Aurelia Butler

The writer is Elihu professor of economics at Yale University, former chief economist of the World Bank and author of ‘The Unequal Effects of Globalization’Economic policy today seeks to address a dizzying array of challenges — to stem inflation, shore up supply chains, and create jobs while also spurring innovation, fighting climate change, bolstering national security, and preparing for a range of future crises and shocks.In the US, the emerging toolbox for tackling these diverse issues centres on “industrial policy”, with two key components. The first is public investment to help make the economy greener and more inclusive. The second is a revival of a “Buy American” policy which includes funding provisions, as well as trade and immigration policies that favour US companies and workers and reduce the inflow of foreign goods and people across the border.While several countries are already emulating this approach, its effectiveness is uncertain, and it may even make some problems worse, or create new difficulties in the process.Consider our experience with globalisation. For many years, economists disputed the idea that it was contributing to rising inequalities in advanced economies. By now, though, the effects of decades of rapid globalisation are clearer. It drastically reduced inequality between countries and lifted billions of people worldwide out of poverty. Likewise, free trade and increased global manufacturing lowered prices and increased variety for consumers. But within rich countries, globalisation contributed to industrial decline and regional inequality. Soaring profits did not trickle down to workers and consumers as much as expected, resulting in wage stagnation and widening gaps between rich and poor.Proponents of the emerging US industrial policy argue that both public investment and Buy American will help mitigate these harmful effects and empower the US worker. Unfortunately, they are only half right.Public investment is definitely worth trying. Of course, careful design and a healthy dose of caution are needed. But it is worth the effort simply because past attempts to correct globalisation’s adverse effects have failed. The most notable — Trade Adjustment Assistance for US workers affected by offshoring — has had disappointing results and was eventually scrapped. Moreover, people want more than just income assistance; they care about good jobs, with dignity and career progression. The obvious issue with industry-focused public investment is its unpredictability. Sometimes it succeeds — see Airbus, for example, or Korean and Taiwanese support for semiconductors. But sometimes it fails, as was the case with China’s Great Leap Forward under Mao Zedong. The learning curves can be long and steep. But in addition to helping reduce inequality, the potential benefits certainly outweigh the risks.Targeting the US high-tech and renewables sectors, for instance, has a good shot at spurring innovation and accelerating decarbonisation. Buy American, on the other hand, is fraught with problems. Closing the country’s borders will not help the US solve its most pressing challenges — and it will jeopardise industrial policy’s laudable goals. To take one example: discouraging cheap imports of solar panels from China, currently the world’s lowest-cost solar producer, will slow down the green transition just as US public investment seeks to accelerate it.And while it might sound patriotic, Buy American will worsen inequality. Trade restrictions and preferential treatment of US companies will increase prices, making inflation harder to control and hurting the poorest Americans most. And without expanding immigration, it is not clear that there are enough workers with the appropriate skills to implement the Biden administration’s ambitious public investment plans.Globally, Buy American inhibits international co-operation precisely when it is most needed. It also curbs economic growth and poverty reduction efforts in low-income countries, slowing or ceasing decades of hard-won progress on global inequality. What is needed, then? For industrial policy to achieve its ambitions, we should embrace public investment that is place-based, carefully targeted and internationally co-ordinated. But Buy American and its equivalents in other countries should be de-emphasised. Rather than using industrial policy as an excuse to close borders, we should focus on maximising the benefits of public investment while minimising its risks.The two ingredients of US industrial policy are at cross purposes. Before becoming a global template, the recipe needs a tweak: carefully sift the first ingredient, but omit the second. More

Russia’s central bank has raised its key interest rate 3.5 percentage points to 12 per cent at an extraordinary meeting, after the rouble fell below Rbs100 to the dollar. The currency strengthened ahead of and immediately after the large rate rise on Tuesday, which exceeded market expectations, before paring some gains to trade at Rbs98 to the dollar. The collapse in the rouble, which fell to Rbs102 against the dollar on Monday, highlights jitters about Russia’s economic prospects almost a year and a half into President Vladimir Putin’s full-scale invasion of Ukraine.The country’s economic policymakers are struggling to balance the competing demands of growing the economy and steering it through western sanctions while keeping the rouble stable.But the central bank said an additional rate increase might be needed “in case of intensifying inflation risks” and in order to stabilise the currency, with many analysts arguing that excess rouble liquidity was the main factor driving up imports and, consequently, price pressures.

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After Russia plunged into recession last year, fuelling the country’s recovery and funding Putin’s war machine have required a borrowing bonanza amid low interest rates that has sped up inflation while weakening the rouble. The central bank said it had decided to “limit risks to price stability” after some inflation indicators rose to more than 7 per cent. But it added that increased pressure on the rouble was driving inflation expectations.“Increased internal demand beyond the possibilities of expanding [monetary] supply strengthens persistent inflationary pressure and affects rouble exchange dynamics by raising demand for imports,” the central bank said.It said further price growth would create a “significant risk” that Russia would not meet its target of reducing inflation to 4 per cent next year, arguing the rate rise would help it meet that target.The central bank, which dropped exchange rate targeting and switched to a free float in 2014, said a decision on whether to lift interest rates further would be based on inflation data and Russia’s success in adapting to western sanctions and other internal and external “risks”.“The decision to raise rates higher than market expectations indicates, in our view, that the tightening cycle will be over quickly,” wrote analysts at Sinara, a Russian investment bank.Sofya Donets, chief Russia economist at Moscow investment bank Renaissance Capital said: “More time will be needed to talk about a sustainable stabilisation and appreciation trend [for the rouble]. The hike is clearly negative for Russia’s growth, but should work well to curb inflation risks.”Russian policymakers have few instruments available to support the rouble slide after western countries froze about $300bn of the country’s foreign currency reserves last year, leaving the central bank unwilling to boost the rouble by selling dollars and euros.Last week, the central bank said it would stop foreign currency purchases until the end of this year to “reduce volatility”.One key reason behind the rouble depreciation is Russia’s shrinking current account surplus, which fell by 85 per cent year on year in the first seven months of 2022. Russia’s loose monetary policy has helped fund ballooning military spending and social programmes such as subsidised mortgages or payouts for soldiers’ families.But while that toolkit has helped stimulate growth, a drop in export revenues under sanctions has widened Russia’s budget deficit and left the country more reliant on imports — factors that drive inflation.Despite July’s rise in oil prices, export revenues remain low, not only because of western price caps but also because exporters do not repatriate a significant portion of their foreign currency earnings. When they do, an unprecedented 40 per cent of Russia’s exports in June were denominated in roubles, adding pressure to the exchange rate.

“Measures to lower excess rouble liquidity are also required,” Denis Popov, chief analyst at Promsvyazbank, a Russian state-owned bank, wrote in a note.The central bank’s decision would not have a substantial impact on the rouble, analysts said.“The rate adjustment mechanism will transmit into the exchange rate with a certain lag and may not become a quick solution for stabilising it,” said Natalia Lavrova, chief economist at BCS Global Markets.Elvira Nabiullina, the central bank governor, who has prioritised economic stability through a hawkish inflation policy during her decade in charge, has faced rare public criticism from statist hardliners as the rouble depreciated.But with the Kremlin reluctant to cut social or military spending, the range of instruments Russia has to stop the rouble’s depreciation are confined to non-market mechanisms such as capital controls. The central bank could turn to more unorthodox measures if it so chose, said Konstantin Sonin, a professor at the University of Chicago.“The arsenal of financial repression is essentially endless. What’s stopping them? The possibility of a black market could appear. In the Soviet Union one could buy dollars to travel abroad or shop in ‘premium’ stores selling goods for dollars, but it was expensive — including the risk of getting arrested.” More

HONG KONG/NEW YORK (Reuters) – Chinese fears of a spillover from missed payments on some shadow banking linked trust products and worsening consumer sentiment are expected to hasten a policy response to revive the country’s cash-starved property sector.Concerns about the outsized exposure of China’s $3 trillion shadow banking sector, roughly the size of Britain’s economy, to property developers and the wider economy, have grown over the past year as the sector lurched from one crisis to another.Zhongrong International Trust Co, which traditionally had sizable real estate exposure, has recently missed repayments on some investment products, fuelling contagion fears.Trust firms operate outside many of the rules governing commercial banks and mainly channel the proceeds of wealth products sold by banks to real estate developers, other sectors, and even some retail investors. Barclays (LON:BARC) said in a note that regulators were likely to step in if the market environment deteriorates significantly, and measures used by China in the past to deal with spiking financial volatility have included liquidity injections.”The risk of a systemic shock to the Chinese financial system is not great, but the downward pressure on the economy will intensify,” said Yan Wang, chief emerging markets and China strategist at Alpine Macro.”These issues are all related, thus the contagion is already happening, and the risk of further spread is material. The government needs to act promptly and aggressively to contain the risk,” he added.Beijing took a step in that direction on Tuesday by cutting key policy rates after a broad array of data highlighted intensifying pressure on the economy, mainly from the property sector. The latest challenge came from the shadows, with two companies saying over the weekend they had not received payment on maturing Zhongrong International Trust investment products.Nomura said a wave of defaults on trust products could cause “substantial ripple effects” for China’s broader economy as losses suffered by individual investors, lured by higher returns, would have an acute impact on consumption.”This is something where the problems are probably not going to be confined to this individual trust but are going to spread to or become more evident in the trust industry as a whole,” said Arthur Kroeber, partner and head of research at Gavekal in New York.”I think they’re within the ability of the government to manage without any sort of dramatic explosion or blow up. But it’s a long, slow-burning problem.”Even as China’s property problems have torn through the economy in the last few years, Beijing has so far managed to contain the impact on the financial industry.’CONTAGION’The trust sector had been a major fundraising channel for property developers seeking rapid expansion. But since 2021, when real estate slipped into a downturn, some of them have gone bust, while others have divested investments in property firms. Beijing has also ramped up efforts since 2017 to reduce the size of the shadow banking sector amid concerns over financial stability. As of end-2022, assets held by trust firms totalled 21 trillion yuan, down about 20% from end-2017.The outstanding value of trust products invested in the property sector was 1.2 trillion yuan as of end-2022, down about 30% year-on-year. Still, exposure to the real estate sector varies from different trust firms.”The real contagion may just be what we are already seeing – weak consumer and business confidence which is dragging down growth. The government is well aware of this but has so far been very timid in its response,” said Kamil Dimmich, partner and portfolio manager at North of South Capital LLP, in London.Barclays said since trust product clients tend to be wealthy individuals or companies, the authorities may have some “tolerance for market forces to play out”.Rayliant Quantamental China Equity ETF co-portfolio manager Phillip Wool said the rise in defaults by trust firms would result in another hit to confidence, as home buyers will not feel comfortable putting down a big down payment.”As for whether Beijing steps in, I think we’re getting to a point where that has to happen. The deeper confidence sinks, the harder that is to reverse,” Wool added. More

LONDON (Reuters) -JPMorgan ramped up its 2023 global emerging market corporate high yield (HY) default rate forecast to 9.7% from 6% on Tuesday following the latest wave of problems in China’s property sector.The U.S. investment bank said Chinese property firms were expected to account for nearly 40% of 2023’s corporate default volumes, followed by 35% from Russia and 12% from Brazil.”Specifically, we raise Asia HY default rate forecast to 10.0% from 4.1% on the back of Country Garden and ripple effects to other parts of the sector,” the bank’s analysts said in a report, referring to China’s largest private developer which is now struggling to make its debt payments.If Country Garden suffers a full-scale default, it would add $9.9 billion to the year-to-date emerging market (EM) HY corporate default tally, JPMorgan (NYSE:JPM) estimates.It would also take the China property default tally to $17 billion and add to the $100 billion of defaults already seen as the sector has buckled over the past two and a half years. Latin America’s default rate forecast was also increased to 7.1% from 6.6% on signs that Brazil’s Odebrecht Engenharia e Construcao (OEC) appeared to be starting another restructuring round that could impact up to $1.9 billion of its bonds.EM Europe’s forecast was raised to 23.4% from 15.7%. JPMorgan’s analysts said that reflected the inclusion of Russian corporate bond defaults, most of which have been “technical” in nature as sanctions have prevented firms getting bond payments to international investors. More