The political-economy of MADANI in a fractionalised geoeconomy

collective on geoeconomics

30/07/2023

I] THE MALAYSIAN ECONOMY

The national economy grew at a bouyant pace of 5.6% year-on-year (y/y) during the first quarter of 2023, indicating a continuous and fast-paced expansion after an annual economic growth rate of 8.7% in 2022 which was the fastest annual GDP growth rate since 2000.

However, the pace of expansion is expected to moderate during 2023 due to a number of geoeconomics headwinds, including the impact of high base year effects and sliding down of merchandise export growth.

The Malaysian economy is able to maintain a positive momentum during the first quarter of 2023 is due to a strong domestic demand where the services sector continued to show rapid growth of 7.3% y/y in the first quarter of 2023. The pace of expansion in the construction sector also remained strong, growing by 7.4% y/y in the first quarter of 2023. However, growth in the manufacturing sector has moderated in recent quarters, growing by 3.2% y/y in the first quarter of 2023, not dissimilar to the 3.9% y/y pace in the fourth quarter of 2022.

According to the seasonally adjusted S&P Global Malaysia Manufacturing Purchasing Managers’ Index (PMI) was unchanged at 48.8 in April, indicating that business conditions remained challenging for firms.

As mainland China is Malaysia’s largest export market, accounting for 15.5% of total exports, the continuing rebound in mainland China’s economy during 2023 may help to mitigate the impact of other softening merchandise exports to the US and EU.

The main products exported from Malaysia to China were Integrated Circuits (US$11.2B), Petroleum Gas (US$3.27B), and Blank Audio Media (US$2.23B). During the last 26 years the exports of Malaysia to China have increased at an annualized rate of 12.2%, from US$2.42B in 1995 to US$47.9B in 2021.

China and Malaysia witnessed frequent and close high-level exchanges in 2022 with bilateral trade between the two countries reaching a record high of US$203.6 billion (US$1=RM4. 42), according to Chinese Ambassador to Malaysia Ouyang Yujing, (MIDA, 17 February 2023).

The IMF July Report 2023 says that under its baseline forecast, growth will slow from last year’s 3.5 percent to 3 percent this year and next – a 0.2 percentage points upgrade for 2023 from its April projections. Global inflation is projected to decline from 8.7 percent last year to 6.8 percent this year – a 0.2 percentage point downward revision, and 5.2 percent in 2024.

The slowdown is concentrated in the developed economies, where growth will fall from 2.7 percent in 2022 to 1.5 percent this year and remain subdued at 1.4 percent next year. The euro area, still reeling from last year’s sharp spike in gas prices caused by the Ukrainian cross-border special military operation, is set to decelerate sharply.

By contrast, growth in emerging markets and developing economies is still expected to pick-up with year-on-year growth accelerating from 3.1 percent in 2022 to 4.1 percent this year and next.

As our national economic vitality is dependent on China’s economic performance, we shall present the following excerpts from the ASIA TIMES – taking into various assessments and analyses from academic think-tanks, commercial consultants and China-watchers – as to what implications thereon shall affect the MADANI economy praxis and consequential development performance.

II] STATE OF CHINA’S ECONOMY

China’s anti-Mario Draghi moment surprises markets

by William Pesek

Jul 28, 2023

China is eschewing the former European Central Bank chief’s pledge to ‘do whatever it takes’ to stabilise via monetary easing.

For weeks now, global markets have ricocheted between excitement over a Chinese stimulus boom and disappointment that Beijing was taking its sweet time to jolt a slowing economy.

It’s now clear that Xi Jinping’s team has settled on a strategy somewhere in between. And for the global economy, the signals from this week’s meeting of the Politburo, the Communist Party’s top decision-making body, seem short-term negative for world markets – but long-term positive.

As Bill Bishop, long-time China-watcher and author of the Sinocism newsletter, sees it, the policy direction being telegraphed seems “fairly dovish,” but “doesn’t seem to signal much more significant stimulus incoming near-term.”

That’s bad news for bulls betting on a new Chinese stimulus bonanza that lifts markets from New York to Tokyo. Under the surface, though, there are myriad hints that the arrival of Premier Li Qiang in March is putting reforms on the front-burner once again. In other words, Beijing cares more about avoiding boom/bust cycles going forward than just mindlessly fuelling a 2023 boom.

As “no fiscal expansion plans have been revealed so far, the impact will only be felt very progressively,” says economist Carlos  Casanova at Union Bancaire Privée.

Economist Wei He at Gavekal Dragonomics added that “the Politburo’s meeting on the economy shows that officials recognise weak demand is an issue. But the meeting mainly called for ‘precise’ policy adjustments.” As such, it “remains far from certain whether those can deliver a near-term turnaround in growth. The conservative stance points to, at best, a stabilisation or weak recovery” in the second half.

Instead of aggressive plans for massive monetary easing and fiscal pump priming — as markets had assumed — the chatter is about prudent policymaking with an emphasis on lower taxes and fees and incentivising increased investment.

Rather than sharp drops in the yuan to boost exports, Li’s reform squad is focused on catalysing greater scientific and technological innovation and giving the private sector more space to thrive and create new good-paying jobs.

In lieu of scores of top-down decrees or public jobs-creation schemes, the zeitgeist is that developing a thriving micro, small and medium-sized enterprises (MSME) sector is a more forceful way to address record youth unemployment than large-scale stimulus.

What Xi and Li are telegraphing might be best called the “anti-Mario Draghi” approach to enlivening Asia’s biggest economy.

The reference here is to the former European Central Bank president’s infamous pledge “to do whatever it takes” to stabilise the financial system via powerful monetary easing.

A year later, Draghi’s liquidity onslaught inspired then Bank of Japan Governor Haruhiko Kuroda to follow suit.

On Draghi’s watch, the ECB unleashed stimulus on a level that would’ve been unfathomable to Bundesbank officials of old. In Tokyo, between 2013 and 2018, the Kuroda BOJ’s balance sheet swelled to the point where it topped the size of Japan’s $5 trillion economy.

Neither monetary boom did much, if anything, to make the broader European or Japanese economies more competitive, productive or, broadly speaking, more prosperous. Instead, executive monetary support generated a bubble in complacency.

Draghinomics — and Kurodanomics — took the onus off government officials from Madrid to Seoul to loosen labor markets, reduce bureaucracy, incentivise innovation, tighten corporate governance or invest big in strengthening human capital.

China, it seems, is determined to go the other way. In the months since Xi started his third term — and Li arrived on the scene as his number two — Beijing has confounded the conventional wisdom on Chinese stimulus.

The start of this week’s Politburo is no exception. Markets were betting on major stimulus moves. Instead, China unveiled a 17-point plan to attract more private capital its way.

In a note to clients, analysts at Capital Economics said that “the absence of any major announcements of policy specifics does suggest a lack of urgency or that policymakers are struggling to come up with suitable measures to shore up growth.”

One possible interpretation was that Xi’s inner circle wants to put some actions on the scoreboard before next month’s annual huddle in the resort of Beidaihe to discuss long-term policy direction. Yet the tenor of steps seems more about supply-side reforms than fiscal and monetary pump-priming that might squander progress in reducing financial leverage.

Instead of talking about reaching this year’s 5% growth target, the government said the priority now is that “good foundation is laid for achieving the annual economic and social development targets.” Officials admitted, too, that “economic recovery will show a wavy pattern and there will be bumps during progress.”

In other words, the instant gross domestic product gratification that investors came to expect in Xi’s first two terms has been replaced with a more pragmatic approach. While there will be “prudent monetary policy” and at times an “active fiscal policy,” the bigger objective is to “extend, optimise, improve and enforce tax cuts and fee reductions.”

Stimulus will indeed emerge when, and where, needed. The Politburo said, for example, that it would “accelerate the issuance and use of local government special bonds.”

This means it’s entirely possible that local governments may be allowed to “dig into” remaining special bond quotas, including from previous years, says economist Yu Xiangrong at Citigroup, who estimates the quota to be about 1.1 trillion yuan (US$154 billion).

But there was far more discussion of ways to “adapt to the major change in supply-demand relations in the property market,” and, in timely fashion, to “adjust and optimise real estate policies.”

That, Beijing says, means steps to “increase construction and supply of low-income housing,” and “revitalise all types of idling properties.”

To economist Zhiwei Zhang at Pinpoint Asset Management, “this is an interesting signal as the property sector downturn is arguably the key challenge the economy faces now.” As such, “it seems the government has recognised the importance of policy change in this sector to stabilise the economy.”

Just as important, arguably, is the government saying it’s committed to “effectively prevent and resolve local debt risks, make a package of plans to resolve the debt.” The same goes for commitments to “concretely optimise private firms’ development environment” and “build and improve the routinised communication mechanism with companies.”

Furthermore, the party’s latest phraseology includes pledges to “firmly crack down on excess fee and fine charging, resolve the receivables governments owe to companies” and “accelerate the fostering and growing of strategic emerging industries.” The plan, the party notes, is to “strengthen financial regulation, steadily push for the reform and risk resolution at small and medium-sized financial institutions of high risks” as a means to “stabilise the basic market of foreign trade and investment.”

Such language is more the stuff of Adam Smith and Milton Friedman than Mao Zedong. More Hans Tietmeyer of Bundesbank fame than Draghi or Kuroda. One possible area of optimism is that Xi’s government is finally serious about fixing the underlying troubles in the property sector – not just treating the symptoms.

Casanova points to the Politburo’s statement that authorities would recalibrate property policies based on the “local property market situation” and consider developments related to “demand and supply imbalances.” To him, “that last point is new, suggesting a change in the macroprudential regime, as the government now sees a structural shift, requiring bottom-up measures to better reflect local conditions.”

That’s not to say Xi and Li won’t support demand where needed.

“We expect the government to roll out modest fiscal support in the second half of 2023, but no aggressive fiscal stimulus,” says economist Ning Zhang at UBS AG. Even so, Zhang says, “some policy room may be kept to support economic growth in 2024.”

Additional stimulus measures that Zhang expects Beijing to prioritise: an acceleration of special local government bond sales; a resumption of policy banks’ special infrastructure investment funds; Beijing providing credit to clear up local governments’ arrears to corporate suppliers; modest property policy easing and credit support for stalled property projects; a modest credit growth rebound; and perhaps a small official rate cut.

There also could be “some small-scale and targeted support” for selected consumption categories as well, Zhang says.

Mostly, though, the signals coming from Beijing this week suggest a greater emphasis in increasing confidence via reform and more vibrant safety nets than runaway stimulus.  Bottom line, China’s Draghi days seem over – and that’s a good thing.

first published: ASIA TIMES  July 26, 2023.

III] IMPLICATIONS

Just as there shall be a subdued growth path in China, but with targeted support and selective structural changes, the unity government in Malaysia will pump in more than RM$5 billion to kick off its Madani Economy Framework to enhance the economy and improve national competitiveness.

1. The framework has lofty ambitions of positioning Malaysia as one of the top 30 major economies around the globe within 10 years,
2. Placing the country in the top 12 of the Global Competitiveness Index,
3. Increasing participation among women in the country’s workforce to 60 per cent,
4. Placing the country in the top 25 nations in the world in the Corruption Perception Index,
5. Boosting the nation’s fiscal strength with fiscal deficit of three per cent or lower, and
6. Positioning Malaysia in the top 25 of the Human Development Index,
7. Additional allocation of RM400 million for micro financing under SME Corporation Malaysia, National Entrepreneurial Group Economic Fund’s (Tekun), Majlis Amanah Rakyat (MARA) and Bumiputera Agenda Steering Unit (Teraju). This fund is aimed at providing entreprenuerial opportunities, trainings and financing for the marginal groups including women and youth,
8. Another new major funding assistance announced under Madani Economy Framework is a financing worth RM$200 million under Agrobank to facilitate the application of technology in farming,
9. The country could record a six per cent growth if everyone “initiates change”. 
10. The successful reaching of targeted area poverty alleviation objectives (TAPAO) will thus dependent on the genre of structural changes to be adopted, the availability of debt financing in economic development, the wholeheartedly adherence to sound economic developmental praxis and a faithfulness to the core MADANI implementation principles.

Then, only thence, shall the country shares a common wealth destiny with our rakyat².

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The new debt crisis threatening the Global South

Collective on Geoeconomics

28th July 2023

PROLOGUE

More than half of the world’s developing countries are currently in or heading towards a debt crisis.

The trillions of dollars poured into financial markets, Covid and war have resurrected the spectre of the 1980s.

This comes on the heels where in the emerging market economies, a 10 percent US dollar appreciation, linked to global financial market forces, decreases economic output by 1.9 percent after one year, and this drag lingers for two and a half years. In contrast, the negative effects in advanced economies are considerably smaller in size, peaking at 0.6 percent after one quarter and are largely gone in a year, (IMF, 19 July 2023).

The IMF 2023 Report in its latest World Economic Outlook said that though inflation was coming down, but the balance of risks facing the global economy remained tilted to the downside and credit was tight projecting global real GDP growth of 3.0% in 2023, and its outlook for 2024 remains unchanged, also at 3.0%, (theedgemalaysia, 25/7/23).

I] INTRODUCTION

In this short essay. Martin Guzman, Argentina’s former Minister of Economy, explains what has changed; what the role of the IMF is; and why the South needs to demand political negotiation of debts – with added comments supported by cited references from The Collective to augment the arguments.

For more than once, people are waking up to discover that another international debt crisis of enormous proportions looms on the horizon of a scale not seen since the early 1980s, after which Latin America and Africa have had to slog through a “lost decade.”

Also, it’s a time when major economists have put forward theories predicting a falling tendency of the rate of profit under capitalism. There is no reason at all why the rate of profit in the economy should fall because of accumulation of capital, (Prabhat Patnaik, 23/07/2023).

Indeed, a paper in the New Political Economy  published online in 30 Mar 2021 by Jason Hickel, Dylan Sullivan and Huzaifa Zoomkawala have contended that wealth drain from the Global South remains a significant feature of the world economy in the post-colonial era; rich countries continue to rely on imperial forms of appropriation to sustain their high levels of income and consumption.

The researcher-authors further articulated that the Global North appropriated from the Global South commodities worth US$2.2 trillion in Northern prices that were enough to end extreme poverty 15 times over. Over the 1960–2018 period studied, the value drain from the Global South totalled USD$62 trillion (constant 2011 dollars), or USD$152 trillion when accounting for the Global South countries’ lost growth alone, (see STORM 2021, Unequal exchange under neo-imperialism.

It is implaudible not to point out that economics implosions of this magnitude can wipe out years of progress in health, education, and social stability. Yet not many people understand the what and when the phenomenon occurs, and more importantly, as to why and how this is happening, again.

Affected immensely, and immediately, will be the workers in the Global South. This is because as early as by 2010, 79 percent of the world’s industrial workers lived in the Global South, compared to 34 percent in 1950 and 53 percent in 1980, (Smith, Imperialism in the Twenty-First Century, 101).

Then, the workers’ immediate families would be affected because government social-economic programmes are reduced due to lesser allocation to social welfare remedies. Affected disproportionately are countries in the Asia-Pacific region:

source: from Ortiz and Cummins 2022.

II] WHAT HAS GONE WRONG

This comes also at a time when debt vulnerabilities are rising, with potential costs and risks to debtors, creditors and, more broadly, global stability and prosperity.

According to the IMF’s Global Debt Database , overall borrowing jumped by 28 percentage points to 256 percent of GDP in 2020. Government borrowing accounted for about half of this increase, with the remainder from nonfinancial corporations and households. Public debt now represents close to 40 percent of the global total—the most in almost six decades, (IMF Annual Report 2022).

As this new crisis gains momentum, economist Martin Guzman, also a co-president of Columbia University’s Initiative for Policy Dialogue offers his perspective on what has gone wrong and what can be done to address it.

In his view, one cannot understand debt crises without confronting the power dynamics at play.

III] What has happened to suddenly create this alarming situation?

What we are seeing is a looming debt crisis in the Global South. A series of events led to this situation by distinguishing three critical ones.

To understand debt dynamics in the Global South, it is always essential to look at what happens with monetary policies in the North. 

The first event critical to understanding this looming debt crisis took place a decade and a half ago. The response to the U.S. financial crisis entailed a massive creation of liquidity through quantitative easing. That liquidity became global, as is always the case in a world economy with capital mobility. In a world of zero interest rates, there was a “search for yield,” a peculiar concept that involves searching for compensation above global market rates. In a competitive market, that would, of course, imply a particular choice of risk and return that would not mean a higher risk-adjusted return.

We saw a significant number of countries having access, for the first time, to international credit markets, but at rates that acknowledged risks. This was the case in African nations that were borrowing at 8-10% interest rates when the treasury bonds from advanced economies were yielding rates close to zero — and in some cases even negative. Countries that formerly had been part of the group of Highly Indebted Poor Countries (HIPCs), such as Ghana or Zambia, both now suffering a debt crisis, managed to place bonds abroad, but at high rates. 

We also had countries re-accessing international credit markets. The most notable case was Argentina in 2016. After the end of a long dispute in the U.S. courts with the vulture funds, which, included 15 years of exclusion from international private credit markets, it began to borrow again at average rates (in U.S. dollars) of 7%. This was happening when the global interest rates were still close to zero.

The second critical event was Covid-19. The pandemic led to increases in global debt as countries saw their tax revenues drop and a need for increased spending. For advanced economies, this did not have sustainability consequences but mostly intergenerational consequences: future generations would pay off debts that were contracted today. But for several countries in the Global South, this situation created immediate debt distress. 

The last blow was the war in Ukraine, which made inflation the top concern for economic authorities all over the world. The response from advanced economies’ central banks featured interest rate hikes and the undoing of quantitative easing — what’s been called “quantitative tightening.” This means less and more expensive liquidity. 

Central banks have their own mandates, and they do not consider the international spillovers of their actions. For the Global South, it becomes more difficult to roll over debts—and in many cases, it becomes unsustainable. With no access to credit markets to refinance the debts, paying them down would imply destabilizing economic and social dynamics, meaning deeper recessions, more unemployment, and more inflation.

These outcomes show how the policies of a few powerful nations have significant repercussions for the rest of the world. 

IV] In what ways does this looming debt problem differ from what happened in 2008 and the famous debt problems of the 1980s, often said to have led to a “lost decade” in many parts of the world?

There are similarities as well as important differences between what is going on now and the 1980s. In both cases, the troubles were preceded by a period of growing global liquidity that was then abruptly reversed. In the 1970s, the oil price shocks led to massive trade surpluses for oil-exporting countries and deficits for the oil-importing ones. Those surpluses were the basis of the loans extended to the deficit countries. In 1981, the Fed responded to inflation by increasing interest rates up to a peak of 20%. Today, the Fed has also abruptly increased rates, but not as much. In both cases, contractionary monetary policies in advanced economies created troubles elsewhere.

The first key difference is that the 1980s debt crisis included distress in a different group of economies than we see now. Most of Eastern Europe was in crisis — first Poland, then Romania, Hungary, and Yugoslavia requested IMF financing at the beginning of the decade. And it hit large economies of Latin America, including Brazil and Mexico. The IMF lending reached what for the time were record amounts, and those funds were used to bail out private creditors.

The second key difference with respect to the 1980s is the composition of creditors and the size of their exposure. Back then, international private financing to sovereign countries came mostly in the form of commercial bank loans. Bank exposures, especially from the U.S. and Japan, were so large that a wave of sovereign defaults in Latin America would have created a financial crisis in those two advanced economies and almost surely it would have turned into a global crisis.

Martin Guzman witnessed something interesting years ago while teaching at the Trento Summer School, an amazing academic school for Ph.D. students created by the great Swedish economist Axel Leijonhufvud. In his lecture, a retired former economist of the NY Fed who was in charge of the Euro-dollar syndicated loan market and dealt with the debt crisis in Latin America from that position, explained to us very candidly that the American banks were so exposed that the U.S. government had to exercise its foreign policy for the region so as to make sure there would not be a wave of defaults in the countries from that region. They did so for the entire decade, which was as long as it took to get to a point at which accepting some losses would not bankrupt the system. We had Latin American economists in the audience who had been involved in policymaking in their countries during that decade. They had seen firsthand how being deprived of foreign exchange led to a lost decade for growth and in some cases hyperinflation, like in Argentina. Martin Guzman remember the gloomy faces. When governments borrow in foreign currency, they must be aware that the resolution of sovereign debt crises is a geo-political process. That was true in the 1980s and it’s true now, although the composition of creditors and associated geopolitics is different today.

The events of the 1980s changed the international financial system and set the stage for bonded debt as the main source of international private financing to sovereigns. This takes us to the third key difference: the universe of private creditors is more fragmented today and more complex to coordinate. This also means that the relations between debtors, private creditors, and official creditors are different.

With bonded debt, restructurings may also involve disputes with holders of derivative contracts, arbitration award holders, and other categories of what we should call “claimants of state resources” rather than creditors.

The last decade and a half has featured a significant increase in the incidence of new official bilateral creditors, referred to as the ‘non-Paris club creditors’ as opposed to the established group of major creditor countries which have coordinated their dealings with debtor countries for nearly 70 years, meeting regularly in Paris. This new group has China as the major player but also includes other emerging official creditors such as India, South Africa, and Saudi Arabia.

This all means that the group of debtors in situations of vulnerability, the exposure of the international financial system, and the group of creditors are all different now than in the 1980s. As a consequence, the current crisis will likely be less systemic, but it will be bad for those countries that suffer from it. The solution will require a distribution of debt write-downs among classes of creditors that are interacting for the first time in history and have competing interests. 

For resolving countries’ debt crises, neither then nor now is there a multinational system for debt restructuring. This is a massive deficiency of the international financial architecture—not a casual one, but a result of international power relations.

V] How have these two experiences affected one’s understanding of the international debt problem? Any special insights that helped from academic theory?

When tackling a sovereign debt crisis as a policymaker, there are two key issues that must be clearly defined. 

First, what kind of debt restructuring operation would be consistent with the goal of restoring debt sustainability, meaning restoring conditions for implementing an economic policy plan that is conducive to economic recovery and sets conditions for sustained progress?

Second, you need a view of the power dynamics at play, both internationally and domestically. Every sovereign debt restructuring is a political process that involves conflict, as there are distributional consequences from those processes. There are also efficiency implications that may not fall only on individual stakeholders; those broader processes not only affect how the pie is distributed but also the size of the pie that will be divided among the debtor and its creditors.

Understanding technical issues helps. A critical stone of every debt restructuring process is the debt sustainability analysis that identifies whether the debt is sustainable, and, if the answer is negative, computes the amount of relief necessary to restore sustainability. You need to grasp both the theory and the practice of debt sustainability analysis to craft an appropriate strategy.

Consider the case of Argentina’s 2020 debt restructuring. In 2018, after two years of massive borrowing in foreign currency, mostly under New York law, the country lost access to international credit markets again. The government immediately resorted to the IMF, which, with the political support of the Trump administration, provided the largest loan in the history of the institution. A USD 50 billion loan was approved, then increased to USD 57 billion, of which almost USD 45 billion was disbursed until the IMF stopped when the previous Argentine president lost in the primary elections of 2019 —another hint that the loan was political in nature. (For the record, the newly elected President Fernandez made it clear immediately after taking office that the government did not want to increase its debt with the IMF, and hence would not seek to receive the additional USD 12 billion that had been approved.)

In December 2019 we took office and I became the country’s Minister of Economy. We immediately began to address the debt crisis. We had conducted a debt sustainability analysis that indicated that foreign-currency public debt was unsustainable and that a debt restructuring with a significant cut in scheduled payments was a necessary condition for restoring growth. At the time, the economy was in freefall.

A debt sustainability analysis is supposed to anchor expectations. But in the context of vested interests, in which the stakes are on the order of dozens of billions of dollars, lobbying is intense and may be highly effective to delegitimize the analysis produced by a debtor government, even if it’s based on state-of-the-art theoretical and empirical literature and has the recognition of top international experts. So I asked the IMF to conduct an analysis of debt sustainability. It was supposed to provide guidelines that could anchor expectations both for creditors and for the domestic political system.

The initial response from a part of the IMF staff was puzzling. Some said we can’t do it because your country is not under an IMF-supported program (the previous program had completely failed and had already been dismissed, a failure that was recognized years later, in 2022, by the IMF Staff in its ex-post Program Evaluation), and so we cannot know what the policy parameters that need to feed the debt sustainability analysis will be. That was just a ridiculous stance to me. My response was that we are a sovereign nation, and as such we could provide the information on what policies we were going to implement, even if the country was not under an IMF-supported program. There were some discussions, and I even flew to Washington D.C. from the G-20 meetings in Saudi Arabia in February 2020 to move forward in what was looking like a negotiation on doing a debt sustainability analysis—which should be the right of any member of the IMF. Finally, the IMF management made the decision to produce a “technical analysis of debt sustainability” at our request. It was remarkably similar to the one produced by Argentina’s government.

Creditors didn’t like it. They complained a lot. Some creditors explicitly told me that the staff at the U.S. Treasury Department was telling them not to pay attention to the IMF document. In that context, it was hard to anchor creditors’ expectations, but there was a very important sense in which the IMF analysis of debt sustainability helped: it aided us in dealing with what I would call a “domestic political economy” problem, meaning that our own domestic political system, for different reasons, was not prepared to face a tough negotiation and there were signals to creditors that the government would not be willing to remain in a situation of default, even if that entailed a very bad deal. Having the IMF say what they said on Argentina’s debt unsustainability strengthened the power of the negotiating team to deal with the internal pressures. It’s not easy for some domestic constituencies to be placed to the right of the IMF.

VI] In what ways do economic theory and legal practice are changing in response to the forces mentioned above?

Canonical sovereign debt models have a hard time accounting for or explaining the facts on sovereign debt defaults, restructurings, and returns. The standard economic literature on sovereign debt doesn’t incorporate a fundamental dimension for understanding sovereign debt dynamics: power.

A recent paper by Josefin Meyer, Carmen Reinhart, and Christoph Trebesch, “Sovereign Bonds since Waterloo,” analyzes data on ex-post returns of sovereign debt—which accounts for losses associated with defaults and restructurings— since Napoleon’s defeat at Waterloo in 1815—an event that marks a wave of creation of sovereign nations—and finds evidence that sheds light on how the system actually works: the average real ex-post returns from foreign-currency denominated government bonds significantly outperform the U.S. or U.K. bonds by an order of magnitude of 400 basis points on average, and in most Latin American countries the margin is even larger. For instance, the average real ex-post return of Argentina’s bonds over the last 140 years is more than 500 basis points higher than a U.S. treasury bond, even accounting for all the defaults.

What explains this? One possible explanation is that private creditors are risk averse, hence models that assume that they are risk-neutral or that risks are sufficiently diversified can’t explain this result. I don’t find this explanation very plausible, because in such a case we should observe that less risk-averse creditors or those who are better at managing risk become the bond “marginal buyers.” To me, that evidence suggests that there are rents, and that has to do with the way the system works. It’s the way power shapes the system – something that the economics literature has not explored in depth. In other words, power in the system readjusts the returns in favor of the creditors.

The role of power should be a central part of a research agenda in economics in general, and for sovereign debt specifically. 

When it comes to practice, there has been an evolution related to power dynamics, as I described before. Let me highlight two issues that matter for the practice of sovereign debt crisis resolution today.

The first one is related to creditor coordination. We still do not have anything remotely close to a bankruptcy framework for sovereigns, so negotiations happen in the context of an international non-system. Since the end of the Bretton Woods system, we have seen bad outcomes when it comes to resolving debt crises. The current non-system produces incentives that delay the initiation of restructurings, and when they are done, they generally come with insufficient relief to allow the countries to restore growth. The literature refers to this problem as the “too little and too late” syndrome.

Top experts have been demanding the creation of a multinational system for sovereign debt restructuring for a long time. The 2009 Stiglitz’s Report for the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System is clear in this respect and anticipates the troubles that we are seeing. In 2001, even the IMF pushed a Sovereign Debt Restructuring Mechanism proposal. While it would have been difficult for debtor countries to accept a creditor as the judge, the initiative did not gather the shareholders’ support, or at least the support of the IMF’s main shareholder, which would have had to take it to Congress for a vote that would allow a change in the IMF Articles of Agreement.

The latest progress for coordinating private bondholders was the endorsement of enhanced collective action clauses that make it easier to act without unanimity from creditors and makes vulture funds’ holdout behavior less profitable in expectation. These measures helped but weren’t nearly enough to guarantee effective restructurings. We tested them for the first time in Argentina’s 2020 restructuring. 

The second issue that merits mention relates to the IMF. A few days ago, on April 3rd, Columbia University’s Initiative for Policy Dialogue hosted a roundtable of experts on sovereign debt at the Columbia Business School. The roundtable was joined by representatives of debtor countries, the U.S. Treasury Department, China, private creditors, the IMF, and academics and practitioners. We had some very insightful discussions. Debtor countries were complaining that when the IMF produces a debt sustainability analysis, it remains secret until the IMF’s Executive Board approves the IMF-supported program. Most of the policymakers do not know that they can make all the information publicly available — they are nudged or pressed not to do it. As member countries, they could request the IMF to perform a debt sustainability analysis as technical assistance and get it published even if there are no negotiations towards an IMF-supported program. Countries could also make public all the memorandums that constitute the IMF-supported programs before they are taken to the Executive Board for approval. That’s how things should be done. Societies should have a chance for public scrutiny of deals between a government and the IMF staff that have massive consequences for their development.

It’s peculiar that the IMF wants the programs to be “owned” by the country, but the institution doesn’t have a preference for transparency. If you want the people to own the program, you should allow the people to see the program.

In 2022 in Argentina, immediately after we reached a deal with the IMF’s staff to refinance the $45 billion debt borrowed in 2018-2019, all the memoranda were submitted to the National Congress. In 2020 I presented a bill that makes Congressional approval mandatory for having any financing program with the IMF. It was passed in 2021 almost unanimously. This was the first country to adopt a legal framework of this kind, and I believe others would do well in doing the same.

EPILOGUE

Capitalism never fade – it just change formations