New challenges for global economic integration
Conference——9th Annual Conference organised by the Central Reserve Bank of Peru and Reinventing Bretton Woods Committee,
Cusco, 24-25 July
29 July 2017
The benefits of global economic integration are seen increasingly sceptically or so it appears. The conference with the participation of leading policy makers from Latin America and other countries, representatives from international organisations, academia and the private sector debated the future of globalisation. While there was recognition that globalisation may produce some adverse distributive outcomes, in Latin America support for openness seemed overwhelming. Herein is a summing-up of the discussions at the conference.
The discussions centred around the following themes:
- Globalisation: Globalisation was seen by most participants as a key source of prosperity. Globalisation was considered to have peaked amid stagnant international trade and foreign assets to world GDP. Several participants stressed that globalisation has been increasingly shaped by international capital flows with foreign assets as percent of world GDP having grown faster than world trade since the mid-1990s. The increase in foreign assets was seen as both posing potential gains and more risks. One participant showed that the distributive impact of globalisation was associated with a decline in global inequality but increasing national inequalities due to an increase in real incomes in emerging markets and a decline in real wages in advanced economies. The latter has led to repeated calls to address national inequalities more effectively emphasising the need to strengthen social policies on housing, credit availability and education. Globalisation was therefore seen by some participants to have “left too many behind” amid rising dislocation costs while many participants saw the gains from globalisation as overwhelming. One participant argued that the debate about globalisation risks unduly becoming biased towards its disadvantages dominated by some advanced economies’ concerns when several advanced economies and most emerging markets see globalisation as unambiguously beneficial. One participant questioned of whether lessons from dislocations in advanced economies in the past due to globalisation could not help calibrate better possible costs and accommodation of globalisation today.
- International trade: International trade was seen growing the slowest since World War II amid low commodity prices and de-industrialisation in commodity-dependent countries in Africa and Latin America. One participant highlighted that the prospects for deepening South-South international trade remain promising. Another participant showed that international trade has been transformed through an unbundling of tasks that imply that production is significantly more widely distributed around the world than previously when international trade was dominated by final goods and commodities. At the same time, this implies that any measure of restricting international trade is likely to have a more severe impact on international trade than beforehand.
- Capital controls: The support for and effectiveness of capital controls was highly contested. While many participants stressed that capital controls were ineffective and undesirable as policy tools, some participants defended a selective application of controls. In a historical perspective with reference to the Bretton Woods era of fixed exchange rates and capital controls, one participant underlined that capital controls were found ineffective in isolating countries from international business cycle fluctuations; capital controls were considered effective as counterpart to national credit controls similar to contemporary macroprudential measures. Another participant showed that capital markets opening can be associated with a rising Gini-coefficient (rising income inequality) and that economic growth benefits in the short-to-medium-term from capital account liberalisation remain elusive when measured in the aftermath of capital account openings. Several participants reacted with consternation to the latter as argument to discourage financial globalisation.
- Low long term interest rates: The decline in long-term interest rates had been attributed to adverse demographic developments, excess savings and excess liquidity. One participant stressed due to adverse demographic developments, that savings in the U.S. and Europe but also in China and Korea should have been significantly higher than they are. Excess liquidity today was seen as a source of instability and higher than prior to the global economic and financial crisis. The occurrence of low long term interest rates is not universal it was shown and has been limited to advanced economies and a small group of emerging markets.
- Monetary policy: Implementation concerns and constraints were seen to differ significantly between advanced economies and emerging markets. One participant stressed that at the lower bound, fiscal policy was seen as more effective than monetary policy. To enhance monetary policy, the participant indicated price level targeting may be considered as an alternative to inflation targeting and that digital currencies may be contemplated to facilitate implementation of negative interest rates though adoption of digital currencies by central banks was seen to take 10 to 15 years. Another participant stressed that advanced economies need to be fully aware of the international repercussions of their monetary policy actions as understanding of spill-overs remains inadequate. One participant underscored that price stability may be too narrow a mandate to allow central banks to play a more proactive role for economic growth. Another participant stressed that Latin America apart from Chile, remains constrained in implementing countercyclical monetary policy, that is, reducing interest in the event of an exchange rate depreciation.
- Global financial safety net: The global financial safety net remains incomplete. The IMF, at the centre of the safety net requires additional resources. One participant underscored while the availability of new IMF facilities was welcome, the fact that only three countries have adopted the contingent credit line (CCL) can be attributed to the persistent stigma of using IMF resources. Another participant highlighted that Africa’s limited access to global financial flows has provided some protectionism from capital account volatility but that Africa’s access to the global financial safety net needs to be enhanced.
- IMF governance: The credibility and legitimacy of the IMF remains under threat. One participant stressed that emerging markets are still underrepresented at the IMF.
- Safe assets: The scarcity of safe assets was seen as a fundamental problem for the conduct of monetary policy in particular in emerging markets. One participant underlined that some emerging markets assets could become safe assets if central banks were to hold them as international reserves to promote safe asset diversification as to a large extent asset safety is endogenous to central banks’ holdings. This was contested by other participants.
- Economic outlook: Prospects for emerging markets remain tilted to the downside. Interest rate normalisation in advanced economies were seen as a major challenge for economic conditions in emerging markets. One participant indicated that Latin America is facing increasing headwinds amid rising corporate debt, low confidence, weak aggregate demand and increasing public debt. Another participant stressed that in Latin America the dominance of balance of payments constraints reduces scope for conducting countercyclical policies to support a recovery. Limited if any appetite for economic policy coordination were considered reducing opportunities for more robust economic growth. One participant highlighted that Brazil’s economic crisis of 2014-16 was its worst ever. Another participant stressed, that extremely low interest rates in advanced economies have been delivering only a sluggish economic recovery.
- International payments: The use of SDRs to reduce reliance mostly on the dollar was presented by two participants. One offered the possibility to adopt blockchain technology to use SDRs in cross-border payments and settlement instead of national currencies as national currencies must be settled in their home countries and given the high costs of conducting international payments in national currencies. Another proposed to use multilateral swap lines in SDRs within the IMF to establish better coverage and permanence of support motivated by the need to establish an alternative to the Federal Reserve that has remained the lender of last resort to the global funding market. The limited amount of SDRs may constrain considerably its use to settle international transactions.