engineer a participants expect the jobless rate to sink 6.00 smoother, more gradual process of policy below the target of around 5% and inflation 5.00 normalisation’. 4.00 to move back towards 2% once ‘temporary’ Delaying and raising rates too late, he added 3.00 dampeners, such as lower oil prices, abate. She ‘would force us into the position of a steep and 2.00 abrupt hike, which doesn’t leave much room concludes that this expectation is why ‘most of 1.00 for manoeuvre’. my colleagues and I anticipate that it will likely 0.00 ▪ be appropriate to raise the target range for the Darrell Delamaide is a writer and editor federal funds rate sometime later this year’. Source: FRED FRED based in Washington DC.

10 www.omfif.org International monetary policy Risk aversion is risky Fed has enhanced danger of another crash Meghnad Desai, Chairman, Advisory Board

he Fed chickened out, after all the main criteria governing the Fed’s policy Normally the Americans follow the adage Tdebates and discussions, by not raising behaviour have now largely moved into line of John Connally, President Richard Nixon’s interest rates on 17 September. We are with pre-set conditions for an interest rate treasury secretary: ‘The dollar is our currency invited to wait for the next time and a rerun increase. The bout of nerves over China and and your problem.’ But even so the Plaza of the same procedure. This is another other emerging market economies (the good Accord that quelled the dollar’s rise in 1985 example where a central bank, in this case news is that India may be an oasis of calm was an international gesture. Greenspan acted the world’s most important, has not learnt in the present troubled scene) has been quickly in 1998 when the Asian crisis began the lessons of 2008. By postponing the rate overdone. to affect the rouble and cut interest rates to rise, even by a modest 25 basis points, the What the central bankers missed was that provide liquidity. That averted a prolonged Fed has enhanced the dangers of another manipulating the rate of interest to stem crisis that would have hit western economies. crash. inflation may have assured price stability but Timely intervention was of the essence. Let us hope I am wrong, but we have had it did nothing to guarantee financial stability. In the latest decision, the Fed has nearly seven years of quantitative easing, zero The Fed under Alan Greenspan kept the heightened rather than reduced the interest rates in developed economy markets interest rate low for a very long time. This prospects of a crisis. Data on US growth and and excess liquidity. In the overall economic sowed the seeds of financial instability. unemployment are looking strong and Yellen picture, and despite current low inflation, the There was a bubble in the housing market is promising a rate rise soon. But who knows effects in exacerbating financial instability are with sub-prime mortgages and M&A activities whether the Fed can grasp the nettle and already starting to appear. with outrageous valuations. move out of its zero rate trap ̶̶ or whether it In the years preceding the crash, the Fed The crash when it came did a lot of damage will again procrastinate? and other central banks concentrated on the to the real economy as much as to the The dangers this time around are serious. inflation–unemployment trade-off. financial system. It is striking that thoughtful In the previous crisis, it was the western The lodestar was the Taylor developed economies which Rule, setting down in a somewhat behaved in an irresponsible way, mechanistic way the interlinkage The Fed has heightened rather than failing to regulate their financial between interest rates and reduced the prospects of a crisis. Data systems. prevailing economic conditions, on US growth and unemployment are looking The Asian and other emerging a sort of a born-again Phillips economies regulated their Curve that mapped the historical strong and Yellen is promising a rate rise soon markets successfully though they relationship between inflation and violated IMF norms. unemployment. “ central bankers such as the Reserve Bank of This time we have seen China suffering The spirit of John Taylor and William Australia’s Glenn Stevens (OMFIF City Lecture, from a burst bubble in the Shanghai stock Phillips guided the Fed when it last increased 30 June) have been saying that, over the next market. China has invited doubts about the interest rates in the two years up to 2006 on 10 years, financial stability may rank alongside accuracy of its growth statistics and its failure the grounds of inflation fears – but, as we now price stability as an equal part of central to communicate the purpose behind its know, the tightening measures were too little banks’ operating mandates. exchange rate depreciation. and too late to quell the imbalances building Yet again the Fed has invoked problems of There is speculation about whether China up in the system. flow variables ̶ income and unemployment will export its (growth) recession westwards. ̶ ̶ rather than stock variables ̶ the high level Capital outflow from China has accelerated. Endless nail-biting induces uncertainty of household indebtedness, bubbles in equity Falling commodity prices have affected all the As we at OMFIF have written (Commentary, economies – such as many African countries – 31 August), a rate rise would have charted markets and, once again, M&A valuations which make no sense. which thrived on exporting to China. the beginning of a long-term adjustment of The short-run prospect is one of recession. monetary policy to the twin dangers of rising The latest episode is the proposed purchase of SABMiller by Anheuser-Busch Low growth and low inflation will persist. If inflation pressures and financial instability the Fed continues to be risk averse, it may InBev to create a $275bn company, a that will eventually ensue from past easy drag other central banks with it. whimsical nonsense that would associate the money policies. There is little chance now of central banks largest international brewer with one of the A number of mainstream commentators unravelling all the bond purchases they made world’s worst takeover deals. (and even, perhaps in somewhat repressed under QE. We may have to wait longer for form, Janet Yellen herself) seem to agree that interest rates to return to realistic levels. Fed conscious of world beyond its boundaries endless nail-biting over the Fed’s first upward This may make borrowers happy and One of the reasons advanced for the move for nine years is itself a factor inducing bond markets buoyant. But the second crisis uncertainty. Fed’s non-action is that it was aware of the becomes more likely. Take cover from the Just as we predicted a month ago, implications of its actions on the global approaching storm. postponing the rise because of worries about economy. It is even said that this was a first ▪ world economic disorder has diminished faith for Yellen’s Fed. But history shows that this is Meghnad Desai is Emeritus Professor in recovery and policy normalisation. not the first time the Fed has been conscious of Economics at the London School of The domestic parameters which are the of the world beyond its boundaries. Economics and Political Science.

October 2015 11 Europe Restructuring Europe in interests of all Why Britain must safeguard its single market rights David Owen and David Marsh

he European Union must make serious euro area domination of the single market. A Tstructural changes to convince its further element of the proposed restructuring member states’ electorates that it can would be that the three non-EU EEA adherents overcome its formidable problems. An (Norway, Iceland and Liechtenstein), at present important way forward would be to not full voting members, would along with restructure the EU into two distinct but any new members be offered full voting rights interrelated elements: the euro area and under QMV. a non-euro area grouping, which would Another change would be that a wider include the single market of the existing Europe would be offered membership of the European Economic Area comprising all EU non-euro grouping, starting with invitations member states plus Norway, Iceland and to Turkey, already an associate EU member. Liechtenstein. This would involve all the advantages and Such a restructuring would not be a massive obligations of full EEA membership except task, but it would bring great reward. It would that such countries would not be offered make European arrangements more cohesive the freedom of movement of people and and efficient, enhancing European companies’ labour within the EU. Such an opt-out would possibilities to become more competitive on be available for EU countries like the UK that the world stage – which would be in the overall have no intention of joining the euro area and interest of the EU. Recognising the realities already control their own borders, not being EU milestone: New edition of Owen’s book of the EU’s ‘variable geometry’ that has been part of the Schengen open border grouping Europe Restructured: The Eurozone Crisis and evolving for 20 years, this refashioning would within the EU. Switzerland would negotiate, the UK Referendum have the ancillary benefit of easing the task is available on Amazon as it is already in the process of doing with the of keeping the UK in the EU in the referendum euro states faced pressure from the other EU Commission, EEA membership, or come in with that will take place in 2016 or 2017. members to provide assistance to Greece under the same offer to Turkey. A UK departure from the EU would be an the European Financial Stability Mechanism, a The euro area remains in the midst of an extremely serious setback, for the UK as well as scheme linking all EU member states funded by economic crisis. Greece’s problems are not for the rest of the EU, with profound economic the EU budget to which Britain contributes. resolved; the French and Italian economies and geopolitical consequences. are still not grappling with the The whole of the EU should make need for radical change; there are every effort to prevent that from The serious economic difficulties of weaknesses in other euro area happening. the euro area and the geopolitical economies. Under the proposed problems of wider Europe are inextricably Geopolitical tensions abound, restructuring, the euro grouping particularly in the east and the would go forward with the much linked to the UK referendum south. Britain has no wish to enhanced degree of political, potentially destabilise the EU economic and social integration “ needed to At present, Britain and other non-euro further by voting to leave. But having no repair the evident flaws of economic and states can be outvoted over use of this fund meaningful negotiation risks Brexit. monetary union and make the single currency The economic difficulties of the euro area under qualified majority voting procedures; in work. Those countries, like the UK, which have and the geopolitical problems of wider Europe future, a proposed ‘double majority’ system no intention of joining the euro (either over are inextricably linked to the UK referendum. should prevent non-euro countries being an indefinite period, or in the next few years) Opinion polls, which have lately shown a forced to bow to the wishes of a euro-area- would be formally placed in the non-euro area. tendency towards a ‘No’ vote, are no guide at based majority over such issues. Under safeguards that would be couched present to the outcome. The euro area is moving towards significant in legally binding language, they would have Safeguarding Britain’s position in the single reforms involving new executive powers access to all the benefits and opportunities market, set in place by the Single European at the euro area level, complemented by available in the European single market – the Act of 1986, fully supported by all the political EU’s main success story during the first 50 years stronger accountability – for example, parties then represented in the Commons, and an achievement that must be kept alive in towards the creation of a euro area grouping would be an important step towards preparing future. Crucially, they would be shielded from within the European Parliament and ‘a euro the way for a crucially important ‘Yes’. ▪ any obligation to intervene in the dealings of, Commissioner’ focusing on fiscal policy as well or provide financial assistance to, the euro area as growth, investment and job creation. David Owen was British Secretary of State member states with regard to measures to The UK has no problems with any of these for Foreign and Commonwealth Affairs shore up the euro, since such matters would be suggestions, provided that when an ever more (1977–79), and is an OMFIF Advisory Board issues for the euro members alone. integrated euro area emerges and starts to vote member. The 2015 edition of ‘Europe A foretaste of potential difficulties was en bloc within the single market, a non-euro area Restructured’ is available as an ebook. David provided in July when Britain and other non- voting majority can be established to prevent Marsh is Managing Director of OMFIF.

12 www.omfif.org October 2015 Europe Overshadowing Greece and refugees UK referendum will be Europe’s biggest test Mojmir Hampl, Deputy Governor, Czech National Bank

he most critical stress test still lies it seriously. I sense instinctively that there is ally on their side: history. For at least 200 years, Tahead for the European Union and the no substitute of comparable strength. In the this, the oldest, most resilient and most stable project of European integration. This claim long run Britain’s EU membership makes the democracy in Europe, has – through various may seem overblown in the light of the European integration project more balanced twists and turns – made the right decisions at refugee crisis and still smouldering Greek and meaningful for us all. key moments in history. It has stood on the turbulence – as if it were not enough that It irritates me to see the debate on the UK right side. Napoleon, Wilhelm II, Hitler, Stalin: both the euro and the Schengen Area are referendum in continental Europe sliding so each time Britain has stood systematically – proving (to the detriment of all, inside and often from realism into sermonising. and sometimes entirely alone – on the side of out) to work only reasonably well in good Britain is called upon to ‘make the right freedom, reason and tolerance against despots, times. In bad times they are clearly not decision’ or ‘face the consequences’. This is a false messiahs and aggressive megalomaniacs sufficiently robust. very continental – and also very un-British – capable of destroying Europe. History tells us Yet I’m convinced that the forthcoming way of thinking. that this corrective trait of the British often British referendum on EU membership, set I therefore welcome the decision of the serves as a last resort for Europe. to take place within the next two years, is of European Commission to create a ‘task force for I could add provocatively that during far greater importance for the EU. strategic issues related to the UK referendum’, the recent Great Recession it was again the I am talking not so much about the headed by Jonathan Faull, a British veteran of Anglo-Saxon world which decided quickly and political repercussions of the Yes/No vote on the European integration process. resolutely to implement the right policy – a the internal integrity of Britain itself and the massive monetary easing – at a time when the division of powers and manner of government Decision about the entire EU risks of inaction were potentially limitless. The there, however great these may be. I refer, The task force may not have the snappiest same cannot be said in our continental Europe. rather, to the consequences for continental name, nor, perhaps, is it institutionally So, let’s drop the sermonising, stop fuming at Europe, which many are studiously ignoring. appropriate for the Commission to take such the British and wise up. If the Britons say the From my own experience of numerous a step, but at least someone is symbolically EU isn’t good enough for them, can it be good debates in Europe, I am well aware of Britain’s acknowledging that they know what is at stake. enough for anyone else? ▪ importance in taking positions often in The decision of the British public will, like it sensible counterbalance to others’. I may not or not, be a decision about the rest of us, about Mojmír Hampl is Deputy Governor, Czech always agree with the UK, but I have to take the entire EU. The British have an important National Bank. Greece starts a debtor v. creditor campaign that Germany is expected to lose he chances of any enduring stability in Greece are not high. TBut Greece’s manifest weakness is its strength. The renewed election victory on 20 September by Alexis Tsipras’ left-wing Syriza party, ushering in another Greek coalition to enact the country’s newly agreed €86bn bail-out package, offers the best chance of relative stability in coming months,writes David Marsh. Tsipras is retaining as finance minister Euclid Tsakalotos, the mild-mannered Oxford-trained economist, to continue euro area negotiations over enacting the bail-out. Greece’s parlous political and economic position delivers precisely the reason why Tsipras will once again be using fears of Greek instability to drive hard bargains with creditors – and why (led by Germany and France, with varying degrees of enthusiasm and distaste) they will succumb. In the creditor versus debtor campaign starting in Europe, we will see four sets of people taking up position around negotiating tables. In one corner sits Tsipras, a reluctant convert to the spending cuts, Victory salute: Alexis Tsipras remains Greece’s leader tax rises and market liberalisation demanded by creditors. Tsipras may well interpret his new mandate as a signal that he can take a tough Central Bank, likely to adopt an exacting stance on Greece’s fulfilment line with creditors over the bail-out details. of budgetary commitments in return for bringing the country into the Facing the Greek debtors are the creditor countries, a diverse bank’s €60bn-a-month programme of euro area-wide (apart from grouping. Germany’s habitually orthodox line on budget cuts is in Greece) asset purchases under the QE measures started in March. disarray, hard hit by the effects of the world economic slowdown and In the fourth corner is the International Monetary Fund. It will the European migration crisis. Italy and France, waging long-standing, participate in the latest bail-out package only if the creditors agree not-so-covert guerrilla warfare against German rigour, will be using substantial debt relief for Greece in coming months, through fresh Tspiras’ strengthened position as a means of reining back their own cuts in (already low) interest rates and a stretching out of repayments deficit reduction commitments. In a third corner is the European until late in the 21st century. ▪ www.omfif.org October 2015 13 Emerging markets Now Buhari’s hard work really begins Nigeria’s cabinet starts to take shape Kingsley Chiedu Moghalu, Advisory Board

fter a delay of nearly four months, of foreign reserves through strict controls on ANigeria’s newly-elected President foreign exchange transactions, instituted in Muhammadu Buhari has started to name his order to avoid further currency devaluations, ministers – beginning with himself as Minister point to rising nationalism in economic policy. As of Petroleum Resources. a result, the US investment bank JPMorgan has Although the pace of announcements has removed Nigeria from the bank’s Government been slow, the news is welcome – but now the Bond Index Emerging Markets. True believers in hard work really begins. the efficient market hypothesis have expressed Boko Haram, though significantly weakened, concern, but it is noteworthy that emerging has wreaked havoc in Nigeria’s northeast market giants such as China and India were not region, which needs to be rebuilt. Corruption listed in the index in the first place. While the is systemic. The economy, battered by external recent actions and statements of the Central shocks from an excessive reliance on crude oil Bank of Nigeria have affected perceptions in revenues, is facing sustained headwinds from financial markets about its independence, the low oil prices and the country’s failure to save need for central banks to work independently for a rainy day while the price of Brent crude surely also encompasses independence from was above $100 (it was $42.23 at its lowest vested private sector interests including foreign point so far this year on 24 August). portfolio investors. The country remains deeply divided along The real test of strategic economic ethnic and religious fault lines. Nigeria is still in nationalism will be how long it takes Nigeria search of nationhood and its politics remains to achieve a diversified industrial economy largely a contest by ethnic nationalities for that can support the value of its currency and winner-takes-all political power that is deployed reduce the structural impact of the current not for a great national vision, but for sectarian dependence on commodities. Nigeria’s patronage networks. Add the problem of deep economic potential is hobbled largely by cleavages within Buhari’s ruling party, the All political factors that create perverse incentives Progressives Congress, and the new leader’s Awaiting appointments: Muhammadu Buhari, for the wrong policy approaches. Buhari must challenges are nearly complete. who was elected in May but who still has not act on the need to devolve more powers, Buhari needs to justify his slow start named his full cabinet Picture: Getty Images responsibility and accountability to the by ensuring that his cabinet, whenever it constituent parts of Nigeria’s dysfunctional is compiled, performs to match the high genuine economic transformation. The fleeting federal structure. Excessive powers are expectations set for it. He and his team must blessings of commodity boom cycles will no concentrated in the federal government in tackle Nigeria’s problems with a sophisticated longer do. Abuja, and the country’s states are little more understanding of how the problems and the The country’s economy presents complex than mendicant supplicants for oil revenues at solutions are interlinked. challenges. It seems clear that the policy the feet of the national government. The great benefit of Buhari’s Constitutional amendments presidency has been the stirrings Buhari must act on the need to devolve that create incentives for real in the national ethos of a shift away sector economic activity in the from institutionalised corruption more powers, responsibility and states and regions – as opposed to and a lack of consequence for non- accountability to the constitutional parts of the prevailing mentality of ‘sharing’ performance in public service to Nigeria’s dysfunctional federal structure a vanishing ‘national cake’ of oil one where his leadership example patrimony – is the path to both has inspired many citizens to fall true economic transformation in line. Many of these people are “ doubtless direction will be towards a strong role for the for Africa’s bellwether country and the unity playing to the gallery. The real task is to build state in economic policy, even while welcoming in diversity it sorely needs. Thinking through a system and institutions that will outlast private business and investment. This is partly these policy dilemmas is not a job for one man. Buhari’s presidency. evident from Buhari’s reluctance so far to The buck stops with the president, but Getting the balance right between a cult abolish wasteful petroleum subsidies in the Buhari needs a strong and credible team. That’s of personality worship and de-personalised belief that to do so would hurt the poor. But why he needs to complete his cabinet as soon reforms of the system will be important. in reality the subsidies are not effective, and as possible. ▪ But contemporary Nigerian history has benefit the rich more than the poor. demonstrated that the values and the Buhari would achieve far more by abolishing Kingsley Chiedu Moghalu was deputy competence of its leaders matter. Nigeria’s them and targeting the resulting savings at governor of the Central Bank of Nigeria sustained progress requires a leadership conditional cash transfers to the very poor, (2009–14) and is a professor at the Fletcher succession that takes the country into the based on clear criteria. The Central Bank of School at Tufts University. He is a member of future on the basis of a new national ethos and Nigeria’s measures to manage the depletion the OMFIF Advisory Board.

14 www.omfif.org October 2015 Emerging markets Papal voice on economic stage Francis’ assault on ‘oppressive lending’ David Smith, Advisory Board

ope Francis, in his six-day visit to the Not everyone agrees. On the day of his overcome only by new policies and new forms PUS, appeared to be basking in a tidal arrival the Wall Street Journal lamented the of social inclusion.’ wave of adulation bordering on adoration. Pope’s embrace of ‘the progressive political And then there was the sentence omitted In discussing economics, he ran into the agenda of income redistribution’. Right- from his speech, only for the official transcript no-holds-barred culture of the ‘American wing commentator George Will, not a man to show what he was supposed to say: ‘If way’ – but only the deaf or delusional could to deal in ambiguities, defined the Pope’s politics must truly be at the service of the imagine that the pontiff was espousing economic thinking as ‘impeccably fashionable, human being, it follows that politics cannot be free market capitalism or economic demonstrably false and deeply reactionary, a slave to the economy and finance.’ globalisation. ideas that would devastate the poor on whose That line, and the thinking behind it, became President Barack Obama went to the airport behalf he purports to speak… Americans cannot the talking-point as he flew to the United to greet him, an extraordinary gesture designed simultaneously honour him and celebrate our Nations. Then at the UN, before the General to show gratitude for his mediation in bringing nation’s premises’. Assembly, speaking in his native Spanish, the rapprochement with Cuba. As he Pope let his message rip. Politics held Washington and New York Above and beyond our plans, we are and economics, he argued, spellbound, Francis’ deft juggling of had a sacred duty to humanity: spirituality, politics and economics dealing with men and women who live, ‘Above and beyond our plans and emphasised his ambition to carve struggle, and suffer, and are often forced to programmes, we are dealing with out a major global role on central live in great poverty, deprived of all rights men and women who live, struggle, issues of world economics. and suffer, and are often forced This Pope is no newcomer to to live in great poverty, deprived political combat. There is no “ doubt where Before the US Congress, Francis chose his of all rights.’ The economy of ‘exclusion’ has he stands: on the side of the debtors, the language and tone carefully. This was mild been the clarion call of this papacy so far, ‘a downtrodden and the economically repressed. indeed from a man who has denounced complete denial of the human fraternity’ as His speech at the United Nations in New unfettered capitalism in the past. ‘Business is a he defined it. The Pope’s balancing act won York summed it up. noble vocation,’ he said, to quiet applause from acclaim. ‘I didn’t hear from him an alternative He did not single out the World Bank, or the Republicans on Capitol Hill. ‘But it must philosophy of politics and economics,’ to quote the IMF, but the global system. He argued, serve the common good, of shared prosperity one veteran Republican Congressman. ‘What I to rapturous applause from the African and and respect for the environment.’ Democrats did hear was a moral obligation to the poor and Latin American delegations: ‘The international loved that. disadvantaged, and it’s on that fundamental financial agencies should care for the The meat of his Washington message lay in policy level that he got his message through.’ ▪ sustainable development of countries and his plea for cooperation among mankind, a long must ensure that they are not subjected to way from the day-to-day rancour that typifies David Smith, is an OMFIF Advisory oppressive lending regimes… which, far from the Congress. ‘Such cooperation is a powerful Board Member, a former White House promoting progress, subject people to greater resource in the battle to eliminate new forms correspondent, and represented the UN poverty, exclusion, and dependence.’ of slavery, born of grave injustice which can be Secretary-General in the Americas 2004–14.

OMFIF Press to launch latest book – The Convergence of Nations nderlining its commitment international panel of six judges which Uto deeper research on Africa, was chaired by OMFIF Advisory Board OMFIF Press will be publishing Chairman Meghnad Desai awarded the The Convergence of Nations: Why Africa’s Time is Now, a compilation of and amateur artist Shivani Shah for her international analysis and opinion on stronglyfirst prize evocative of £1,000 depiction to Kenyan of pharmacistAfrica, the continent’s political, economic and which fuses different media in a way that social realities. Jean-Claude Bastos expresses convergence and solidarity. de Morais, founder of the Quantum In the artist’s own words: ‘The use Global Group, leads a team from across of red symbolises man’s most primitive the continent illuminating Africa’s opportunities and challenges. silver evoke the tremendous wealth In a search for an appropriate cover instincts of self-preservation; gold and design, OMFIF ran a competition for effect of the wires shows the increasing an original work of art to be produced importancefound throughout of the Africa;internet and and the mobile 3-D by African nationals living in Africa. An technology.’ ▪ www.omfif.org October 2015 15 Advisory Board

Meghnad Desai, Chairman Philip Middleton, Deputy Chairman Louis de Montpellier, Deputy Chairman Frank Scheidig, Deputy Chairman Songzuo Xiang, Deputy Chairman Jai Arya, Director Mario Blejer, Banco Hipotecario Jean-Claude Bastos de Morais, Director Paul Betts, formerly Financial Times Nicholas Bray, formerly OECD Peter Bruce, Business Day Reginald Dale, Center for Strategic and International Studies Darrell Delamaide, Market Watch Jonathan Fenby, China Research, Trusted Sources Stewart Fleming, formerly Financial Times Harold James, Princeton University Roel Janssen, NRC Handelsblad William Keegan, The Observer Joel Kibazo, formerly Commonwealth Secretariat Jürgen Krönig, Die Zeit Willem Middelkoop, Commodity Discovery Fund Peter Norman, formerly Financial Times Janusz Reiter, former Polish Ambassador to US Anthony Robinson, formerly Financial Times David Smith, formerly United Nations Michael Stürmer, WELT-Gruppe David Tonge, IBS Research & Consultancy Lifen Zhang, Financial Times EDITORIAL & COMMENTARY & EDITORIAL Thomas Kielinger, Die Welt John Adams, China Financial Services Consuelo Brooke, Alliance Trust & BlackRock Moorad Choudhry, Habib Bank John Chown, Institute for Fiscal Studies Michael Cole-Fontayn, BNY Mellon Christian Gärtner, DZ Bank Ernst Welteke, formerly Deutsche Bundesbank José Manuel González-Páramo, BBVA Korkmaz Ilkorur, Business & Industry Advisory Committee to OECD Dick Harryvan, formerly ING DIRECT Akinari Horii, formerly Bank of Japan Philippe Lagayette, Fondation de France Andrew Large, formerly Bank of England Thomas Laryea, Dentons Oscar Lewisohn, Soditic Kingsley Chiedu Moghalu, formerly Central Bank of Nigeria Wilhelm Nölling, formerly Deutsche Bundesbank BANKING Athanasios Orphanides, formerly Central Bank of Cyprus Francesco Papadia, formerly European Central Bank Martin Raven, formerly Foreign and Commonwealth Office Philippe Sachs, Standard Chartered Bank Nasser Saidi, formerly Bank of Lebanon Fabio Scacciavillani, Oman Investment Fund José Alberto Tavares Moreira, formerly Banco de Portugal Jens Thomsen, formerly Danmarks Nationalbank Pasquale Urselli, formerly Crédit Agricole Makoto Utsumi, Japan Credit Rating Agenc

Andrew Adonis, House of Lords Bahar Alsharif, International Finance Corporation David Badham, World Platinum Investment Council Stefan Bielmeier, DZ BANK Mark Burgess, formerly Future Fund Caroline Butler, Walcot Partners John Campbell, Campbell Lutyens Stefano Carcascio, formerly Banca d’Italia Hon Cheung, State Street Global Advisors Peter Gray, Berkeley Capital Trevor Greetham, Royal London Asset Management George Hoguet, State Street Global Advisors Frederick Hopson, formerly Hessische Landesbank Matthew Hurn, Mubadala Development Compan Paul Judge, Schroder Income Growth Fund Mumtaz Khan, Middle East & Asia Capital Partners Celeste Cecilia Lo Turco, Italian Ministry of Foreign Affairs George Milling-Stanley, formerly World Gold Council Paul Newton, London & Oxford Capital Markets Saker Nusseibeh, Hermes Fund Managers

Robin Poynder, formerly Thomson Reuters Colin Robertson, formerly Aon Hewitt Marina Shargorodska, formerly Quantum Global Group Gary Smith, Baring Asset Management Hendrik du Toit, Investec Asset Management Bruce Packard, formerly Seymour Pier

Governor, Bangladesh Bank CAPITAL MARKETS & INVESTMENT & MARKETS CAPITAL Aitur Rahman, Marsha Vande Berg, formerly Pacific Pension Institute Jack Wigglesworth, formerly LIFFE

16 www.omfif.org Advisory Board

Aslihan Gedik, Senior Adviser Norman Lamont, Senior Adviser John Nugée, Director John Plender, Director Fabrizio Saccomanni, Senior Adviser Ted Truman, Senior Adviser Pete Wilkin, Director Iain Begg, London School of Economics Harald Benink, Tilburg University Gottfried von Bismarck, Körber Stiftung Michael Burda, Humboldt University, Berlin Nick Butler, King’s College, London David Cameron, Yale University Forrest Capie, CASS Business School Mark Crosby, Melbourne Business School Jon Davis, Queen Mary University, London Haihong Gao, Institute of World Economics and Politics Steve Hanke, Johns Hopkins University John Hughes, former UK Ambassador to Argentina Ray Kinsella, University College, Dublin Ludger Kühnhardt, Center for European Integration Studies Mariela Mendez, Escuela Superior Politecnica del Litoral Rakesh Mohan, International Monetary Fund José Roberto Novaes de Almeida, University of Brasilia Michael Oliver, ESC Rennes School of Business Danny Quah, London School of Economics Abdul Rahman, International Academy of Retail Banking Richard Roberts, King’s College, London Shumpei Takemori, Keio University

EDUCATION & RESEARCH & EDUCATION Maria Antonieta Del Tedesco Lins, University of São Paulo Niels Thygesen, University of Copenhagen Daniel Titelman, ECLAC Peter Walton, ESSEC Business School Linda Yueh, BBC Hans Genberg, SEACEN Antonio Armellini, former Abassador, OSCE Franco Bassanini, Cassa Depositi e Prestiti Frits Bolkestein, formerly European Commission Laurens Jan Brinkhorst, University of Leiden Colin Budd, formerly UK Diplomatic Service Otaviano Canuto, World Bank Desmond Cecil, Areva UK Natalie Dempster, World Gold Council Jonathan Grant, Policy Institute at King’s Peter Heap, former UK Ambassador to Brazil François Heisbourg, Fondation pour la Recherche Stratégique John Kornblum, former US Ambassador to Germany Ben Knapen, European Investment Bank Ruud Lubbers, former Dutch Prime Minister Bo Lundgren, formerly Swedish National Debt Office Denis MacShane, former British Minister for Europe Kishore Mahbubani, Lee Kuan Yew School of Public Policy Boyd McCleary, former HM Diplomatic Service

PUBLIC POLICY PUBLIC Luiz Eduardo Melin, Brazilian Development Bank Célestin Monga, UNIDO John West, Asian Century Institute Murade Miguigy Murargy, CPLP David Owen, House of Lords Jukka Pihlman, Standard Chartered Bank Poul Nyrup Rasmussen, former Danish Prime Minister Paul van Seters, Tilburg University Christopher Tugendhat, House of Lords Paul Wilson, De La Rue Irena Asmundson, California Department of Finance Katinka Barysch, Allianz Robert Bischof, German-British Chamber of Industry & Commerce Eduardo Borensztein, Inter-American Development Bank Albert Bressand, European Commission Shiyin Cai, Business Adviser Efraim Chalamish, New York University Vladimir Dlouhy, former Czech Industry Minister Brigitte Granville, Queen Mary, University of London Hans-Olaf Henkel, University of Mannheim Hemraz Jankee, formerly Central Bank of Mauritius David Kihangire, formerly Bank of Uganda Pawel Kowalewski, Deutsche Bundesbank Gerard Lyons, Greater London Authority Stuart Mackintosh, Group of Thirty Winston Moore, Moore Asociados Vicky Pryce, formerly UK Department for Business Takuji Tanaka, Innovation Network Corporation of Japan Pedro Schwartz, CEU San Pablo University Vilem Semerak, Charles University, Prague Song Shanshan, SDIC CGOG Futures Gabriel Stein, Oxford Economics ECONOMICS & INDUSTRY & ECONOMICS Jorge Vasconcelos, New Energy Solutions Obindah Gershon nee Wagbara, Georgetown University Frank Westermann, Osnabrück University Volker Wieland, German Council of Economic Experts

October 2015 17 Review An unholy mixture The problem of morals and markets William Keegan, Advisory Board

n May I was on a panel at the Chalke The author does not pull his punches, but IValley History Festival discussing the is fair-minded, with few sounds of axes being topic: ‘Capitalism in crisis: where next?’ The ground. There is obligatory coverage of Marx, other panelists were the economists Peter Keynes and Schumpeter. Marx famously Oppenheimer and Nicholas Crafts. I think our thought capitalism contained the seeds of chairman, the biographer and broadcaster its own destruction; Keynes devoted much Michael Crick, was mildly disappointed when, of his life’s work to trying to save capitalism; in response to his opening question – whether, Schumpeter – a senior member of the ‘Austrian after the financial crisis and its repercussions School’ – passionately believed in capitalism, targeting, turning a blind eye to the warnings of any of us thought the end of capitalism was in but respected Marx and feared that capitalism the Bank for International Settlements about sight – we all responded with a firm ‘no’. would evolve into bureaucratic socialism. What asset prices. How ironical that the BIS is known What everybody was agreed on was that, Plender explains so vividly is not that capitalism as the central bankers’ bank! although the collapse of Soviet communism contains the seeds of its own destruction, but Plender argues that, for all the volumes of had been good news for capitalism, the system the seeds of its own recurrent crises. space they take up, the new regulatory efforts was in serious need of reform, as indicated by Plender speaks up for entrepreneurs, but to control the excesses of the banking system that crisis, the Great Recession. has his eyes open. ‘Here’ he writes ‘is one of the do not go nearly far enough. And he is highly Now, one of the great achievements of the great paradoxes of capitalism. However dubious critical of the way that executive compensation, financial crisis and the Great Recession has their business practices, the robber barons in both banks and big business generally, is still been to give a boost to the tree felling industry, indisputably drove one of the fastest periods so skewed in favour of the short term approach as a necessary preparation for the onslaught of of economic growth in US history.’ What really which rewards executives at the expense of books on the subject. Some of these have been concerns him is the way that ‘to put it crudely, long term investment. ‘When finance becomes unashamedly designed for the initiated only; capitalism has been hijacked by the banks’. He increasingly remote from servicing industry and others have been aimed at the general reader adds: ‘That is not how it was meant to work. commerce, it is time to watch out. And when it but have not necessarily proved as lucid as The only question is how long it will take before becomes disproportionately large in relation to intended. John Plender is a highly distinguished the system blows up again.’ the economy, it needs to be cut down to size.’ financial journalist, and a man with practical Plender has a nice macroeconomic point when experience of entrepreneurship and the City (he Greenspan censured he notes that the redistribution of income to is also Chairman of OMFIF) and in Capitalism: But, unlike some critics, he does not lay all the rich in recent years means that they may Money, Morals and Markets, Plender has the blame at the doors of the banks – at least have enough to satisfy their needs, but their employed all his talents and experience to great not the commercial banks. Central bankers, in combined expenditure is not enough to boost advantage. Capitalism is beautifully written and particular former Federal Reserve Chairman western economies suffering from a deficiency should appeal to the general reader as well as Alan Greenspan, come in for serious censure, of demand. In his final chapter Plender the initiated. as do politicians – in the US they are known as declares: ‘I am, with caveats, pro-business ‘lawmakers’, but the tragic thing was that they and pro-capitalism.’ But he ends this rigorous Seeds of recurrent crises were essentially law-breakers when, in 1999, examination of capitalism on a pessimistic For this reviewer one of the recurring joys of they repealed the Glass-Steagall Act of 1933, note: ‘With politicians in thrall to the business the book was the strong impression that, unlike which had been the sensible response to the and banking lobbies, the representatives of the some of the stuff emerging from some modern Great Crash of 1929 and its aftermath. people... are most unlikely to curb the excesses historians, this book does not give the irritating The criticism of Greenspan, his belief in the of an inherently unstable system through more impression that it was written by teams of ‘efficient markets hypothesis’, and his erratic stringent and coherent regulation.’ ▪ researchers, or that the wonderfully apposite approach to ‘bubbles’ is damning: Plender quotations – many of them literary – are the observes that the so-called ‘maestro’ sidelined William Keegan is Senior Economics product of ‘search engines’ as opposed to the staff members who were more prescient. Again, Commentator at the Observer, and a wide reading of the author over the years. the central banks became obsessed by inflation member of the OMFIF Advisory Board.

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