Author Archives: Adela Rogers

Updating the Social Safety Net

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Laura Tyson and Lenny Mendonca write:  Today’s labor markets are undergoing radical change, as digital platforms transform how they operate and revolutionize the nature of work. In many ways, this is a positive development, one that has the potential to match workers with jobs more efficiently and transparently than ever before. But the increasing digitization of the labor market also has at least one very worrying drawback: it is undermining the traditional employer-employee relationships that have been the primary channel through which worker benefits and protections have been provided.

The ecosystem of digital labor platforms is still in its infancy, but it is developing rapidly. Large popular platforms like LinkedIn have so far mainly been used to match high-skill workers with high-end jobs. But these platforms are already expanding to accommodate middle-skill workers and jobs. Nearly 400 million people have posted their resumes on LinkedIn, and in 2014 the site facilitated more than one million new hires worldwide.

Meanwhile, other types of digital platforms are emerging, linking workers with customers or companies for specific tasks or services. Such platforms play a growing role in the market for “contingent” or “on-demand” workers, broadly defined as workers whose jobs are temporary and who do not have standard part-time or full-time contracts with employers. Well-known digital platforms that link contingent workers directly to customers include Lyft, TaskRabbit, Uber, and Angie’s List. Freelancer.com and Upwork are examples of platforms that help companies find and hire contingent workers for a range of specialized tasks such as software or website development. Freelancer.com has more than 17 million users worldwide.

The trouble is that even as these sites provide new opportunities for workers and companies, they are bypassing the traditional channels through which the US and many countries deliver benefits and protections to their workforce. In the US, in particular, the “social contract” has long relied on employers to deliver unemployment insurance, disability insurance, pensions and retirement plans, worker’s compensation for job-related injuries, paid time off, and protections under the Fair Labor Standards Act. Although the Affordable Care Act has made it easier for workers to acquire health insurance on their own, most workers continue to receive health insurance through their employers.  How To Reweave the Social Safety Net in the Age of Digital Platforms

Low Income Means Shorter Life in US

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Income inequality is real and life threatening.

Joseph E. Stiglitz writes:  The Nobel Memorial Prize in Economics went to Angus Deaton “for his analysis of consumption, poverty, and welfare.”  Deaton has published some startling work with Anne Case in the Proceedings of the National Academy of Sciences – research that is at least as newsworthy as the Nobel ceremony.

Analyzing a vast amount of data about health and deaths among Americans, Case and Deaton showed declining life expectancy and health for middle-aged white Americans, especially those with a high school education or less. Among the causes were suicide, drugs, and alcoholism.

America prides itself on being one of the world’s most prosperous countries, and can boast that in every recent year except one (2009) per capita GDP has increased. And a sign of prosperity is supposed to be good health and longevity. But, while the US spends more money per capita on medical care than almost any other country (and more as a percentage of GDP), it is far from topping the world in life expectancy. France, for example, spends less than 12% of its GDP on medical care, compared to 17% in the US. Yet Americans can expect to live three full years less than the French.

The racial gap in health is, of course, all too real. According to a study published in 2014, life expectancy for African Americans is some four years lower for women and more than five years lower for men, relative to whites. This disparity, however, is hardly just an innocuous result of a more heterogeneous society. It is a symptom of America’s disgrace: pervasive discrimination against African Americans, reflected in median household income that is less than 60% that of white households. The effects of lower income are exacerbated by the fact that the US is the only advanced country not to recognize access to health care as a basic right.

The Case-Deaton results show that America is becoming a more divided society – divided not only between whites and African Americans, but also between the 1% and the rest, and between the highly educated and the less educated, regardless of race. And the gap can now be measured not just in wages, but also in early deaths. White Americans, too, are dying earlier as their incomes decline.  Impact of Income Inequality in America

 

Stimulating Global Growth?

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Michael Spence writes:  The global economy is settling into a slow-growth rut, steered there by policymakers’ inability or unwillingness to address major impediments at a global level. Indeed, even the current anemic pace of growth is probably unsustainable. The question is whether an honest assessment of the impediments to economic performance worldwide will spur policymakers into action.

For starters, governments must recognize that central banks, however well they have served their economies, cannot go it alone. Complementary reforms are needed to maintain and improve the transmission channels of monetary policy and avoid adverse side effects. In several countries – such as France, Italy, and Spain – reforms designed to increase structural flexibility are also crucial.

Furthermore, impediments to higher and more efficient public- and private-sector investment must be removed. And governments must implement measures to redistribute income, improve the provision of basic services, and equip the labor force to take advantage of ongoing shifts in the economic structure.

Generating the political will to get even some of this done will be no easy feat. But an honest look at the sorry state – and unpromising trajectory – of the global economy will, one hopes, help policymakers do what’s needed.  Stimulating Global Growth

 

Advantages of Macroeconomic Approach

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Jeffrey Frankel writes: Macroeconomic policy seems to be back on policymakers’ agendas. The reason is understandable: growth remains anemic in most countries, and many fear the US Federal Reserve’s impending interest-rate hike. Unfortunately, the reasons why coordination fell into abeyance are still with us.

The heyday of international policy coordination, from 1978 to 1987, began with a G-7 summit in Bonn in 1978 and included the 1985 Plaza Accord. But doubts about the benefits of such cooperation persisted. The Germans, for example, regretted having agreed to joint fiscal expansion at the Bonn summit, because reflation turned out to be the wrong objective in the inflation-plagued late 1970s. Similarly, the Japanese came to regret the appreciated yen after the Plaza Accord succeeded in bringing down an overvalued dollar.

Moreover, emerging-market countries’ representation in global governance did not keep pace with the increasingly significant role of their economies and currencies. These countries’ very success thus became an obstacle to policy coordination. Macroeconomic Policy

 

Putin Addresses the Economy

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The Russian economy is the G-20’s worst performer, contracting by 3.8%.  President Vladimir Putin claims that his economic policies remain consistent; in fact, he has wisely changed course, limiting the damage that could have been done had he not.

Anders Aslund writes:  At the end of 2014, Russia was seized by financial panic. The Central Bank of Russia (CBR) responded to collapsing oil prices by floating the ruble, which immediately lost half its value. Desperate Russians rushed to buy whatever they could before their money became worthless. Inflation shot up to 16%.

In 2008-2009, the Russian Central Bank CBR pursued a policy of gradual devaluation, bailing out all big state-owned and private corporations, regardless of their performance. This time, Russia has maintained a floating exchange rate, conserving its reserves. The CBR stabilized the market by shock-hiking its interest rate, and has since reduced it gradually, as any sound central bank would.

Russia did adopt an anti-crisis stimulus package; but, at 3.5% of GDP, it was just one-third the size of the 2008 package. And while the Russian government singled out some enterprises as “strategic,” it actually gave them very little money. Many big companies, most notably in the construction and aviation sectors, were forced into bankruptcy. Creative destruction  has been revived somewhat. Life is a little less secure for Russia’s rich.

Since the expropriation of Yukos Oil Company in 2004, Putin’s policy had been highly benevolent to large state-owned firms. The state financed their purchases and investment projects with seemingly inexhaustible oil revenues. But now, with oil prices down sharply, Russia’s export revenue has plummeted by 30% this year, and state funds have become very scarce.

Something had to give, and, to Putin’s credit, it was not fiscal conservatism. This year, Russia’s budget deficit is expected to be just 2% of GDP, rising to 3.5% in 2016 – a remarkably strong performance given that the country has had to weather a trade shock and international financial sanctions. Next year, the government is set to use $40-45 billion of its reserve fund for budget financing.

Accomplishing this has required Putin to abandon some of his regime’s taboos. For the first 15 years of Putin’s rule, Russians’ standard of living rose steadily; but it has fallen sharply since November 2014. Real wages are set to plummet by 10% this year. Real pensions are also declining, and spending on health care and education is set to fall by 8% next year.

State-owned firms have been affected as well. Gazprom, Rosneft (which absorbed Yukos), and Russian Railways have been publicly begging for government money. Last December, Putin accepted a complex financing scheme for Rosneft. But by August, it was clear that all three corporate giants would receive only a small share of what they wanted.

Given Western financial sanctions, Putin’s effort to conserve state funds is entirely sensible. Still, the significance of these changes should not be exaggerated. Their macroeconomic impact is substantial, but no systemic reforms are on the agenda. Unlike China, Russia has made no attempt to rein in rampant corruption at the top. Nor has anything been done to strengthen the rule of law. Tens of thousands of presumably innocent Russian businessmen sit in pretrial detention because security officials want to seize their companies. Protectionism proliferates as Russia imposes ever more trade sanctions.

The big question is how Russians will respond when they realize that the decline in their standard of living is not temporary, as it was in 1998. In 2014, Russia’s GDP was $2.1 trillion (at the current exchange rate). It has plunged to $1.1 trillion. These numbers do not reflect purchasing power, but the Russian middle class measure their salaries in dollars. So far, public reaction has been muted, but a two-week protest by Russia’s truck drivers over a new highway toll suggests that popular quiescence may not last.

Russia’s economy was stagnating even before the bottom fell out of global oil prices, and most experts expect energy prices to remain low for years. This confronts Putin with a challenge he has never faced: leading Russia at a time when there is no light visible at the end of the tunnel.

Russian Economy?

We Watch the Fed. Everyone Watches the Fed, So We Watch the Fed.

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History is no guide to the impact of the anticipated rate hike by the Federal Reserve.   But why do we watch this activity anyway?   We watch the Fed because everyone watches the Fed  because we watch the Fed.  Circles.

It has been so long since the Federal Reserve raised interest rates that US stock market investors probably should not look to past rate hike cycles for clues about potential winners and losers.  But investors do expect more rapid-fire moves from one stock market sector to another, based on what happened throughout 2015 when comments from Janet Yellen or other Fed officials changed expectations of central bank moves multiple times.

Stock market investors are ready for the first U.S. Federal Reserve interest rate hike in nearly a decade next week, but they may not be fully prepared for all of the nuanced remarks likely to accompany that announcement.

If the Fed lays out an aggressive schedule of future rate increases, stock markets could become very volatile and even plummet, say strategists who expect a market-calming central bank announcement detailing the patience of policymakers.

Activity in the options market suggests stock traders are being cautious ahead of the Fed policy meeting and options expiring at the end of next week could amplify volatility in either direction.

Traders hoping to profit on the Fed’s expected statement lack a playbook. The markets haven’t been through the current scenario of a rate lift-off after years in which the central bank’s short-term interest rates have been locked near zero.

That could partly explain the jittery trading on Wall Street,during which volatility has risen and the benchmark S&P 500 dropped 3.5 percent.

A slew of economic data due to be released before the Fed meeting, including readings on growth in manufacturing, industrial production and consumer prices, could cause some choppiness if traders take any robust data as a sign that the Fed may be more aggressive with future rate increases.

Furthermore, markets could face an interruption next week if Congress and President Barack Obama trigger a government shutdown by failing to finish work on a $1.5 trillion government funding bill.

That uncertainty has helped trigger bets in the options market by investors trying to cover themselves against a wide array of outcomes in stocks, and similar uncertainty has been apparent across other asset classes as well.

Crude oil futures fell to seven-year lows while the euro, expected to decline against the dollar as the Fed tightens, rallied after many covered those bets.  Positioning is leaning more heavily toward seeking protection against a broad stock market move lower, said traders who expect volatility to spike after the Fed meeting..

The CBOE Volatility Index .VIX, the market’s favored barometer of trader angst, has crept over its long-term average of 20, after having stayed mostly below that level since early October. On Friday, it was up 28 percent at 24.72.

That level is higher than futures show the VIX going forward, signifying that traders are more worried about near-term volatility than they are about a long-term breakdown.

But a sharp move to the downside could be amplified since the Fed decision comes just two days ahead of “quadruple-witching,” when options on stocks and indexes and futures on indexes and single-stocks all expire, making the index particularly prone to a jump in volatility.

Fed Rate Hike

Is China Ready for the Big Time in Finance?

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Does China Belong at the Grownups table in international finance?

Paola Subacch writes:  The IMF has given a huge vote of confidence in China’s capacity to play a major role in international finance.

Many market participants, however, remain skeptical about the decision. Does the renminbi really belong in the same category as the US dollar, the euro, the Japanese yen, and the British pound in the international monetary system?

No doubt, China has made remarkable progress over a relatively short period. Since 2009, the share of China’s trade settled in renminbi has increased from less than 1% to more than 20%. And the renminbi now ranks fourth among the world’s currencies used for international payments.

But the renminbi’s 3% share in global payments lags far behind that of the dollar (45%) and the euro (27%). Moreover, growth in the use of the renminbi to settle trade has been concentrated largely in the Asia-Pacific region, and specifically in transactions between China and its neighbors. And demand for renminbi-denominated assets remains relatively low, with a mere 1.5% of total renminbi bank deposits held outside China.

The contrast between the renminbi and its SDR counterparts is stark. The renminbi offshore bond market amounts to just 0.5% of the world’s total, with 40% issued in dollars, 41% in euros, nearly 10% in pounds, and 2% in yen. The value of loans denominated in renminbi – CN¥188 billion ($29.2 billion) – is tiny, especially when one considers that almost 50% of total international banking liabilities are denominated in dollars, approximately 30% in euros, 5% in pounds, and about 3% in yen. And the renminbi accounts for 0.6-1% of global foreign-exchange reserves held by central banks, whereas the dollar and the euro account for 62% and 23%, respectively.

In short, unlike the rest of the currencies in the SDR basket, the renminbi is an international currency in the making, just as China is an economic and financial power in the making. Indeed, like most developing countries, China remains an “immature creditor” that lends mainly in dollars; and if it needed to borrow in international markets, it would have to issue most of its debt in dollars, not renminbi. Clearly, China’s standing in international finance does not match its status in international trade.

Nonetheless, there is a distinct sense that the renminbi will become a key player in global financial markets. After all, unlike other developing countries – even large ones like Brazil, India, and Russia – China has an economy that is large enough to provide critical mass to its currency’s development.

Furthermore, Chinese leaders are determined to push through reforms – especially of the banking sector and state-owned enterprises – that will help drive forward this development. They have made it clear that one of their key goals for the next five years is to narrow the gap between the international standing of the renminbi and that of the world’s “great currencies,” as they promote use of the renminbi far beyond the Asia-Pacific region.

It is important to note, however, that China’s leaders do not seem to be angling for the renminbi to replace the dollar as the dominant international currency. Their approach – based on the belief that a more diversified, and thus more liquid, international monetary system would contribute to a more balanced and less volatile global economy – is more pragmatic. Anticipating a shift from a dollar-based (and, more broadly, US-dominated) system toward a multi-currency, multipolar system, China’s leaders are laying the groundwork for their country (and its currency) to grasp one of the positions at the top, alongside other great powers.

While some countries – the United States and Japan, in particular – are far from enthusiastic about that, it is difficult to deny what seems inevitable (neither country formally opposed the SDR decision when it came). And, as China gains more financial clout, its role in global economic governance will undoubtedly grow as well.

Given all of this, it is unsurprising that the reform of the international monetary system and its governance will feature prominently at next year’s G-20 summit, hosted by China, which will hold the group’s rotating presidency. It is not yet clear how China will shape the debate. But the mere fact that it will happen at the G-20, rather than at the long-dominant G-7, sends a clear message that the global economic and monetary system is changing for good.

Remninbi

Can the IMF Save Brazil?

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Brazil’s economy is in intensive care. And its intensifying political crisis –impeachment proceedings have now been initiated against President Dilma Rousseff for allegedly using irregular accounting maneuvers to disguise the size of the budget deficit – is raising serious questions about who can provide the much-needed treatment.

The situation is certainly serious. Output is contracting; fiscal revenues are faltering; and the budget deficit exceeds 9% of GDP. Inflation has surpassed the double-digit mark, forcing the central bank to raise interest rates – an approach that is unsustainable, given the deepening recession and the ballooning cost of servicing Brazil’s rapidly growing debt.

Indeed, with Brazil’s creditworthiness deteriorating fast, interest-rate spreads on its sovereign debt are reaching Argentine levels. And its international reserve position of $370 billion, which once seemed unassailable, looks increasingly vulnerable. When the notional value of foreign-exchange swaps ($115 billion) is netted out, the share of short-term public debt (foreign and domestic) covered by international reserves is below the critical threshold of 100%.  Brazil’s Dilemma

Changing Work

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Dani Rodrik writes: In mid-December, the United Nations will launch the latest of its annual landmark Human Development Reports. This year’s report focuses on the nature of work: how the way we earn a living is being transformed by economic globalization, new technologies, and innovations in social organization. The outlook for developing countries, in particular, is decidedly mixed.

For most people most of the time, work is mostly unpleasant. Historically, doing lots of backbreaking work is how countries have become rich. And being rich is how some people get the chance to do more pleasant work.

Thanks to the Industrial Revolution, new technologies in cotton textiles, iron and steel, and transportation delivered steadily rising levels of labor productivity for the first time in history. First in Britain in the mid-eighteenth century, and then in Western Europe and North America, men and women flocked from the countryside to towns to satisfy factories’ growing demand for labor.

But, for decades, workers gained few of the benefits of rising productivity.

Eventually, capitalism transformed itself and its gains began to be shared more widely.

Democracy, in turn, tamed capitalism further. Employment conditions improved as state-mandated or negotiated arrangements led to reduced working hours, greater safety, and family, health, and other benefits. Public investment in education and training made workers both more productive and freer to exercise choice.

Labor’s share of the enterprise surplus rose. While factory jobs never became pleasant, blue-collar occupations now enabled a middle-class standard of living, with all its consumption possibilities and lifestyle opportunities.  Work

work

Solar Power in the Developing World?

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Xavier Lemaire writes: The International Solar Alliance announced by India at the Paris climate conference invites together 120 countries to support the expansion of solar technologies in the developing world.

The cost of solar cells has decreased spectacularly over the past four decades, and the trend seems likely to continue. Solar energy has moved from a niche market for providing power in remote places (at the very beginning in 1958 to space satellites) to a mainstream technology which feeds into the national grid.

Most richer countries have been supporting solar power for some time and the rest of the world is now catching up, turning to solar not only for energy access in remote areas but to power cities. Emerging countries such as China, India, Brazil, Thailand, South Africa, Morocco or Egypt are investing in large solar plants with ambitious targets. In developing countries such as Bangladesh, Ethiopia, Kenya, Rwanda, Senegal or Ghana, solar farms or the large roll-out of solar home systems are a solution to unreliable and insufficient electricity supplies.

Most developing countries benefit from high solar radiation.  Source: SolarGIS © 2015 GeoModel Solar

Large solar farms can be built in just a few months – compared to several years for a coal plant and even longer for a nuclear plant – without generating massive environmental and health damages. Modular decentralised generation with solar is a way to increase access to energy while still remaining on top of rapidly increasing appetites for electricity.

Culture of innovation

This alliance could boost the solar market in the Global South by accelerating the circulation of knowledge, facilitating technology transfer and securing investments. Such a partnership would aim to create a common culture among people working in solar energy. Permanent innovation is the key to success in a field where technologies evolve fast and where norms and standards are not yet established. So an alliance could help countries exchange policy ideas while benchmarking performance against each other.

The decrease of the price of solar cells: a long term trend. Source: Bloomberg New Energy Finance & pv.energytrend.com 

Indeed in developing countries, where regulations and regimes tend to be less stable, investments suffer from a perceived risk. Given that the initial construction of solar plants makes up most of their cost (sunlight, after all, is free so ongoing expenses are minimal), the business model requires them to run for a long period. High risk means higher costs of financing the initial investment. Countries with well-designed regulatory frameworks and policies can reduce risk and attract investors.

Not California or Spain – this is Egypt. Green Prophet, CC BY

The alliance could also support a network of universities and local research centres in each country to capitalise on local experience and build knowledge. Research and development can then more easily target the specific needs of developing countries.

… and the real politics of renewables

The intensification of globalisation and competition between technology firms and utilities is sparking a revolution in the electricity sector which could result in a new world of energy providers. A number of countries are keen to position themselves as leaders.

For the moment, both China and India want massive investments in solar only on top of further investments in new coal and gas plants. They need to make their growth less carbon intensive – but do not yet consider solar power as a complete substitute for fossil fuels.

But renewables accounted for nearly half of all new power generation capacityacross the world last year. As the cost of solar power is falling to the same level as traditional energy supplies all over the world, some players in the electricity sector are – willingly or not – shifting away from fossil fuels. The decarbonisation of the electricity sector may be not just an empty political pledge, but an economic necessity.