Category: Finance

Market Forecasting: A Sensitive Practice at the Heart of Neoliberal Capitalism

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This article was originally posted on .

Since the emergence of modern financial markets, financial analysts have played a critical role in producing visions of 鈥渢he economy鈥� and its future development. As experts, they analyze market developments and predict future scenarios that enable other financial market participants to speculate on the rise or fall of stock prices, the success or failure of particular investment products, and the growth or decline of entire national economies.聽The substance of the analysts鈥� valuation and forecasting practices is, however, heavily disputed among economists. In neoclassical economic theory, the assumption that markets are informationally efficient has challenged the legitimacy of the work of financial analysts since the establishment of the efficient market hypothesis as a central paradigm in the mid 1960s. Alternative schools of thoughts 鈥� such as new institutional or behavioral economics 鈥� have criticized this paradigm. However, they have also argued that the degree of uncertainty, which is inherent to financial markets, makes prediction impossible.Read More »

How We Learned Not to Say No to Gold… In International Reserves

Aleksandr V. GevorkyanLeave a comment

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By Aleksandr V. Gevorkyan (St. John鈥檚 University) and Tarron Khemraj (New College of Florida)

In May 2016, economist Kenneth Rogoff that central banks in emerging markets should add gold to their reserves. Rogoff stated 鈥渢hat a shift in emerging markets toward accumulating gold would help the international financial system function more smoothly and benefit everyone.鈥� Despite initial disagreement, we find there may actually be some justification for this view in a recent .Read More »

From Addis to Davos: International Development Finance gets Conspicuous

Rose WordenLeave a comment

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The theme of the 2018 World Economic Forum was, 鈥淐reating a Shared Future in a Fractured World.鈥� Its six richest attendees each boasted an estimated net worth of, or the same amount as the total burden of Somalia鈥檚 outstanding debt, which, amid the splendor of the event, Somali Prime Minister Hassan Ali Khayre to discuss . In this era of extreme global inequality, it is estimated that the United Nations agenda of seventeen sustainable development goals (SDGs) known as, will require of investment per year to be realized, or more than twice the amount expected to be available from traditional official development assistance (ODA) alone. Due to the increasing concentration of private wealth in the global economy, discussions around development finance have focused on private sector engagement, rather than more traditional, ODA from predominantly Western donor governments and multilateral institutions.Read More »

Thinking politically about capital controls: a class perspective

Ilias ALAMILeave a comment

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The recent global financial crisis sparked renewed debates, both within academia and policy-making circles, about regulating highly mobile cross-border money-capital flows. A particular type of policy tool has received considerable attention: capital controls (CC). Within mainstream economics and policy-oriented circles (including policy-makers in central banks, finance ministries, and international organisations such as the IMF and the G20) there has been a growing recognition that unregulated cross-border money-capital flows can considerably disrupt capital accumulation, and debates have accordingly focused on the potential role and effectiveness of temporary CC in limiting the destabilising potential of those flows, while maintaining a long-term commitment to an open capital-account and free capital mobility.[1] By contrast, the Left (including organised labour, progressive economists, and civil society organisations) has been largely critical of capital-account liberalisation, and has denounced its detrimental effects in terms of constraining policy options for development and long-term industrial development.[2]Read More »

A Soft Law Mechanism for Sovereign Debt Restructuring

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By Martin Guzman and Joseph E. Stiglitz

The ultimate goal of sovereign debt restructuring is to restore the sustainability of public debt with high probability[1]. But this is not happening. Since 1970, more than half of the restructuring episodes with private creditors were followed by another restructuring or default within five years[2] 鈥� evidence inconsistent with any sensible definition of 鈥渞estoration of sustainability of public debt with a high probability.鈥� This evidence suggests that relief for distressed debtors is often insufficient for achieving the main goal of a restructuring, delaying the recovery from recessions or depressions, with large negative social consequences.[3]

The lack of a statutory regime for dealing with distressed sovereign debt makes sovereign debt crises resolution a complex process 鈥� marked by inefficiencies and inequities that take multiple forms[4]. The current non-system is characterized by bargaining based on decentralized and non-binding market-based instruments centered on collective action clauses and competing codes of conduct. The IMF often plays the role of the facilitator in this process of bargaining between a distressed debtor and its creditors.[5] But it has not always been successful in ensuring that restructuring needs are addressed in a timely way 鈥� indeed, it has often failed; and as we have already noted, even when restructuring processes have ultimately been carried out, they have often not been deep enough.[6]Read More »

Emerging Market Downgrades: Panic at the Disco?

ilanstraussLeave a comment

When it rains, it pours. For emerging markets, the downpour has come in the form of credit rating downgrades by the big three global ratings companies. Fitch, Moody鈥檚, and S&P took a record聽聽negative rating actions on emerging market sovereign and government-related entities in 2016. Emerging economies are right to be concerned. With a 鈥榞ood鈥� credit rating (AAA), a sovereign state can borrow at very low rates of interest from investors. A poor rating could force states to pay significantly higher borrowing costs. Rating downgrades could have negative ripple effects throughout the affected economies, raising the cost of borrowing for banks and firms, and, in turn, consumers.

Infrastructure projects, business ideas, and consumer credit extensions, become unprofitable due to the higher cost of credit to banks, businesses, consumers, and governments. If a country is downgraded to 鈥榡unk status鈥� (more formally known as 鈥榥on-investment-grade鈥� or 鈥榮peculative-grade鈥�), it risks the mass exodus of investors from its bond markets. As the cost of borrowing for governments increases, this can lead to a dangerous downward spiral as borrowing and spending dries up business and consumer activity declines.

Getting back on course
So what is the best set of policies for emerging markets to recover their credit ratings? On one side are economists who argue for 鈥榓usterity鈥�. In their view, recovering from a ratings downgrade requires sharp reductions in state spending, even if this results in poor conditions in the short term. The benefits are twofold: It can reduce inflation and prices, thereby helping restore a country鈥檚 price competitiveness in international markets; and it can enhance the credibility of a government when it comes to containing profligate spending.

Former British Prime Minister David Cameron called this philosophy 鈥樷��. The problem is that there is not much evidence to聽聽this idea. The EU enforced austerity among its member states in response to the 2007 financial crisis, until it helped propel a 鈥樷�� recession in 2011/12. Following this largely unsuccessful adventure with austerity, the EU turned towards more pro-growth policies, which supported expansions in infrastructure and fixed-capital investment, with notable success.Read More »

Caveat emptor: the Graduation Approach, electronic payments and the potential pitfalls of financial inclusion

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By Paulo L dos Santos and Ingrid Harvold Kvangraven

The Graduation Approach to poverty reduction is inextricably bound up with programmes promoting financial inclusion. Proponents for the approach see it guiding a series of interventions that encourage poor households to 鈥榞raduate鈥� into 鈥榤ainstream development programmes鈥� which are centred on the provision of credit and other financial services (). Indeed, the approach has been presented as a way to address the needs of those 鈥渢oo poor for microfinance services鈥� (). The presumption is that the development and poverty reduction needs of 鈥榞raduates鈥� will be well served by financial inclusion initiatives.Read More »

The Financialization of Africa鈥檚 Development

Richard Itaman4 Comments

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Financial development has gained prominence in Africa. Only with slight reservation around the regulatory environment, most country and regional studies of financial development paint a strikingly positive picture of its impact on growth, poverty and inequality. [i] This optimism with finance in Africa is corroborated with increase in financial flows, expansion of commercial bank branches, growth of regional banks, rise in microcredit institutions and success of mobile payment systems. [ii] However, poverty and inequality remain persistently high. There are more poor people in Africa today than in 1990, and 7 of the 10 most unequal countries in the world are in Africa. [iii] Hardly has any progress been made in addressing a most obstinate infrastructure gap unsettling the continent. In addition, Africa鈥檚 most recent average growth of 1.5 per cent is at its lowest in two decades. As such, the underscored belief in financial development as a driver of progress is exaggerated, since it seems to disregard the immediate needs of the people on the continent.

For these reasons, a growing body of literature now demonstrates wariness with the financial development narrative. An aspect of this literature reveals that the success story of microfinance in Africa is not quite what the proponents claim it to be. There is evidence of how the poor were plunged into a crisis of over-indebtedness in South Africa, through microfinance lending. By 2012, the country鈥檚 debt amounted to a staggering 75 per cent of disposable income. [iv] This experience contradicts the proposed poverty alleviating effects of microfinance. Like other forms of finance, its dominant motivation has been found to be profit seeking rather than poverty alleviation. Similar caution has been expressed about the celebrated rise of electronic payment systems,[v] prominent in Kenya, Nigeria and Uganda. Yet, more than just caution is needed to ensure that the proliferation of finance does not continue to wield detrimental effects on economic development in African countries.Read More »