Three speeds of the crisis and its divergent paths

Oscar Ugarteche, Ariel Noyola Rodríguez

14/05/2013

Opinión

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For the second half of 2012 the rhythm of world economy involved two speeds: on the one hand, the United States and Europe with economic growth near zero, discussing the "fiscal precipice" and the "sovereign risk"; on the other, the emerging economies, with positive rates of growth -- now decelerating – but with growing risk factors due to the rising exchange rates tied to the flow of short-term capital and the shrinking of economic activity in the advanced countries.

Nevertheless, according to the IMF report Perspectives (1) from April 2013 the crisis is becoming regionalized and moving from two to three speeds: 1) recession in Europe, 2) volatile rallying in emerging economies and 3) weak recovery in the United States.

The "fatigue of adjustment" has become clear in Europe with the political crisis (Italy), financial uncertainty (Cyprus joins the equation), historic rates of unemployment and depression in the intraregional market. Economic activity falls by 0.25% -- including Germany -- instead of growing by 0.25% as had been assumed by the Fund in October of 2012. José Manuel Durão Barroso, president of the European Commission, has recognized that austerity had "reached its limit" in line with the discrediting of "scientific" works such as the growth in periods of indebtedness by Reinhart and Rogoff, where public debt is categorized as the worst of possible evils.

The United States appears to have departed from the tendency followed in Europe: favourable data in the labour market put the unemployment rate under eight per cent, the recovery of bank credit, of the housing market and greater solidity in balances have strengthened the recovery. Nevertheless, the IMF obtusely denies the growth of financial bubbles on Wall Street -- whose principal indices, Nasdaq, Dow Jones and S&P have reached pre-crisis levels without recovery in consumption and employment--although it does recognize unusual "signs of financial engineering" over the past few months through the re-purchase of stocks with funds arising from the issuance of debt funds. Over against this, the Report on World Financial Stability (2) emphasizes that the exercises of quantitative easing undertaken by the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan have increased the desire of investors for more risk-laden financial paper and increased the liquidity risk in emerging economies.

For Asia a recovery of growth to the order of 5.7% is foreseen, due to more dynamic internal demand and some recovery of external demand while the recent exchange adjustment of the yen in face of other currencies of the region could unleash a currency war. The Japanese monetary policy faces a dilemma: on the one hand, to continue the injection of liquidity to generate inflation in a deflationary context; on the other the risk of non-payment on the debt when the interest rates rise due to an increase in inflation in the context of a total debt of 245% of GDP, which at 0% interest absorbs 40% of the national budget (3).

With respect to Latin America, while indeed the perspectives of economic growth for 2013 have increased to 3.25% in 2013 compared to 3% in 2012, the vulnerability in face of international capital flows remains. If Mexico is excluded, the growth rate is closer to 5%. Hence Alicia Bárcena, executive secretary of CEPAL believes it necessary (4) to strengthen the regional financial integration in two ways: 1) introducing countercyclical finance in support of the balance of payments and 2) channeling greater resources to finance productive development.

The Fondo Latinoamericano de Reservas (FLAR) includes only seven -- Bolivia, Colombia, Costa Rica, Ecuador, Peru, Uruguay and Venezuela -- of the thirty three economies of the region. The challenge is to increase this Fund both in volume and in the number of members. Bárcena believes that FLAR should stand for 15,000 million dollars (mdd) and at the present time the fund amounts to 2,344 mdd. Our contention is that FLAR should be able to contain simultaneous foreign exchange stampedes in the region, excepting Brazil and Mexico and that this would require between 50,000 and 100,000 mdd which could be financed through a financial transaction tax on short term capital flows that at the present time amount to 900,000 mdd annually according to the IMF. In agreement with Ocampo (5), with contributions from Brazil equivalent to double those of countries with the biggest contributions at the present time, the Regional Fund would reach a capacity for credit of 21,000 mdd, sufficient to cover 82% of short-term debts. Nevertheless, he may be underestimating the short-term debts since he does not take into account movements in the stock markets where public debt bonds are issued in national currency purchased by foreigners particularly in Mexico, Colombia, Brasil and Argentina. The data bases of the IMF show this quite clearly. The most significant is the flow of Chilean capital in the Stock Market of São Paulo and those of tax havens into São Paulo, Lima, Bogotá and Caracas.

To sum up, the slight US recovery could have an impact on interest rates of Latin American economies and lateral impacts on short-term capital flows, which in some cases could come as early as the middle of the present year (LEAP/E2020, idem) while Europe is buried in an economic depression and Japan attempts to provoke inflation over against their deflation in order to recover a rise in consumption and in export earnings through a better exchange rate. For Latin America, the paths it could follow are divergent: 1) strengthen the process of regional financial integration in order to reduce the possible impact of the crisis and increase the intraregional market through a process of inclusive productive development, or 2) remain stuck in the inertia in the hope that the hurricane passes them by. The coin is up in the air and meanwhile the crisis continues.

(Translation: Jordan Bishop).

- Oscar Ugarteche is a Peruvian Economist. Resident researcher at the Institute of Economic Research in UNAM, Mexico. Member of the SNI/Conacyt. Coordinator of the Observatorio Económico de América Latina (OBELA) www.obela.org and president of ALAI www.alainet.org. Ariel Noyola Rodríguez is a Member of the OBELA project, IIEC-UNAM. Contact: anoyola@iiec.unam.mx

Notes: (1) Internacional Monetary Fund. World Economic Outlook. Publication date: April (2013).

(2) Internacional Monetary Fund. Global Financial Stability Report. Old risks, new challenges. Publication date: April (2013).

(3) LEAP/E2020. “Crisis sistémica global. Es declarada la guerra entre el ámbito económico-político y el financiero bancario” in GEAB No. 74. Publication date: 16-04-2013.

(4) Bárcena, Alicia. “América Latina necesita integración financiera regional frente a la volatilidad” in Infolatam. Publication date: 25-04-2013.

(5) Ocampo, José Antonio. La arquitectura financiera mundial y regional a la luz de la crisis. Comisión Económica para América Latina y el Caribe (CEPAL). Serie Macroeconomía del Desarrollo No. 131. Publication date: March (2013).

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