↳ Finance

May 1st, 2020

↳ Finance

The Class Politics of the Dollar System

Managing an international public good

The global dollar system has few national winners. The typical frame for understanding the US dollar is that of “exorbitant privilege.” But the role of the dollar in structuring the international financial system and defining the relationship between a hegemonic US and the rest of the world is ambiguous—as is the question of who exactly benefits from the current arrangement. Dollar primacy feeds a growing American trade deficit that shifts the country’s economy toward the accumulation of rents rather than the growth of productivity. This has contributed to a falling labor and capital share of income, and to the ballooning cost of services such as education, medical care, and rental housing. With sicknesses like these, can we say for certain that the reserve currency confers substantial benefits to the country that provides liquidity and benchmark assets denominated in that currency?

For the rest of the world, the ills are clear enough. In developing countries, the need to insure their economies against currency crises and debt deflation has meant the accumulation of dollars at the expense of necessary domestic investment. These policies are usually accompanied by a suppression of consumption and incomes to establish a permanent trade surplus vis-à-vis the dollar system. And in many countries, the dollar system allows corrupt elites to safely transport their ill-gotten earnings to global banking centers located in jurisdictions with opaque ownership laws.

⤷ Full Article

September 3rd, 2019

Eye Machine

IMPLICIT FAVOR

The failures of research on fin-tech and poverty alleviation

Last week, we considered how social and political standards can pressure climate scientists to under-report their findings, introducing an underestimation bias into published climate research. In a recent thread, Nicholas Loubere examines the development buzz around mobile money, showing how similar factors can serve to exaggerate the findings of academic studies.

In a new article quoted in the thread, MILFORD BATEMAN, MAREN DUVENDACK, and NICHOLAS LOUBERE contest a much cited study on the poverty alleviating effects of mobile money platforms like M-Pesa. The criticism rests largely on grounds of omission: the study, they argue, ignores the closure of nearly half of microenterprises opened with M-Pesa, the jobs and incomes lost with the introduction of new businesses into fragile markets, the burgeoning debt accrued through digital loans, the overwhelmingly foreign ownership of M-Pesa and its profits, and the wealthy networks composing its primary users. Methodologically, it had no control group, used a small sample size, and overlooked the potential for reverse causality.

Why was a potentially flawed study so well regarded? According to Bateman, Duvendack, and Loubre, it's in part because its results told researchers and policymakers what they wanted to hear. From the article:

"The rapid popularization of fin-tech as a developmental solution is premised on the continued prominence of microcredit and the broader concept of financial inclusion. The microcredit movement was established and validated in the 1980s on overblown and ultimately false claims that providing small loans to groups of poor women was a panacea for global poverty reduction—claims that were especially associated with Dr Muhammad Yunus. Empirical justification came from an impact evaluation undertaken in Bangladesh by then World Bank economists Mark Pitt and Shahidur Khandker, which claimed that microcredit programs had significant beneficial results for impoverished female clients. For many years, Muhammad Yunus used Pitt and Khandker’s findings to successfully ‘sell’ the microcredit model to the international development community, generating a consensus that the microcredit model was the most effective way to efficiently provide enormous benefits to the global poor."

Link to the article, and link to a blogpost in which the authors outline their key findings.

  • "Kenya’s new experience of debt reveals a novel, digitized form of slow violence that operates not so much through negotiated social relations, nor the threat of state enforcement, as through the accumulation of data, the commodification of reputation, and the instrumentalization of social ties." Kevin P. Donovan and Emma Park report on the consequences of mobile debt for poor borrowers. Link.
  • In an article from 2017, Loubere "examines examples of exploitation, fraud, instability, and extraction related to expanded digital financial coverage in contemporary China." Link. At Bloomberg, David Malingha compares credit markets in Asia with those of sub-Saharan Africa. Link.
  • "This article claims that to bring finance back to serve the real economy, it is fundamental to (a) de-financialize companies in the real economy, and (b) think clearly about how to structure finance so that it can provide the long-term committed patient capital required by innovation." Mariana Mazzucato on governments' role in ensuring that finance serves public ends. Link.
⤷ Full Article

June 10th, 2019

Sketch for a Counter-Sky

MECHANICAL SHADOWS

On central bank independence and the rise of shadow money

Debates over the political impacts of Central Bank Independence (CBI) reached their peak in the late 90s and early 2000s, due to rising inequality and the volatility of financial markets. Initiated with the 1977 Federal Reserve Act and Paul Volcker’s subsequent term as chairman of the Fed, CBI was, and remains, a means of isolating the more "mechanical" field of monetary policy from the fleeting interests of politicians. In order to preserve stability and credibility, independent central banks have made inflation targeting the center point of their agenda. Critics of CBI have argued that the distinction between economic science and political incentives are not as clear as they might seem; low levels of inflation may benefit creditors and investors, but they harm those whose income entirely depends on rising wages. While monetary policy has distributional and political consequences, its decision makers are insulated from public accountability.

Expanding the literature on the politics of CBI, BENJAMIN BRAUN and DANIELA GABOR examine its financial consequences. In a recently published paper, they argue that the anti-inflationary policies of central banks have catalyzed dependence on shadow money and shadow banking, key components of a broader trend towards financialization:

"In the late 1990s, the US Federal Reserve was confronted with a peculiar predicament. While the world was celebrating central bank independence as a mark of 'scientific' economic governance after the populist era of monetizing government bonds, the US Federal Reserve worried about projections that the US government would pay down all its debt by 2012. A world without US government debt, they worried, was a world filled with monetary dangers. Market participants would not have a safe, liquid asset to turn to in times of distress.

Rather than seeking to limit shadow money supply, the Fed actively encouraged its expansion, seeking market solutions to political problems. It lobbied Congress to ensure that holders of shadow money backed by private (securitized) collateral had the same legal rights to collateral as those holding shadow money issued against US government debt. The Fed also changed its lending practices, allowing banks to issue shadow money backed by private collateral to borrow from the Fed. These concrete steps contrast starkly with the picture of central banks watching passively from the margins, as financial institutions find new ways to monetize credit and circumvent rules."

Link to the article.

  • More contemporary iterations of the debate over CBI can be found in the comparison between a 2018 HKS working paper, which distinguishes between "political oversight" and "operational independence," and a 2014 Levy Institute working paper which argues there is no practical meaning of operational independence at all. Link and link.

  • A primer on shadow banking, from Stijn Claessens and Lev Ratnovski at Vox EU. Link.

  • A new article by Andreas Kerna, Bernhard Reinsbergc, and Matthias Rau-Göhring finds that the IMF’s targeted lending practices actively encouraged the proliferation of independent central banks in low income economies. Link.

  • On CBI, inflationary targets, and the 2010 Eurocrisis, by Mark Copelovitch, Jeffry Frieden, and Stefanie Walter. Link.

⤷ Full Article