Tuesday, December 20, 2016

IMF's prudent assessment of globalisation

IMF continues the post-crisis revisionism of some of the central tenets of economic orthodoxy in its latest edition of F&D magazine. 

Sebastian Mallaby makes the most prudent assessment of globalisation and free trade. He decomposes cross-border capital flows and shows that cross-border lending has declined dramatically since 2007. 
To some extent—indeed, probably to quite a large extent—the retreat from cross-border lending represents a healthy correction... there has been a reappraisal of the case for cross-border finance. For one thing, some of its theoretical advantages appear to be just that: theoretical. In principle, financial globalization allows savers in rich countries to reap high returns in fast-growing emerging market economies, thus easing the rich-country challenge of paying for retirement. Meanwhile, it supplies foreign capital to emerging market economies, allowing them to invest more and thereby catch up faster with the rich world. But in reality, many large emerging markets have grown by mobilizing domestic savings, exporting capital rather than importing it. The textbook case for financial globalization exists mostly in textbooks.


If the upside of financial globalization has been elusive in practice, the downsides have grown more obvious. First, global capital tends to rush into small open economies during good times, aggravating the risk of overinvestment and bubbles; it flees in bad times, exacerbating recession. That has led middle-income nations to experiment with capital controls. Second, cross-border banking involves large, complex, and hard-to-regulate lenders, which poses risks to society that became evident during the 2008 bust. Because of those risks, regulators in the rich world have discouraged banks from foreign adventures, which has added materially to deglobalization. Forbes, Reinhardt, and Wieladek (2016) show that, in the case of Britain, regulatory discouragement of foreign lending can be remarkably powerful, accounting for about 30 percent of the attrition in cross-border lending by U.K. banks during 2012–13.
Although there is no denying that finance is less international than it used to be, it is debatable whether this retrenchment is best described as “deglobalization,” with its connotations of retreat, or as something more positive—“sounder global management.” After all, the new regulatory restrictions are at least partly a response to the risks of cross-border financing, which suggests a desirable level of flows considerably lower than the 9.9 percent of global output during 2002–04. If the optimal ratio were, say, around 5 percent, today’s degree of financial globalization might be just about right.
He argues that the apparent slowdown in global trade since 2008 may be due to statistical illusion (lower dollar price of commodities like oil), shifts in supply chains (China makes more intermediate goods itself instead of importing them), increased consumption of services as against manufactures as economies develop, and shrinking current account balances. To that extent, he finds that the decrease may not be something to be alarmed about. 

Maurice Obstfeld makes a long delayed case for having policies that redistribute the gains from trade to cushion those adversely affected. However, the focus on safety nets seems to be confined to developed countries, whereas one would argue that developing countries need them more. He also makes the distinction between safety nets (which protect those subject to job loss) and trampoline (which offer a springboard to new jobs, through trainings etc), and favours the former. 

But Paul Krugman is disappointing in his assessment. Two examples. The first is a benign assessment of international trade till eighties,
And for a long time—from the 1940s into the 1980s—trade liberalization proceeded remarkably smoothly. The losers from growing trade didn’t seem that obvious or numerous, largely because much of that growth took the form of intra-industry flows between similar countries, which had minimal effects on distribution.
I think the fundamental reason why there is a backlash against trade liberalization now is because the shoe (in terms of being at the receiving end of terms of trade) is on the feet of the developed economies. When unfettered free trade was critiqued in the eighties and nineties by those in developing countries as being detrimental to their economies and societies, the very same people used to mock the critics as marxists and socialists!

On the more prudent response to anti-globalisation sentiments, he writes,
The best attitude might well be to treat globalization as a more or less finished project, and turn down the volume on the whole subject.
Really! What about the third wave of globalisation, in terms of migration? 

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