The Yekaterinburg BRICs and a closer look at their global reach

Today, Russia is hosting a summit of the BRICs, the emerging markets that seem to have only one thing in common, namely to have been lumped together by Goldman Sachs in 2001. The countries will discuss the global financial architecture and  their role in it. There’s lots of talk about them in the media. Let me pick up on two articles published in  Business New Europe today (subscription required), of which some abstracts below.

A first article reports on a map that was just developed of the actual global integration (investment, trade and migration) of the BRICs with the rest of the world:

“Consulting company Maplecroft has just produced the Emerging Powers Integration Index (EPII), which tries to go beyond the usual comparisons of GDP growth or trade and assesses just how dependant the rest of the world already is on the BRICs.

Will hot money matters have an effect on long-term money?

Let’s not dwell on hot money flows and on the raging politics of bailout packages and bank nationalisations. Let’s look at those cross border long-term investments called Foreign Direct Investment (FDI). These are often less controversial in the debate over globalization because they have a long-term horizon and hands-on feel to them: it’s about taking stakes in actual factories or services companies, about building a plant, and creating jobs. Of course it’s also about investing in resource extraction in mining or hydrocarbons, here a much more politically charged business. But how is the current financial crisis affecting FDI?

On current protectionism and related abuse of tax-payer’s money, economic self-defaitism, and blaming easy targets (hard-working migrants)

Late December/early January, when my employers were issuing warnings on the threats of protectionism in the current crisis, I was wondering how much of a threat all this really is, since we hadn’t heard that much protectionist noises, at least not worse ones than in pre-crisis months. But suddenly a loud protectionist cacophonia is indeed starting to be heard.

The kind of protectionism discussed in this post has been looming in the last  years, but the crisis might well accelerate the trend

More Keynes in China rather than in the US?

On the historical day of Obama’s inauguration as the first African-American and most rhetorically talented US president, the United States braces itself for a one trillion US$ stimulus package and years of excessive government debt, in the name of a Keynesian policy approach to stimulate demand. In this context, the analysis of Finance Professor Michael Pettis comes in very handy. Pettis, who runs a brilliant blog on Chinese finance, is based in Beijing and has written extensively on the global imbalances that have now started destabilizing the world economy. Among others he analyzed the “chimeric” global macroeconomic imbalance based on an excessive current-account surplus supporting China’s export-oriented economy vs. an excessive deficit fuelling the US’s recent consumption and private borrowing binge. In an article in the Financial Times back in December, he warns:

Financial crisis: ah, someone hasn’t completely lost sight of the “core problem”

In the midst of announcements of billions of US$ of bailout money across the globe in late 2008 – some of which destined to coddled uncompetitive sectors such as certain car industries that should restructure rather than be allowed to stagnate and therefore retard economic recovery – I had published a small post highlighting what my utterly modest little blogger self tends to believe is at the heart of the recovery. Current countercyclical spending binges to keep consumption going will not be effective if the heart of the matter is not properly addressed, i.e., get the banking sector back on track, not least by getting rid of the bad bank assets that mire its balance sheets. That was the initial idea of US Treasury’s Hank Paulson’s “TARP” $700bn programme, that was ultimately derailed. The cash pot this fund represents is being coveted by various sectors and constituencies that want money injections, paving the road to all sorts of ugly pork-barrel politics. But Ben Bernanke, head of the US’ Fed just “called for fresh efforts to clean up the US banking sector”, so the FT. The paper further reports:

“Raising the possibility that the Obama Treasury might “decide to supplement injections of capital by removing troubled assets from institutions’ balance sheets”, [Ben Bernanke] highlighted three options.

One would be for public purchases of troubled assets (highlighted by me)– the model Mr Paulson proposed. A second would be for the government to provide asset guarantees in return for warrants – used with the Citigroup rescue.

The third would be to “set up and capitalise so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank”.

Sample of a video-audio week-end: US facing its crisis, Russian affairs, Pascal Lamy.

This blog is written by a nerd-of-sorts who hardly ever watches online videos, is still not quite familiar with YouTube, and loves one means of transmitting information above all others:  the written word. This week-end, however, I’ve decided to prioritize listening and watching. A small sample of my audio-video tour:

Aftermath of the Georgia war by Amnesty International: here. (thanks to James over at the Robert Amsterdam blog).

The US debating how to deal with Russia – CNN interview hosted by Fareed Zakaria (thanks again to the Robert Amsterdam  blog…)

Howard Rosen from The Peterson Institute in Washington on how to adapt US unemployment benefit schemes to the reality of today’s workforce. Here. To back up this interview with some written text, I do recommend to read Rosen’s latest Policy Brief on the matter.

The US is handling crisis anxiety. Obama unveiled his big plans yesterday. Here. Some more details and background (in written form…;-)) here.

And, for French speakers: Pascal Lamy, the Secretary-General of the WTO, hosting some diplomatic meetings this week-end in Geneva on a potential, highly hypothetical conclusion of a Doha Round deal, spoke to French radio (France Culture) yesterday morning. One of the questions debated was whether global finace could be regulated following a governance model similar to the WTO (oh my….! do we need a financial dispute settlement body?). No answer of course, but a few interesting thoughts tailored to a French audience on the difference between opening markets and regulating markets.

Financial crisis. Losing sight of the core problem?

During my obligatory daily leafing through the Financial Times today I was struck by one little article squeezed in between headline news on the enormous amounts of money the Chinese want to inject into their economy, the subsidies US carmakers could receive – a few weeks after a the German and French governments announced they would help their car producers -, the big schemes the G20 is lost in planning, the chorus of commentators calling for fiscal stimuli and the like. This short article was entitled

Into the maelstrom – Emerging markets in the financial turmoil

It’s very hard to keep up with the current financial crisis… The speed of the spread is dazzling. Banks, governments, companies, currencies, commodities, people’s savings, all dragged into the whirlwind. So, the financial crisis is now hitting emerging markets. Eastern Europe is badly hurt, not least because its financial sector is owned by Western European banks. Hungary had to reach out to the European Central Bank and to the International Monetary Fund. The IMF is generally back in fashion, even for the the unlikely likes of Paul Krugman and Dani Rodrik. But the amounts available in its coffers are dwarfed by the sovereign reserves by key emerging markets. The IMF is for example probably getting a helping hand from Saudi Arabia….  China’s rulers are getting very nervous because their country’s economy is slowing down to “only” 8% GDP growth this year. Russia is said to be likely to weather the crisis, thanks to its accumulated reserves, but it is going to have rough times ahead. Some are even outright alarmist. As regards emerging markets, whoever has time to go through the IMF’svery good World Economic Report will have a sober analysis of the fundamentals in the situation. Same for the Global Financial Stability Report (I haven’t had time for all chapters…!).

For those who want something shorter I recommend a recent testimony before the US Congress by Simon Johnson, former IMF Chief Economist, now at MIT and at the Peterson Institute in Washington. The piece not only summarizes and explains many of the recent events, it also proposes policy solutions for the US (a strong stimulus package). More interestingly in this context: he shares a few views on what is going to happen to the world’s emerging markets.

Who’s being hit?:

The end of “Chimerica”

The quantity of ink and html-text produced on the current financial crisis is too phenomenal to be mastered.

However, what one gathers, very roughly, is this: 

Financial crisis. When in doubt…

always ask… Martin Wolf! 😉

Today is Wednesday, Wolf FT column day. In the midst of the financial crisis, always a good read. In the current panic sweeping the world, much is being written, but knowing who’s right and wrong will need some time.

Martin Wolf says Europe needs systematic time-limited savings guarantees and serious recapitalization of our banks. Whether one agrees or not, it is however hard for me to disagree with this:

“The fear driving today’s breakdown in financial markets is as exaggerated as the greed that drove the opposite behaviour a little while ago”.