Yilmaz Akyuz is the chief economist of the South Centre, based in Geneva. A longer version of this article was originally published in the Real News network (there
GENEVA, April 26, 2016 (IPS) – The U.S. was the cause of the crisis but has come out better than anyone else in the advanced world and better than many developing countries. During the crisis there was a widespread perception that this was the end of U.S. hegemony. It was end of the dollar as the major reserve currency.
When we look back now, we see that the U.S. is strengthened a lot more as a result of this crisis. Not only vis-à-vis other developed countries –“ Europe, European Union or Japan – but developing countries including China, in economic terms. The status of the dollar as a reserve currency today is unchallenged because of the crisis in Europe.
The U.S. economy is also fragile. Usually economic expansions are often followed by contractions. This is part of the capitalist system working in boom bust cycles. The U.S. has had 24 quarters of expansion since the beginning of the crisis. And a lot of people think simply on this observation that after such expansion U.S. recovery or growth is supposed to come to an end on historical evidence.
But apart from that? It is very difficult to get out of the policies that U.S. introduced in response to the crisis. It does not know how to get out of the policy of easy money. It is very hesitant in raising interest rates. But on the other hand if there is a slowdown in the U.S. and a contraction and renewed instability they do not have any ammunition to respond to it, because they used all their ammunition to respond to the last crisis and they are still using the same except in bond purchases.
We have not had a serious debt crisis in an emerging economy in the past 10 – 12 years. However, the risks are very serious now. The world is caught in a debt trap today. Why? Because the resolution of the European and American crisis — which was a debt crisis — required cutting debt. But what we have seen is that the policies implemented to resolve that crisis have given rise to the accumulation of additional debt.
In the U.S., the ratio of public plus private debt to gross domestic product (GDP) increased from 200 percent to 280 percent. In Japan it increased to 500 percent; in the Eurozone and China it doubled. And in developing countries today it is close to 200 percent of GDP.
The current situation has an uncanny similarity to the 1970s and 1980s. Developing countries had a boom in commodity markets in the 70s which was accompanied by massive international lending by banks recycling petrodollars [oil surpluses]. And this twin-boom in commodities and capital flows to developing countries in the 70s ended up with a bust when the US raised interest rates in 1979 and 1980. And what we had was a debt crisis in Latin America. And the situation now is somewhat similar. We had a twin boom in commodity prices and capital flows and now we have come to the end of this boom even without the US changing its monetary policy in a big way. And the question is will the outcome be the same as in the 1970s?
We are highly vulnerable to the reversal of commodity prices and capital flows. The vulnerability to commodity prices nevertheless varies among developing countries because different types of commodities fell at different rates. Some developing countries benefit from commodity price declines but no developing country would benefit from tightening of the external financial situation. Now we cannot count on reserves. Traditionally we look at the reserve adequacy in terms of their volume relative to short-term external debt, but now there is a strong presence of foreigners in domestic bond, equity and deposit markets and their exit can cause significant turmoil.
Monetary policy now faces a major dilemma. In order to stimulate demand and growth we have to cut interest rates. A cut in interest rates can trigger capital outflows. So there is a dilemma between growth and stability. If we face a liquidity crisis we no longer have enough reserves to meet our imports and stay current on our debt payments and keep the capital account open — what do we do? Business as usual? Borrow from the IMF? Keep the capital account open? Continue allowing capital to run out, using reserves and the borrowing from the IMF and practicing austerity?
Now I think there is a strong misgiving vis-à-vis the IMF among the developing countries. And I am sure they will do their best to avoid going to the IMF in the event of a serious liquidity crisis. I am not referring to a solvency crisis, default — I am talking about simple liquidity crisis when you do not have enough foreign exchange to meet your current account needs and debt payments. Then what do you do?
Of course, the unorthodox response is to use reserves to support one’s economy, imports, not to support capital outflows. Are we prepared to impose controls over capital outflows? Are we prepared to impose temporary debt standstills? Or, are we prepared to impose austerity on creditors and investors rather than austerity on the people? These are the critical issues.
In conclusion, even if we avoid a fully-fledged financial crisis, the prospects are for sluggish, erratic growth and heightened instability in the global economy. Why? Because of financial excesses we have had in the past eight–nine years. And one cannot easily restructure balance sheets; that is the problem. We need to have a better policy mix than we have been using.
A few suggestions. First, stop relying on easy money which is not good except for speculation in advanced economies, abandon fiscal orthodoxy, invest in infrastructure and create jobs and create demand. Secondly, we need better control over international capital flows not only by recipient countries but also by source countries. Because they are most destabilizing. They are at the heart of the current difficulties that we face. Third, we need a mechanism for adequate provision of international liquidity and finally we need effective and equitable debt resolution mechanisms.
Now these issues should be studied and debated extensively, particularly at the current juncture. But unfortunately Bretton Woods institutions are not the best place to do that; neither to consider the fragilities, nor to resolve the problems. The IMF has missed one of the most serious crises in the world since the second world war, the subprime crisis. The IMF at the Secretariat level is not very efficient in providing early warnings to countries about the global economic situation. And this is not just a technical expertise issue; it is also a political issue. Because such an early warning – an effective projection of the difficulties in the world requires a critical examination of the policies of countries which exert significant impact on the world economy. It would require criticizing U.S. and European economic policy. The IMF Secretariat cannot do that. In 20018 and 2009 when we were writing that the rise of the South was a myth, the IMF was promoting that the South was becoming a locomotive for the world economy. And they changed their mind only in 2013.
Secondly the IMF is not very bold in innovation. They are not bold in the reform of the international financial architecture. Why? Because the IMF is part of that architecture and that requires to reform that very same institution…So I believe that these matters should be discussed and debated among developing countries and in other fora such as the United Nations Conference on Trade and Development (UNCTAD), which has a much better record in anticipating these difficulties and providing proposals, which eventually became part of the mainstream.