1. THE THIRD WAVE OF THE GLOBAL CRISIS? Yılmaz Akyüz South Centre, Geneva Chinese People’s Institute of Foreign Affairs < Beijing, China 12 November 2015 www.southcentre.int

2. OVERVIEW 2 Global crisis now appears to be shifting to the South after moving from US subprime to EZ sovereign debt crisis. Until recently major EDEs were widely seen as locomotives for the world economy thanks to their strong growth before the crisis and rapid recovery subsequently. They are now said to be leading the world economy into slump. Can EDEs weather this turmoil without facing significant instability and job and output losses? What is the role of policy, particularly S-S cooperation? What role EDEs can play collectively in reforming the global economic and financial architecture to prevent systemic shortcomings in the world economy that lead to such global boom-bust cycles?

3. Growth down more in S than N; margin falling. 3

4. Growth in BRICS at 2009 crisis level 4

5. TWIN BOOM–BUST SUPER CYCLES: DEBT AND COMMODITIES 5 The boom-bust cycle in EDEs is driven by two super-cycles:  Debt/Credit cycle: started in early 2000s, culminated in US/EZ crises; then ZIRP/QE; surge in capital inflows => credit expansion and spending in EDEs (including large scale corporate borrowing in dollars)  Commodity cycle: China factor; its response to the crisis with rapid credit expansion and massive investment, helped by global easy money, sustained commodity boom that had started earlier. Neither could be sustained (Charts):  Slowdown and shift away from investment in China; commodity weakness  Falling commodities, prospects of normalization of US monetary policy and reassessment of risks generating reversal of capital flows Commodity downturn and capital flow reversals reinforcing each other (Charts).

6. The commodity super cycle is over 6

7. Non-resident capital inflows on a downward trend 7

8. Non-resident portfolio inflows have become negative 8

9. Net capital flows negative for the first time since 1988 9

10. Capital inflows and commodity prices reinforce each other

11. Strong dollar pushes commodity prices down

12. Lower commodity prices raise sovereign spreads 12

13. FINANCIAL VULNERABILITY OF EDEs All EDEs vulnerable to continued tightening of global financial conditions and capital reversals irrespective of external positions; they are close integrated. Both domestic and external financial stability are susceptible, notably in EDEs with large external liabilities and dependent on capital inflows; likelihood of widespread liquidity and debt-servicing difficulties after ten years of calm in major EDEs. China has its own bubble. But, it is not expected to face a Lehman-type meltdown because of government control over the banking system. Large shifts in Chinese currency, asset prices and interest rates would not have strong direct financial spillovers to EDEs except through their impact on global risk appetite (EDEs have little external liabilities in RMB). Still trade (commodity) impact could be important and this can depress capital inflows to EDEs further, 13

14. POLICY RESPONSE Reserve accumulation in EDEs unprecedented, but mostly borrowed, not earned. May be adequate to cover CA deficit and short-term debt but not exit from equity and bond markets and capital flight (Malaysia). Business as usual? Borrow from IMF, bail out private debtors at home and creditors abroad, keep capital account open, practice austerity. Already talk in Lima if resources of BWIs would be enough. Unorthodox response:  Temporary exchange controls, debt standstills; not using reserves to finance outflows; but no protection against creditor litigation.  S-S cooperation in liquidity provision; but CMIM and CRA not adequate either in size or in design (complementing IMF facilities; partly tied to IMF program)  Swaps among EDEs; only China, with 30 countries, but mostly with AEs; designed to facilitate trade rather than boost reserves (except Argentina).  A large SDR allocation as dollars are withdrawn. 14

15. SYSTEMIC PROBLEMS US monetary policy plays a central role in global boom-bust cycles. US faces a structural demand gap (secular stagnation). Wages lag productivity growth and wage share falling; workers cannot afford what they produce. This results in low inflation and interest rates. Given fiscal orthodoxy, there is tendency to rely on easy money and debt/credit-driven booms. Some (Krugman, Summers) argue that bubbles are necessary to avert secular stagnation. Easy money in turn creates asset price inflation and greater inequality. Booms end with busts: more is lost by labour in busts than gained during booms. Creditors get bailed out, interest rates are cut and even more money is pumped in, thereby setting the stage for another boom-bust cycle. Thus a series of such cycles in US in past three decades: Savings & Loans; Dot- Com; Subprime; and now ZIRP/QE. 15

16. REDESIGNING INTERNATIONAL MONETARY SYSTEM 16 China also faces secular decline in wage share and underconsumption. Until 2009 exports provided way out; then came credit/debt driven expansion, now coming to an end. But Chinese boom-bust cycle is not expected to have a strong financial impact on EDEs because it is not a reserve issuer. Germany faces the same problem, but relying on exports rather than bubbles. It is now joined by others in EZ; German surplus 8% of GDP (China 2%) EDEs are on the receiving end of boom-bust cycles created by US policies and financial markets. They could (and should) manage these cycles better but cannot altogether avoid their adverse repercussions. Resolution of these problems calls for a fundamental overhaul of international monetary system; this is perhaps one of the most important areas of reflection for S-S cooperation.