Tuesday, December 31, 2019

2020 Hindsight: Why the world is not zero-sum

According to a report, Global Waves of Debt, pre-published by the International Bank for Reconstruction and Development:
Waves of debt accumulation have been a recurrent feature of the global economy over the past fifty years. In emerging and developing countries, there have been four major debt waves since 1970. The first three waves ended in financial crises—the Latin American debt crisis of the 1980s, the Asia financial crisis of the late 1990s, and the global financial crisis of 2007-2009.  
A fourth wave of debt began in 2010 and debt has reached $55 trillion in 2018, making it the largest, broadest and fastest growing of the four. While debt financing can help meet urgent development needs such as basic infrastructure, much of the current debt wave is taking riskier forms. Low-income countries are increasingly borrowing from creditors outside the traditional Paris Club lenders, notably from China. Some of these lenders impose non-disclosure clauses and collateral requirements that obscure the scale and nature of debt loads. There are concerns that governments are not as effective as they need to be in investing the loans in physical and human capital. In fact, in many developing countries, public investment has been falling even as debt burdens rise. 
We hear from time to time that "the world is not zero sum." Rarely is that dictum explained in other than mystical terms (e.g. "supply creates its own demand," "human wants are insatiable," etc.). The explanation, however, is simple: debt. Without debt there would be no "economic growth."

Debt finances growth; growth services debt. And they all lived happily ever after. But some debt takes "riskier forms." Hyman Minsky wrote about the first of those four debt waves in "The Bubble in the Price of Baseball Cards." In that paper Minsky addressed the price of baseball cards, the Latin American debt crisis, the Japanese, Korean and Taiwanese real estate and equity booms of the '80s, and "[o]ne of the puzzles of the 1980s... the rapid rise in the financial wealth of Donald Trump."

What the rise in Trump's wealth had in common with the Latin American debt crisis was that they both were predicated on a precarious differential between real interest rates and increases in asset values that could change very suddenly with an increase in the former or a decrease in the latter. 

One of Minsky's best shots was a drive-by -- relating the regional increase in real estate prices to "rapid increase in incomes in banking and financial services -- sort of a derived demand from the financial success of Drexel Burnham." That Drexel Burnham "success" was, of course, transitory and involved fraud. The inference was that Trump's financial success, too, was ultimately -- at least indirectly -- fraudulent.

John Kenneth Galbraith coined the term "bezzle" for the amount by which total wealth is inflated by embezzlement in the period before the embezzlement is discovered:
At any given time there exists an inventory of undiscovered embezzlement in—or more precisely not in—the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle.
Any large quantity of debt includes an inventory of embezzlement. A certain amount of it will never be paid back. Some was never intended to be repaid. As the debt increases relative to income, the proportion of prospective embezzlement also increases.

Happy New Year!

27 comments:

Anonymous said...

This is a fascinating post, but what is the moral? How does a Nigeria or Sri Lanka or Brazil develop without debt accumulating?

Sandwichman said...

The moral to the story is that economic growth involves debt and debt involves non-probabilistic risk (uncertainty). Therefore, growth is inherently risky.

Anonymous said...

"The moral to the story is that economic growth involves debt and debt involves non-probabilistic risk (uncertainty). Therefore, growth is inherently risky."

Excellent summary, but China has averaged 9.5% growth in GDP from 1977 through 2018 and will have grown over 6% in 2019, a consequence of which will mean the end of severe poverty in a country of 1.4 billion by 2020. Another consequence is that China is now the largest economy and is using its size and growth to help other developing nations not to mention Greece and several developed nations. I then will take the risks run by China over and over, having watched the consequences.

Anonymous said...

Growth is risky but essential and China has shown profoundly just how well the risk can be handled. Now hopefully for Ethiopia and Zambia and Malawi ...

Sandwichman said...

China is by far the biggest player in that $55 trillion of EMDE debt estimated by the World Bank report. I'm not saying the "fourth wave" will go the way of the first three.


But I'm not saying it won't.

Anonymous said...

China is by far the biggest player in that $55 trillion of EMDE debt estimated by the World Bank report.

[ This is of no consequence.

The World Bank is an always American-led institution that has no interest in the development of China, rather the reverse.

China has a lower government debt share of GDP than Germany or India, let alone Japan or the United States. China has about $3.1 trillion in foreign currency reserves and another $1 trillion in a state investment fund. China is the largest economy in GDP using PPP which is the proper measure. China manages capital flows.

Chinese economic managers are always aware of the Japanese bubble forming and collapse, the Asian currency crisis and of course the Great Recession. Chinese economic managers have recognized and worked through problem after problem that Western economists thought would or should be crippling (see the writings of Brad DeLong or The Economist).

There is no systemic danger at all to the Chinese economy from debt. ]

Anonymous said...

http://www.bradford-delong.com/2015/12/ever-since-i-became-an-adult-in-1980-i-have-been-a-stopped-clock-with-respect-to-the-chinese-economy-i-have-said-alw.html

December 1, 2015

China's Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run

Now that 90 days have passed, from the Huffington Post from Last August: *

Ever since I became an adult in 1980, I have been a stopped clock with respect to the Chinese economy. I have said--always--that Chinese supergrowth has at most ten more years to run, and more probably five or less. There will then, I have said, come a crash--in asset values and expectations if not in production and employment. After the crash, China will revert to the standard pattern of an emerging market economy without successful institutions that duplicate or somehow mimic those of the North Atlantic: its productivity rate will be little more than the 2%/year of emerging markets as a whole, catch-up and convergence to the North Atlantic growth-path norm will be slow if at all, and political risks that cause war, revolution, or merely economic stagnation rather than unexpected but very welcome booms will become the most likely sources of surprises.

* http://www.huffingtonpost.com/brad-delong/china-market-crash-5-years_b_8045742.html

-- Brad DeLong

Anonymous said...

http://www.bradford-delong.com/2016/04/must-read-i-do-not-understand-china-but-it-now-looks-more-likely-than-not-to-me-that-xi-jinpings-rule-will-lose-china.html

April 5, 2016

I do not understand China. But it now looks more likely than not to me that Xi Jinping's rule will lose China a decade, if not half a century... *

* http://www.economist.com/news/china/21695923-his-exercise-power-home-xi-jinping-often-ruthless-there-are-limits-his

-- Brad DeLong

Anonymous said...

China by the way has a remarkably high national saving rate, along with the relatively low government debt to GDP ratio and $4 trillion in foreign currency-liquid investment reserves. Also, there is the Chinese-led Asian Infrastructure Investment Bank (the existence of which I am sure bothers the American-led World Bank).

There are always problems in a rapidly developing economy of 1.4 billion. Watch the problems be recognized and worked on to resolution. Pick a problem, I will refer you to work being done to resolve it. Notice by the way how well China has handled the American trade onslaught....

Sandwichman said...

Let's assume that China does everything right. Would that be sufficient insurance against things going south in China's export markets or in its supply chains? Even if China is able to weather a recession triggered by a financial crisis, would it still be in a position to pull the rest of the world out of the slump?

Undeniably, China's growth has been predicated on intensive integration into a world system of trade and investment. That inevitably exposes China to risks that arise from the miscalculations of other actors. Some of those actors may even have hostile intent. ("The World Bank is an always American-led institution that has no interest in the development of China, rather the reverse.")

Anonymous said...

Let's assume that China does everything right. Would that be sufficient insurance against things going south in China's export markets or in its supply chains? Even if China is able to weather a recession triggered by a financial crisis, would it still be in a position to pull the rest of the world out of the slump?

[ An especially interesting and important question, about which I am thinking carefully. ]

Anonymous said...

Thinking through the fine question, before responding I would hope and suppose that Chinese planners are thinking through the question as well. A Liu He is forward thinking and cautious, as is Li Keqiang, and flexibility in thinking is encouraged.

Anonymous said...

Let's assume that China does everything right. Would that be sufficient insurance against things going south in China's export markets or in its supply chains? Even if China is able to weather a recession triggered by a financial crisis, would it still be in a position to pull the rest of the world out of the slump?

[ By way of thinking, China is bent on extending globalization, especially through the Belt and Road initiative but with all comers. Also, China is aware of how precipitous the United States can be in limiting or stopping trade. So, we can be sure that the Chinese are making sure to be independent of any critical reliance on the US or US controlled supply lines. Actually, China has already mandated independence in a number of key economic areas.

We have then a China which is both working on globalization and being sure to be independent in filling critical needs. ]

Anonymous said...

Also, at growth between 6 and 6.5%, which is the current objective and likely to be the objective through the coming 5 year plan beginning in 2022, China to my understanding should be able to drive some 30% of growth through the Belt and Road countries.

Deborah Brautigam at Johns Hopkins needs to be read in this regard:

https://www.tandfonline.com/doi/full/10.1080/23792949.2019.1689828

December 6, 2019

Anonymous said...

"Low-income countries are increasingly borrowing from creditors outside the traditional Paris Club lenders, notably from China."

Deborah Brautigam makes clear that this China lending scare is of no consequence, but the Chinese lending is rather an important even critically necessary development assist:

https://www.tandfonline.com/doi/full/10.1080/23792949.2019.1689828

Anonymous said...

Low-income countries are increasingly borrowing from creditors outside the traditional Paris Club lenders, notably from China....

[ Precisely what is needed for development needs, and I can assure you that China selects projects and tracks development loans carefully and while there will be problems now and again there is and will be no systemic danger to China or borrowers from the loans. The Chinese know what development is about and loans are intended to facilitate that with all due care.

The Paris Club or World Bank should be learning about credit extension from the increasingly efficient development progress of China. ]

Anonymous said...

Please do ask for any data you might wish.

Anonymous said...

Another point about a debt wave nonsense focused on China, is that Chinese debt is at least 90% Yuan denominated debt. There is no way foreign speculators could take advantage of Chinese debt extensions. China is just not vulnerable to a foreign debt bubble, as were American lenders in the wake of the housing-mortgage bubble. Also, since the beginning of 2018 Chinese international investors have been told to avoid foreign real estate lending. Investing in a Greek or Sri Lankan port, that has important commercial value to either country and which value China will add to through development is only going to be "win-win" in time no matter American-led complaints or scares.

Really, Chinese planners actually know stuff and learn about what may have been missed quickly.

Anonymous said...

Do read Deborah Brautigam, to begin with, who has been writing about Chinese lending for years and who is even Western.

Sandwichman said...

Thanks, 'anonymous,' for the Brautigam reference. I will check it out.

Anonymous said...

https://www.tandfonline.com/doi/full/10.1080/23792949.2019.1689828

December 6, 2019

A critical look at Chinese ‘debt-trap diplomacy’: the rise of a meme
By Deborah Brautigam

Abstract

In 2017, a meme was born in a think tank in northern India: Chinese ‘debt-trap diplomacy’. This meme quickly spread through the media, intelligence circles and Western governments. Within 12 months it generated nearly 2 million search results on Google in 0.52 seconds and was beginning to solidify into a deep historical truth. Stories can contain truths and falsehoods. Human emotions, including negativity bias, prime us to think in certain ways. This paper retells a series of stories about China’s international involvement, including in Angola, Djibouti, Sri Lanka and Venezuela, that challenge the media’s spin. It concludes with some suggestions about the relationship between academia and the media and policy worlds, and the need for scholars to speak ‘truth’ to ‘power’.


Deborah Bräutigam is the Bernard L. Schwartz Professor of Political Economy and Director of the China Africa Research Initiative at Johns Hopkins University’s School of Advanced International Studies.

Anonymous said...

There is so much more, such as Chinese infrastructure in Ethiopia allowing for a land-locked nation to reach to the sea. Across to Laos, infrastructre that will allow a land-locked nation to reach to the sea. The port of Piraeus when greece was floundering... Bringing power and roads across the country and a port to Pakistan... Mozambique, a port. Ethiopia? China has just launched the first Ethiopian satellite... On and on.

Oh, and I need to mention again the ending of severe poverty in China this year, this very year, a momentous accomplishment.

Anonymous said...

Spelling:

infrastructure

Capitalizing:

Greece

Sorry, I am tired and there is so much more.

Calgacus said...

Sandwichman:Undeniably, China's growth has been predicated on intensive integration into a world system of trade and investment. That inevitably exposes China to risks that arise from the miscalculations of other actors. Some of those actors may even have hostile intent. ("The World Bank is an always American-led institution that has no interest in the development of China, rather the reverse.")

No need to speculate. In 2008-09, we saw how trivial those risks and exposures were when confronted by a government that knew what it was doing. Obsessive, universal exaggeration of the importance of the international sector is a topic that there should be many books about. But there aren't any; only a few tangential to it.

Long live Socialism in One Country (and then one planet)! Down with today's Trotskyism for the Rich!

Anonymous said...

"In 2008-09, we saw how trivial those risks and exposures were when confronted by a government that knew what it was doing. Obsessive, universal exaggeration of the importance of the international sector is a topic that there should be many books about. But there aren't any; only a few tangential to it...."

I appreciate this comment, even as I think about the Chinese emphasis on globalizing while even the nature of the European Union is in question and American for the time at least seems determined to change the concept of globalization to an open American-first concept.

Anonymous said...

https://www.washingtonpost.com/news/monkey-cage/wp/2018/07/24/xi-jinping-is-visiting-africa-this-week-heres-why-china-is-such-a-popular-development-partner/

July 24, 2018

Xi Jinping is visiting Africa this week. Here’s why China is such a popular development partner.
By Deborah Bräutigam - Washington Post


https://www.nytimes.com/2019/04/26/opinion/china-belt-road-initiative.html

April 26, 2019

Is China the World’s Loan Shark?
Some say Beijing lends money for infrastructure and development to pressure poor countries with debt. Not so.
By Deborah Brautigam

Anonymous said...

https://www.washingtonpost.com/news/theworldpost/wp/2018/04/12/china-africa/

April 12, 2018

U.S. politicians get China in Africa all wrong
By Deborah Bräutigam - Washington Post


https://www.the-american-interest.com/2019/04/04/misdiagnosing-the-chinese-infrastructure-push/

April 4, 2019

Misdiagnosing the Chinese Infrastructure Push
China’s Belt and Road Initiative does not pose a military or strategic threat to the West so much as an economic one.
By DEBORAH BRAUTIGAM