tag:theconversation.com,2011:/es/topics/currency-crisis-8819/articlesCurrency crisis – The Conversation2024-03-06T13:23:20Ztag:theconversation.com,2011:article/2245452024-03-06T13:23:20Z2024-03-06T13:23:20ZNigeria: botched economic reforms plunge the country into crisis<p>Nigeria, Africa’s largest economy, is facing an economic crisis. From a botched currency redesign to the removal of fuel subsidies and a currency float, the nation has been plunged into spiralling inflation and a currency crisis with far-reaching consequences. The question now is: how long before the inferno consumes everything?</p>
<p>On October 26, 2022, the Central Bank of Nigeria announced a <a href="https://www.thecable.ng/breaking-buhari-unveils-redesigned-naira-notes">bold move</a> – that it had redesigned the country’s highest denomination notes (₦200, ₦500 and ₦1000) and would be removing all old notes from circulation. People were given a deadline of January 31, 2023 (a couple of weeks before a national election) to make this exchange, or all of the old notes would cease to be valid legal tender.</p>
<p>This initiative ostensibly aimed to curb counterfeiting, encourage cashless transactions, and limit the buying of votes during the elections. But, while the intention may have been sound, the execution proved disastrous. </p>
<p>Short deadlines, limited availability of new notes, and inadequate communication created widespread panic. It led to long queues at banks, frustration among citizens, and a <a href="https://carnegieendowment.org/2024/01/18/why-nigeria-s-controversial-naira-redesign-policy-hasn-t-met-its-objectives-pub-91405">thriving black market</a> for the new notes. </p>
<p>The confusion surrounding the currency redesign had an unintended consequence: the beginnings of a loss of confidence in the naira. People began to look to other mediums as a store of value and as a medium of exchange. The obvious choices were foreign currency like the US dollar and the British pound, as well as more stable cryptocurrencies like <a href="https://businessday.ng/business-economy/article/weak-naira-cross-border-payments-drive-nigerians-into-cryptos/">Tether’s USDT</a>.</p>
<p>The currency redesign was criticised at the time by the then-presidential candidate of the ruling party, Bola Ahmed Tinubu, who saw it as a move to <a href="https://www.vanguardngr.com/2023/01/2023-fuel-scarcity-naira-redesign-ploy-to-sabotage-my-chances-tinubu/">derail his presidential campaign</a>. However, Tinubu won the contested election and, once in power, set out to reshape the economy immediately. </p>
<p>In his inaugural address in May 2023, Tinubu <a href="https://www.premiumtimesng.com/news/top-news/601239-fuel-subsidy-is-gone-tinubu-declares.html">announced</a> that the “fuel subsidy is gone”, referring to the government’s longstanding subsidised petrol policy that ensured Nigerians enjoyed some of the lowest petrol prices in the world. Over the coming days, he would also announce the reversal of the currency redesign policy and the <a href="https://leadership.ng/tinubu-begins-monetary-policy-reforms-floats-naira/">floating of the Nigerian naira</a> on the foreign exchange market.</p>
<figure class="align-center ">
<img alt="A compilation of Nigerian naira bank notes." src="https://images.theconversation.com/files/579202/original/file-20240301-28-sej1lc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/579202/original/file-20240301-28-sej1lc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/579202/original/file-20240301-28-sej1lc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/579202/original/file-20240301-28-sej1lc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/579202/original/file-20240301-28-sej1lc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/579202/original/file-20240301-28-sej1lc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/579202/original/file-20240301-28-sej1lc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">When in office, Tinubu reversed the currency redesign policy.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/naira-currency-nigeria-200751113">Pavel Shlykov/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Fuelling the flames</h2>
<p>Other underlying economic conditions around the time of Tinubu’s inauguration included a large amount of foreign debt, dwindling foreign reserves and global economic headwinds. When the removal of the fuel subsidy was announced, it was met with a mix of surprise and elation by many Nigerians, and in particular by international donor agencies like the International Monetary Fund and the World Bank, who had long been <a href="https://www.reuters.com/markets/commodities/nigeria-should-end-fuel-subsidy-speed-reforms-boost-growth-world-bank-says-2021-11-23/">advocating</a> for the removal.</p>
<p>But this was all before the effects began to bite. And bite hard they did. The price of Premium Motor Spirit (also known as gasoline or petrol), which used to retail for ₦189 (US$0.12) per litre, increased by 196% practically overnight and began to retail for <a href="https://www.reuters.com/world/africa/nigeria-triple-petrol-prices-after-president-says-subsidy-end-2023-05-31/">₦557 per litre</a>. </p>
<p>One challenge with developing economies like Nigeria is that a rise in fuel price tends to cause the price of everything else to rise. Many industries, particularly those in manufacturing and agriculture, tend to rely heavily on fuel for powering machinery and equipment due to the poor supply of grid electricity nationwide.</p>
<p>Many Nigerian households were significantly affected by the increased prices. But they saw an opportunity in that the savings from the fuel subsidy regime would be redistributed to improve education, healthcare provision and the general welfare of the people, as was promised during the electioneering. The regime cost the country an estimated <a href="https://www.premiumtimesng.com/news/top-news/582724-fuel-subsidy-now-above-n400bn-monthly-nnpcl.html">₦400 billion</a> a month at its height, after all. </p>
<h2>Enter currency devaluation</h2>
<p>Then, on June 14, 2023, the Tinubu government ended the policy of pegging the naira to the US dollar, allowing it to float and find its true market value based on supply and demand. The idea was to stop corruption and reduce arbitrage opportunities due to the difference between official and black-market foreign exchange prices. </p>
<p>Currency arbitrage happens when people buy a currency at the lower official exchange rate and immediately sell it at the higher black market rate for a profit. This practice often occurs where there are strict currency controls and black markets offer a truer reflection of a currency’s value based on supply and demand.</p>
<p>However, this was one policy change too many. The naira lost a staggering <a href="https://www.focus-economics.com/countries/nigeria/news/exchange-rate/central-bank-sets-the-naira-free-to-fall/">25% of its value</a> in one day, and the cascading effects now push the country to the brink.</p>
<p>Nigeria depends heavily on imported commodities, including essential goods like food, fuel and medicine. So the policy escalated the inflationary crisis, pushing inflation to almost 30% (the major driver being food inflation, which <a href="https://leadership.ng/food-headline-inflation-spike-to-35-4-29-9/">reached 35.4%</a>). </p>
<p>Imports in general have become significantly more expensive, and Nigerians are finding their purchasing power being eroded. Wages in Nigeria are pretty fixed. The current minimum wage in the country is <a href="https://www.statista.com/statistics/1119133/monthly-minimum-wage-in-nigeria/">₦30,000</a> per month and the average monthly income is <a href="https://wagecentre.com/work/work-in-africa/salary-in-nigeria">₦71,185</a>. </p>
<p>Businesses are also feeling the pinch, facing difficulties accessing the <a href="https://www.trade.gov/country-commercial-guides/nigeria-market-challenges">foreign exchange</a> critical for importing raw materials and equipment. </p>
<h2>Pheonix or ash?</h2>
<p>The Central Bank of Nigeria has implemented measures to counter the crisis. It recently raised interest rates from <a href="https://punchng.com/just-in-cbn-raises-interest-rate-to-22-75/">18.75% to 22.75%</a> and is selling US dollars through auctions. </p>
<p>Recovery is a possibility and there are already signs of appreciation in the currency. The <a href="https://businessday.ng/news/article/naira-records-first-gain-at-official-market-after-rate-hike/">naira appreciated</a> by 6.89% a day after interest rates were raised. But it will be a long, hard road. </p>
<p>These strategies often come with trade-offs. Higher interest rates can stifle already struggling economic growth, while currency interventions might deplete already strained reserves of foreign currency. </p>
<p>The bottom line is that if the current cost of living crisis continues, civil unrest is likely. Should this happen, who knows what – if anything – will be left behind when the flames are done.</p><img src="https://counter.theconversation.com/content/224545/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kunal Sen has received funding from ESRC and DFID. </span></em></p><p class="fine-print"><em><span>Chisom Ubabukoh does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Africa’s largest economy is in crisis, and unrest is growing.Chisom Ubabukoh, Assistant Professor of Economics, O.P. Jindal Global UniversityKunal Sen, Professor and Director, World Institute for Development Economics Research (UNU-WIDER), United Nations UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2034352023-05-02T14:06:01Z2023-05-02T14:06:01ZNigeria and digital banking: a revolution still waiting to happen<figure><img src="https://images.theconversation.com/files/520775/original/file-20230413-26-hhkl4x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cash is still king in Nigeria. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/this-picture-taken-on-january-28-2016-in-lagos-shows-naira-news-photo/507489912?adppopup=true">Pius Utomi Ekpei/AFP via Getty Images </a></span></figcaption></figure><p><em>At the end of 2022 the Central Bank of Nigeria <a href="https://punchng.com/just-in-buhari-unveils-new-naira-notes-at-aso-rock/">launched</a> new banknotes. At the same time it also <a href="https://www.pensionnigeria.com/blog/cbn-imposes-new-cash-withdrawal-limits-on-nigeria-bank-accounts-full-circular-to-banks/">capped</a> withdrawal of the new banknotes. The rollout of the currency change was <a href="https://www.premiumtimesng.com/news/top-news/585737-timeline-naira-redesign-policy-from-inception-to-supreme-court-judgement.html">shambolic</a>. But it also led people to turn to digital financial services such as the use of <a href="https://nibss-plc.com.ng/news/4xapzv7015vgjryewfn8e2wd50">point of sale (PoS) machines for payments</a> in their transactions. <a href="https://pubdocs.worldbank.org/en/230281588169110691/Digital-Financial-Services.pdf#page=12">Digital financial services</a> are financial services which rely on digital technologies for their delivery and use by consumers. The Conversation Africa’s Wale Fatade asks Iwa Salami, an expert in financial technology regulation and financial regulation in emerging economies, to explain the increase and its implications.</em></p>
<p><strong>How did the botched currency changeover affect the way Nigerians used the banking system?</strong></p>
<p>The Central Bank <a href="https://www.cbn.gov.ng/Out/2022/CCD/Naira_Redesign.pdf">set a deadline of 31 January 2023</a> for all old notes to be deposited in banks in exchange for new. The country was <a href="https://www.premiumtimesng.com/news/top-news/585737-timeline-naira-redesign-policy-from-inception-to-supreme-court-judgement.html">plunged into a currency crisis</a> when all old notes were out of circulation and the new notes were hardly circulating. The ensuing scarcity of cash made life unbearably hard for Nigerians.</p>
<p>One outcome was that Nigerians sought alternative ways to pay for goods and services using digital alternatives, such as point of sale machines. Between 2017 and 2022, the number of point of sale terminals in Nigeria grew significantly. </p>
<p><a href="https://www.statista.com/statistics/1178109/number-of-pos-terminals-in-nigeria/">In 2017, there were around 155,000 terminals</a>, and this number has increased to roughly 1.1 million as of April 2022. Merchants and PoS operators handle the machines. Their operations are <a href="https://www.cbn.gov.ng/cashless/POS_GUIDELINES_August2011_FINAL_FINAL%20(2).pdf">regulated by the Central Bank</a>. </p>
<p>It also resulted in a <a href="https://www.nibss-plc.com.ng/news/4xapzv7015vgjryewfn8e2wd50">surge </a>in point of sales transactions in Nigeria. There was a 40.69% year-on-year increase from the N573.72 billion (US$1.24 billion) transactions that was done in January 2022 to N807.16 billion (US$1.75 billion) in January 2023. Total cashless transactions also rose by 45.41% year-on-year to N39.58 trillion (US$85.96 billion) in January 2023.</p>
<h2>What are the most developed forms of electronic transacting in Nigeria?</h2>
<p><strong>Point of Sale (PoS):</strong> These devices are installed both by traditional banks as well as by payment service banks. They are now ubiquitous throughout Nigeria - in supermarkets, large retail outlets as well as in small-scale businesses set up for this purpose only. </p>
<p><strong>Payment service banks:</strong> These <a href="https://www.mondaq.com/nigeria/financial-services/1188262/payment-service-banks-psb-in-nigeria">are technology driven companies</a> licensed by the Central Bank to engage in banking activities. Examples are Hope and MoneyMaster.</p>
<p><strong>Fintechs:</strong> This <a href="https://plaid.com/resources/fintech/what-is-fintech/">includes</a> any app, software, or technology that allows people or businesses to digitally access, manage, or gain insights into their finances or make financial transactions. A number of companies offer these services in Nigeria. They include Flutterwave, Piggyvest, OPay, Interswitch, Kuda and Remita. </p>
<p><strong>Online banking offered by traditional banks:</strong> All Nigerian banks offer online services. However, the services aren’t always reliable. During the currency crisis, for example, platforms collapsed and customers were unable to transact. Digital platforms didn’t have the ability to cope with the deluge of online transactions.</p>
<p><strong>Mobile money:</strong> <a href="https://datahelp.imf.org/knowledgebase/articles/1906552-fas-what-is-mobile-money-how-is-it-different-fro#:%7E:text=It%20is%20a%20financial%20service,is%20a%20basic%20mobile%20phone.">Financial service offered by a mobile network operator</a> and can be independent of the traditional banking network. A bank account is not required to use mobile money services – the only pre-requisite is a basic mobile phone.</p>
<p>Those offering this service include MTN and Airtel Africa. As with most other countries on the continent, mobile money uptake in Nigeria has been slow. The exception has been <a href="https://thedocs.worldbank.org/en/doc/4fff8526d366d112cd9fd96eaf4adbb1-0050062022/original/FindexNote1-062419.pdf">Kenya,</a> where the <a href="https://www.vodafone.com/about-vodafone/what-we-do/consumer-products-and-services/m-pesa">launch of MPesa in 2007 </a> led to a massive uptake in mobile financial services. </p>
<p>In 2022, the Central Bank of Nigeria issued MTN the first license to operate mobile money services. It started <a href="https://www.mtn.ng/wp-content/uploads/2022/05/MoMo-Payment-Service-Bank-commences-Commercial-Operations.pdf?_ga=2.69147735.751641338.1681378566-391186901.1681378566">operations in May</a>. MTN is the largest mobile network operator in Nigeria.</p>
<h2>Can you paint a picture of the banking landscape?</h2>
<p><a href="https://www.statista.com/statistics/1182094/number-of-bank-customers-in-nigeria/">In 2021 Nigeria had 122.3 million active bank customers</a>. According to February 2022 data only <a href="https://www.statista.com/statistics/1139751/popularity-of-financial-products-or-services-in-nigeria/">39% of Nigerians</a> use the formal banking system.</p>
<p>As has been shown elsewhere, <a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/03/SOTIR_2014.pdf#page=14">mobile money offerings</a>, as well as other digital services, can extend banking to the unbanked. </p>
<p>In 2022 the volume of transactions performed electronically in Nigeria surged to the highest in five years. The total volume of the Inter Bank Settlement Scheme Instant Payment Platform transactions<a href="https://www.nibss-plc.com.ng/news/4cy2cqt4g9bkj44n75n4ete3x9#:%7E:text=A%20latest%20Mastercard%20survey%20said,websites%20to%20make%20financial%20transactions.">rose by 613.1% to 5.2 billion in 2022 from 729.2 million in 2018</a>. <a href="https://www.nibss-plc.com.ng/news/4cy2cqt4g9bkj44n75n4ete3x9#:%7E:text=A%20latest%20Mastercard%20survey%20said,websites%20to%20make%20financial%20transactions.">Its value also increased</a> by 381.5% from N80.4 trillion (US$174.6 billion) as at 2018 to N387.1 trillion (US$840.67billion) in 2022. </p>
<p>In my view, the spike in the value of transactions carried out at point-of-sale devices in Nigeria in January 2023 – they went up by <a href="https://nibss-plc.com.ng/news/4xapzv7015vgjryewfn8e2wd50">40.7% higher compared to the same month in 2022</a> – shows a wider adoption of digital payments. It is also an indication of the huge opportunities that mobile money operators and other forms of digital payments have in Nigeria. </p>
<h2>How does Nigeria’s digital currency eNaira fit into the picture?</h2>
<p>eNaira was <a href="https://www.cbn.gov.ng/out/2021/ccd/enaira%20launch%20press%20release%20%20231021.pdf">launched by the Central Bank in October 2021</a>. However, <a href="https://www.bloomberg.com/news/articles/2022-10-25/shunned-digital-currency-looks-for-street-credibility-in-nigeria?leadSource=uverify%20wall">less than 0.5% of Nigerians</a> were recorded as using it a year after its launch. </p>
<p>The Central Bank didn’t have an adoption strategy for the eNaira planned ahead of the currency change over. This was clearly a missed opportunity. </p>
<p>Although the aim of the currency was to <a href="https://enaira.gov.ng/assets/download/eNaira_Design_Paper.pdf#page=4">facilitate financial inclusion</a> and shrink the size of the informal market, it’s fallen short of the mark. It is currently only accessible to those with bank accounts. So, despite a <a href="https://www.bloomberg.com/news/articles/2023-03-21/nigeria-digital-currency-transactions-jump-63-on-cash-shortages?leadSource=uverify%20wall&sref=3REHEaVI">reported increase in the number of e-Naira wallets</a> to 13 million since October 2022, and an increase in the value of transactions in 2023, a lot still needs to be done to drive widespread adoption by the financially excluded. </p>
<p>Rethinking its architecture and policies to drive its adoption could include: </p>
<ul>
<li><p>making it accessible to all with a mobile phone; </p></li>
<li><p>incentivising people to use it such as granting significant discounts when used to pay taxes and for other public services; and </p></li>
<li><p>embedding mobile network or payments apps into Central Bank Digital Currency wallets for the wallets to be inter-operable with mobile network operators’ infrastructure. </p></li>
</ul>
<p>A lesson of the currency crisis is that fintech offers a solution to the limitations of legacy financial institutions, and at the same time, they can help address the financial exclusion challenge in Nigeria.</p>
<p>Had Nigeria appreciated the value of digital finance and particularly the key role to be played by mobile money operators, the impact of the crisis would not have been as painful.</p><img src="https://counter.theconversation.com/content/203435/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Iwa Salami does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Nigeria’s Central Bank didn’t have an adoption strategy for its digital currency. It was a missed opportunity.Iwa Salami, Reader (Associate Professor) in Law, University of East LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1727092021-11-26T15:06:19Z2021-11-26T15:06:19ZTurkey’s currency crisis is a textbook example of what not to do with interest rates<figure><img src="https://images.theconversation.com/files/434156/original/file-20211126-15-ltxel2.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Another fine mess. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/belgrade-serbia-7-october-2019-turkeys-1676561797">ToskanaINC</a></span></figcaption></figure><p>Central banks around the globe are currently staring at inflation rates unseen in more than 20 years. Supply chain problems and labour shortages arising from the pandemic, combined with sharply rising food and energy prices, have pushed prices up by as much as <a href="https://news.sky.com/story/us-inflation-hits-highest-level-since-1990-at-6-2-as-food-and-fuel-prices-surge-12465340">6.2%</a> in the US, <a href="https://www.bbc.co.uk/news/business-12196322">4.2%</a> in the UK, <a href="https://tradingeconomics.com/brazil/inflation-cpi">10.7%</a> in Brazil and <a href="https://tradingeconomics.com/india/inflation-cpi">4.5%</a> in India. Every central bank has responded by either raising interest rates or committing to raising them in the immediate future.</p>
<p>It’s too early to say whether the new coronavirus <a href="https://www.newsweek.com/nu-b-1-1-529-covid-variant-discovered-israel-heavily-mutated-strain-spreads-1653456">variant B.1.1.529</a>, first identified in Botswana, will take rate-rises off the agenda, but certainly they have not been part of Turkey’s plans. Since September, Turkey has cut interest rates by four percentage points from 19% to 15%, wreaking havoc in the financial markets in the process. </p>
<p>The Turkish lira, which was trading at TL8.28 = US$1.00 in early September, fell to TL13.40 a few days ago, its lowest level on record at the end of an eleven-day losing streak. It is now trading at around TL12.10, having recovered a little but then weakened again as investors move money out of weaker currencies in response to new fears about COVID. </p>
<p>So why has Turkey had such an “irrational” policy stance on interest rates while everyone else is doing the opposite?</p>
<h2>Erdoğanonomics</h2>
<p>It would have been of some academic interest to analyse the reasoning behind such a move, but there has been little forthcoming from the authorities – <a href="https://www.aljazeera.com/news/2021/11/23/turkeys-lira-hits-all-time-low-after-erdogan-rate-remarks">except to say</a> that it would “boost exports, investment and jobs”. President Erdoğan believes that raising interest rates would raise inflation rather than reduce it, and has maintained this view throughout the near 20 years that he has been prime minister (2003-14) and president (2014 to present). Unlike the 2018 currency crisis, which followed a diplomatic crisis between Turkey and US, the latest debacle is very much homemade and self-inflicted. </p>
<p><strong>Turkish lira vs US dollar</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/434160/original/file-20211126-27-1gfvim3.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph of Turkish lira against the US dollar over time" src="https://images.theconversation.com/files/434160/original/file-20211126-27-1gfvim3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/434160/original/file-20211126-27-1gfvim3.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=306&fit=crop&dpr=1 600w, https://images.theconversation.com/files/434160/original/file-20211126-27-1gfvim3.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=306&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/434160/original/file-20211126-27-1gfvim3.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=306&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/434160/original/file-20211126-27-1gfvim3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=384&fit=crop&dpr=1 754w, https://images.theconversation.com/files/434160/original/file-20211126-27-1gfvim3.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=384&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/434160/original/file-20211126-27-1gfvim3.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=384&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com/symbols/USDTRY/">Trading View</a></span>
</figcaption>
</figure>
<p>There have been two important changes in governance in recent years with important consequences. First, the move to the current executive presidential regime in 2018 officially crowned the president as the dominant authority in every sphere of policy. </p>
<p>Second, the independence of the country’s central bank, granted as part of a series of economic reforms in the early 2000s before Erdoğan’s AKP came to power, is now also gone. There have been four central bank governors in less than three years, with a <a href="https://theconversation.com/turkeys-plunging-lira-dont-expect-an-end-to-this-saga-soon-157844">clear pattern</a> of dismissals closely following interest rate hikes. The most recent appointment was Şahap Kavcıoğlu in March, and interest rates have not risen since then. </p>
<h2>Compounding factors</h2>
<p>The lira has now lost nearly 40% of its value since the beginning of the year. This is a massive depreciation for any economy, and even worse for Turkey for various reasons. For one thing, the fall in the lira will soon show up in a rise in inflation, which is already <a href="https://www.reuters.com/business/cop/turkish-inflation-climbs-near-20-highest-2-12-years-2021-11-03/">hovering around 20%</a> even by official accounts. The fact that so much of the economy runs on <a href="https://nationalinterest.org/feature/turkey-coalmine-how-erdogan%E2%80%99s-economic-plans-could-backfire-195183">US dollars</a> does not help. </p>
<p><a href="https://tcmbblog.org/wps/wcm/connect/blog/tr/main+menu/analizler/kurdan_enflasyona_gecis#dipnot3">Existing estimates</a> suggest that a 10% depreciation in the lira against the US dollar results in around a two percentage point rise in inflation. Given that inflation <a href="https://tradingeconomics.com/turkey/inflation-cpi">has only risen</a> by about one percentage point since the summer, that suggests it has a long way to go yet. About 70% of Turkey’s imports are made up of raw materials and goods used in manufacturing, so that’s where much of the effects will be felt. Among the difficulties is that <a href="https://www.iea.org/countries/turkey">Turkey has to</a> import most of its energy. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/434157/original/file-20211126-15-18nxo9v.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A house made of lira" src="https://images.theconversation.com/files/434157/original/file-20211126-15-18nxo9v.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/434157/original/file-20211126-15-18nxo9v.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=485&fit=crop&dpr=1 600w, https://images.theconversation.com/files/434157/original/file-20211126-15-18nxo9v.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=485&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/434157/original/file-20211126-15-18nxo9v.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=485&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/434157/original/file-20211126-15-18nxo9v.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=610&fit=crop&dpr=1 754w, https://images.theconversation.com/files/434157/original/file-20211126-15-18nxo9v.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=610&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/434157/original/file-20211126-15-18nxo9v.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=610&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Weak foundations.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/money-house-made-stack-coins-turkish-67845772">Levent Konuk</a></span>
</figcaption>
</figure>
<p>Another issue is that a significant proportion of Turkey’s debts are in foreign currencies – mainly US dollars and euros. The weaker lira makes these debts much more difficult to service, and Turkey is due to pay <a href="https://www.imf.org/en/Publications/CR/Issues/2021/06/11/Turkey-2021-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-50205">US$168 billion</a> (£126 billion) of its external debts in the next 12 months. The increased risk of default could inflict serious losses on foreign investors, with certain <a href="https://www.reuters.com/article/turkey-cenbank-europe-banks-factbox-int-idUSKBN2BE1P8">Spanish and Italian banks</a> among those that are heavily exposed. This raises the prospect of Turkey’s problems spilling over into other countries, and the sell-off in the lira is likely to get worse if market panic becomes prolonged because of variant B.1.1.529. </p>
<h2>What can policymakers do?</h2>
<p>There are three policy tools available to policymakers in the face of currency turmoil: raising interest rates, selling foreign exchange reserves and imposing capital controls (meaning you prevent foreign currency from leaving the country). </p>
<p>All three aim to take the pressure off the domestic currency. Raising interest rates makes the domestic currency more attractive to investors, since it increases what they can earn from it. Selling foreign exchange reserves means buying more of the domestic currency, so its value is strengthened by the extra demand. And capital controls slow down the volume of trade between the domestic and foreign currency, which means fewer people are selling the domestic currency. </p>
<p>Apart from the fact that the regime in Turkey is not enthusiastic about raising interest rates, it can’t sell foreign reserves because it essentially <a href="https://www.nasdaq.com/articles/turkeys-net-fx-reserves-fall-to-%2412.44-bln-as-of-may-28-2021-06-03">doesn’t have any</a>. That leaves capital controls, which would be an extreme measure in today’s world and would imply that Turkey was withdrawing from the international financial system. Capital controls <a href="https://www.nber.org/digest/jan06/costs-international-capital-controls">are also difficult</a> and costly to enforce, even in countries with robust institutions. </p>
<p>Perhaps instead the central bank will reverse policy and raise interest rates. This already happened during the 2018 currency crisis, when the authorities made a major U-turn and raised interest rates <a href="https://www.reuters.com/article/turkey-cenbank-rates-idUKEONI9D0SG">by 6.25 percentage points</a> that September. At that time the lira had plummeted to close to TL6.50 = US$1.00 – still much more valuable than it is today – before strengthening to the low TL5.00s after the change of policy. Similarly, in 2020 a rate-cutting streak was followed by sharp rate-rises later in the year. </p>
<p>Yet, as necessary as it is for Turkey to increase interest rates, this will not do much to solve the significant imbalances in the economy that have accumulated over a long period. </p>
<p>What Turkey needs is a carefully designed and inclusive stabilisation programme with buy-in from large sections of society, with independence for the central bank at its core. This is highly unlikely to happen with the current all-powerful presidential regime, with or without a change in power.</p><img src="https://counter.theconversation.com/content/172709/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gulcin Ozkan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Contrary to most economists, President Erdoğan has long believed that raising interest rates increases inflation.Gulcin Ozkan, Professor of Finance, King's College LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1433652020-08-11T13:13:42Z2020-08-11T13:13:42ZTurkey’s collapsing lira: government is running out of options for embattled currency<p>The Turkish lira hit its <a href="https://www.nasdaq.com/articles/turkish-lira-slides-again-as-funding-costs-edge-higher-2020-08-10">weakest ever level</a> against the US dollar on August 7, trading at 7.36 at one point, having lost nearly 20% of its value since the beginning of the year. It comes almost two years to the day since Turkey was last hit by a massive currency crisis, following the economic sanctions imposed by the US government after Turkey detained American pastor Andrew Brunson on terrorism charges. </p>
<p>On that occasion, the lira <a href="https://www.cnbc.com/2018/09/13/lira-jumps-as-turkish-central-bank-hikes-rates-to-24-percent.html">stabilised after</a> Turkey’s central bank raised interest rates by 625 basis points (6.25%). This brought a relative calm, but only temporarily. The lira has been on <a href="https://uk.reuters.com/article/uk-turkey-economy-reserves/turkish-state-banks-short-forex-to-support-lira-say-sources-and-data-idUKKCN24H0RW">life support</a> for the past two years and the economy has <a href="https://tradingeconomics.com/turkey/gdp#:%7E:text=GDP%20in%20Turkey%20averaged%20269.73,7.99%20USD%20Billion%20in%201961.&text=Turkey%20GDP%20%2D%20values%2C%20historical%20data,updated%20on%20August%20of%202020.">continually struggled</a>. </p>
<p><strong>US dollar vs Turkish lira</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/352224/original/file-20200811-15-17p5x35.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="US dollar/Turkish lira graph going back to 2006" src="https://images.theconversation.com/files/352224/original/file-20200811-15-17p5x35.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/352224/original/file-20200811-15-17p5x35.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=223&fit=crop&dpr=1 600w, https://images.theconversation.com/files/352224/original/file-20200811-15-17p5x35.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=223&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/352224/original/file-20200811-15-17p5x35.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=223&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/352224/original/file-20200811-15-17p5x35.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=280&fit=crop&dpr=1 754w, https://images.theconversation.com/files/352224/original/file-20200811-15-17p5x35.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=280&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/352224/original/file-20200811-15-17p5x35.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=280&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-rates/usd/USD-to-TRY">PoundSterlingLive</a></span>
</figcaption>
</figure>
<p>The lira’s latest tumble is even more dramatic than it appears because the <a href="https://www.reuters.com/article/us-health-coronavirus-dollar-analysis/battered-u-s-dollar-hanging-by-a-thread-as-coronavirus-cases-grow-idUSKCN24N2UI">US dollar has itself</a> been losing value. The dollar is <a href="https://www.marketwatch.com/investing/index/dxy/charts">down 9%</a> against a basket of other currencies due to investors deeply unimpressed by America’s handling of the COVID-19 crisis. So why is the lira in so much trouble?</p>
<h2>Emerging economies and COVID-19</h2>
<p>COVID-19 is not the whole story, but it is a good place to start. It is now widely acknowledged that the coronavirus has posed an even greater challenge to emerging economies like Turkey <a href="https://www.ft.com/content/777cd7da-7269-11ea-90ce-5fb6c07a27f2">than the</a> 2007-09 global financial crisis. </p>
<p>Whereas the global financial crisis affected emerging economies only indirectly, mostly sparing those who were less exposed to it, COVID-19 is a different story. Nations are having to cover the cost of a public-health crisis while coping with the wider economic fallout both at home and further afield. </p>
<p>As most advanced economies ground to a halt in lockdown, their demand for exports from emerging markets tanked. A good example is international tourism, <a href="https://www.oecd.org/coronavirus/policy-responses/tourism-policy-responses-to-the-coronavirus-covid-19-6466aa20/">which is forecast</a> by the OECD to be down 60% this year. This has dramatic financial consequences for the likes of Indonesia, Thailand, and of course Turkey. </p>
<p>These countries can’t afford huge rescue packages like the UK, US and EU, so their economies are significantly more vulnerable. They have <a href="https://www.ft.com/content/66d6e34f-523a-41bf-af32-8bdd2cf1345e">also been hit</a> by massive capital flight. In just four weeks at the beginning of the crisis, a third of the investments into emerging nations’ bonds over the past four years were sold. This was four times the capital outflows of the 2007-09 financial crisis. It has spelt disaster for these countries, who rely on this capital for financing domestic investment and hence economic growth. </p>
<p>Especially for countries like Turkey that persistently run current account deficits, meaning they import more than they export, this drying up of external finance is a strong harbinger of a <a href="https://www.moneyandbanking.com/commentary/2018/6/24/sudden-stops-a-primer-on-balance-of-payments-crises">balance-of-payments crisis</a>. This is where investor confidence falls so much that the local currency collapses and the country can’t cover its debts or pay for essential imports. Various emerging economies <a href="https://www.ft.com/content/777cd7da-7269-11ea-90ce-5fb6c07a27f2">risk such a crisis</a> if current conditions prevail for an extended period, and Turkey is clearly one of them. </p>
<h2>Turkey’s vulnerabilities</h2>
<p>Turkey has been considered among the riskiest emerging markets in recent years, categorised as one of the “<a href="https://www.nytimes.com/2014/01/29/business/international/fragile-five-is-the-latest-club-of-emerging-nations-in-turmoil.html">fragile five</a>” along with India, Brazil, South Africa and Indonesia. Turkey earned its place for running large current-account deficits, and although there have been improvements on and off, it has continually relied on external financing as its engine of growth. </p>
<p>Turkey has long survived by attracting strong capital inflows, prompting strong credit expansion which in turn encourages economic growth. But this virtuous cycle turns vicious in bad times, dragging the lira to the brink.</p>
<p><strong>Turkey’s current account, US$ millions</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/352229/original/file-20200811-15-o23py4.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Turkey's current account in millions of US dollars" src="https://images.theconversation.com/files/352229/original/file-20200811-15-o23py4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/352229/original/file-20200811-15-o23py4.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=260&fit=crop&dpr=1 600w, https://images.theconversation.com/files/352229/original/file-20200811-15-o23py4.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=260&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/352229/original/file-20200811-15-o23py4.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=260&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/352229/original/file-20200811-15-o23py4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=327&fit=crop&dpr=1 754w, https://images.theconversation.com/files/352229/original/file-20200811-15-o23py4.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=327&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/352229/original/file-20200811-15-o23py4.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=327&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/turkey/current-account">Trading Economics</a></span>
</figcaption>
</figure>
<p>Then there is politics. Since 2014, Turkey has had at least one election <a href="https://www.dailysabah.com/election-results">every year</a> except 2016. There were local elections in 2014, two general elections in 2015, a referendum on the government system in 2017, general and parliamentary elections in 2018, and local elections in 2019. This has put almost continuous pressure on the authorities to spend money and keep stimulating the economy with <a href="https://countryeconomy.com/key-rates/turkey#:%7E:text=Turkey%20has%20lowered%20its%20interest,Banks%20to%20implement%20monetary%20policy.">interest rates</a> low enough to encourage more borrowing. </p>
<h2>What now</h2>
<p>There are three <a href="https://academic.oup.com/ej/article-abstract/105/429/510/5158864?redirectedFrom=fulltext">well-known measures</a> that one can deploy against a falling currency. Raise interest rates, buy the currency using national foreign-exchange reserves, or adopt capital controls to prevent foreign currency outflows.</p>
<p>Capital controls <a href="https://www.wsj.com/articles/the-hottest-idea-in-finance-capital-controls-are-good-1454581800">may stabilise</a> investment flows in the medium term, but there is no compelling evidence that they work in the heat of a currency crisis. So Turkey’s options are to raise interest rates and/or use foreign exchange reserves. The bad news is that the central bank <a href="https://uk.reuters.com/article/uk-turkey-economy-reserves/turkish-state-banks-short-forex-to-support-lira-say-sources-and-data-idUKKCN24H0RW">has been defending</a> the lira for several years using foreign-exchange reserves already. Reserves are almost depleted, which <a href="https://www.ft.com/content/6bba02fc-d0ca-499c-adae-87d6fd162f6b?segmentId=6bf9295a-189d-71c6-18fb-d469f27d3523">is why</a> the currency has been taking such a hammering lately.</p>
<p>Turkey could either obtain more foreign currency by borrowing from international institutions like the IMF, or raise interest rates like it did in 2018 (the base rate is currently 8.25%). But both options are political minefields right now. </p>
<p>President Recep Tayyip Erdoğan has a <a href="https://www.bloomberg.com/news/articles/2019-08-02/behind-erdogan-s-strange-ideas-about-interest-rates-quicktake">well-known conviction</a> – contrary to conventional economic theory – that high interest rates cause high inflation. And his party, the ruling AKP, has <a href="https://www.aa.com.tr/en/energy/finance/turkey-not-to-reopen-imf-chapter-president-erdogan/21870">long told the people</a> that Turkey is no longer a country that needs IMF assistance. </p>
<p>Turkey’s leaders have made it common knowledge that neither option will be sought unless everything else fails. When the lira was last under acute pressure in May, the authorities signed a <a href="https://www.reuters.com/article/us-turkey-qatar-swap/qatar-offers-turkey-relief-by-tripling-fx-swap-line-to-15-billion-idUSKBN22W147">currency swap agreement</a> with Qatar for US$15 billion (£11.4 billion). </p>
<p>This time, they have been trying everything from <a href="https://www.intellinews.com/turkey-insight-how-the-central-bank-is-actively-using-six-different-funding-rates-188214/?source=turkey">forcing Turkish banks</a> to borrow at the higher-cost overnight facility (an interest-rate rise by another name) to reducing domestic lending, since this weakens the lira by boosting demand for US dollars. Such measures may buy time, but are unlikely to prevent further melting of the lira unless the government moves on the two main fronts. </p>
<p>Even then, these won’t solve Turkey’s long-running problems. The current model based on external finance, cheap credit and booms in consumption has run its course. The real question is what will replace it.</p><img src="https://counter.theconversation.com/content/143365/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gulcin Ozkan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s two years since Turkey’s last near-death experience, and the same short-term fixes are unlikely to work again.Gulcin Ozkan, Professor of Finance, King's College LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1282102019-12-03T19:45:02Z2019-12-03T19:45:02ZCurrency manipulation and why Trump is picking on Brazil and Argentina<figure><img src="https://images.theconversation.com/files/305014/original/file-20191203-67007-e5zemb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Trump says Argentina is intentionally weakening the peso. </span> <span class="attribution"><span class="source">FJZEA/Shutterstock.com</span></span></figcaption></figure><p>President Donald Trump <a href="https://www.reuters.com/article/us-usa-trade-trump/trump-citing-us-farmers-slaps-metal-tariffs-on-brazil-argentina-idUSKBN1Y614O">slapped new tariffs</a> on Brazil and Argentina after accusing them of manipulating their currencies to boost exports. </p>
<p>It wasn’t the first time Trump has labeled another country a “currency manipulator” for supposedly meddling to keep its own currency weak or undervalued. China <a href="https://www.reuters.com/article/us-usa-trump-china-currency-exclusive-idUSKBN1622PJ">received that epithet</a> from the president long before it felt the pain of his trade war. </p>
<p>But the truth is more complicated than Trump makes it out to be. </p>
<h2>Everyone does it</h2>
<p>The first thing to understand is that government efforts to influence their exchange rates – which is often dubbed currency manipulation – is extremely common, as I’ve seen firsthand in <a href="https://scholar.google.com/citations?user=qttICm8AAAAJ&hl=en&oi=ao">my work</a> as an international business professor.</p>
<p><a href="https://www.imf.org/en/Publications/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions/Issues/2019/04/24/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions-2018-46162">All but 31</a> of the <a href="https://www.imf.org/external/np/sec/memdir/memdate.htm">International Monetary Fund’s 189 members</a> meddle, in a mild or total fashion, to influence or fix their exchange rates. Only a few major currencies, such as the dollar or euro, are allowed a “free float” based on market forces of supply and demand with minimal or no government intervention. </p>
<p><iframe id="I2cfN" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/I2cfN/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Other governments have a variety of ways to manage their currencies. Some peg their currencies to a fixed rate, as long as they can afford to keep it there. Others tie their currencies to a major but stable currency like the euro or a basket of different ones. For example, the Lebanese pound is tied to the dollar at a fixed rate of 1,507.5 to 1. </p>
<p>About 16% of IMF members use a “managed float,” in which they allow market forces to play a role but with the government buying or selling their own currency as needed to bias the exchange rate upward or downward. Argentina and Brazil both adhere to a managed float system. </p>
<h2>Why weaken a currency</h2>
<p>Generally, when the Trump administration has criticized countries, the allegation is that their government is keeping its currency undervalued in order to <a href="https://www.investopedia.com/articles/investing/090215/3-reasons-why-countries-devalue-their-currency.asp">give an artificial boost</a> to exports while making it harder for imports to compete.</p>
<p>A weaker currency makes the products it sells abroad cheaper, while making imports more expensive for its consumers. This may have the effect of boosting jobs in that country. <a href="https://www.reuters.com/article/us-usa-trade-trump/trump-citing-us-farmers-slaps-metal-tariffs-on-brazil-argentina-idUSKBN1Y614O">Trump believes this is what Brazil and Argentina are doing</a>. </p>
<p><a href="https://www.wsj.com/articles/trump-restores-tariffs-on-steel-and-aluminum-shipped-from-argentina-brazil-11575288359">Economists say</a> the two countries are actually trying to prevent their currencies from weakening against the dollar. That’s in part because a weak currency also makes imports more expensive for businesses that rely on foreign inputs to make their products. </p>
<p>So higher import costs, along with persistently high inflation in both <a href="https://tradingeconomics.com/argentina/inflation-cpi">Argentina</a> and <a href="https://tradingeconomics.com/brazil/producer-prices">Brazil</a>, largely offset any gains from their weaker currencies. </p>
<h2>The strong dollar</h2>
<p>But more importantly, these currencies seem undervalued primarily because the U.S. dollar is unnaturally strong. </p>
<p>One reason for the strength of the dollar is that inflation-adjusted interest rates in the U.S. are still relatively high. Another is that the dollar is still a haven, making it an attractive place to park your cash during global economic uncertainty. </p>
<p>As a result, a massive amount of foreign money has <a href="https://www.stlouisfed.org/on-the-economy/2019/may/foreign-demand-currency-fed-balance-sheet">flowed into dollar denominated-bank deposits</a>, treasury bonds, U.S. stocks and real estate over the past few years. And the reality is that the dollar is now exceptionally strong, not that other currencies are weak or necessarily being manipulated. </p>
<p>Ultimately, labeling other countries as currency manipulators is more about politics and geopolitical relations than policy. </p>
<p><em>This is an updated version of an <a href="https://theconversation.com/does-china-manipulate-its-currency-as-donald-trump-claims-60148">article originally published</a> on July 13, 2016.</em></p><img src="https://counter.theconversation.com/content/128210/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Farok J. Contractor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Most countries manipulate their currencies – at least a little – but at the moment that’s not the real reason they are undervalued relative to the dollar.Farok J. Contractor, Distinguished Professor of Management & Global Business, Rutgers UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1218342019-08-15T12:42:07Z2019-08-15T12:42:07ZThe US branding China a ‘currency manipulator’ threatens global stability<p>The US has escalated its <a href="https://theconversation.com/winners-and-losers-in-the-us-china-trade-war-119320">trade war with China</a> by accusing the country of devaluing its currency to make its exports unfairly cheap. When China’s currency, the renminbi (RMB) fell below the symbolic seven-per-dollar level on August 5, President Donald Trump reacted by <a href="https://twitter.com/realdonaldtrump/status/1158350120649408513">labelling China a currency manipulator</a> on Twitter. His Treasury department <a href="https://www.bbc.co.uk/news/business-49244702">followed suit</a>, making it the official government position. </p>
<p>It is the latest development in a fight that was never purely about economics. And it marks a fundamental shift in relations between the world’s two largest economies. What was a relatively symbiotic economic relationship between the US and China is beginning to fracture – with serious implications for both countries, and the rest of the world.</p>
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<p>The charge of currency manipulation has been thrown around by Trump since the early days of his <a href="https://eu.usatoday.com/story/money/2017/04/16/trump-defends-u-turn-china-currencys-practices/100548546/">2015-16 presidential campaign</a>. It is not, however, a classification that should be used lightly. <a href="https://www.scmp.com/economy/global-economy/article/3022526/singapore-economy-tipped-recession-us-china-trade-war-slams">Economic growth forecasts have worsened</a> as a result and this kind of rhetoric makes matters worse.</p>
<h2>What is currency manipulation?</h2>
<p>Currency manipulation involves the artificial movement of a domestic currency valuation through government intervention such as by printing more money or buying and selling other currencies on the foreign exchange market. </p>
<p>Currency valuation is particularly important in the early stages of a country’s economic development. China is no exception. For instance, from the mid-1980s to late 1990s China <a href="https://www.investopedia.com/articles/investing/090215/3-reasons-why-countries-devalue-their-currency.asp">kept its currency low</a> to make its labour and production costs cheap. Managing its currency in this way proved a significant advantage for attracting foreign investment and enabled China to accumulate foreign exchange reserves. All of which are necessary for sustained growth. </p>
<p>But devaluing the currency also translates into more expensive imports for China’s domestic consumers, and a higher risk of <a href="https://www.ft.com/content/ce27b2de-be24-11e9-b350-db00d509634e?segmentId=778a3b31-0eac-c57a-a529-d296f5da8125">foreign investors pulling their money out of the country</a>. Plus, with China’s recent efforts to transform the RMB <a href="https://theconversation.com/chinas-currency-gets-the-imf-stamp-of-approval-as-it-enters-a-new-normal-42559">into an international reserve currency</a> that is held by central banks around the world, foreign holders of the RMB expect a stable value. So manipulation can have real – and potentially destabilising – costs for China and its economy.</p>
<p>A year and a half into the US-China trade war, things are starting to take their toll for China. On July 15, the country reported a 6.2% growth rate, its <a href="https://www.ft.com/content/73f06b8a-a696-11e9-984c-fac8325aaa04">slowest in 27 years</a>. With <a href="https://www.scmp.com/economy/china-economy/article/3012481/chinas-debt-ratio-hits-record-high-efforts-offset-us-trade">record levels of debt</a> and <a href="https://www.ibtimes.com/chinas-food-prices-7-consumer-inflation-hits-15-month-high-2799938">consumer inflation rates reaching a 15-month high</a>, currency devaluation would in many ways exacerbate the situation. While China is known for state intervention, there’s no foul play here.</p>
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<img alt="" src="https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The RMB recently passed the symbolic seven dollar mark.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/currency-peoples-republic-china-united-states-1471633103?src=hZJoSarsZslGqGSocEpz0w-1-42">Junming Lu /shutterstock.com</a></span>
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<p>To understand China’s currency regime, it is important to recognise that China prioritises stability. Its economic policy, and its approach to currency flows in particular, has been <a href="https://www.cis.org.au/app/uploads/2015/04/images/stories/policy-magazine/1999-autumn/1999-15-1-terry-black-susan-black.pdf">preoccupied with minimising volatility</a>. </p>
<p>The drop in value of the RMB followed an announcement by the Trump administration that it was raising tariffs on <a href="https://www.cnbc.com/2019/08/01/trump-says-us-will-impose-10percent-tariffs-on-300-billion-of-chinese-goods-starting-september-1.html">US$300 billion of Chinese goods</a>. This went against the consensus the two sides <a href="https://theconversation.com/g20-summit-bring-a-truce-in-us-china-trade-relations-but-its-likely-to-be-temporary-108017">reached at the G20 in June</a> and Chinese government <a href="https://www.ft.com/content/39c5e812-bda3-11e9-89e2-41e555e96722">officials say</a> that the RMB devaluation came from the market reacting to this announcement, with escalating trade tensions putting the currency under pressure.</p>
<p>Similarly, in its annual assessment of China’s economy, published in the wake of US accusations, the <a href="https://www.imf.org/en/Publications/CR/Issues/2019/08/08/Peoples-Republic-of-China-2019-Article-IV-Consultation-Press-Release-Staff-Report-Staff-48576">IMF stuck with its position</a> that the RMB is in line with China’s economic fundamentals. If anything, according to the IMF, the US dollar <a href="https://markets.businessinsider.com/news/stocks/imf-agrees-with-trump-us-dollar-overvalued-german-euro-undervalued-2019-7-1028364276">is overvalued</a>. </p>
<h2>Interdependence</h2>
<p>America’s decision to label China a currency manipulator has significant implications for world markets. It not only exacerbates the uncertainty surrounding the state of relations between China and its largest trading partner, but as an escalation of tensions it is bad for both China’s and global economic growth. </p>
<p>Markets have been on edge since the US and China began putting tariffs on each other’s goods in July 2018. Immediately following the Treasury’s designation of China as a currency manipulator, volatility in the markets was seen <a href="https://www.theguardian.com/business/2019/aug/05/markets-fall-sharply-amid-fears-of-full-scale-us-china-yuan-currency-war">around the world</a>. </p>
<p>China is at the heart of the world’s global supply chain. Any economic slow down will extend to its major production and resource partners. Big American and multinational businesses have been hit by the uncertainty surrounding the costs of production, parts and components that come with an escalating trade war. Accusations of currency manipulation raise these tensions, further denting consumer confidence and their purchasing power around the world. </p>
<p>Plus, Trump’s approach to managing negotiations with China ignores the highly interdependent relationship of the two countries. One of the ways that China keeps the RMB from appreciating in value is by buying US debt <a href="https://www.economist.com/finance-and-economics/2018/06/23/sino-american-interdependence-has-been-a-force-for-geopolitical-stability">with its large amount of US dollar reserves</a>. This, in turn, enables China to keep producing and exporting cheap goods, which are bought by US consumers. Dubbed <a href="https://www.telegraph.co.uk/comment/personal-view/3638174/Not-two-countries-but-one-Chimerica.html">“Chimerica”</a>, this situation has been a win-win for the two countries.</p>
<p>The Trump administration’s approach to China prioritises short-termism and immediate gain by appealing to the populist sentiment of his voter base over economic reality. By breaking the recent G20 accord and challenging the decisions of international institutions like the IMF, the US is ramping up the US-China trade war. And this cuts to the heart of how America’s global leadership is increasingly unreliable.</p>
<p>The rest of the world has long looked to the US and the institutions it spearheads (such as the IMF and World Bank) as a guide for global economic governance. So the accusation of currency manipulation not only raises genuine concerns for markets, but could help foster a global split along economic lines. If China gets cut off from US consumers it will be forced to turn elsewhere and, as the <a href="https://www.cnbc.com/2018/04/05/chinas-1-point-2-trillion-weapon-that-could-be-used-in-a-us-trade-war.html">single largest holder of US debt</a>, it has a serious weapon up its sleeve.</p><img src="https://counter.theconversation.com/content/121834/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Winnie King does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US and China have an interdependent economic relationship. If this unravels it will have global ramifications.Winnie King, Lecturer East Asian and International Political Economy, University of BristolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1216192019-08-08T20:06:51Z2019-08-08T20:06:51ZVital Signs. Blame Trump, not China for the looming trade and currency war<figure><img src="https://images.theconversation.com/files/287332/original/file-20190808-144888-1cnl2k6.jpg?ixlib=rb-1.1.0&rect=11%2C251%2C3646%2C1455&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We are being sucked in to something Trump started.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Donald Trump is at it again. He triggered trade tensions with China in January 2018 by imposing tariffs on Chinese solar panels and washing machines and quickly moved on to steel and aluminium – before brokering a tentative peace with President Xi Jinping.</p>
<p>Then last week he announced another 10% tariff on almost all of the remaining US$300 billion of imports from China. </p>
<p>In the scheme of things that’s not a lot of money, a mere <a href="https://www.nytimes.com/2019/08/05/opinion/trumps-china-shock.html"> 0.1%</a> of US gross domestic product and 0.15% of Chinese domestic product. </p>
<p>Its real impact was to demonstrate that Trump is either unwilling or unable – due to self-control problems – to avert a full scale trade and currency war.</p>
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Read more:
<a href="https://theconversation.com/are-trumps-tariffs-legal-under-the-wto-it-seems-not-and-they-are-overturning-70-years-of-global-leadership-121425">Are Trump's tariffs legal under the WTO? It seems not, and they are overturning 70 years of global leadership</a>
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<p>China responded by stopping intervening in currency markets to prop up its currency, the yuan.</p>
<p>The yuan quickly breached the seven yuan to the US dollar barrier <a href="https://www.npr.org/2019/08/05/748155575/chinas-currency-falls-to-lowest-exchange-rate-in-11-years">for the first time in 11 years</a>. It is a barrier that had been thought to be unassailable.</p>
<h2>If anything, China stopped manipulating its currency…</h2>
<p>The Trump administration, via Treasury Secretary Steve Mnuchin, designated China a <a href="https://www.washingtonpost.com">currency manipulator</a>. </p>
<p>This is both dangerous and wrong. It is dangerous because it risks (actually, as good as guarantees) further escalation. </p>
<p>It is wrong because what China had been doing in response to US pressure was keeping its currency artificially high. What it did on Monday was to stop that, just for a day or two; long enough to send a message.</p>
<p>There is a reasonable argument that a decade ago China was indeed keeping its currency artificially low in order to give its exports an advantage, but as former US Treasury Secretary Larry Summers has noted, <a href="https://www.washingtonpost.com/opinions/2019/08/06/by-naming-china-currency-manipulator-mnuchin-has-damaged-his-credibility/">China stopped that years ago</a>. </p>
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<p>Over the past eight years, it has reduced its trade surplus from more than 8% of GDP to essentially zero in response to US pressure. Its interventions in currency markets over the past several years have been to prop up its currency rather than to drive it down. And the move down in the yuan on Monday was not artificial – it was an entirely natural market response to newly imposed US tariffs.</p>
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<h2>…panicking financial markets</h2>
<p>All of this spooked investors, with the US stock market dropping 3% and investors moving aggressively from stocks to the safety of government bonds. </p>
<p>In Australia the ASX 200 dropped 2.9% immediately on opening Monday, then further, and after a bounce on Thursday is now down 4% on its record high set last week. The Australian dollar fell below 68 US cents for the first time in ten years.</p>
<p>The flight to bonds pushed the Australian government’s 10-year bond rate down to a new record low. On Wednesday it dipped 1% for the first time ever. </p>
<p>The new ultra-low low rate means investors would prefer to lend money to the government for ten years at an-after inflation loss than take their chances in the world of commerce.</p>
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Read more:
<a href="https://theconversation.com/the-china-trump-trade-war-has-spread-to-australia-were-now-at-risk-of-global-currency-war-121486">The China-Trump trade war has spread to Australia. We're now at risk of global currency war</a>
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<p>The big risk for Australia is a move toward worldwide protectionism.</p>
<p>Australian exports (and imports) are around 20% of GDP. Australian farmers depend on selling things to rest of the world, especially China. </p>
<p>Our iron ore and other mineral producers, and even the university sector, are similarly dependent.</p>
<h2>(Minor) reasons to be cheerful…</h2>
<p>The best case is that it all blows over pretty quickly. </p>
<p>Like he has so many times before, President Trump might reverse course. The Chinese government seems highly rational and, since it also stands to lose a lot from a trade and currency war, might “call off hostilities”.</p>
<p>If it doesn’t, there might be some consolation in picking up crumbs. </p>
<p>China has suspended imports of <a href="https://www.cnbc.com/2019/08/05/china-confirms-it-is-suspending-agricultural-product-purchases-in-response-to-trumps-new-tariffs.html">US agricultural products</a>. Australia might be able to fill the breach. Some of the Chinese students who would have studied at American universities might come to Australia instead.</p>
<p>The Reserve Bank likes a lower Australian dollar because it makes our exports more competitive and could mean that it doesn’t need to cut interest rates as aggressively as it would have in order to lower the dollar.</p>
<h2>…bigger reasons to be worried</h2>
<p>We’ll learn more later today when Governor Philip Lowe appears before the <a href="https://www.aph.gov.au/News_and_Events/Events_Calendar/Event_Details?ID=%7B4E9C7A28-8F73-4BB8-81C9-FBE6865F613E%7D">parliament’s economic committee</a>. </p>
<p>He will be quizzed about why the bank took as long as it did to cut rates, and he will provide an updated set of <a href="https://rba.gov.au/publications/smp/2019/may/">economic forecasts</a>.</p>
<p>Despite his considerable skills, what he won’t be able to do is forecast what will happen between Trump and Xi Jinping. No-one knows.</p>
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Read more:
<a href="https://theconversation.com/the-us-china-trade-war-5-essential-reads-121476">The US-China trade war: 5 essential reads</a>
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<img src="https://counter.theconversation.com/content/121619/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia has more to fear than most countries from a global trade and currency war. All eyes will be on the Reserve Bank governor Friday as he attempts to outline what might happen.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1214862019-08-06T20:09:34Z2019-08-06T20:09:34ZThe China-Trump trade war has spread to Australia. We’re now at risk of global currency war<figure><img src="https://images.theconversation.com/files/287022/original/file-20190806-84240-l9d0l8.jpg?ixlib=rb-1.1.0&rect=41%2C263%2C3946%2C1862&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Australian dollar has already slipped, falling to its lowest point against the US since the global financial crisis.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>When US President Donald Trump announced <a href="https://twitter.com/realDonaldTrump/status/1156979446877962243">via Twitter</a> on Friday that he was slapping tariffs on an extra US$300 billion of China’s exports, it was widely expected that China’s currency would slide against the US dollar. </p>
<p>What wasn’t expected was that on Monday it would break the <a href="https://www.afr.com/world/asia/why-cracking-seven-is-a-big-deal-for-china-s-currency-20190612-p51wru">seven Chinese renminbi (RMB) to the dollar</a> barrier, a line held by China since 2008.</p>
<p>The RMB/USD exchange rate is tightly managed by the People’s Bank of China. The rate is permitted to move only 2% away from a midpoint fixed by the bank each day.</p>
<p>Although in its <a href="http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/3869683/index.html">official statement</a> the bank attributed the slide mainly to changes in demand and supply, the slide would not have happened had the bank not allowed it. In the past it spent as much as US$107 billion in a single month defending the renminbi.</p>
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Read more:
<a href="https://theconversation.com/will-trumps-trade-war-with-china-ever-end-121405">Will Trump’s trade war with China ever end?</a>
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<p>It is more reasonable to believe that the devaluation was a deliberate decision taken to offset the effect of the punitive tariffs. </p>
<p>By making China’s exports cheaper in US dollars it will neutralise the effect of Trump’s decision to impose tariffs that would make them more expensive. </p>
<p>But it will have far-reaching implications, so far-reaching as to suggest that Beijing has run out of alternatives.</p>
<h2>In part, China is hurting itself…</h2>
<p>The exchange rate - the external price of money – affects almost everything, including inflation in China itself, which will receive a boost as imports to China become more expensive. </p>
<p>Chinese inflation is already <a href="https://www.ft.com/content/1d561e32-a3b2-11e9-a282-2df48f366f7d">on the rise</a> due to disruptions in supply of food staples such as pigs.</p>
<p>There isn’t much the People’s Bank of China can do to restrain inflation. Pushing up interest rates might choke the economy given that China’s GDP just posted its <a href="https://edition.cnn.com/2019/07/15/economy/china-gdp-growth/index.html">smallest quarterly gain since 1992</a>. </p>
<p>It would also make it even more difficult for already heavily indebted state-owned enterprises and local governments to make payments on their debt. </p>
<p>If the Chinese think the currency is going to continue to fall they’ll attempt to take their money out of the country while it still has buying power. </p>
<p>Although the People’s Bank of China has demonstrated its capacity to control capital flight, it has increasingly had to do it using harsh measures that harm legitimate trade and investment.</p>
<p>The devaluation will essentially act as tax on net importers, which in China are households. This means it will work against China’s goal of rebalancing the economy away from investment to private consumption.</p>
<h2>…and endangering global recovery</h2>
<p>An RMB that breaches seven is also bad news for the global economy. It means weaker demand from China, which will depress global economic growth. </p>
<p>In that way it can be thought of as spreading the cost of US tariffs onto China’s trading partners, which are themselves likely to devalue in something of a currency war. The Australian dollar has fallen through 68 US cents, a low not seen since the global financial crisis.</p>
<p>Asian economies are also likely to devalue, among them South Korea, Vietnam, Thailand and Indonesia. The European Central Bank has also <a href="https://www.bloomberg.com/news/articles/2019-07-25/ecb-signals-rate-cut-qe-ahead-as-global-stimulus-push-picks-up">signalled</a> rate cuts and other measures to bring down its exchange rate as has the <a href="https://www.bloomberg.com/news/articles/2019-07-15/boj-would-back-government-stimulus-in-october-ex-official-says">Bank of Japan</a>. </p>
<h2>Other nations will devalue…</h2>
<p>The US Fed itself will be under pressure to cut rates further in what the <a href="https://www.bloomberg.com/news/articles/2019-07-15/pimco-says-full-blown-currency-war-can-no-longer-be-ruled-out">Pacific Investment Management Company</a> has warned
could lead to a “full-blown currency war with direct intervention by the US and other major governments/central banks to weaken their currencies”.</p>
<p>On Tuesday Australia’s Reserve Bank signalled its <a href="https://rba.gov.au/media-releases/2019/mr-19-20.html">willingness to cut interest rate again</a>, although in our case the drop in the Australian dollar might have made it nervous. It would prefer a controlled rather than unpredictable decline in the dollar.</p>
<p>John Connally Jr, Richard Nixon’s treasury secretary, once said in 1971 that the US dollar was “our currency, but your problem”. He meant that the rest of the world had to live with whatever the US did for its own reasons.</p>
<h2>…meaning none of them will win</h2>
<p>As the currency of the world’s second largest economy increasingly moves to the centre of global trade, China is able to say much the same thing. But an international currency war could hurt China as well by endangering the still not complete international recovery from the global financial crisis. </p>
<p>The People’s Bank of China has tried to reassure the world that it “has experience, confidence and capacity to maintain renminbi exchange rate at a reasonably stable equilibrium”.</p>
<p>It might do more for confidence if it wound down its control, as have other countries, relying less on manipulating the exchange rate for strategic reasons.</p>
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Read more:
<a href="https://theconversation.com/what-china-wants-3-things-motivating-chinas-position-in-trade-negotiations-with-the-us-117286">What China wants: 3 things motivating China's position in trade negotiations with the US</a>
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<img src="https://counter.theconversation.com/content/121486/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hui Feng receives funding from Australian Research Council.</span></em></p>President Trump’s decision to slap tariffs on US$300 billion of China’s exports has set up a currency war that has engulfed Australia.Hui Feng, ARC Future Fellow and Senior Research Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1024832019-02-05T19:10:47Z2019-02-05T19:10:47ZWhat caused hyperinflation in Venezuela: a rare blend of public ineptitude and private enterprise<p>Imagine going to the store and finding that nothing has a price tag on it. Instead you take it to the cashier and they calculate the price. What you pay could be twice as much, or more, than an hour earlier. That’s if there is even anything left in stock. </p>
<p>This is the economic reality that underpins Venezuela’s current “political crisis” – though in truth that crisis has been going on for years. </p>
<p>The government headed by Nicolás Maduro, who has presided over Venezuela since 2013, declared a state of emergency in 2016. That year the inflation rate hit 800%. Things have since gone from bad to worse. </p>
<p>By 2018 inflation was an estimated 80,000%. It’s difficult to say what the rate is now, but Bloomberg’s <a href="https://www.bloomberg.com/features/2016-venezuela-cafe-con-leche-index/?terminal=true">Venezuelan Cafe Con Leche Index</a>, based on the price of a cup of coffee, suggests it is now about 380,000%.</p>
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<p>About <a href="https://www.unhcr.org/news/press/2018/11/5be4192b4/number-refugees-migrants-venezuela-reaches-3-million.html">3 million Venezuelans</a> – a tenth of the population – have fled the country. This is the largest human displacement in Latin American history, driven by shortages of everything including food as well as the Maduro regime’s <a href="https://www.amnesty.org/en/countries/americas/venezuela/report-venezuela/">oppressive treatment of dissent</a>. </p>
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Read more:
<a href="https://theconversation.com/venezuela-is-fast-becoming-a-mafia-state-heres-what-you-need-to-know-109887">Venezuela is fast becoming a 'mafia state': here's what you need to know</a>
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<p>No wonder, then, that Maduro, who has just begun his second term as president, is now under considerable domestic and international pressure to call new elections.</p>
<p>So how did things get so bad? How did inflation become hyperinflation in Venezuela? And how do Venezuelans deal with it?</p>
<h2>The cost of goods and the value of currency</h2>
<p>What we pay for goods and services reflects not only their cost of production but also of the value of the currency we buy them in. If that currency loses value against the currency the goods are sold in, the price of those goods goes up. </p>
<p>By 2014 the value of Venezuela’s currency, the bolívar, and the prosperity of the Venezuelan economy, was highly dependent on oil exports. More than 90% of the country’s export earnings came from oil.</p>
<p>These export earnings had enabled the government headed by Hugo Chavez from 1999 to 2013 to pay for social programs intended to combat poverty and inequality. From subsidies for those on low incomes to health services, the government’s spending obligations were high.</p>
<p>Then the global price of oil dropped. Foreign demand for the bolívar to buy Venezuelan oil crashed. As the currency’s value fell, the cost of imported goods rose. The Venezuelan economy went into crisis. </p>
<p>The solution of Venezuela’s new president Nicolas Maduro, who succeeded Chavez in March 2013, was to print more money.</p>
<p>That might seem silly, but it can keep the economy moving while it gets over a hump caused by a short-term price shock. </p>
<p>The Venezuelan crisis, however, just got worse as the oil price continued to fall, compounded by other factors that reduced Venezuelan oil output. International investors began looking elsewhere, driving the value of the bolívar even lower.</p>
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Read more:
<a href="https://theconversation.com/curious-kids-why-dont-poorer-countries-just-print-more-money-107633">Curious Kids: why don’t poorer countries just print more money?</a>
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<p>In these conditions, printing more money simply made the problem worse. It added to the supply of currency, pushing the value down even further. As prices rose, the government printed more money to pay its bills. This cycle is what causes hyperinflation. </p>
<h2>Playing the currency market</h2>
<p>Circumstances like these quickly make saving money in the local currency nonsensical. To protect themselves, Venezuelans started to convert their savings into a more stable currency, like the US dollar. This lowered the value of the bolívar even further.</p>
<p>The government responded by issuing currency controls. It set a fixed exchange rate, to stop the official value of the bolívar dropping against the US dollar, and made it difficult to actually get permission to exchange bolívares into US dollars. The idea was to stabilise the currency by effectively shutting down all currency transactions.</p>
<p>US dollars were still available on the black market, however. This meant going to any number of operators on the streets of downtown Caracas or asking a friend to hook you up. As the crisis deepened, more and more Venezuelans looked to switch their bolívares into US dollars. </p>
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<a href="https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/257179/original/file-20190205-86233-6r2unm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">By mid-2018 the official foreign exchange rate was about 250,000 bolívares to one US dollar.</span>
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<p>This increasing demand meant the black market price for greenbacks rose, creating a difference between the official exchange rate (set by the government) and the unofficial going rate. </p>
<p>With this came new opportunities. In 2014 reports emerged that groups of middle-aged women were crossing the border to use ATMs in Colombia. They could withdraw funds from their Venezuelan accounts as US dollars at the official rate. They could then cross back into Venezuela and exchange the dollars for bolívares at the unofficial rate, making a tidy profit. Government officials able to exchange bolívares for US dollars within Venezuela had their own version of this practice. </p>
<p>This pushed the price of US dollars up, and that of bolívars down, even more. As the crisis deepened increasing numbers of ordinary Venezuelans began to engage in the unofficial currency market. </p>
<p>Sometimes this took the form of taking subsidised Venezuelan goods like food across the border to sell. This earned the sellers foreign currency, but it also exacerbated shortages of goods within the country, driving prices up even further. </p>
<p>This does not mean Venezuela’s currency crisis is the fault of ordinary Venezuelans. Illegal economic activity is largely a coping mechanism, a bellwether of the actual economy’s ability to provide for people. When a government fails its responsibilities, it should be no surprise that people protect themselves through unofficial currency trading. This is exactly what big international investors do all the time, albeit through more official channels. </p>
<h2>Cannot be trusted</h2>
<p>By August 2018 the Venezuelan currency was worth so little that it was more prudent to <a href="https://www.bbc.com/news/world-latin-america-45246409">use cash for toilet paper</a> rather than buy toilet paper. </p>
<p>The government tried to get on top of this situation by issuing a currency devaluation. Maduro devalued the bolívar by 95%, the largest currency devaluation in contemporary world history. He also tied the new currency to the price of oil, an economic experiment designed to show the Venezuelan economy had solid foundations. </p>
<p>By bringing the bolívar’s value into line with the reality of what people actually thought it was worth, and showing it was backed by something valuable, oil, Maduro’s government hoped Venezuelans would believe in their own currency and not exchange it for dollars. This would help stabilise the economy overall.</p>
<p>But within weeks of the devaluation it was clear ordinary Venezuelans had not been convinced.</p>
<p>They had no reason to be, given the government was not addressing other issues, such as policies contributing to low productivity across the economy. The government’s increasing authoritarianism, including interfering with the constitution and elections, also signalled it was not to be trusted. </p>
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Read more:
<a href="https://theconversation.com/is-authoritarianism-bad-for-the-economy-ask-venezuela-or-hungary-or-turkey-106749">Is authoritarianism bad for the economy? Ask Venezuela – or Hungary or Turkey</a>
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<p>Hyperinflation is a very difficult hole out of which to climb. Very few economies ever experience it, and it’s hard to stop it without massively cutting government spending. </p>
<p>It is easy, then, to see why millions of Venezuelans responded by dealing in the black market or taking their savings, and themselves, out the country altogether. </p>
<p>As the political crisis in the country deepens, Venezuelans will have to continue to seek ways to allow them to survive the storm any way they can.</p><img src="https://counter.theconversation.com/content/102483/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Carmody does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Venezuela’s hyperinflation has been caused by an inept public policy of printing more money and private individuals making the most of differences between official and unofficial exchange rates.Michelle Carmody, Academic Specialist, Latin America, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1067492019-02-04T11:38:33Z2019-02-04T11:38:33ZIs authoritarianism bad for the economy? Ask Venezuela – or Hungary or Turkey<p>Democracy is at risk worldwide. And the economy may be, too.</p>
<p>Seventy-one out of the world’s 195 countries saw their democratic institutions erode in recent years, according to the <a href="https://freedomhouse.org/report/freedom-world/freedom-world-2018">2018 year-end report by democracy watchdog Freedom House</a>, a phenomenon known as “<a href="https://www.annualreviews.org/doi/abs/10.1146/annurev-polisci-050517-114628">democratic backsliding</a>.” Signs of backsliding include elected leaders who expand their executive powers while weakening the legislature and judiciary, elections that have become less competitive and shrinking press freedom. </p>
<p>When <a href="https://www.annualreviews.org/doi/abs/10.1146/annurev-polisci-050517-114628">government institutions erode like this</a>, it isn’t just bad for democracy - it also <a href="https://www.washingtonpost.com/news/democracy-post/wp/2017/02/13/why-the-rise-of-authoritarianism-is-a-global-catastrophe/">hurts countries economically</a>, research shows.</p>
<p>To understand why, we applied our background as <a href="https://scholar.google.com/citations?user=h0o27GgAAAAJ&hl=enstudied">political scientists</a> focused on <a href="https://works.bepress.com/nisha-bellinger/">developing economies</a> to study Venezuela, Turkey and Hungary – all countries that have seen varying degrees of <a href="https://www.v-dem.net/en/">democratic backsliding</a> in recent years.</p>
<h2>The authoritarian economic problem</h2>
<p>All three countries have struggled economically as their democratically elected leaders turned nakedly authoritarian over the past five years.</p>
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<p>In Turkey, President Recep Erdoğan has been <a href="https://www.bloomberg.com/news/articles/2018-07-09/turkey-to-be-transformed-as-erdogan-sworn-in-with-strong-powers">steadily consolidating presidential powers</a> for years while attacking the independence of both the <a href="https://www.theguardian.com/commentisfree/2017/jul/19/turkey-erdogan-turkish-democracy">legislative and judicial</a> branches, as well as restricting press and <a href="https://www.hrw.org/news/2018/05/14/turkey-government-targeting-academics">academic freedoms</a>. Turkey’s economy has <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=TR">struggled</a> in kind, with gross domestic product dropping about 60 percent between 2013 and 2016. Its <a href="https://theconversation.com/turkeys-currency-collapse-shows-just-how-vulnerable-its-economy-is-to-a-crisis-101556">currency, the lire, also collapsed last year</a>, plunging the country into crisis. </p>
<p>Under the <a href="https://theconversation.com/venezuelans-want-president-maduro-out-but-most-would-oppose-foreign-military-intervention-to-remove-him-109135">autocratic leadership</a> of President Nicolás Maduro – who is now in a bitter <a href="https://theconversation.com/venezuela-power-struggle-plunges-nation-into-turmoil-3-essential-reads-110419">power struggle</a> to retain the presidency – <a href="https://theconversation.com/inside-venezuelas-crisis-7-essential-reads-89018">Venezuela</a> has seen financial ruin. Inflation hit <a href="https://www.forbes.com/sites/stevehanke/2019/01/01/venezuelas-hyperinflation-hits-80000-per-year-in-2018/">80,000 percent there last year</a>, and food and medicine are scarce. Venezuela’s government stopped releasing economic data in 2014, but its gross domestic product is believed to have <a href="https://www.bloomberg.com/news/articles/2018-11-22/venezuela-economy-is-said-to-have-fallen-16-6-percent-in-2017">shrunk by around 15 percent</a> for <a href="https://www.forbes.com/sites/nathanielparishflannery/2018/03/22/venezuelas-economic-crisis-worsens-in-2018/">each of the last three years</a>.</p>
<p>Meanwhile, Hungary has stagnated as <a href="https://theconversation.com/hungary-election-viktor-orban-tightens-his-grip-with-a-super-majority-94680">Prime Minister Victor Orbán</a> has become <a href="https://www.nytimes.com/2011/12/22/world/europe/foes-of-hungarys-government-fear-demolition-of-democracy.html?module=inline">increasingly undemocratic</a>. Since the 2014 election, when Orban’s <a href="https://theconversation.com/how-viktor-orban-degraded-hungarys-weak-democracy-109046">grip on power really tightened</a>, growth has mostly <a href="https://data.worldbank.org/country/hungary">dropped</a>, from 4 percent in 2014 to 2 percent in 2016. The <a href="https://data.worldbank.org/country/hungary">World Bank predicts</a> that Hungary’s economy will continue to contract through 2020 and beyond.</p>
<h2>Leaders are fallible</h2>
<p>Authoritarianism isn’t always bad for the economy. Autocratic <a href="https://www.worldbank.org/en/country/china/overview">China</a> and <a href="https://www.straitstimes.com/business/economy/singapore-economy-grew-22-in-q3-less-than-expected-full-year-growth-forecast-at-3">Singapore</a> are both economic success stories, growing at double digits – a pace largely unseen in Western democracies. </p>
<p>But these countries were never set up to be democracies. </p>
<p>When a one-time democracy turns toward authoritarianism, however, the economic effect is often negative. That’s because, in a democracy, economic policy is meant to be made jointly, by various elected officials from the executive and legislative branches. Other independent government agencies, like the U.S. Federal Reserve or central bank, help decide economic policy, too.</p>
<p>Lawmakers check <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1468-0343.00066">impulsive decisions by presidents</a> in a number of formal and informal ways, our research shows. Policies that relate to government investments, taxing and spending, among other issues, are generally the result of negotiation between the two branches.</p>
<p>When legislatures can no longer effectively serve this function – because they’ve been sidelined, <a href="https://www.reuters.com/article/us-venezuela-politics-parliament/parliamentary-body-demands-venezuela-halt-harassment-of-opposition-mps-idUSKBN1H42G6">as in Venezuela</a> and Turkey, or because they are dominated by the ruling party, as in Hungary – there’s little to prevent <a href="https://onlinelibrary.wiley.com/doi/10.1111/j.1540-5907.2008.00315.x">authoritarian leaders</a> from making bad choices that hurt the economy.</p>
<p>Turkey is a good example of the risks that come from having one all-powerful, fallible leader. </p>
<p>In July 2018, President Erdoğan expanded his executive powers to include making <a href="https://www.bloomberg.com/news/articles/2018-07-10/erdogan-gives-himself-power-to-appoint-central-bank-governor">key appointments to Turkey’s central bank</a> and appointed his son-in-law to lead economic policy in Turkey. Erdoğan then <a href="https://www.cnbc.com/2018/04/16/turkeys-currency-is-tanking-and-president-erdogan-is-keeping-it-down.html">restricted the bank</a> from raising interest rates to curb rising inflation – despite <a href="https://foreignpolicy.com/2018/05/25/erdogan-is-a-mad-economist-and-turkey-is-his-laboratory/">warnings from economists</a> that this move would lead the value of the Turkish currency to plummet. And, of course, it did. </p>
<h2>Social unrest is bad for the economy</h2>
<p>Legislatures play an important role in setting economic policy also because, as representative bodies made up of different political parties, they serve as channels through which people and <a href="https://www.cambridge.org/core/journals/european-journal-of-sociology-archives-europeennes-de-sociologie/article/dictatorial-institutions-and-their-impact-on-economic-growth/FE171E0B87781B9A0ABDF3A6635C5C63">social groups</a> can make demands on policymakers. </p>
<p>In healthy legislative debate in a functioning democracy, opposing parties develop economic policies that help their constituents. They also try to change laws that they believe will hurt the people they represent.</p>
<p>When authoritarian leaders sideline opposition parties and stack the legislature with their supporters, the only way for citizens to air their grievances is on the streets.</p>
<p>Venezuelans staged months of <a href="https://www.cnn.com/2017/04/18/americas/venezuela-protest-explainer/index.html">mass daily protests in 2017</a> after President Maduro <a href="https://www.reuters.com/article/us-venezuela-politics-parliament/parliamentary-body-demands-venezuela-halt-harassment-of-opposition-mps-idUSKBN1H42G6">stripped Venezuela’s opposition-dominated parliament of its powers</a>. They are marching again now, <a href="https://www.bbc.com/news/world-latin-america-47060659">demanding Maduro’s ouster</a>. </p>
<p>Social unrest can <a href="https://muse.jhu.edu/article/528239">deepen economic woes</a>, especially when it gets violent. Riots may <a href="https://www.securitymagazine.com/articles/88297-when-critical-infrastructure-encounters-civil-unrest">destroy physical infrastructure</a> like oil pipelines or block highways that keeps the country running. People may flee for their own safety, leaving jobs undone and critical positions unfilled. </p>
<h2>Democratic backsliding reduces foreign investment</h2>
<p>International markets, too, <a href="https://www.cnbc.com/2014/09/29/why-hong-kong-unrest-scares-markets.html">dislike social unrest</a>. When protests are prolonged or if the governments crack down violently, it is common for <a href="http://www.jpolrisk.com/protests-in-latin-america-impact-on-investment-the-economy-and-political-stability/">investors to flee</a>.</p>
<p>International investors get worried, too, when parliaments have too few opposition parties to effectively check the executive branch, our <a href="https://journals.sagepub.com/doi/full/10.1177/0032321718799015">study</a> finds. </p>
<p>When democratically elected leaders turn authoritarian, investors get nervous, withdrawing funds and reducing investments.</p>
<p>Since 2013, Hungary, Venezuela and Turkey have all seen notable declines in their foreign direct investment, a measure of global confidence in a country, according to the <a href="https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD">World Bank</a>. Declines range from 66 percent in Venezuela to 300 percent in Hungary. </p>
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<p>One reason investment drops as democracy erodes is because investors fear the government could begin meddling in their businesses in ways that reduce profits. </p>
<p>This is a common strategy of authoritarian leaders from both the right and the left.</p>
<p>Since taking sweeping control of Hungary’s parliament in 2018, for example, President Orban’s right-wing Fidesz party has reasserted government control over major energy firms, taking over public utilities and <a href="https://www.cnbc.com/2018/10/02/reuters-america-hungary-adopts-law-to-control-foreign-investment-in-sensitive-sectors.html">increasing government oversight of foreign companies</a> that operate in the country.</p>
<p>In Venezuela, the left-wing Maduro has <a href="https://www.wsj.com/articles/venezuela-seizes-warehouses-from-empresas-polar-other-companies-1438294617">taken over food production</a> in the country, ordering companies like Nestle and Pepsi to vacate their factories in 2015.</p>
<h2>It’s all about the legislatures</h2>
<p>Our <a href="https://journals.sagepub.com/doi/full/10.1177/0032321718799015">study</a> found one condition that allows economies to thrive even when democracy is in decline: functioning political parties in independent legislatures.</p>
<p>In the Philippines, hard-right president Rodrigo Duterte has <a href="https://news.abs-cbn.com/focus/06/25/17/stray-cats-killers-and-no-regrets-de-lima-on-life-in-jail">imprisoned</a>, even killed, thousands of citizens as part of his “war on drugs.” Duterte has also arrested <a href="https://www.theguardian.com/world/2018/sep/25/duterte-critic-antonio-trillanes-iv-hits-out-at-darkness-and-evil-philippines">powerful people</a> who criticize his policies. So far, however, the <a href="https://freedomhouse.org/report/freedom-world/2018/philippines">Filipino</a> parliament is still fairly functional, with opposition parties that operate freely.</p>
<p>Consequently, the Filipino economy remains unaffected by Duterte’s authoritarianism. Gross domestic product has grown at a good rate of around <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?locations=PH">7 percent since 2012</a>. Foreign investments have also been increasing. </p>
<p>Sharing some power with lawmakers gives the economy a boost. Ultimately, that may help these authoritarian-leaning leaders stay in power longer.</p><img src="https://counter.theconversation.com/content/106749/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When an elected leader turns autocratic, the economy tends to suffer. That’s because, in a functioning democracy, economic policy is made jointly, with lawmakers playing a key role.Nisha Bellinger, Assistant Professor of Political Science, Boise State UniversityByunghwan Son, Assistant Professor of Global Affairs, George Mason UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1049602018-10-21T09:34:04Z2018-10-21T09:34:04ZZimbabwe’s economy is collapsing: why Mnangagwa doesn’t have the answers<figure><img src="https://images.theconversation.com/files/240644/original/file-20181015-165918-1dmrkek.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A KFC in Harare, like many other shops, has shut down as a result of Zimbabwe's financial crisis .</span> <span class="attribution"><span class="source">EPA-EFE/AARON UFUMELI</span></span></figcaption></figure><p>When President Emmerson Mnangagwa <a href="https://theconversation.com/zimbabwes-first-mugabe-free-election-mnangagwa-promises-western-cash-but-little-else-99228">campaigned</a> in July for Zimbabwe’s presidency, he promised to be a business friendly leader, and to return his country’s economy to twentieth century times of plenty and prosperity.</p>
<p>But Mnangagwa has already shown himself incapable of jettisoning the state centrist, rent-seeking predilections of his predecessor. A “big-bang” sharp break with Zimbabwe’s recent past is essential to reassure consumers and capitalists. Yet Mnangagwa and his cronies have so far rejected anything forward-looking and sensible.</p>
<p>Mnangagwa’s administration is struggling to overcome the national <a href="https://www.iol.co.za/news/africa/shops-shut-doors-as-zimbabwe-financial-crisis-deepens-17414862">economic destruction</a> wreaked on Zimbabwe over two decades under Robert Mugabe. This included profligate spending, immense debt pileup, colossal corruption, and ravaging of the country’s once immensely productive agricultural sector.</p>
<p>As a result, Zimbabwe now lacks foreign exchange with which to buy petrol and ordinary goods to stock the shelves of its supermarkets. In the last few weeks many shops – such as Edgars, a long-time clothing store; Teta, an eatery; KFC, a fast food outlet – have simply <a href="https://www.iol.co.za/news/africa/shops-shut-doors-as-zimbabwe-financial-crisis-deepens-17414862">shut their doors</a>. Queues for petrol stretch for miles. </p>
<p><a href="http://nehandaradio.com/2018/10/13/zimbabwe-currency-crisis-no-cash-no-bread-no-kfc/">Banks have no US dollars</a>, or South African rands or Botswana pulas (the notional national currency), and therefore cannot supply stores or customers with the funds to carry on business as usual.</p>
<p>The locally created <a href="https://zwnews.com/latest-us-dollar-zimbabwe-bond-note-trgs-exchange-rates-today-9-october-2018/">Zimbabwe bond note</a> which is officially supposed to trade 1 to 1 with the US dollar, has been trading as high as 10 to 1 on the Harare black market according to unconfirmed local shopping experiences. In its October 20th edition The Economist reported that the bond note, known unofficial as <a href="https://www.news24.com/Africa/Zimbabwe/zimbabwes-bond-notes-being-traded-outside-borders-report-20170516">the zollar</a>, was trading for as little as 17 cents, or roughly 6-1.</p>
<p>The new administration has naturally resorted to <a href="https://www.iol.co.za/business-report/international/zimbabwes-currency-crisis-shows-little-sign-of-abating-17052960">printing</a> its own faux money. That inevitably has led, as always, to hyperinflation and monetary collapse.</p>
<p>China may yet help Mnangagwa – but in exchange for multi-years worth of precious minerals and Virginia tobacco at discounted prices. With Zimbabwe’s leadership so thoroughly tainted by decades of peculation and mendacity, and devoid of any real notion of “the public interest,” Mnangagwa’s regime is otherwise unlikely to clean up the prevailing fiscal mess because of its refusal to break sharply with the fiscal derring-do of the Mugabe era. Its principals continue to profit from Zimbabwe’s economic mayhem.</p>
<h2>What went wrong</h2>
<p>Zimbabwe’s economic weaknesses are unsustainable. Governments in such parlous straits would turn, even now, to the International Monetary Fund, for a bailout – as <a href="https://www.scmp.com/news/asia/south-asia/article/2168507/pakistans-khan-slams-imf-then-seeks-bailout-why-change">Pakistan</a> has just done. But Zimbabwe is already in arrears to the international lending institutions and has very few helpful friends left. </p>
<p>Government is running a hefty overdraft. And it’s been unable to collect as much as it needs from the national tax base. Its now attempting to impose a <a href="https://www.fin24.com/Economy/Africa/zimbabwe-slaps-catastrophic-tax-on-electronic-transactions-20181001">2% tax </a> on internal electronic financial transactions. This only shows desperation. If implemented, it could yield twice as much revenue as is derived annually from VAT. But that losing manoeuvre has already helped drive commerce underground. It has also undermined what little confidence consumers and financiers have in their current rulers.</p>
<p>The Mnangagwa government has also reimposed import and <a href="http://businessdaily.co.zw/index-id-national-zk-38015.html">exchange controls</a>, thus creating additional incentives to avoid regular channels of commerce. Those controls also permit officials to allocate “scarce” resources and licenses to import, export, and so on. These are well-known occasions for corruption and for giving rent-seeking opportunities to cronies.</p>
<p>It wasn’t always this bad. Despite the massive loss of formal employment that occurred under Mugabe, the informal sector flourished and Zimbabwe’s poor probably benefited. This was partly because under the unity government of 2009-2013, when Tendai Biti of the Movement for Democratic Change was finance minister, there were no such controls and there were plenty of US dollars and no questionable bond notes and Treasury bills. Hard currency (the US dollar) permitted Zimbabwe to start growing economically after the long Mugabe slide, and individuals and businesses to prosper. The country ran a budgetary surplus. </p>
<p>But this all came to an end when the government of national unity <a href="https://pindula.co.zw/Government_of_National_Unity">collapsed</a> in 2012. </p>
<h2>What needs to happen</h2>
<p>To begin to restore the economy, the government needs to acknowledge corrupt dealings and repatriate the huge amounts of cash that have fled the country as laundered money. </p>
<p>The regime could also try to take <a href="https://www.theguardian.com/world/2017/nov/17/robert-grace-mugabe-missing-millions-money-zimababwe">ill-gotten gains</a> away from Mugabe and Grace Mugabe, as <a href="https://www.csmonitor.com/World/Asia-Pacific/2018/0703/Former-Malaysian-leader-arrested-for-theft-money-laundering">Malaysia’s new government</a> is doing to its previous kleptocratic prime minister and his wife.</p>
<p>Gestures in that direction would help to begin to restore confidence, a step towards eventual prosperity. So would promises to restore the rule of law. Investors might also return if a sound currency was likely. But that would only follow shedding of ministers, civil service layoffs, military reductions, and many other indications that Mnangagwa and his minister of finance were serious about reducing the debt hangover.</p>
<p>Cutting some sort of deal with the IMF would also be worthwhile, but that could mean giving control over the Treasury to foreign advisors. Zimbabwe is and, since Biti’s day, has been, a basket case. It’s time to acknowledge that fiscal reality and to do something about it.</p><img src="https://counter.theconversation.com/content/104960/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Rotberg does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Emmerson Mnangagwa’s administration is struggling to overcome the national economic destruction wreaked on Zimbabwe over two decades under Robert Mugabe.Robert Rotberg, Founding Director of Program on Intrastate Conflict, Harvard Kennedy SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1029512018-09-11T12:44:17Z2018-09-11T12:44:17ZArgentina, Turkey, Indonesia – why it’s too early to speak of contagion in emerging markets<figure><img src="https://images.theconversation.com/files/235774/original/file-20180911-144458-nhs919.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The value of Argentina's peso has plummeted in recent months.</span> <span class="attribution"><span class="source">SC Image / Shutterstock.com</span></span></figcaption></figure><p><a href="https://theconversation.com/turkeys-lira-crisis-economic-war-sees-erdogan-look-east-for-new-allies-101466">Turkey</a>, <a href="https://www.ft.com/content/23361c1e-af28-11e8-8d14-6f049d06439c">Indonesia</a> and <a href="https://www.ft.com/content/57cf95ae-add4-11e8-8d14-6f049d06439c">Argentina</a> have all seen their currencies experience huge drops in recent months. Similarly, stocks in India, <a href="https://www.thetimes.co.uk/article/no-respite-for-emerging-markets-as-crisis-grows-3rzsjfgv6">South Africa</a>, Mexico <a href="https://www.theguardian.com/business/2018/sep/08/emerging-economies-crisis-looms-shadow-america-boom-interest-rates">and others</a> have taken a hit. </p>
<p>Emerging markets across the board have been under pressure since the US Federal Reserve raised interest rates in June. Governments and companies had borrowed in dollars when interest rates were low and the dollar was weak. Now the dollar is strong <a href="https://www.ft.com/content/19fe9bc8-6f1b-11e8-852d-d8b934ff5ffa">and interest rates are rising</a>. And research by economists Michael Bordo, Chris Meissner and David Stuckler has shown that countries with higher foreign currency debt are <a href="http://www.nber.org/papers/w15534">more likely to experience currency and debt crises</a>, especially in countries with lower policy credibility.</p>
<p>Some <a href="https://www.theguardian.com/business/2018/may/14/rising-dollar-the-world-usemerging-economies-trade-talks">fear</a> a repeat of the 1997 Asian financial crisis when contagion spread from the Thai baht to other South-East Asian currencies, resulting in a large regional economic crisis. But contagion this time round is unlikely. </p>
<p>The 1997 Asian financial crisis has changed the way economists approach currency crises. Before, they mainly believed that a run on a currency would occur only when a country was running a balance of payment deficit and the central bank did not have sufficient reserves to defend the currency. Following the Asian crisis, current IMF chief economist Maurice Obstfeld was <a href="http://www.nber.org/papers/w5285">among the first economists to show</a> that currency crises can be a self-fulfilling prophecy, as happened in 1997. If investors start to have a pessimistic outlook on emerging markets currencies, it can lead to runs on currencies with no unhealthy economic fundamental or no misguided government policies. </p>
<p>This is not what is happening now. Argentina shows <a href="https://www.economist.com/finance-and-economics/2018/05/10/argentinas-economic-woes">weak fundamentals</a> and the government is struggling to finance its budget for the upcoming years. Turkey’s central bank is <a href="https://theconversation.com/turkeys-lira-crisis-economic-war-sees-erdogan-look-east-for-new-allies-101466">under attack from its president</a>, Recep Tayyip Erdoğan, and needs to prove its independence to investors. But these are isolated situations and it is unlikely we will see global contagion. </p>
<p>The Fed recently <a href="https://www.federalreserve.gov/econres/notes/ifdp-notes/emerging-market-nonfinancial-corporate-debt-how-concerned-should-we-be-20170601.htm">issued a note</a> explaining that the global crisis risk associated with emerging market currencies. According to the note, the risk of contagion among emerging currencies is low as only a limited number of countries present a risk, and their importance relative to the global economy is small. They based their reasoning on a <a href="https://dash.harvard.edu/bitstream/handle/1/33110124/17-097.pdf?sequence=1">study</a> by Harvard economist Laura Alfaro and colleagues that demonstrated that emerging markets after the global financial crisis are less at risk than the five Asian crisis countries before 1997.</p>
<h2>Different approaches</h2>
<p>The Argentinian case is interesting, however, because the current government has been the poster child of orthodox economic policies. If the economy were to fall further, it would show that even by following most IMF recommendations, growth is not achievable. This would open the door to a more populist backlash or the return of Peronist opposition in the upcoming 2019 general election. </p>
<p>But all is not lost. The US$50 billion that the IMF offered Argentina is a significant amount compared to the size of the currency market in Argentina, which the Bank for International Settlements estimates to be roughly <a href="https://www.bis.org/publ/rpfx16.htm">US$1 billion a day</a>. This means that the central bank will have room for manoeuvre as long as Argentina’s president, Mauricio Macri, refrains from any missteps, such as when he announced his desire <a href="https://www.youtube.com/watch?v=CwM_sThawIE">for help from the IMF via YouTube</a>. The move reflected the president’s willingness to get his country on board to talk again to the IMF, an institution that is closely linked to the bankruptcy of the country in the early 2000s. But markets felt <a href="https://www.ft.com/content/bef83be0-b280-11e8-8d14-6f049d06439c">less reassured by his comments</a>. </p>
<p>Turkey, meanwhile, has implemented measures to try to stop the fall in the lira and to make it more difficult for speculators to bet against <a href="https://www.theguardian.com/world/2018/aug/13/turkey-financial-crisis-lira-plunges-again-amid-contagion-fears">or “short” the lira</a>. This has had some effect without solving the crisis. The real issue remains whether the central bank will be able to remain independent of Erdoğan, as economist Barry Eichengreen <a href="https://www.ft.com/content/c987fc2a-a147-11e8-b196-da9d6c239ca8">recently argued</a>. The Turkish president’s disdain for central bank independence shows how different Turkey’s situation is from Argentina’s.</p>
<p>It is too easy to lump together all emerging markets. But, although contagion is not yet on the agenda, this does not mean that all is fine. A recession in the US is overdue after over nine years <a href="http://www.nber.org/cycles.html">since the last official recession</a>, and this would have a more serious effect on the global economy by putting pressure on exports from emerging markets. This would be likely to lead to more currency crisis. But until then, contagion should be limited.</p><img src="https://counter.theconversation.com/content/102951/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alain Naef is funded by the Economic and Social Research Council (ESRC).</span></em></p>A number of emerging markets are struggling but this doesn’t mean they are totally related.Alain Naef, PhD Candidate in Financial History and Teaching Fellow in the Economics Faculty, University of CambridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1015962018-08-16T20:17:38Z2018-08-16T20:17:38ZVital Signs: Turkey shows the economic pain of global democratic backsliding<p><em>Vital Signs is a regular economic wrap from UNSW economics professor Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<hr>
<p>As American baseball legend Yogi Berra once supposedly quipped, “It’s déjà vu all over again.” Three years ago the <a href="https://theconversation.com/living-through-the-greek-crisis-an-anthropologist-reports-from-thessaly-73091">crisis was in Greece</a>, now it’s <a href="http://www.abc.net.au/news/2018-08-16/wall-street-europe-drop-us-turkey-trade-row-intensifies/10125952?section=business">Turkey</a>. Another European summer and another European economic crisis.</p>
<p>It’s tempting to say that being in Europe is all the two situations have in common. Greece’s population is a little over 10 million; Turkey’s is nearly 80 million. Greece’s troubles were triggered by <a href="https://tradingeconomics.com/greece/government-debt-to-gdp">out-of-control government debt</a>; <a href="https://tradingeconomics.com/turkey/government-debt-to-gdp">Turkey’s government debt-to-GDP ratio is quite low</a>. The Greek government was on the loopy left; Turkey’s ruling Justice and Development Party is on the conservative right.</p>
<p>But the similarities between the Greek and Turkish crises are deeper than the differences. </p>
<p>Both were brought about by decades of ignorant, populist economics. When crisis hit, both countries had leaders who instantly made things worse. And in both cases the world’s global capital capital markets have proved to be an unforgiving judge.</p>
<h2>Erdogan’s voodoo economics</h2>
<p>Turkey finds itself in crisis not because of massive government debt – although it has been <a href="https://tradingeconomics.com/turkey/government-debt">rising pretty rapidly of late</a> and private-sector debt is <a href="https://tradingeconomics.com/turkey/private-debt-to-gdp">a real issue</a> – but because of a large <a href="https://www.investopedia.com/terms/c/currentaccount.asp">current account</a> deficit.</p>
<p>The current account deficit – roughly the difference between the value of what it imports and what it exports – <a href="https://tradingeconomics.com/turkey/current-account">is running at more than US$60 billion at an annualised rate</a>. </p>
<p>This means Turkey is a large net borrower from the rest of the world.</p>
<p>President Recep Tayyip Erdogan has goosed GDP through cheap foreign credit and low real interest rates. But unlike tinpot strongmen who worry mainly about holding onto power tomorrow, global markets look far into the future.</p>
<p>And this year markets decided that Turkey’s economic future looked pretty bleak. </p>
<h2>A plummeting lira</h2>
<p>The Turkish currency, the lira, has fallen by more than 40% against the US dollar this year. Since <a href="https://www.cnbc.com/2018/08/13/what-happens-in-turkey-wont-stay-in-turkey-why-this-debt-crisis-co.html">more than half of Turkey’s foreign debt (government plus private) is denominated in foreign currencies</a>, this is a big problem. </p>
<p>It is <a href="https://www.bloomberg.com/news/articles/2018-08-13/think-turkey-argentine-sovereign-debt-is-bad-look-at-companies">estimated</a> that there is more than US$200 billion of dollar-denominated Turkish corporate debt. When the lira falls, foreign-denominated debt rises, making it hard to service, let alone repay.</p>
<p>At the same time, the inflationary spiral this sets off does huge damage to the domestic economy. It is estimated that Turkey’s annual inflation rate is running at more than 100%.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1029350093453975554"}"></div></p>
<p>Erdogan doesn’t want interest rates to rise – and he has bullied the central bank into doing so later and less than the bank otherwise might have. He is <a href="https://www.businessinsider.com.au/turkish-lira-crisis-erdogan-interest-rates-2018-8?r=US&IR=T">on record</a> as saying that higher interest rates <em>increase</em> inflation, rather than the opposite, as every first-year economics student knows. </p>
<p>To Erdogan, black is white, night is day, up is down.</p>
<p>US President Donald Trump announced last week that “Aluminum will now be 20% and steel 50%. Our relations with Turkey are not good at this time!” Erdogan’s response has been to <a href="https://www.washingtonpost.com/world/erdogan-calls-for-turkish-boycott-of-us-made-electronics-singling-out-apples-iphone/2018/08/14/465d3fe6-9fac-11e8-b562-1db4209bd992_story.html?utm_term=.15e70f26847d">call for a boycott of iPhones and enact retaliatory tariffs</a> of as much as 140% on a range of US goods.</p>
<p>Erdogan did secure US$15 billion in foreign investment from Qatar, after meeting Emir Sheikh Tamim Bin Hamad Bin Al Thani in Ankara on Wednesday. That might stop some of the bleeding for now, but this gives Qatar tremendous leverage. </p>
<p>The real cost of this support won’t be measured in basis points.</p>
<h2>Global contagion?</h2>
<p>The big risk here is that the foreign holders of all this dollar-denominated Turkish debt get into trouble as Turkey struggles to repay or defaults. Even the Bank of International Settlements doesn’t easily know who all these debt holders are, <a href="https://www.theguardian.com/world/2018/aug/13/how-serious-is-turkeys-lira-crisis-and-what-are-the-implications">but banks in Spain and France appear to be significantly exposed</a> – especially Spain.</p>
<p>A run on the Turkish currency could turn into damage to balance sheets of banks across Europe, triggering a potential debt crisis in countries like Spain. </p>
<p>That’s some distance off for now. But it looms.</p>
<p>All this will likely end in some kind of International Monetary Fund assistance package – but that’s going to come with conditions. Folks who like to use the term “neoliberal” will dub such conditions as brutal austerity. </p>
<p>Others will consider the conditions the cost of stabilising an economy pushed to the brink by a financially illiterate megalomaniac.</p>
<h2>Economics in a world of democratic backsliding</h2>
<p>Turkey may be at the centre of the crisis du jour, but Erdogan is but one of a cast of nasty, illiberal characters. Although they occupy varying positions on the ideological spectrum, from Poland to Hungary to Latin America, there has been significant democratic backsliding in recent years.</p>
<p>These strongmen do violence to principles of liberal democracy – often literally. They also damage their economies and, as a consequence, their people.</p>
<p>Institutions like the International Monetary Fund will probably handle the problem in Turkey, although it would be a lot simpler if Erdogan just allowed interest rates to increase and solve the problem directly.</p>
<p>But sadly we can expect more illiberal and nonsensical economics from these illiberal strongmen. It is contagious populist ideology more than financial contagion that should scare us right now.</p><img src="https://counter.theconversation.com/content/101596/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It is contagious populist ideology more than financial contagion that should scare us right now.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1014662018-08-13T13:29:43Z2018-08-13T13:29:43ZTurkey’s lira crisis: ‘economic war’ sees Erdoğan look east for new allies<p>Global markets are on edge once again, this time thanks to the Turkish lira. It crashed more than 15% against the US dollar, euro and pound sterling on August 10 and continued to fall when markets reopened after the weekend on August 13. </p>
<p>The latest trigger was Donald Trump’s <a href="https://twitter.com/realDonaldTrump/status/1027899286586109955">announcement</a> that he would double import tariffs on Turkish steel and aluminium. But the lira has been falling consistently over the past year as markets fear for the president’s increasing control over the economy.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1027899286586109955"}"></div></p>
<p>With their mammoth depth and reach, global currency markets reflect big shifts to new economic and political realities. Sterling dropped by more than 10% when it became clear that <a href="https://theconversation.com/brexit-shock-has-caused-a-sterling-crash-of-historic-proportions-heres-just-how-bad-it-is-for-the-pound-62191">the UK had voted to leave the EU</a> in June 2016. Currency markets can also hasten these shifts, for example in 1992 when <a href="https://www.theguardian.com/business/2012/sep/13/black-wednesday-20-years-pound-erm">the UK crashed out of Europe’s fixed currency regime</a>, the Exchange Rate Mechanism, after sustained runs on sterling in currency markets. </p>
<p>The lira crisis therefore – at the very least – reflects the political and economic turmoil taking place in Turkey. It could also play a key role in shifting the country from relying on the West to aid its economic development and turning east to Russia and China for growth and investment.</p>
<h2>Crisis and contagion</h2>
<p>The underlying economic cause for the crisis is simply a lack of confidence in Turkey’s economy. Inflation is spiralling (currently <a href="https://tradingeconomics.com/turkey/inflation-cpi">more than 15%</a>), Turkish companies are saddled with foreign debt and the country has one of the world’s largest current account deficits in proportion to its economic output, heightening fears of a debt crisis. </p>
<p>As an open economy since the late 1980s, Turkey has attracted significant international capital flows. These flows, some of which are highly mobile and short term, also expose Turkey to sudden stops and reversals when international investors fear the worst. The recent history of globalisation in developing countries is full of such crises, including the 2000-01 Turkish <a href="https://economics.rabobank.com/publications/2013/september/the-turkish-2000-01-banking-crisis/">banking and currency crisis</a>. It was the aftermath of that crisis that brought Recep Tayyip Erdoğan and his AK party to power. </p>
<p>As of August 2018, Turkey has an <a href="http://databank.worldbank.org/data/download/site-content/IDS-2018.pdf">external debt</a> of US$406 billion, US$99 billion of which is short term. What worries foreign banks and markets is the exposure of some European banks, as direct investors in the Turkish banking sector. According to estimates, this amounts to more than <a href="https://www.cnbc.com/2018/08/10/european-officials-reportedly-concerned-about-exposure-to-turkey.html">US$138 billion</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Turkish lira to the US dollar.</span>
<span class="attribution"><a class="source" href="https://www.xe.com/currencycharts/?from=TRY&to=USD&view=1M">xe.com</a></span>
</figcaption>
</figure>
<p>Should private Turkish debtors, who owe around 75% of Turkey’s external debt, fail to service their share as a result of the nosediving lira and creditors’ unwillingness to lend any more hard currency, the European financial system might have to absorb significant losses. This is similar to what happened during <a href="https://www.reuters.com/article/us-europe-banks/europes-banks-bleed-from-greek-debt-crisis-idUSTRE81M0LT20120223">the Greek debt crisis</a>.</p>
<h2>Political decisions</h2>
<p>None of these debt figures have emerged overnight. What transforms them into a currency and debt crisis is ultimately political. The presidential election in June gave Erdoğan unprecedented control over all branches of the state and he has made his intention to interfere with the economy <a href="http://eprints.lancs.ac.uk/82573/1/SSRN_id2856691.pdf">clear</a>.</p>
<p>Since the new presidential system came into effect, international investors have been trying to understand where Erdoğan would steer the Turkish economy. The signals so far, including Erdoğan’s appointment of his son-in-law as the minister in charge of the economy, suggest a new period of “Erdoğanomics”. This includes a mix of high government spending, politically repressed interest rates <a href="https://theconversation.com/turkeys-currency-turmoil-and-upcoming-election-what-you-need-to-know-97477">and runaway inflation</a>. Such a heady mix has caused a <a href="https://www.marketwatch.com/story/cost-to-insure-turkish-debt-spikes-as-turkey-teeters-on-brink-of-currency-crisis-2018-08-10">surge in Turkey’s risk premium</a>.</p>
<p>The worsening political relationship between Turkey and the US does not help. Over his 16-year rule, Erdoğan has rallied his supporters on a number of occasions against <a href="https://theconversation.com/why-did-turks-react-so-strongly-against-anti-erdogan-coup-62643">real</a> and purported threats to his rule. He is once again defiant against Western economic and political actors, whom he accuses of striving to destabilise Turkey under his rule, this time via the runs on the Turkish lira. </p>
<p>This defiance seems to have consolidated Erdoğan’s domestic power, but given the country’s considerable economic reliance on Western banks and markets, the country is now more vulnerable than ever to a currency and debt crisis of its own making. Freeing Turkey from this difficult corner will be a feat. If and when Erdoğan achieves it, Turkey will probably have shifted a considerable part of its economic and political allegiances, <a href="https://www.reuters.com/article/us-turkey-currency-erdogan/turkey-is-a-target-of-economic-war-erdogan-says-idUSKBN1KW08U">from the West to the East</a>, with both Russia and China potential future allies in what Erdoğan <a href="https://www.bloomberg.com/news/articles/2018-08-12/lira-extends-retreat-as-turkey-heads-toward-a-financial-crisis">has called</a> an “economic war”.</p><img src="https://counter.theconversation.com/content/101466/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Emre Tarim does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>President Erdoğan is accusing the West of striving to destabilise Turkey.Emre Tarim, Lecturer in Behavioural Sciences, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922952018-02-25T20:18:47Z2018-02-25T20:18:47ZLIBOR: elections, manipulations – and a possible fix<figure><img src="https://images.theconversation.com/files/207522/original/file-20180222-152363-13zyo3f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">London's financial district at night.</span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/NaWJWzmprZQ">Gordon Williams/Unsplash</a></span></figcaption></figure><p>While some first political and economic consequences of the <a href="https://theconversation.com/uk/eu-referendum-2016">Brexit vote</a> are already visible, London’s role in the world financial markets has been so far relatively unaffected. The high density of financial institutions combined with a longstanding tradition of the banking industry makes the role of the City in the financial arena rather stable.</p>
<p>Among the several indexes located in this financial powerhouse is the <a href="https://www.theice.com/iba/libor">ICE London Interbank Offered Rates</a> – commonly known by its acronym, LIBOR. Since the <a href="https://www.theguardian.com/business/2017/jan/18/libor-scandal-the-bankers-who-fixed-the-worlds-most-important-number">2008 rigging scandal</a> there has been some discussion of <a href="https://www.theguardian.com/business/2017/jul/27/libor-interest-rate-phased-out-scandals">phasing it out</a>, but it remains a key index in the world’s financial markets.</p>
<p>Each LIBOR rate determines the interest rate at which banks lend each other money for some length of time (ranging from 1 day to 12 months) on different currencies (dollars, euros, etc.). These benchmark rates are widely used as a base interest rates by financial institutions all over the world since many contracts are paid at least the interest corresponding to some LIBOR rate.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/207510/original/file-20180222-152348-1jut9n7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure 1: Two LIBOR rates since 2008: EUR at 12 months and USD 3 months.</span>
<span class="attribution"><span class="source">St. Louis Fed.</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Therefore, the LIBOR rates impact directly and indirectly small businesses as well as corporations, the world’s largest banks and almost any financial product such as loans, mortgages and derivatives. Arguably, the LIBOR rates are among the world’s most important numbers. It is often thought as a good barometer of the global economic and financial situation. </p>
<p>Figure 1 depicts the evolution of two of these rates since 2008: the one corresponding to loans in euros for 12 months and the one corresponding to loans in US dollars for three months. One can distinguish clearly three different regions. In first one, spanning from the beginning of 2008 until mid 2010, where both indexes are in decline, corresponds to the aftermath of the subprime financial crisis. The second period, that ends at the beginning of the year 2015, corresponds to some stable period in which both rates do not move much the EUR12 being higher than the USD3 one. The final region, that lasts until today, corresponds to an unusual period in which the EUR12 is negative while the USD3 is positive and increasing. What can one infer from these indexes ? How is each index determined?</p>
<h2>Elections and manipulations</h2>
<p>A distinct feature of these rates is that its value is not determined through a market but through an election. More precisely, a daily election is held in which a selected sample of 18 banks takes part. Each bank reports a value (interest rate) which represents the rate at which it is ready to lend money in this currency for certain amount of time. The extreme reports (the top and the bottom four) are removed and the LIBOR corresponds to the average of the remaining values. Figure 2 explains this computation with five banks and the deletion of the top and the bottom value.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=154&fit=crop&dpr=1 600w, https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=154&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=154&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=194&fit=crop&dpr=1 754w, https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=194&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/207511/original/file-20180222-152360-vq4lw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=194&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure 2: Example of LIBOR computation with five banks.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The logic of the LIBOR computation is made transparent in Figure 2: the first step, dropping the extreme reports, invalidates the extreme reports whereas the second one simply averages the moderate ones, leading to a LIBOR of 0.527%. The role of the second step is to represent in a consensual manner the moderate values. In a sense, one could argue that this method tries to give incentives for consensus since none of the banks has an interest in announcing a value too different from the rest of the announcements. Yet, since the financial crisis in 2008, manipulation in the LIBOR (often referred to as the LIBOR scandal) casts some doubts over the way this index is determined.</p>
<p>In the 2008 LIBOR scandal, some banks altered their reports so as to obtain a value that fitted better their own interests. For instance, a report by the United Kingdom Financial Services Authority (FSA) <a href="https://www.fca.org.uk/news/press-releases/barclays-fined-%C2%A3595-million-significant-failings-relation-libor-and-euribor">stated that</a>:</p>
<blockquote>
<p>“Barclays’ misconduct was serious, widespread and extended over a number of years. The integrity of benchmark reference rates such as LIBOR and EURIBOR is of fundamental importance to both UK and international financial markets. Firms making submissions must not use those submissions as tools to promote their own interests”.</p>
</blockquote>
<p>If every bank announces honestly its preferred interest rate, this method is arguably close to perfect. However, a reasonable question is whether banks have the incentives to do so under this method. If not, this casts some shadow over this manner of computing LIBOR.</p>
<p>To understand the logic of a manipulation in a simple manner, consider that in Figure 2 every bank is honestly announcing its preferred interest rate. For instance, this implies that Société Generale’s preferred rate is 0.52%. What is the consequence of a misreport with this system? As long as the report is not too extreme, that is located in between the ones of Rabobank and Crédit Suisse, a misreport (or strategic report) affects the outcome. If for instance, S.G. announces 0.499, then the final outcome is 0.52: namely, by misreporting, S.G. obtains its preferred rate (see Figure 3 for an explanation). This leads to the following conclusion: the classical method for computing LIBOR gives banks incentives not to report their preferred interest rate but rather to strategise as a function of the expected reports of the rest of the banks.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=146&fit=crop&dpr=1 600w, https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=146&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=146&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=183&fit=crop&dpr=1 754w, https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=183&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/207512/original/file-20180222-152357-mftw5a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=183&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure 3: A misreport might be beneficial for a bank.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>A proposal</h2>
<p>Can we find reasonable ways of building the LIBOR rate without this undesirable feature? One can always design sophisticated methods to check whether the reported values are indeed sincere, yet this comes at the cost of thin auditing methods which can be rather inefficient. Yet, this method will still lie in the setting in which banks are always tempted to manipulate the true valuation, which might in turn create new problems with fake reports. Our view is that the purpose of the LIBOR method is to design a method which is simple and practical while at the same time it represents well the different preferences of the banks. Namely, if one wants to improve the computation of the LIBOR, one needs to design an instrument that moderates the final decision while it leads to a consensual final rate.</p>
<p>This <a href="https://www.sciencedirect.com/science/article/pii/S0022053117300558">has led us to design methods</a> that escape from the dilemma of reporting the true value versus manipulating via reporting a strategic value. One of these methods works as follows: each bank reports a range of values and not anymore, as in the original LIBOR, a single value. Namely, rather than reporting 0.52 and 0.499 as in Figures 2 and Figure 3, the Société Générale is now allowed to announce any range of interest rates: for example, in Figure 4, S.G. announces any value from 0.231 until 0.841. This means that S.G. approves of any value in this interval.</p>
<p>The interval method computes the LIBOR in a different manner. Rather than dropping values, it considers the different intervals announced by the different banks as a sample of points (see Figure 4b). Given this sample of points, it plots the distribution of the approvals made by the different banks (Figure 4c). Finally, it selects the value that divides in two exact halves the sample of points generated by the banks’ announcements.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=395&fit=crop&dpr=1 600w, https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=395&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=395&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=497&fit=crop&dpr=1 754w, https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=497&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/207830/original/file-20180226-140197-1hy5rtb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=497&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure 4: Computing the LIBOR with intervals.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>How should we expect banks to behave under this method? Theoretically, this method should lead to selecting (a very accurate estimation of) the median preferred interest rate of the banks. The idea behind the median interest rate is quite familiar in economics and political science: the Condorcet winner. Consider the ideal point of each bank and order them from the lowest to the highest one. The median interest rate is the one that divides the sample of ideal points in two exact halves since half of these values are lower than the median interest rate and half are higher. An important property of the median interest rate is its democratic appeal: it turns out that if one starts comparing by pairs each of the ideal points of the different banks, the only interest rate that defeats by a majority any other ideal point is the median interest rate. It is hence a basic desideratum for respecting the will of the banks to ensure that the outcome is as close as possible to the median of the ideal points.</p>
<p>This convergence to the median should occur since a bank’s ideal strategy is to announce either all the interest rates to the left of the outcome or all the alternatives to the right of it. The bank should theoretically announce all alternatives located to the left of the outcome if its interest rate is lower than the outcome whereas it announces all alternatives to the right of the outcome if its ideal interest rate is higher. In practice, few are known. </p>
<p>Some experiments have been run in the Cyprus Experimental Economics Lab at the University of Cyprus, and while it is still early, the first available results are encouraging. In a lab setting, we endow players with a minute to decide over the interval they want to announce. During this period of time, they are allowed to play with the intervals while seeing in real-time the announcements of the rest of the players. Most experimental subjects tend to understand well the mechanism and the outcome is quite close to the median of the players’ ideal points. More importantly, players seem to be much more satisfied with the final outcome than with the usual methods so that the method increases the consensual views of the different players.</p>
<h2>Final remarks</h2>
<p>The LIBOR rates are core tools in the global financial system. It is then essential to ensure that these rates are well-calibrated so that they reflect well the will of the different banks involved in its construction. While the LIBOR scandal underlined some weaknesses in the initial method of computation, a myriad of possible fixes might be available. Our proposal is to offer each of the banks more flexibility, allow each to announce ranges of interest rates. While more evidence is needed on the benefits of this system, the current <a href="https://www.sciencedirect.com/science/article/pii/S0022053117300558">theoretical and experimental results</a> make this approach a potentially interesting one. A key advantage is that banks would no longer face the usual dilemma between being sincere or opting for their self-interest, removing any potential auditing costs.</p><img src="https://counter.theconversation.com/content/92295/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>The London Interbank Offered Rates is one of the world’s key financial tools, but the 2008 rigging scandal has led to calls for its being phased out. Can we find better ways of building the LIBOR rate?Matias Nunez, CNRS Researcher in Economics, Université Paris Dauphine – PSLDimitrios Xefteris, Assistant Professor of Political Economy, University of CyprusLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/907422018-01-25T22:42:33Z2018-01-25T22:42:33ZTreasury Secretary Mnuchin’s weak-dollar myopia is dangerous<figure><img src="https://images.theconversation.com/files/203480/original/file-20180125-100919-f8lspe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Treasury Secretary Steven Mnuchin walks through the snow at Davos. </span> <span class="attribution"><span class="source">AP Photo/Markus Schreiber</span></span></figcaption></figure><p><a href="https://www.ft.com/content/84c19cd8-00eb-11e8-9650-9c0ad2d7c5b5">Breaking with long-standing tradition</a>, U.S. Treasury Secretary Steven Mnuchin endorsed the weakening of the dollar as “good” for the United States. </p>
<p><a href="https://www.nytimes.com/2018/01/25/business/dealbook/steven-mnuchin-dollar-davos.html">Speaking during a panel</a> at the World Economic Forum in Davos, Switzerland, on Jan. 24, Mnuchin said: “Obviously, a weaker dollar is good for us as it relates to trade and opportunities.” </p>
<p>The reaction was swift. The greenback <a href="http://thehill.com/policy/finance/370566-dollar-drops-to-3-year-low-after-mnuchin-praises-weak-us-currency">dropped like a stone</a> as news of his comments spread, hitting a three-year low in currency markets. </p>
<p><a href="https://voxeu.org/article/strong-dollar-policy-us">Never before in living memory</a> has one of America’s top economic officials spoken in favor of a weaker dollar. The president himself dove into the mix by <a href="https://www.reuters.com/article/us-davos-meeting-dollar/president-trump-talks-up-dollar-in-davos-idUSKBN1FE0TD">reassuring nervous investors</a> after he arrived in Davos that he does, in fact, favor a stronger dollar. </p>
<p>Indeed, that’s been the <a href="https://www.nytimes.com/2015/01/25/business/the-strong-dollar-is-always-good-except-when-it-isnt.html">usual mantra</a> out of Washington for decades. Mnuchin’s immediate predecessor, Jacob Lew, for example, put it this way: “A strong dollar has always been a good thing for the United States.”</p>
<p>So it came as a shock to many – including me – when Mnuchin declared that a depreciation of the greenback is “obviously” welcome. As a specialist in currencies, I think it’s worth briefly highlighting what exactly was so alarming about what the treasury secretary said. </p>
<h2>What a weaker dollar does</h2>
<p>Mnuchin may have begun to realize he went too far soon after he made his remarks on Jan. 24 – or noticed the dollar’s sudden plunge – because the next day <a href="https://www.wsj.com/articles/mnuchin-plays-down-dollar-comments-after-selloff-1516870106">he tried to walk them back</a>, declaring that the Trump administration is not really concerned with “where the dollar is in the short term.” </p>
<p>The effort seemed half-hearted, as he described his previous words as “consistent with what I’ve said before…. There are benefits and there are costs of where the dollar is.”</p>
<p>But does he really understand the benefits and costs involved? So far he has said little to ease fears about the Trump administration’s intentions in promoting a weaker U.S. dollar.</p>
<p>It is clear that Mnuchin sees benefits in depreciation. A weaker dollar, he said, “is good for trade.” The logic is familiar to any first-year student of economics. Depreciation, in principle, <a href="https://www.forbes.com/sites/bobmcteer/2015/01/24/is-a-strong-dollar-a-good-thing-or-a-bad-thing/#13aa5753f26a">is supposed to lower the price of domestic goods</a> relative to foreign goods and thus both promote exports and limit imports. </p>
<p>Much depends, however, on how traded goods are priced and how much of any exchange-rate change will actually be “passed through” to customers as final prices. The net impact on the U.S. trade balance <a href="http://www.frbsf.org/publications/economics/papers/2008/wp08-13bk.pdf">could be considerably smaller</a> than anticipated. </p>
<p>On the import side, for example, we have oil, the biggest single product Americans purchase from abroad. Since the global petroleum market is priced in dollars, a weaker greenback will have no effect at all on the cost of oil imports. And the same is true for many industrial imports as well that are typically priced in dollars, such as cars and electronics from Japan. </p>
<p>Conversely, on the export side, many of the products American industry sells abroad – such as aircraft or heavy machinery – are highly complex and little affected by marginal movements of price.</p>
<h2>Costs of weakness</h2>
<p>It is less clear whether Mnuchin understands the potential costs of the weak-dollar policy he was advocating, which could be substantial. In his view, it seems, favoring a weak dollar is not threatening to others. </p>
<p>“What’s good for the U.S.,” he said, “is what’s good for the rest of the world.” </p>
<p>But that is precisely wrong if the “good” for America comes at the expense of others, as it does when the benefit comes from weakening one’s own currency. Depreciation is a “<a href="https://www.investopedia.com/terms/b/beggarthyneighbor.asp">beggar-thy-neighbor</a>” strategy in which any trade gains are by definition someone else’s loss. </p>
<p>Why should we assume that foreign governments would stand idly by while market shares are being lost? More likely, they would retaliate with competitive depreciations of their own, unleashing currency war on a major scale, as we saw <a href="https://www.bloomberg.com/quicktake/currency-wars">earlier this decade</a>. </p>
<p>And perhaps worst of all, prolonged depreciation could severely erode the dominant position of the greenback as the <a href="https://www.thebalance.com/world-currency-3305931">world’s leading currency</a>. The United States <a href="http://www.global-systems-science.org/wp-content/uploads/2013/12/Dollar-as-the-World-Reserve-Currency.pdf">has long gained</a> both economically and politically from the willingness of others to use the dollar as their favorite investment medium. But who wants to hold onto a sadly wasting asset? Why not switch to the euro, yen or yuan instead? </p>
<p>A myopic policy of depreciation in Washington could prove to be the death knell of the dollar.</p><img src="https://counter.theconversation.com/content/90742/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Benjamin J. Cohen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The treasury secretary said a weak dollar would be ‘good’ for the U.S. Here’s why he’s wrong.Benjamin J. Cohen, Professor of International Political Economy, University of California, Santa BarbaraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/725302017-02-06T14:40:38Z2017-02-06T14:40:38ZHow Donald Trump is using talk of a trade war to destabilise European unity<p>The US president’s top trade adviser, Peter Navarro, has <a href="https://www.ft.com/content/57f104d2-e742-11e6-893c-082c54a7f539">accused the German government</a> of manipulating the euro exchange rate and “exploiting” the other countries of the currency zone. This <a href="https://www.theguardian.com/business/2017/jan/31/trump-trade-adviser-germany-euro-us-eu-peter-navarro">near-rant</a>, that the German government “continues to exploit other countries in the EU as well as the US with an ‘implicit Deutsche Mark’ that is grossly undervalued”, followed quickly on from accusations that the Chinese regime has <a href="http://theconversation.com/why-donald-trumps-china-policy-is-a-trade-war-in-the-making-70723">destroyed US industry</a> by unfair trade practices. </p>
<p>Unlike with China, however, the US does not have a large trade deficit with Germany. The reasons for Trump’s attack on Germany do not appear to be economic. A closer look at Trump’s ideology and the ideology of his advisers, along with the economics, shows that there could be something more underhand at play.</p>
<h2>A look at the numbers</h2>
<p>America’s <a href="https://www.census.gov/foreign-trade/index.html">trade balance</a> with Germany does not suggest a strong economic motivation for its recent attack. The chart below shows four US trade balances, 1993-2016, with China, Japan and Germany, and the net trade in petroleum. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/155639/original/image-20170206-18520-19eqkx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/155639/original/image-20170206-18520-19eqkx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/155639/original/image-20170206-18520-19eqkx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=332&fit=crop&dpr=1 600w, https://images.theconversation.com/files/155639/original/image-20170206-18520-19eqkx3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=332&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/155639/original/image-20170206-18520-19eqkx3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=332&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/155639/original/image-20170206-18520-19eqkx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=418&fit=crop&dpr=1 754w, https://images.theconversation.com/files/155639/original/image-20170206-18520-19eqkx3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=418&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/155639/original/image-20170206-18520-19eqkx3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=418&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">US trade deficits with China, Japan & Germany, and on Petroleum,
1993-2016 in US$ billions.</span>
<span class="attribution"><a class="source" href="https://www.census.gov/foreign-trade/index.html">US Census Bureau, Foreign Trade</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Until the last few years the US deficit with Germany was the smallest of the four. Over the 24 years the cumulative deficit for Germany (US$986 billion), is half the US deficit with Japan (US$1.8 trillion) and less than a quarter of the Chinese total (US$4.1 trillion).</p>
<p>When we exclude exports and imports of petroleum, commerce with China (including Hong Kong) has since 2007 accounted for well over half the US trade deficit. While the Chinese share rose rapidly after 1990, the Japan percentage was the mirror image of decline, from close to 100% to barely 10%. Over the last two decades the German share has remained in the 10-15% range.</p>
<p>If the new president’s goal is to reduce his country’s trade deficit, going after the German government is the wrong adversary. </p>
<h2>Sowing discord in the EU</h2>
<p>Trump’s recent selection of Ed Malloch, a <a href="http://www.politico.eu/article/how-eu-can-block-donald-trump-ambassador-pick-ted-malloch/">virulent opponent of European unity</a>, as ambassador to Brussels suggests that the aggressive attack on German trade policy may be part of a conscious strategy. The criticism of German policy explicitly sought to split off the other members of the eurozone, asserting that they and the US were all victims of German mercantilism.</p>
<p>In the least sinister interpretation, Trump’s aggressiveness towards Germany is an element in a divide-and-conquer trade policy. A Europe divided would make for weaker negotiating partners than trying to strike a deal with the entire bloc. Thus, the president of the European Council, Donald Tusk, <a href="http://www.independent.co.uk/news/world/europe/donald-tusk-donald-trump-existential-threat-europe-brexit-eu-theresa-may-a7555061.html">included on the agenda</a> at the recent Malta meeting of EU leaders, discussion of the threat that Donald Trump’s US presented to the unity of Europe.</p>
<p>The Trump project to sow discord would seem to have fertile ground in which to grow, due to recent tensions and conflicts within the EU. Tensions continue through the eurozone over the austerity policies advocated so insistently by the German government, with strong objections <a href="http://www.reuters.com/article/us-eurozone-italy-budget-idUSKBN15128U?il=0">from an unstable Italian government</a>, and the prospect yet again of a <a href="https://www.theguardian.com/world/2017/feb/03/grexit-greece-debt-crisis-eu-germany-us">Greek debt default</a>. </p>
<p>Among the non-euro EU countries Trump where has his sympathisers are dubiously democratic leaders, which share his antipathy to Muslim immigrants – <a href="http://www.independent.co.uk/news/world/europe/donald-trump-nationalist-hungary-pm-viktor-orban-praise-america-first-a7542361.html">Viktor Orbán</a> in Hungary, <a href="http://www.independent.co.uk/news/world/europe/donald-trump-nationalist-hungary-pm-viktor-orban-praise-america-first-a7542361.html">Andrej Kiska</a> of Slovakia, and the Polish government (which <a href="http://www.thenews.pl/1/10/Artykul/291867,Poland-invites-President-Trump">recently invited Trump</a> for an official visit).</p>
<h2>Prospect of a trade war?</h2>
<p>In practice, European soil may prove less fertile than anticipated by Trump and his far-right, <a href="https://www.theatlantic.com/politics/archive/2016/08/the-radical-anti-conservatism-of-stephen-bannon/496796/">anti-EU adviser Stephen Bannon</a>. As much as the would-be EU authoritarians may approve of a <a href="https://theconversation.com/trumps-travel-ban-is-nothing-to-do-with-national-security-72170">travel ban that targets Muslims</a>, in practice their cooperation may be constrained by anxiety over Trump’s apparent intent to cooperate with the Putin regime. A US-Russian detente, combined with Trump’s <a href="http://www.economist.com/news/united-states/21716034-nato-leaders-make-pitch-president-donald-trump-seems-see-allies-burden">criticism of NATO</a>, would likely keep Poland and the Baltic countries firmly in the EU camp.</p>
<p>The early days of Trump’s presidency have taught us not to rule out policies that seem unfeasible or antagonistic. With that caveat in mind, a few judgements seem defensible. First, a US trade war with China is <a href="http://theconversation.com/why-donald-trumps-china-policy-is-a-trade-war-in-the-making-70723">considerably more likely</a> than one with Germany, because the deficit with China is by far the larger. Confronting the Chinese government over trade issues would fit into the broader contest for influence and <a href="https://theconversation.com/why-china-wont-back-off-the-south-china-sea-whatever-the-world-might-say-62248">control of South-East and East Asia</a>.</p>
<p>An attempt to separate Germany from the other EU countries for a trade war, however, would confront a practical problem shown in the following graph. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/155640/original/image-20170206-18532-1ns3u6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/155640/original/image-20170206-18532-1ns3u6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/155640/original/image-20170206-18532-1ns3u6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=388&fit=crop&dpr=1 600w, https://images.theconversation.com/files/155640/original/image-20170206-18532-1ns3u6g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=388&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/155640/original/image-20170206-18532-1ns3u6g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=388&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/155640/original/image-20170206-18532-1ns3u6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=487&fit=crop&dpr=1 754w, https://images.theconversation.com/files/155640/original/image-20170206-18532-1ns3u6g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=487&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/155640/original/image-20170206-18532-1ns3u6g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=487&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">US trade deficits with Germany and EU 26 (the EU minus Germany and the UK), 1993-2015 in US$ billions.</span>
<span class="attribution"><a class="source" href="https://www.census.gov/foreign-trade/index.html">US Census Bureau, Foreign Trade</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>The US <a href="https://www.census.gov/foreign-trade/index.html">trade deficit</a> with Germany and the other EU countries combined (excluding the UK) has hardly differed over the years. The cumulative total for the former was US$825 billion and the latter US$854 billion. No EU leader is likely to believe that his country would be exempt for very long from US trade sanctions launched against Germany.</p>
<p>More likely than a trade war with Germany, the Trump government will reach a bilateral deal that is relatively favourable to Britain (whose trade balance with the US has been close to zero in recent years). This might lend credibility to a Trump claim that he is singling out Germany for punishment, and would give the other EU members a better trading arrangement than they currently have within the EU. But, for the time being at least, solidarity <a href="http://www.consilium.europa.eu/en/press/press-releases/2017/02/03-tusk-press-remarks-malta/">seems to be holding</a> among the remaining 26 EU countries.</p><img src="https://counter.theconversation.com/content/72530/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Weeks does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>US accusations of German currency manipulation do not appear to be motivated by economics.John Weeks, Professor Emeritus, SOAS, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/714132017-01-17T17:10:19Z2017-01-17T17:10:19ZWhy junk status still hangs over South Africa<figure><img src="https://images.theconversation.com/files/153041/original/image-20170117-2750-1oupxky.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Although South Africa <a href="http://mg.co.za/article/2016-12-02-reprieve-for-south-africa-as-sp-leaves-credit-rating-unchanged">avoided a downgrade</a> to non-investment grade, or junk status, in 2016, the country is not yet out of the woods and may be downgraded this year. The reasons for this are ongoing political risk as <a href="https://theconversation.com/ministers-call-for-zuma-to-resign-signals-internal-rebellion-in-south-africas-cabinet-69663">factional battles</a> in the governing African National Congress intensify, policy inconsistencies and low economic growth. </p>
<p>The effects of a sovereign credit rating downgrade would be significant for all South Africans. It would drive up borrowing costs, which in turn would have a negative impact on the government’s finances. It could also lead to foreigners leaving South Africa’s capital markets as well as driving the rand weaker. And it would in-turn push interest rates up, which would hurt ordinary South Africans.</p>
<p>But there are some possible steps the country can still take to avert a downgrade. These would include underscoring that Finance Minister Pravin Gordhan is secure in his job, and cutting wasteful expenditure.</p>
<h2>Impact on the markets</h2>
<p>South Africa’s public debt stands at 50.1% of the country’s GDP, <a href="http://www.tradingeconomics.com/south-africa/government-debt-to-gdp">nearly double what it was in 2006</a>. If the government’s borrowing position is not controlled it runs the risk of running up debts that it can’t service. An over-borrowed government is also perceived to be risky, which increases the cost of additional borrowing because lenders demand a premium. On top of this the country’s fiscus is under pressure from low revenue collection as a result of the slowing economy. </p>
<p>A downgrade to junk status is also likely to trigger significant capital flight. This is because sovereign downgrades typically have a direct impact on bonds and other fixed income securities making them less attractive to foreign bond investors. The likely outcome is that they will take their money to markets that offer better returns. This would be bad news for the country as <a href="https://www.wits.ac.za/news/latest-news/in-their-own-words/2016/2016-11/south-africa-needs-tougher-exchange-controls-before-junk-status-hits.html">foreign investors hold</a> about R62 billion (USD4.5 billion) in government securities. </p>
<p>A downgrade may not affect equity holders to the same extent as bondholders. Of the 472 companies listed on the Johannesburg Securities Exchange, <a href="http://www.fin24.com/Markets/Equities/dual-listed-shares-shine-on-the-jse-20160510">39 are dual listed</a>. These have primary or secondary listings in South Africa, London and New York. Companies listed abroad will be less vulnerable because most of their earnings are from abroad and in foreign currencies. But companies listed solely in South Africa would be affected by the country’s poor economic performance and a weaker currency. This is likely to drive them to internationalise which would mean a loss to South Africa. In addition, their valuations would be negatively affected by the higher cost of capital.</p>
<p>As the bond market reacts to the sovereign downgrade, the ripple effect would extend to the rand, causing it to weaken against other major currencies. The rand averaged R14/USD at the end of 2016 but a downgrade this year would be likely to push it beyond its lowpoint of about <a href="https://businesstech.co.za/news/finance/116372/rand-vs-the-dollar-1978-2016/">R16.80/USD</a>, possibly beyond the R20/USD level in the medium term). It plunged to this level in December 2015 after President Jacob Zuma announced he was removing then Finance Minister <a href="https://theconversation.com/the-removal-of-south-africas-finance-minister-is-bad-news-for-the-country-52170">Nhlanhla Nene</a>. </p>
<h2>Ordinary people</h2>
<p>According to the World Bank <a href="http://siteresources.worldbank.org/EXTAFRSUMAFTPS/Resources/chapter2.pdf">South Africans are the biggest borrowers in the world</a>. The country’s National Credit Regulator Statistics has reported that approximately <a href="http://www.ncr.org.za/documents/pages/Annual%20Reports/NCR%20Annual%20Report%202015-16.pdf">20% of consumers are three months in arrears</a>. </p>
<p>A Adowngrade would drive up debt servicing costs. In addition, the fiscus would be under pressure due to higher interest costs on debt repayments coupled with lower economic growth. The government’s response would then be to raise taxes. The choices would between the politically unpalatable option of raising the value added tax rate, which would hit the rural poor and the lower-middle class urban consumers, or increasing personal taxes on the already <a href="http://www.fin24.com/Economy/sa-is-an-overtaxed-nation-says-outa-20160403">over-taxed working middle class</a>. As the <a href="https://www.washingtonpost.com/news/monkey-cage/wp/2016/08/12/here-are-4-reasons-that-south-africas-african-national-congress-lost-ground-in-this-months-election/?utm_term=.70e8eaf46612">recent local government elections have shown</a> this could also have political ramifications for the governing party.</p>
<p>With budget deficits for the past 20 years <a href="http://www.tradingeconomics.com/south-africa/government-budget">averaging -3.24%</a>, a rating downgrade would force the government to either embark on injecting new money into the economy or <a href="http://www.capetalk.co.za/articles/1576/south-africa-s-government-is-running-out-of-money-sairr">borrowing</a> more. Injecting new money into the economy would fuel inflation and exert pressure on the exchange rate. The central bank would then have to respond by raising interest rates, again hitting consumers.</p>
<p>Further borrowing is also risky as it could lead to a possible debt trap where the government is no longer able to service its debts. </p>
<h2>Momentous year</h2>
<p>This is a momentous year for the country, with the <a href="https://theconversation.com/zuma-lives-to-fight-another-day-but-fallout-from-latest-revolt-will-live-on-69587">factional battles</a> and ANC contestation gathering momentum, and for the world with the inauguration of President Donald Trump and uncertainties around <a href="https://theconversation.com/brexit-shows-economic-costs-of-pursuing-populist-policies-like-trumps-62407">post-Brexit</a> trade policies. In such an uncertain environment, South Africa must rectify the four mistakes that have led it to drift to the point of a downgrade. </p>
<p>First, government policy needs to be clear, consistent and growth-oriented. Second, rather than considering further borrowing or increasing taxes, the government must cut non-productive spending and restructure the non-viable state-owned entities (especially those that rely on bailouts or have become too large to manage). Third, the authorities need to ensure that <a href="https://www.businesslive.co.za/bd/national/2017-01-06-sarss-luther-lubelo-should-not-have-attacked-rating-agencies-says-gordhan/">business confidence</a> doesn’t deteriorate further. It can do this by desisting from issuing <a href="https://www.dailymaverick.co.za/article/2016-12-22-we-want-the-rand-to-fall-so-that-when-it-rises-we-will-control-the-economy-maine/#.WHYPZVN97IU">conflicting political statements</a> which cause investors to panic. And lastly, the presidency must quell the uncertainty around the finance minister’s position. </p>
<p>If South Africa continues to get <a href="http://blackopinion.co.za/2016/12/05/south-africa-ruled-rating-agencies/">these wrong</a>, it’s likely that it will be downgraded this year. Since it takes <a href="http://www.cnbcafrica.com/news/southern-africa/2016/06/03/south-africa-to-regain-investment-rating/">an average of seven years for a country to regain its investment grade</a>, South Africa would be stuck in a <a href="https://theconversation.com/south-africa-can-expect-zero-growth-its-problems-are-largely-homemade-62943">middle-income trap</a> until at least 2024. Under this scenario it would be unable to move out of low-level manufacturing, unemployment levels would remain high and the economy would remain stagnant.</p><img src="https://counter.theconversation.com/content/71413/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town. </span></em></p><p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The effects of a sovereign credit rating downgrade would be painful for all South Africans.Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, specializing in Finance, University of Cape TownSean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/565052016-03-27T21:46:39Z2016-03-27T21:46:39ZNegative interest rates – are there any positives?<p>Some say that economics is “the dismal science” and perhaps this is because many economic theories do not seem to work in practice. One contemporary example is negative interest rates, where instead of interest being added to their savings, individuals find that value is lost. </p>
<p>Negative rates have been introduced by some central banks worldwide. In theory doing so should both devalue their currency, making their exports cheaper and imports more expensive, and at the same time encourage consumer spending. It should also boost lending by financial institutions, as the value of capital being held by both individuals and banks is ever decreasing.</p>
<p>Sadly this theory when put into practice has been found wanting. The Bank of Japan introduced a negative interest rate of minus 0.1% in January 2016 and the yen subsequently increased in value compared to its competitor currencies. Indeed in 2016 the yen is the best performing G10 currency against the US$. </p>
<p>Similarly the Swiss National Bank flagged a negative interest rate of minus 0.25% to be introduced in January 2015, but the inflow of funds into the Swiss franc continued and the rate was finally reduced on its introduction to minus 0.75%, with the aim of discouraging capital inflows. However despite these moves the Swiss National Bank continued to accumulate foreign exchange reserves into the second half of 2015. </p>
<p>The European Central Bank (ECB) further increased its negative interest to minus 0.4%, on bank deposits held at the ECB in mid March 2016, as it attempted to manipulate downward the value of the Euro. The impact of this was undermined somewhat by allowing the European banks to borrow from their central bank at the same minus rate, depending on how much they lend to businesses and consumers. An initial dip in the value of the Euro when the minus 0.4% was announced was then followed by a sharp rise, as the implications of the whole package became clearer.</p>
<p>The aim of this is to lower the cost of borrowing for both consumers and corporations, as the banks borrow money from the ECB at no cost to them. This is intended to help stave of the threat of deflation in the eurozone by stimulating investment and consumption. </p>
<p><a href="https://www.bis.org/publ/qtrpdf/r_qt1603e.htm">Recently published research from the Bank for International Settlement (BIS)</a> found that in some cases savings accounts had been insulated from the impact of negative interest rates and that some mortgage rates in Switzerland had “perversely increased”. The conclusion from the BIS was then,“if
negative interest rates do not feed into lower lending rates for households and firms, they largely lose their rationale”.</p>
<p>The Governor of the Bank of England <a href="http://www.ft.com/cms/s/0/d9bdae6e-dee4-11e5-b67f-a61732c1d025.html">has argued</a> that if central bank policies are structured in ways that shield retail bank customers from minus interest rates, then they are unlikely to do much to stimulate domestic demand. Instead the main effect will be on exchange rates and this will result in the provoking of <a href="https://theconversation.com/did-swiss-banks-franc-surprise-signal-start-of-a-currency-war-36381">currency wars</a>, as central banks attempt to out do each other in negative interest. Negative interest rates are intended to boost domestic demand by forcing banks to lend money out and encouraging consumers to both borrow and spend.</p>
<h2>Consumer behaviour is unpredictable</h2>
<p>Once again the “dismal science” comes up against the unpredictable behaviour of individuals and organisations, when they enter the territory of negative interest rates. </p>
<p>Take Japan in February 2016. One month on from the Bank of Japan’s decision to unleash negative interest rates, applications to join the loyalty clubs of Japanese department stores such as Mitsukoshi, Daimaru and Takashimaya were 100-200% higher than in the same month of 2015. The explanation is that these loyalty clubs offer a 5 to 8% annual bonus to their members, a far better return than any Japanese bank can offer, even if it encourages them to spend their money where they have their account(s).</p>
<p>So will negative interest rates continue to be used as a weapon from the central bank armoury, or will the unpredictable behaviour of consumers and investors undermine the intentions of the central banks? </p>
<p>If the weapon of negative interest rates does not work as expected on currency values or domestic consumption and investment, what else is there left to deploy to prevent deflation and a further slow down in economic actively? Economics indeed truly is dismal science.</p><img src="https://counter.theconversation.com/content/56505/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Worthington does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Negative interest rates are not the weapon some central bankers had hoped they would be.Steve Worthington, Adjunct Professor, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/460652015-08-13T18:14:12Z2015-08-13T18:14:12ZUS shouldn’t fret over cheaper yuan: China’s growing middle class will keep buying ‘Made in America’<figure><img src="https://images.theconversation.com/files/91806/original/image-20150813-21387-1je95vd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A change in the scales isn't likely to put a major dent in the growth in US exports to China.</span> <span class="attribution"><span class="source">Yuan dollar via www.shutterstock.com</span></span></figcaption></figure><p>News that the People’s Bank of China, the country’s central bank, changed its formula for calculating the reference rate of the yuan (RMB) prompted the currency to <a href="http://www.theguardian.com/business/2015/aug/12/china-yuan-slips-again-after-devaluation">fall</a> to a four-year low. </p>
<p>Essentially, the People’s Bank of China is now <a href="https://theconversation.com/explainer-why-is-china-devaluing-its-currency-46034">calculating</a> the reference rate on a daily basis and incorporating market forces. Some financial experts <a href="http://online.barrons.com/articles/chinas-yuan-play-a-complex-puzzle-for-stocks-1439431538">argue</a> that allowing market forces to help determine the value of the yuan is logical, while others assert that China is merely trying to boost its own exporters – at the expense of foreign companies – by making their products relatively cheaper in the global marketplace.</p>
<p>Many in the US are concerned that our businesses will be hurt, with some <a href="http://www.bloomberg.com/news/articles/2015-08-11/yuan-devaluation-creates-fresh-china-conundrum-for-u-s-treasury">accusing</a> China of currency manipulation. </p>
<p>The truth is, however, the value of the yuan doesn’t matter that much: China’s swelling middle class and its insatiable demand for foreign (and US) products and services will easily offset the impact from a cheaper yuan. For now, anyway.</p>
<h2>Growth in trade</h2>
<p>Having been a professor and director of the Center for International Business Education and Research (CIBER) in the Eli Broad College of Business since 2001, I am always <a href="https://bps.broad.msu.edu/media/documents/55b1817310edd53230b5c844.pdf">intrigued</a> by dynamics and influences in international business, trade and global competitiveness. </p>
<p>Much of what we do as a federally funded CIBER – one of only 17 in the country – is to strive to make US companies as competitive globally as possible. </p>
<p><a href="http://www.mhprofessional.com/product.php?isbn=0071827420">Research</a> I conducted this year shows that customers expect companies to <a href="https://twitter.com/tomashult/status/604514002782306304">sell</a> 49% more in global markets in the next two decades. </p>
<p>Historically, this anticipated increase is primarily related to exporting more products to China. US companies have boosted their exports to China by more than 500% in the last decade, compared with an average of only a little over a 100% increase to the rest of the world.</p>
<p>On the other side of the equation, US imports from China <a href="https://www.census.gov/foreign-trade/balance/c5700.html">seemed</a> to have stabilized (not growing as much) before the devaluation of the yuan. A cheaper RMB will destabilize the export-import dynamics, but mostly in the short run.</p>
<p>Regardless of China’s <a href="http://www.reuters.com/article/2015/08/12/us-china-markets-yuan-cenbank-idUSKCN0QH1XY20150812">motive</a> (whether an intentional devaluing of the yuan to spur exports and economic growth or a competitive-based market adjustment), a weaker currency generally leads to a decrease in imports because it is more expensive to buy foreign products.</p>
<h2>The rise of the ‘mainstream’</h2>
<p>In the case of US products and services, the likelihood is that the trend of annual increases of exports to China will slow down but that we will see overall increases nevertheless, just not as significant, perhaps, as in the past decade. </p>
<p>This will hurt the top exporting industries from the US to China, such as crop production, computers and electronics, and chemicals, but, importantly, at the same time we expect to see a pretty drastic increase in the so-called Chinese mainstream consumers.</p>
<p>That is, we expect that this population in China (read: middle class) will go from about 20 million to 200 million people in the <a href="http://www.mckinsey.com/insights/consumer_and_retail/mapping_chinas_middle_class">next five years</a>. </p>
<p>In other words, in all likelihood, even though the yuan may weaken the purchasing power of Chinese consumers, we can expect the overall increase in mainstream (and affluent) shoppers to more than offset this decrease in the value of the yuan. </p>
<p>By extension, urbanization in China has a chance to divide the country’s people in a more marked way due to the yuan devaluation. </p>
<p>Specifically, while the top 100 Chinese cities (advanced and developing cities) will soon be made up of a vast majority of affluent and mainstream customers, the other parts of the country will be financially much weaker. And while the yuan trading at a lower value might benefit the advanced and developing cities in China, the emerging and lagging cities will not see the same benefit.</p>
<h2>China’s conundrum</h2>
<p>Perhaps the People’s Bank of China realized this conundrum already when, almost immediately after devaluing the yuan, it reversed course by selling off US dollars to stabilize its currency. </p>
<p>It also put out statements basically saying that there is no practical basis to <a href="http://economictimes.indiatimes.com/opinion/interviews/yuan-to-fall-more-but-recent-events-do-not-change-long-term-view-on-china-stephen-roach-yale-university/articleshow/48462519.cms">expect</a> that the trend of a depreciating yuan will be a long-term phenomenon. </p>
<p>The opposite view is interesting though.</p>
<p>The reality is that the yuan has been appreciating for the last decade, many say intentionally so, at the hands of the central bank. This <a href="http://www.forbes.com/sites/kenrapoza/2015/08/11/in-recent-devaluation-china-takes-step-towards-market-liberalization/">appreciation</a> has helped slow the economy from double-digit growth to just single digits. It has also meant that strategically, China has opted to focus on social stability, steady growth and maintaining the Chinese market as an attractive investment instead of the long run of unprecedented growth.</p>
<p>Whether these stabilizing mechanisms will be viewed by the US and the rest of the world as currency manipulations or as more market-based financial strategy remains to be seen. </p>
<p>What we do know is that China remains an incredibly important market to trade into and buy from, and the expected drastic increase in the total number of mainstream individuals there is an important part of developing a long-term strategy for selling into China regardless of the relatively small fluctuations in the yuan. </p>
<p>This could change, though, if the yuan is pushed a lot lower and US consumers end up snapping up far more Chinese products. But so far, that doesn’t appear to be the case.</p><img src="https://counter.theconversation.com/content/46065/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tomas Hult receives funding from U.S. Department of Education, National Science Foundation, and Michigan Economic Development Corporation. He is also executive director of the Academy of International Business and president of the Sheth Foundation, and serves on the US District Export Council.
</span></em></p>China’s interventions to cheapen its currency relative to others will hurt US imports in the short term, but the country’s surging “mainstream” will easily offset the impact.Tomas Hult, Byington Endowed Chair and Professor of International Business, Michigan State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/460342015-08-12T15:34:56Z2015-08-12T15:34:56ZExplainer: why is China devaluing its currency?<p>China has shocked global financial markets by devaluing its currency for two days running. August 11 saw a record 1.9% fall in value, followed by another <a href="http://www.bbc.co.uk/news/business-33875061">1% decline on August 12</a>. The move by the Chinese central bank marks the yuan’s largest devaluation in two decades, sending a ripple effect across the regional Asian market and global financial markets.</p>
<p>Stocks, currencies and commodities came under heavy pressure as money managers feared it could ignite a currency war that would destabilise the global economy. Both the Nikkei stock market index in Japan and Hang Seng in Hong Kong were down more than 1%. Meanwhile the Singapore and Taiwan dollar both <a href="http://www.straitstimes.com/business/economy/singapore-dollar-hits-5-year-low-of-14150-to-us-dollar-after-china-weakens-yuan">hit five-year lows on the news</a>. It was a similar story for Indonesia’s rupiah, the Philippine peso, South Korean won and Malaysian ringgit. </p>
<p>The Australian dollar, which is often seen as a proxy for China’s currency, fell to a fresh six-year low of US$72.25, <a href="http://www.theguardian.com/business/2015/aug/11/australian-dollar-falls-to-735-us-cents-as-chinas-central-bank-devalues-yuan">having been sold off heavily on Tuesday</a>. Oil was hit, too, as well as key industrial and construction materials including <a href="http://www.theguardian.com/business/2015/aug/12/china-yuan-slips-again-after-devaluation">nickel, copper and aluminium</a>.</p>
<h2>Why the devaluation</h2>
<p>The move comes as a bit of an about turn, as it follows a long period of strengthening. The People’s Bank of China had been keeping the yuan strong to support the government’s goal of shifting economic growth from being export-driven to increasing domestic demand. But a run of poor economic data in the last few months clearly has the Chinese government worried.</p>
<p>The abrupt devaluation is a clear indication of mounting concern in Beijing that the country could fall short of its goal of roughly 7% economic growth for 2015. In the past few months, dwindling growth has put heavy pressure on state-owned banks to lend money readily to companies willing to invest in new factories and equipment. A rout of the Shanghai and Shenzhen stock markets <a href="https://theconversation.com/chinas-stock-market-is-so-unstable-even-the-government-cant-control-it-45457">in late June and early July</a> (which took aggressive government action to stem) appears to have further dented consumer demand within China and investor confidence across the globe.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/91629/original/image-20150812-13700-35fml2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/91629/original/image-20150812-13700-35fml2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=384&fit=crop&dpr=1 600w, https://images.theconversation.com/files/91629/original/image-20150812-13700-35fml2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=384&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/91629/original/image-20150812-13700-35fml2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=384&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/91629/original/image-20150812-13700-35fml2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=483&fit=crop&dpr=1 754w, https://images.theconversation.com/files/91629/original/image-20150812-13700-35fml2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=483&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/91629/original/image-20150812-13700-35fml2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=483&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Calculated drop in the yuan.</span>
<span class="attribution"><span class="source">xe.com</span></span>
</figcaption>
</figure>
<p>The People’s Bank of China defended its move to devalue the yuan as a way of making the country’s financial system more market-oriented. The central bank guides the market daily by setting a reference rate for the yuan, from which trade may vary only 2%. But on August 11 the bank said it will set this rate based on market forces, <a href="http://www.pbc.gov.cn/publish/english/955/2015/20150811090338341860668/20150811090338341860668_.html">which have been willing the yuan lower</a>. This seems logical, as over the past few months the yuan-dollar spot price had been lower than the exchange rate, and it became clear the central bank was supporting a stronger yuan.</p>
<p>Thus, the Chinese government may well have the IMF in mind, whom it has been lobbying to include the yuan among freely traded benchmarks like the dollar, euro and yen, so that other countries can include it <a href="http://www.theguardian.com/business/2015/aug/12/china-yuan-slips-again-after-devaluation">as an official reserve currency</a>. A market-driven exchange rate is something the IMF has welcomed, saying it would facilitate the operations of its basket of reserve currencies, <a href="http://www.bloomberg.com/news/articles/2015-08-12/imf-welcomes-china-s-new-yuan-mechanism-no-impact-on-sdr-push">should the renminbi be included in the future</a>.</p>
<h2>Multiple currencies at play</h2>
<p>Whether or not the Chinese government is reversing its policy and trying to boost exports, <a href="http://www.reuters.com/article/2015/08/12/us-china-yuan-pressure-insight-idUSKCN0QH0W420150812">as some have claimed</a>, is hard to say. It is important to see the devaluation in the context of how the currencies of China’s competitors have been performing.</p>
<p>The yuan is strongly tied to the dollar because China manages the exchange rate within a range against the dollar. Thus, the rise of the US dollar against other currencies <a href="http://www.wsj.com/articles/yuan-rises-against-u-s-dollar-with-beijings-help-1426823620">over the past year</a> (pulling almost even with the euro), means the yuan has also risen against its trading partners’ currencies thus raising the relative price of Chinese exports worldwide.</p>
<p>Meanwhile, the Japanese yen has been falling in value, as a result of Bank of Japan market intervention. It hit a 13-year low in June this year, losing 16% of its value <a href="http://in.reuters.com/article/2015/06/09/markets-asia-currencies-idINKBN0OP2F920150609">since the last quarter of 2014</a>. So, arguably China is responding to this competition. </p>
<p>In <a href="http://www.ft.com/cms/s/0/7c3f4d42-c86a-11e4-8fe2-00144feab7de.html#axzz3ib1wdk00">South Korea</a>, <a href="http://www.themalaymailonline.com/money/article/ringgit-falls-to-six-year-low-as-rate-cut-speculation-boosts-volatility">Malaysia</a>, <a href="http://www.bloomberg.com/news/articles/2015-02-17/bank-indonesia-unexpectedly-cuts-interest-rate-to-bolster-growth">Indonesia</a> and <a href="http://www.wsj.com/articles/thailand-cuts-interest-rate-in-surprise-move-1430293133">Thailand</a> – China’s competitors – central banks have initiated interest rate cuts due to gradual slides against the US dollar. This has allowed a slow depreciation of their currencies, making their exports more attractive.</p>
<p>Ultimately, China wants a stronger currency and to move toward a domestic demand-driven economy. In the meantime, however, the determination to stay on course for 7% growth this year and need to compete with its neighbours means we have the makings of a currency battle on our hands.</p><img src="https://counter.theconversation.com/content/46034/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nafis Alam does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Why the Chinese yuan took its biggest one-day loss in two decades.Nafis Alam, Associate Professor of Finance, Director- Centre for Islamic Business and Finance Research (CIBFR), University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/363812015-01-19T06:40:47Z2015-01-19T06:40:47ZDid Swiss bank’s franc surprise signal start of a currency war?<p><a href="http://www.institutionalinvestor.com/blogarticle/3417869/blog/currency-wars-and-other-lessons-of-the-shock-swiss-rate-move.html">Currency wars</a> have been predicted for years. Outright monetary battles were last seen during the Great Depression of the 1930s, when governments competed to devalue their currencies to gain market advantage. But since the return to floating exchange rates in the 1970s, the risk of renewed competitive manipulation has hovered over the monetary system like a dark cloud.</p>
<p>The only question, it seemed, was: who would be the main culprit? Would it be the United States, pushing around exchange rates through the machinations of the Federal Reserve? Would it be Japan, hoping to reverse years of stagnation by engineering a depreciation of the yen? Or might it be the eurozone, seeking an escape from its problems?</p>
<p>Who would have guessed that, remarkably, it might turn out to be none other than Switzerland – perhaps the stodgiest monetary power on the face of the earth? The Swiss franc has long been regarded as one of the world’s most dependable currencies, prized by investors as a stable and secure haven for their wealth. Yet a few days ago, <a href="http://www.ft.com/intl/cms/s/0/75138b30-9cb1-11e4-971b-00144feabdc0.html#axzz3PCE8ZlkG">with one bold stroke</a>, the Swiss National Bank succeeded in severely destabilizing financial markets around the world.</p>
<h2>Franc becomes a haven</h2>
<p>The act itself was deceptively simple. Since 2011, the Swiss franc had been firmly pegged to the euro at a cap of 1.20 francs. Prior to that it floated freely, and 1 euro equaled as much as 1.68 francs back in 2007 before the financial crisis increased its value as a haven. </p>
<p>To ensure the franc didn’t trade below the cap, the Swiss National Bank spent enormous sums selling francs and buying up euros and other currencies to keep the franc from increasing in value. In other words, when traders and investors were buying francs, driving up their value, the central bank was selling them in similar quantities to keep the currency stable. </p>
<p>Then, last Thursday, the peg was removed, allowing the franc to move freely. Henceforth, the Swiss National Bank would refrain from buying up euros, dollars or anything else to keep the franc from appreciating. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/69317/original/image-20150118-5206-5gqcar.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/69317/original/image-20150118-5206-5gqcar.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/69317/original/image-20150118-5206-5gqcar.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/69317/original/image-20150118-5206-5gqcar.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/69317/original/image-20150118-5206-5gqcar.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/69317/original/image-20150118-5206-5gqcar.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/69317/original/image-20150118-5206-5gqcar.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/69317/original/image-20150118-5206-5gqcar.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">That ski trip to the Swiss Alps just got more expensive.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Repercussions abound</h2>
<p>Repercussions, however, were anything but simple. Almost immediately, the franc soared by as much as 30% before settling down at around parity to the euro – that is 1 to 1 – causing massive dislocations for investors and financial institutions around the globe. <a href="http://www.bloomberg.com/news/2015-01-16/barclays-said-to-lose-millions-of-dollars-amid-snb-surprise-move.html">Particularly hard hit</a> were banks such as Germany’s Deutsche Bank and Britain’s Barclays PLC, both of which had invested heavily in securities directly tied to the Swiss exchange rate. Eastern Europeans, who had borrowed heavily in francs to take advantage of low interest rates, now <a href="http://www.businessweek.com/news/2015-01-15/polish-banks-zloty-slump-as-swiss-franc-mortgages-get-expensive">suddenly faced more onerous debt-service burdens</a>. Currency traders everywhere suffered losses. Ripples from the shock spread widely.</p>
<p>Nor were the Swiss themselves spared. The currency’s abrupt rise immediately translated into higher prices for Swiss output in world markets, damaging sales prospects. “Words fail me,” <a href="http://www.bloomberg.com/news/2015-01-15/swiss-exporters-face-tsunami-after-snb-unexpectedly-drops-cap.html">said the chief of the Swatch Group</a>, one of the country’s biggest exporters. It “is a tsunami: for the export industry and for tourism, and finally for the entire country.” Swiss stocks fell like a stone.</p>
<h2>An increasing burden</h2>
<p>So why did Switzerland do it? The peg was originally intended to counter large-scale inflows of capital fleeing the crisis-ridden euro zone and other trouble spots. The National Bank pledged to provide all the francs needed to satisfy foreign demand. The currency would not be allowed to become more expensive.</p>
<p>Over time, however, cost of the peg became increasingly burdensome. Sales of newly created francs greatly expanded the bank’s balance sheet, threatening domestic inflation. Since 2011, the <a href="http://www.businessinsider.com.au/swiss-national-bank-loses-60-billion-francs-2015-1">monetary base</a> (commercial bank reserves held at the central bank plus the currency in circulation) has quintupled, and in recent months inflows had actually accelerated. Notably, much was coming from wealthy Russians eager to get rid of their <a href="https://theconversation.com/vladimir-putin-and-russias-incredible-shrinking-ruble-35638">incredible shrinking rubles</a>.</p>
<p>The final straw appears to have been the prospect the European Central Bank launching a program of buying billions of euros worth of government bonds in an effort to lower interest rates and boost inflation, which could begin within days. The ECB’s program, known as quantitative easing, essentially amounts to printing new money, increasing how much is in circulation.</p>
<p>Evidently the <a href="http://www.forbes.com/sites/raoulruparel/2015/01/16/what-does-the-swiss-national-bank-know-that-no-one-else-does/">Swiss authorities feared</a> that much of this newly created eurozone cash would slosh across their borders, adding to inflationary pressures. Letting the exchange rate go seemed the safer option. </p>
<h2>Grave consequences</h2>
<p>Longer-term consequences, though, could be grave. Most obviously, many in Switzerland will suffer from the currency’s rise – everyone from the makers of cuckoo clocks to the employees of ski resorts. Worse, the reputation of the Swiss National Bank could be damaged, perhaps irreparably.</p>
<p>In reality, the bank had little choice. The tide of incoming capital was swelling, and with asset returns at all-time lows, there was little room for further interest-rate reductions to curb foreign appetite for the franc. Switzerland was caught in the classic dilemma that theorists call the Unholy Trinity – the mutual incompatibility of monetary policy autonomy, currency stability and capital mobility. Unable to directly restrict financial inflows, the bank chose to sacrifice exchange-rate stability for the sake of restoring domestic monetary control. The decision was not unreasonable.</p>
<p>But the way the Swiss went about their decision has upset many. The bank acted entirely on its own, without <a href="http://www.businessinsider.com/christine-lagarde-swiss-national-bank-decision-2015-1">any consultations with monetary authorities</a> elsewhere. “I find it a bit surprising that [the Swiss] did not contact me,” said Christine Lagarde, managing director the International Monetary Fund, in a classic diplomatic understatement. In fact, many central bankers were incensed by Switzerland’s unexpected unilateralism. The bank had always been regarded as a prudent and reliable member of the central bank fraternity. Could the Swiss still be trusted?</p>
<p>More broadly, would anyone now trust any central bank? If the stodgy old Swiss could behave with such abandon, who might not be similarly tempted? Central bankers traditionally pride themselves on their sense of community, communicating often to share views and signal intentions. But now some might feel that they too have the right to act unilaterally in what they regard, rightly or wrongly, as their legitimate self-interest. If so, a currency war could indeed erupt, as long predicted.</p><img src="https://counter.theconversation.com/content/36381/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Benjamin J. Cohen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Currency wars have been predicted for years. Outright monetary battles were last seen during the Great Depression of the 1930s, when governments competed to devalue their currencies to gain market advantage…Benjamin J. Cohen, Professor of International Political Economy, University of California, Santa BarbaraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/226602014-02-03T14:34:11Z2014-02-03T14:34:11ZMINTs are fresher than BRICS, but don’t expect massive growth<figure><img src="https://images.theconversation.com/files/40489/original/kk2jytpg-1391435259.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Could Jakarta be the new Shanghai?</span> <span class="attribution"><span class="source">owiboy</span></span></figcaption></figure><p>The global financial crisis has morphed into its latest form: an <a href="http://qz.com/170776/a-global-tour-of-the-emerging-markets-currency-crunch/">emerging markets currency crisis</a>. Investors are fleeing developing and middle-income countries – even those with strong long-term growth prospects – for <a href="http://www.theguardian.com/business/2014/jan/29/emerging-markets-crisis-rush-for-save-havens">the safety of developed economies</a>. What capital remains must search harder than ever for excellent returns.</p>
<p>Over the past decade the BRICS countries (Brazil, Russia, India, China and South Africa) have dominated emerging market investments, but their <a href="http://blogs.ft.com/beyond-brics/2013/10/08/imf-crunching-the-brics-slowdown/">growth is slowing</a>. Investors have now turned their eyes to another group, the MINTs (Mexico, Indonesia, Nigeria and Turkey). The BRICS have achieved double-digit growth rates in recent years, and investors are wondering if this will be possible in the MINTs too. The opportunities presented by the MINTs are clear, but so are the challenges. </p>
<p>So, what unites the MINTs? The key thing they all share is favourable demographics. Their populations are large and youthful, with a strong ratio of people eligible to work relative to those not working. This last point is something two ageing BRICs, China and Russia, can envy. </p>
<p>The MINTs should also benefit from their geographical positions. Mexico borders the US and links it to the rest of Latin America, Indonesia is in the heart of South-East Asia, Nigeria is close to some thriving African countries, while Turkey spans Europe, Central Asia and the Middle East. As global trade patterns develop, the MINTs are well placed to take advantage.</p>
<p>At this stage of their economic development the MINTs are generally harnessing their large populations to pursue export-led growth, following in the footsteps of the Asian tiger economies of the 1970s and 80s. As Chinese exports become more expensive due to rising wages, an appreciating currency and an economy increasingly geared towards domestic consumption, we’ll increasingly find our goods manufactured in a MINT.</p>
<p>But increasing the labour force is not enough to automatically achieve high rates of economic growth. The countries need steady flows of capital, both domestic and foreign. </p>
<p>However, capital – that is, investors’ money and expertise – is especially sensitive to political factors such as strong institutions and the rule of law. No one wants to see their investment seized in a coup, or lose its value due to sudden legal changes. In fact, following the global financial crisis, countries who had good legal institutions <a href="http://ideas.repec.org/p/ecb/ecbwps/20111364.html">retained more of their foreign investment</a>.</p>
<p>Given this sensitivity, the serious issues with corruption and the rule of law in the MINTs represent a particular challenge. The four countries are characterised by low scores in the <a href="http://cpi.transparency.org/cpi2013/">Corruption Perceptions Index</a> published annually by Transparency International on how corrupt each country’s public sector is. Out of 177 countries, Nigeria ranks 144th, Indonesia 114th, Mexico 106th and Turkey 53rd. Doing business in those countries, especially in Mexico and Nigeria, is a challenge. </p>
<p>The MINTs face other barriers: poor levels of education, especially in Indonesia and Nigeria; poor infrastructure – again more so in the case of Nigeria, where energy supply is clearly affecting productivity and growth; and a general resistance to reform, especially in the labour market.</p>
<p>One of the big questions facing the MINTs right now is over their ability to withstand to financial crises. The recent slide in emerging market currencies has raised fears that we might see a repeat of the Asian financial crisis on 1997, when many of the “Asian tigers” ran into massive problems.</p>
<p>The MINTs are more vulnerable to currency crises as they do not at the moment share the depth of the financial system of the BRICS economies, or the experience of their monetary authorities to help them manage their economies out of a currency crisis. </p>
<p>Take China. The financial system there faces mounting difficulties but the government has the capacity to bail it out and restore international confidence. Similarly India has its problems, but its central bank is giving the impression that it has control of the economic situation. </p>
<p>Turkey, on the other hand is currently experiencing 7% inflation, a huge current account deficit, a sliding currency and shrinking savings, investment and exports. The monetary authorities cannot do anything about it. </p>
<p>The Turkish experience is typical across the MINT economies, who have yet to truly develop major financial systems. Worries over financial resilience will definitely be on the minds of investors when balancing the growth prospects of these countries against their vulnerabilities.</p>
<p>Yet despite the gloom there is no doubt that the MINT economies are fresher than the BRICS. There is an enthusiasm and dynamism, which I certainly felt myself on a recent visit to Turkey.</p>
<p>But stable double digit economic growth? Don’t count on it just yet. </p><img src="https://counter.theconversation.com/content/22660/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kate Phylaktis received funding from the Economic and Social Research Council (ESRC) to fund a series of networking events on Emerging Markets Finance. The grant ended last year.</span></em></p>The global financial crisis has morphed into its latest form: an emerging markets currency crisis. Investors are fleeing developing and middle-income countries – even those with strong long-term growth…Kate Phylaktis, Director, Emerging Markets Group, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.