Jambo Africa Online’s Senior Editorial Correspondent, Francois Fouche, shares a collage of news titbits from across the world that impacts of Africa’s business.
The Rethinking of the International Monetary System
Fifty years ago, the world changed. On August 15, 1971, US President Richard Nixon slammed shut the “gold window,” suspending dollar convertibility. Although it was not Nixon’s intention, this act effectively marked the end of the Bretton Woods system of fixed exchange rates. But, in truth, with the rise of private cross-border capital flows, a system based on fixed exchange rates for the major currencies was no longer viable and Nixon’s decision – decried at the time as an abrogation of America’s international responsibilities – paved the way for the modern international monetary system.
The collapse of Bretton Woods prompted a fundamental rethink about what would give stability to the international monetary system.
The Bretton Woods era
When the Bretton Woods system was established in 1944, the prevailing narrative was that competitive devaluations, exchange restrictions, and trade barriers had worsened, if not caused, the Great Depression. Accordingly, IMF member countries would only be allowed to alter their exchange rate parity in cases of “fundamental disequilibrium” – the thinking being that stability of individual exchange rates (ruling out competitive devaluations) would result in stability of the overall system. Importantly, however, it was only the member country that could propose a change in the parity – the IMF’s sole power was to approve or not approve the proposed change.
The system incorporated elements from the previous “gold standard” system, but now, instead of currencies being tied directly to gold, countries fixed their exchange rates relative to the US dollar. In turn, the United States promised to provide gold, on demand, in exchange for dollars accruing in foreign central banks at the official price of $35 per ounce. All currencies pegged to the dollar thereby had a fixed value in terms of gold.
In an extraordinary surrender of national sovereignty for the common good, member governments undertook to maintain a fixed parity for their exchange rate against the US dollar unless they faced a “fundamental disequilibrium” in their balance of payments. The IMF would lend reserves (usually dollars) to enable central banks to maintain the parity in the face of temporary shocks to their balance of payments without “resorting to measures destructive of national or international prosperity.”
The system worked reasonably well for over two decades. However, cracks emerged. Governments of deficit countries with overvalued currencies often delayed necessary devaluations for fear of the political repercussions. Meanwhile, surplus countries, which were enjoying a trade competitiveness advantage, had no incentive to revalue their currencies.
Experience during the 1960s showed that this artificial stability of individual exchange rates could delay necessary adjustment, ultimately ending in traumatic balance-of-payments crises that resulted in instability of the system, especially if one of the major economies (for instance, the United Kingdom) was involved. The rise of private capital flows meant that any whiff of a possible devaluation would send billions of dollars out of a deficit country – thus precipitating the devaluation – and into surplus countries that would struggle to contain the inflationary consequences of the capital inflows.
In the early 1970s, the United States suffered such a balance-of-payments crisis, mainly due to its lax domestic monetary and fiscal policies as it sought to finance the costs of the Vietnam War and the “Great Society” programs, together with the reluctance of the major surplus countries (notably Germany and Japan) to revalue their currencies. As the United States hemorrhaged gold reserves, Nixon decided to close the gold window. Though intended as a ploy to force surplus countries to revalue their currencies, since the dollar was the lynch pin of the system, Nixon’s action effectively brought down the system.
New system, new thinking
The collapse of Bretton Woods (and its short-lived successor, the Smithsonian Agreement) prompted a fundamental rethink about what would give stability to the international monetary system.
In devising the Bretton Woods system, the presumption had been that fixing individual currencies against gold or the dollar would make the system stable. However, in the aftermath American officials argued that simply fixing the exchange rate would bring rigidity, not stability. Attempts to maintain the peg (including through exchange restrictions or capital controls) when the exchange rate grew out of line with domestic policies only resulted in costly – and ultimately futile – a delays in external adjustment.
The new thinking was the stability of the system would come less from the stability of individual exchange rates per se, and more from domestic policies being directed toward domestic stability (orderly growth with low inflation), which would result in stable but not excessively rigid exchange rates, thus allowing for timely external adjustment, and hence contributing to the stability of the overall international monetary system. While countries were no longer required to declare and maintain a fixed parity for their exchange rate, to prevent possible competitive devaluations/ depreciations or other currency manipulation, the IMF was charged with exercising “firm surveillance” over its members’ exchange rate policies.
Subsequent experience (especially the aftermath of the 2008 global financial crisis) showed that even such domestic stability may not suffice for stability of the system when it comes to systemically important countries. More recently, countries now regularly discuss with the IMF the external spillovers from their domestic policies. And though they would never be required to alter those policies provided they are promoting their own domestic stability, they may be encouraged to consider alternative policies if those better promote stability of the system as well.
What the future may hold
The collapse of the system of fixed exchange rates shook the world in 1971. But monetary systems exist to serve the needs of mankind, and as our societies evolve, so too must our societal systems. The world in 1971 was not what it was in 1944 – just as our world today bears only some resemblance to the realities of 1971. Today, fundamental transformations are accelerating the development, deployment, and adoption of digital money. Could a digital transformation of the international monetary system soon be underway? Regardless of how the system evolves, the bedrock principle that its stability will depend on international monetary cooperation, will remain.
This article first appeared here (https://blogs.imf.org/2021/08/16/from-the-history-books-the-rethinking-of-the-international-monetary-system/)
The impact of COVID-19 on the Global Value Chains (GVC)
A growing body of research is trying to measure whether economies enmeshed in global value chains have fared better or worse during the pandemic than they would’ve if production lines were closer to home.
But there’s no definitive answer yet.
Take the report released on Tuesday from the Asian Development Bank.
Researchers at the Manila-based lender studied the relationship between a country’s pandemic-induced economic downturn and its level of openness to trade via global value chains, or GVCs for short.
To do so, they modelled the demand blows under three scenarios:
• autarky (full self-reliance),
• classical trading (only bilateral commerce across borders), and
• GVCs (value-added trade with multiple borders crossed).
The result might be surprising for those who expected globalization to always absorb big jolts: “GVCs have tended to amplify rather than dampen the COVID-19 shock for the 26 economies studied, with the shock being 0.6 points smaller under autarky compared with a GVC world.”
The ADB notes that the difference is “relatively small” when compared with the realized shock of -10.9% and that the relationship fades as an economic contraction intensifies.
Survey another group of countries and the conclusions differ.
An OECD analysis earlier this year concluded that “GVCs, on top of generating efficiency gains, play an important role in cushioning economic shocks” and that the “economic case for a significantly reshoring of GVCs is weak.”
So as companies re-evaluate their supply chains and try to make them more durable, they’re doing things like increasing inventories and adding vendors rather than scrapping GVCs and going full tilt into re-shoring production.
That’s because distance isn’t the main problem during the pandemic.
If you near-shore and you put a factory in Mexico instead of China or you put a factory in Eastern Europe instead of China, that factory can still be hit just as easily in a pandemic scenario as it can if it’s based in China.
So, we are not seeing any dramatic move to near-shoring as a consequence of this.
- It is clear there is no one answer that fits all.
- But no doubt, more trade has proven to improve sovereign prosperity over time versus less trade.
- Increased participation in international trade makes countries more competitive. That is the crux.
Reviving FDI’s transformative Power
The benefits of FDI are far-reaching.
Properly guided foreign direct investment (FDI) has transformed firms, cities, sectors, and entire economies.
In addition to its impact on GDP and employment, FDI provides benefits that are visible, yet difficult to quantify.
The majority of these relate to greenfield investments, which involve the construction of new facilities.
Despite its benefits, FDI was put on hold during the current pandemic.
Overall, greenfield investment fell 56% year-on-year in Q4 2020.
Unfortunately, COVID-19 is not the only source of concern for foreign investment.
FDI flows have been in a downward trend since the Global Financial Crisis of 2009.
Governments and society continue to demand more from international business, often calling for higher quality FDI – investments that do more to advance sustainable development and tackle climate change.
Meanwhile, more companies are scaling back their FDI. Here are two reasons why:
- Public policy is becoming less conducive to inbound FDI. Public policy has been more consistently supportive of outbound FDI – that is, overseas investments by developing economies. Thus, governments are demanding more FDI, but not making it easier for companies to invest.
- FDI is becoming entangled 2 in geopolitical rivalries. The rising prevalence of state-controlled capitalism has raised concerns for policymakers. Whether real or imagined, these geopolitical concerns are being translated into action – often through the blocking of FDI projects.
This infographic from the www.hinrichfoundation.com and Visual Capitalist illustrates it well.
China exports more sophisticated products despite the US trade war
The technological level of China’s exports increased through the trade war with the U.S., according to a new ranking, which predicts the Chinese economy will grow faster than India’s over the next decade.
China ranked 16th globally when judged by the complexity of its exports in 2019, moving up three places ahead of countries including Ireland since the onset of the trade war in 2018, according to a new study by Harvard University’s Growth Lab.
The index measures the diversity and technological sophistication of goods exported by a country as well as the volume of exports. The U.S. ranked 11th, with the gap between the world’s two largest economies more than halving over the past decade.
The data show China was able to increase its ranking despite U.S. tariffs by exporting to other regions, said Tim Cheston, senior research manager at the Growth Lab.
“There was an adept move by China to diversify its export destinations for electronics to Europe and elsewhere,” he said.
Data covering the coronavirus pandemic is not yet available, but it may have further boosted the country’s ranking due to a surge in China’s exports. The 2019 data was recently updated.
“There are signs that China will continue to gain market share in sectors because it was able to keep production going,” Cheston added.
A high ranking doesn’t guarantee fast economic growth: Japan has topped the ranking for 19 successive years, while posting sluggish growth. Rather, the gap between a country’s export sophistication and its current level of GDP per capita is the strongest predictor of a country’s future economic expansion, according to the Growth Lab.
China’s export performance contrasts with its almost equally populous but less well-off neighbor India, whose ranking in 2019 was 43rd despite the government’s “Make in India” push.
“In the past few years we’ve seen India fall off, its generally stagnated when it’s come to export development,” Cheston said.
That suggests that when it comes to economic growth “China will outpace India over the next 10 years,” he said.
As China has moved ahead of more developed countries in the ranking, it faces greater challenges in maintaining its progress.
Chinese exports “are now at the level of having nearly filled all known areas of global products,” said Cheston.
“China must now move from taking know-how from across the world into true innovation, that is going to be a major challenge.”
Source: Bloomberg. The article first appeared here(https://www.bloomberg.com/news/articles/2021-08-03/china-is-exporting-more-sophisticated-products-despite-trade-war?)