SPECIAL SESSION : ROKE -The 9th Godley-Tobin Lecture

[00:00:06][music] the godly memorial lecture.

[00:00:41]Thank you everybody for being here. My name is Matias Reno. I'm not an editor of despite what uh what uh Ricardo said of I'm the book editor. I can guarantee you that I do not see your your your papers. They discuss the papers. So when you have to blame somebody because of the comments of you know the reviewer number two, I have nothing to do with that. I was in favor of your paper. Uh, so I have nothing to do with that. I haven't been for now what four years. I haven't been I've been doing the book review and I'm not going to be doing that by come February it will be just Luca. So I'm going to be finally done with that and I'm also close enough. We are with Jay and Stan. I hope close enough to being done with the new Paul Grave dictionary of economics and I will never edit anything else in my life. So that that is something that it's behind behind. So first of all uh you know let me thank uh Suma and the Suma Palooa. So so he definitely as he said he has created this as a as a new uh place.

[00:01:52]It's an institution like rogue like the review of ken economics. It has become a place for all of us to gather and to have conversations and discuss and that's invaluable. uh it's institution building and so I have great admiration and I thank you uh for this and I'm very happy to say that we're starting a new marriage uh so there is a wedding here of the uh godly Tobin lecture organized by the review of kin economics and the demand led workshop uh so it's the ninth godly tobin memorial lecture and the seventh uh you know workshop uh uh on demand le growth so so the idea is going forward to have um one uh one godly Tobin in New York uh every February and one one um godly Tobin the following year in Rio in July. So so that that would be the new uh sort of framework uh for for the godly Tobin lecture. Before I present you, you know, we're very happy to have Jay Gosh give the uh the ninth lecture. Let me say a couple of things about the lecture and about ro and the project of ro. So ro >> [clears throat] >> uh came about uh the review of kjun economics as a project exactly to uh reconstruct the uh old kenjun consensus and to be open and pluralistic and not necessarily uh based on a particular view of what kenjun economics meant. The idea was that although there were significant uh differences between the Cambridge Cuns that at least some of them more clearly than others had a project of putting together Cynas and the old classical political economy with the neocclassical synthesis in the United States. But there at the policy level and to some extent at the political level uh there used to be what we could call a can consensus and that breaks down in in the 1970s and it's in the 1970s really that a terodox economics appears as we sort of tend to discuss it you know with different journals we publish in different places we we gather at different conferences and and so on and so forth. The idea of the review of Kenjan economics was to try to bring together a few of those groups in one place and to a limited but not insignificant extent we have done that. I should say in that respect I want to thank uh Tom Tom Pal was instrumental in this. We came up with the idea the name of the journal in an airport in Texas.

[00:04:30]So that was a little bit more than 10 years ago. was what uh 16 years ago or something like that. Um so so in that respect we have sort of succeeded in doing that. The godly Tobin lecture is a uh a further project something similar to what uh Suma was talking when he had the idea of having the um uh the workshop. The idea of having a lecture that highlighted uh [clears throat] this this bringing together of these two strands of canonism represented as I said I think at some point it could have been Samson and John Robinson or something along those lines. The reasons where I was a student of godly and Tom was a student of Tobin. Tobin had gone to the new school when I was a student uh more than 30 years ago and he said in that lecture that he was not an hyphenated kangjun that he was simply kangjun and and I told that I was working at the time between godly and godly said oh I feel that way too I'm just a non-hyenated kangjun so the non-hyphenated no gives you the non-hyphenated kangjun memorial lecture that's the idea of this they're just kangun So I have the pleasure to present today Jayatti Gosh. I met Jayatti for the first time at a conference organized by Lance Taylor. She probably doesn't remember but I it was in 2001 November of 2001. Lance told me that she was one of the most brilliant development economist and one of the best piano players. Uh and so um I I was actually presenting a paper on on the Brazilian economy uh in that uh in that conference. Uh at any rate I I was lucky to also invited when I was at the central bank of Argentina. Martina is here uh was important and instrumental in the fact that I work there and and Jiadi came to a conference there. We actually wrote together a few things in that in that era. So it's it's on a personal level it's a pleasure to have her here. Uh she doesn't need much of an introduction but I'm going to tell you a couple of things about her. So Jayatti um I think your undergrad I learned this your undergraduate degree is in sociology from Java Nu University from Delhi. Okay. Well but then you did the the economics there. Yeah. The masters before you went she went to England. She worked with uh Susan Payne first before you moved to to Jeff Harkard. And the influences are obviously the influences of what I was talking before the the Kenjun Kletkian John Robinson side of of the economy of the Kenjun sort of tradition and of course the sort of Marxist more radical traditions in India Krishna Brad Patnik Praat Patnik and so on and so forth were were important in in information and I'm sure those things will be reflected today in the lecture in the title of the lecture that you know talks about decolonizing kjun economics. Uh she [clears throat] uh received many prizes. Uh I think the ones to site are the ILO prize uh on it's decent work. I think uh decent work uh uh you know um prize by the ILO the international labor office and the John Kenneth Greath uh sort of uh you know prize which I think are very feeding.

[00:07:45]But what I like is she gave two other lectures. the David Gordon lecture for the Union for radical political economics and David was my teacher and and that's a very fitting sort of compliment idea that we are in in the set of lectures that you know correspond to to the important groups and the other you gave uh the Hellbrunner lecture at uh at the at the at the new school and and Bob Hellbrunner was when when I was there still teaching so so she has given all the important Terodox lectures she has received some of the important uh and you know we're in for for a treat.

[00:08:24]So without further ado Jadi [applause] >> okay well thank you so much Matias and thank you for inviting me. I can't tell you how utterly honored I feel actually to be giving this godly to lecture. I mean you have such a prestigious list of very eminent economists so I feel like a bit of an outlier but never mind. Okay. Uh it's also really I mean I lucked out that you choose to have it in Rio the year that I'm delivering this lecture.

[00:08:58]So it is so much better than doing this in New York. Thank you. [laughter] Uh so I'm doubly delighted and I have to say I'm very impressed with the quality of the papers I heard today. Uh so it's it's a great job you're doing Ricardo. I think it's well all of you really and uh it's clearly something that uh should be done much more and it's fantastic that I was able to be part of it this time as well. So thanks a lot for all of this.

[00:09:25]Okay. So you know I don't know about being in for a treat. No pressure, right? I mean you're not supposed to say all this before I I do need the um thing that allow Ah, yes. Great. Thank you.

[00:09:38]Okay. So, yeah. What I'm going to do, I'm holding it, John. No.

[00:09:54]No.

[00:09:56]Um, any idea if am I doing it wrong or something?

[00:10:06]>> There we go. Damn, it wasn't me.

[00:10:09]Oh, so he's doing it.

[00:10:10]>> No, he's passing.

[00:10:12]>> Should I?

[00:10:13]>> I think it was not me.

[00:10:19]>> Sorry about that. But Oh, great. Thank you. So, >> it didn't happen in New York. [laughter] >> Oops. Oops. Okay. Um, no.

[00:10:35]No, he's doing it now. [laughter] Oh, it's working. Okay.

[00:10:42]Yeah. Okay. Right. Yes. Great. Thank you. Okay. So, look, I mean I it's embarrassing to list all this here. I mean, you guys know this much more than I do about all the insight the fundamental insights about economics etc. But just just to say it again, why?

[00:10:58]Because some of these things actually were critiqued early on in other parts of the developing world. Okay. And I know you uh I I mean I've gathered the many ways in which Latin Americans have decolonized gains including through that interaction with the structural tra tradition that Julia talked about it all of that it also happened in India but yes of course you know effective demand involuntary unemployment autonomous public investment the role of deficit financing money creation counteryclical policies re regulating ing finance. I want to emphasize that because I'm going to come back to that. I think that's going to be the critical thing really in for us in the 21st century. Of course, the idea of the symmetric adjustment, you know, in international balance of payments, the idea he proposed in that discussion with Harry Dexter White, which again was discussed this morning about an international clearing union and so on. Lots of very important significant insights that are still relevant today. But you know I do want to emphasize that the decolonizing of Keynesian thinking is a very old tradition. Actually it's almost as old as when the general theory became a kind of common thing in a lot of the world and a very early version of this particularly was in Asia. I don't know how many of you have heard of VKRo who uh was an Indian economist who was actually around in Cambridge at the time with John Robinson and etc etc. Uh and his argument was really that you know the multiplier principle really only works in an economy that's industrialized that has unlimited uh well first of all has excess capacity and more or less that you know unlimited supply of labor until full employment which is what you want to reach anyway.

[00:12:49]So there there's no issue in a sense in terms of the multiplier process working out if you have excess capacity and unemployment.

[00:12:58]Ralph argued that you know look yes of course you need involuntary unemployment for the multiplier to work but you also need he says an industrialized economy with an upward sloping supply curve that does not become vertical until much later. So this issue that of not having a vertical supply curve for anything.

[00:13:16]Now why does that matter? Essentially he says the point is really excess capacity not not just overall but in the consumption industries consumption goods industries well what has been talked about in terms of the essential goods you know the wage goods essentially is what they called it then and also a relatively elastic supply of working capital for increased output. So Ralph says no sorry we don't have that kind of economy and he's thinking about South Asia but I would argue it was actually applicable to a large part of Asia for sure and Africa as well which is to say there is a wage goods constraint there is a supply bottleneck and therefore if you just increase autonomous investment this doesn't necessarily translate into the full working out of the multiplier you can actually be stopped by supply bottlenecks you cannot grow enough food say or you cannot generate enough wage goods. There there are supply bottlenecks that prevent the multiplier process from working through and this was subsequently also developed to include infrastructure bottlenecks which are also a fairly big thing in many developing countries and certainly at that time were there. So what does that mean? It means that you do that and you don't necessarily get the full employment levels you get inflation.

[00:14:38]Okay. And that insight plays into a bunch of other things.

[00:14:44]There's a huge amount of ways in which there have been other critiques of that you know the basic some of those uh thoughts but also extensions. I won't say critiques so much as extensions that are trying to um in a sense apply some of these concepts but with conditions in uh different kinds of economies. The nature of unemployment is it entirely demand determined or is it structural?

[00:15:10]Is there undermployment? Uh Kleski as Julia knows uh talked about this fundamentally unemployment in developing countries according to Galileeski was in fact uh structural. It was not necessarily demanddriven. It was a shortage of capital that generated the unemployment for Kleski there. John Robinson has an extensive amount of work on the nature of unemployment and particularly undermployment which is of course you know very prominent in in large parts of the developing world but basically those se large informal sectors are typically characterized by underemployment persistence of informal activities and the dual economic structures there's a lot of material that that duel is nothing to do with the Louiswis jewel really or if it is it's you know it's sort of vaguely it's related yeah it it it's not the same it kind of rhymes but it's not the same and Amitavos Prabhnak Galan a lot of these people have looked at that interreation between informal and formal not in the standard Louiswisian way now I'm thinking Louis the way you said about but uh in the the Arthur Lewis way but in in more complex models [gasps] one of The critiques that has become much more significant recently is the lack of recognition of unpaid labor which is actually quite important and it does change the way you look at macroeconomics when you recognize unpaid labor in the Raher in uh India EPEClakaran in Turkey etc. lot of people have looked at that issue but specifically on the macroeconomic implications of that issue the financing of development I think again Julia mentioned that this morning right and the fact that you know the basic problem of financing development in well Kellleski at that point was talking really mostly about closed economies but but generally was to overcome the wage goods constraint and therefore the food constraint that the problem of financing development is actually a problem of the real economy.

[00:17:18]It's the problem of the inability to generate the wage goods that you need for expansion. Then of course there is this whole recognition of inflation is not just you know cost push demand pull but ultimately a struggle over income distribution which is a long tradition here. I don't have to tell people in Latin America about that you you have much longer tradition of this of course then when you open the economy then what happens? You can have the two gap models, the three gap models and you know again I feel embarrassed mentioning them in this room because all of you are so familiar with of course the generary third world types but certainly also sim timoli porcel etc have done a lot of work on those three gap models. The standard Keynesian approach to open economy macro was usually seen as either the elasticities approach or the absorption approach, right? And the elasticity approach was the Marshall learner conditions. And of course people knew that there was a very complicated you know formula but everybody boiled it down to the demand elasticities of imports and exports being greater than unity which is only true for industrial economies because it they don't have a problem of supply elasticities. The supply elasticities are assumed to be in infinite for industrial economies. Okay.

[00:18:38]In the developing world that's not true.

[00:18:40]So you have to actually pay attention to these supply elasticities which comes back to that earlier problem about bottlenecks and so on. And so the marshall learner conditions don't necessarily work.

[00:18:53]And of course even with the absorption approach you can end up with the possibility of contractionary devaluations. If you remember the early Keynesians all assumed that devaluation is always expansionary.

[00:19:05]Yeah. And we have some modern modern monetary theorists who also think so as well. But we do know that it can indeed be contractionary.

[00:19:14]And then of course there's a whole relationship between you know open and controlled trade. Open or controlled trade and industrialization which is not a shortrun macroeconomic problem specifically but it does have you know it's more of a growth and development problem but it does have the shortrun implications. Again, I mean, you know, Mariad Konasau definitely talked about this, but so did Omia Bakchi, who is one of our great development economists who passed away last year.

[00:19:44]Okay. Now, I'm actually not going to talk about all that. I'm just trying to tell you that there's been a lot of the lot of decolonizing that has happened already with Keynesian economics. I'm going to talk much more about financial globalization and how we have to now decolonize in a different way in along different dimensions because of the fact of financial globalization. And again, this is something you all know. We've had these waves of capital account liberalization uh across low and middle inome countries. I I keep saying LMIC's now because you know developing some countries are not developing anymore.

[00:20:21]They're in fact retrogressing. So just low and middle inome countries. Yeah.

[00:20:26]uh from the early 1990s. Now, what does that involve? You can allow foreign residents to hold domestic financial assets. In other words, you liberalize the inflows.

[00:20:37]You can allow domestic residents to hold foreign assets. So, you liberalize the outflows. And then you can do the extreme form of the capital account liberalization, which is to allow foreign assets to be freely traded in your domestic markets. And of course that can culminate in dollarization.

[00:20:55]Um Ecuador of course is officially dollarized but you know maybe Argentina is kind of de facto dollararized kind of. Yeah. So so you know once you allow that to happen that really completely reduces your ability to manage the capital account in any meaningful way. So why did so many countries do it? In fact, p practically every country in the world has got some extent of capital account deregulation.

[00:21:24]But many have gone the whole hog and many have done certainly the first two.

[00:21:28]Why did we do it? Because we were told, well, you know, you need global savings.

[00:21:32]You don't you're not generating domestic savings rates that are high enough for the investment you need. So, you really have to attract more capital and that will give you more investment and growth and and you will then become a developed country. So it was really that you will have this net inflow of financial resources but this is actually not an expectation that has been met. I think people know that broadly, you know, we've really had a situation of water flowing upwards. There's a net flow of capital resources from the south to the north overall. And also for every continent, Latin America, well, yeah, Latin America, Africa, Asia, I hesitate to call Asia continent, the three different bits of Asia because it's more it's it's so complicated. But generally there has been a transfer in the last three decades actually now there's been a transfer of resources from south to north particularly to the US within that there's an international context okay so we were supposed to get a transfer of resources from capital rich to capital poor that's what all the textbooks tell you even the latest version of the handbook of international economics the um you know the who which one was the one that brings them out the very mainstream versions those big fat books. Yeah. Uh says yes of course capital will flow from capital rich to capital poor countries. And I'm thinking when did they write this and when did when will they wake up you know but in fact typically mobile capital flows in the wrong direction. But what's important for us are the currency hierarchies because the nature of global capital markets is one that involves very sharp and almost largely unchanging currency hierarchies. Okay, which is quite interesting because they're unchanging despite the more rapid growth of many economies. the more you know they still remain within certain patterns of the US at the top, Europe next, Japan etc. then maybe secondrun uh middle income developed countries etc. and then the rest of us down to the very bottom in terms of investor perception. Okay. And as a result we are forced to restrict our own macroeconomic policies. We don't have that policy autonomy and then we are also the victims of the macroeconomic policies of the global north. Okay, we are subject to their spill words. If they want to have low interest rates, we get all the capital inflow for a while. The minute they want to raise it, the capital flows out etc. You know the fiscal policies actually in turn mean less resources for the developing world. The capital is highly mobile but it's not something that we have much control over. Okay.

[00:24:29]And of course that affects exchange rates which is a a very supposedly a very critical policy variable. Okay. Now overall there are two aspects of this.

[00:24:40]There is the shortrun impact of all of these spillovers or impacts of shocks and so on and so forth. But there is also the fundamental difference which means that because we are perceived to have higher risk associated with our financial assets, we necessarily face a higher cost of capital and that in turn means that our debt servicing requirements are much higher. So even when we are much more fiscally prudent and well behaved and disciplined and so on, we actually suffer from higher rates of return or on our on the assets that foreigners hold with liberalized capital accounts. In fact, it doesn't even have to be the foreign investor. It can be the domestic investor. Especially when you've allowed, as I said, you know, both forms the both the inflows and the outflows are liberalized.

[00:25:34]You have this issue that the risk perceptions will dominate in terms of how the capital flows and always you will be facing higher interest rates uh much more need to provide higher rates of return on your own domestic assets.

[00:25:51]Now all that is bad enough but we we was the IMF was supposed to be a global financial safety net has not functioned that way at all. And of course, if you're in a debtor world, the lack of a sovereign debt resolution framework in turn dramatically adds to debt servicing costs because you know there's no way of restructuring really in a meaningful way most of the time.

[00:26:18]Of course that in turn has generated so we've had these periods of crisis. The '9s was a period I think the IMF counted 92 balance of payments or financial crisis in the developing world over the 1990s. Okay. What happened in the 2000s is the developing countries said, "Okay, enough already. We're exhausted with these crises and we're going to the IMF and and doing all that. So, we will do self insurance. we will add to our reserves and have these very cheap um uh basically ensure that we have enough of a cushion to tide over a period of potential crisis. Okay. None either way you basically end up worrying about the level of your fiscal deficit. So what's the traditional Keynesian argument? Why would the fiscal deficit be bad? It would be bad in so far as it reflects an excess of expenditure over income which can translate into either higher inflation or a balance of payments deficit. Right? That's how it worked.

[00:27:21]But a fiscal deficit need not involve actually a balance of payments deficit at all or an inflation if it is completely countered by a private savings surplus domestically. Right? or a fiscal surplus cannot save you if your private sector has a large deficit. In other words, you know, it's not an identity. It's part of the identity.

[00:27:45]It's public and private net savings that matter. And so, it's really what you have to worry about is not only the government deficit. Yet, the way everything has evolved, there's an assumption that the private deficit is okay because it's market determined.

[00:28:02]it's responding to market stimuli and incentives and therefore it's got to be correct whereas the government deficit is that this bad thing you know it's government spending too much and so that's the problem and so you find the IMF going into countries where there is a balance of payments crisis which have government surpluses Spain during the Euro zone crisis before that Thailand South Korea in the Asian crisis had government surpluses pretty high 3 4% of GDP and they're told increase your surplus because the private sector is in big deficit. Yeah. So there is this whole um concern about large public deficits, large fiscal deficits. And what's the argument? It's not again you know the traditional Keynesian issue with the government uh open economy was that you know there would be import leakages for the multiplier not to work fully and so on. Here it's not about that. It's about the impact of finance and what financial markets can do to you. So financial markets are not supposed to like large deficits. Okay. We're always told that, right? You can't do this deficit because the financial markets will not allow it.

[00:29:17]It's very strong in Brazil for sure.

[00:29:18]Yeah.

[00:29:20]And why won't they like it? Because it will add to the public debt. And there is this level of public debt to GDP which is acceptable. Anything above that is terrible. You're just asking for trouble. you have to reduce it. Okay? If you don't, if you add to your deficit, then of course your bond prices will fall and yields will go up and sorry, I it should be bond prices and so your future borrowing will become much more expensive. This is now so internalized in among policy makers in the developing world that they actually do the selfcensorship. you know they control their own deficits way before any financial market can punish them. Okay.

[00:30:01]And mainly they do this by spending.

[00:30:05]But you know, here's the bad news. They get punished anyway. Okay.

[00:30:11]So, let me show you how. So, if you're thinking about fiscal discipline, this is not something that rich countries do anymore. Okay? It's the middle and low-income countries that are doing the fiscal discipline. So this is from 2016 to 2025 this decade but as you can see this is of course the coid9 pandemic period right and the blue line is advanced economies and you can see how the average for all advanced economies the deficit goes to around 10% of GDP in the COVID period because they're doing counteryclical spending as indeed they should okay but they're doing heavyduty counter cyclical spending there's one number I never get tired to geek about as a comparison. Uh I I'll come to that in a minute. Okay.

[00:31:01]The middle inome countries are more disciplined as you can see. Yes, they increase but not by as much and the low-income countries who are already with very low deficits is spending very little more. Yeah.

[00:31:15]If you look at just the primary government balance, now remember the low-income countries have got debt as well, right? So they have to repay a lot of debt service etc. So there's actually even less of a change. Yeah. They really barely increase the primary deficit during the pandemic period. The the um advanced economies, the middle- inome countries.

[00:31:40]Again, there's a hierarchy. The hierarchy is evident just from this.

[00:31:44]Yeah. If you wanted to see it in terms of the averages.

[00:31:51]And how do you control the deficit? not through raising resources but by controlling spending.

[00:31:57]So look at the advanced economies. There's a significant increase in spending. This is the number. This is the advanced economies as a group overall. Okay. The number I never get tired of quoting is the United States spending during the pandemic. The period between January 2020 and March 2021.

[00:32:18]The US spent an additional $28,000 per capita per person. An additional $28,000 beyond what they were already spending. Okay.

[00:32:30]Oh, slightly more than a year. It's a year and a quarter, but still.

[00:32:34]Low-income countries as a group spent $2 more per capita because I'm giving you as a share of GDP, but their GDPs are lower, right? So, there's barely any increase in spending. There's really no counter cyclical spending to speak of for low-income countries during the pandemic, which means not only less social protection, but less counteryclical macroeconomic policy.

[00:32:56]Yeah. Okay. So surely all that good behavior has to get you some benefit, right?

[00:33:04]Because and how does it play out in terms of the debt ratio? The first of all, who has the higher public debt to GDP ratios? The advanced economies of course on average they begin at about 105% of GDP. They go up to 124% of GDP and then they stay pretty high. They stay at about 112% of GDP. Okay, very high.

[00:33:36]The middle inome countries, they do increase it from it's still very low. 55 goes to 60, it's now about 63.

[00:33:44]Okay, but it's I mean, come on, that's low compared to 122, right? But look at the low-income countries. The public debt to GDP, the debt to GDP ratio, it's less than 40% till the COVID crisis and it stays around that level. It barely goes up. Yeah. So we are talking about countries that are being not just fiscally fiscally disciplined, they're fiscally bound, you know, they're changed to the ground in terms of their fiscal behavior. And they're already poor countries that are spending tiny amounts per capita on the most minimal things. Okay, forget about climate investment and all of those things.

[00:34:24]They're not spending on anything really.

[00:34:27]But then let's look at the interest rate effectively that you're paying on this debt. And here you see the picture is reversed. Who gets the lowest interest rates? All those badly behaved advanced economies. This is the blue line here.

[00:34:41]Yeah, this is the average. Okay, they around at the most it goes up to about 1.6% of GDP.

[00:34:52]What about the middle inome countries?

[00:34:54]They're in the middle out there. But who pays the highest on average interest on their government debt? the very well- behaved very fiscally disciplined low-income countries.

[00:35:06]Okay, so that's as a group and I just want to highlight the period of the pandemic because it's it is actually quite shocking what happens.

[00:35:15]This is as I told you now there very little increase in the general government debt and as you can see the low-income countries it remains below 50%. Even for the middle inome countries it goes up to 69% of GDP. Whereas the rich countries at the end of this period 2023 it's 112% of GDP. Okay. So consider what's happening to the spread on your sovereign debt. This is the spread above the US Fed rate. This is the advanced economies.

[00:35:47]Why does it look flat? Because it is.

[00:35:49]Why does it look close to zero? Because it is less than one basis point. Not less than one percentage point. One basis point. The spread the average spread of advanced economy sovereign debt over the US Fed rate over this entire period between 2018 and 2023 is less than one basis point despite all this bad behavior. Okay, what happens to low and middle inome countries who are being very well behaved? Well, first there's this dramatic increase in the peak COVID period and then a kind of decline but it's still mind you it goes up to 450 basis points. Okay, during peak COVID period the in the spread declines a little bit but then the Ukraine war happens. Okay, not anything to do with any developing country.

[00:36:40]No, no developing country is involved in the Ukraine war. Okay, and this happens this dramatic rise in the spread on sovereign debt happens to both commodity exporters and commodity [clears throat] importers. This is the average but it happens to both. What does that mean? So the Ukraine war, what did it do? It didn't I mean it didn't actually change supply conditions, but because of financial activity in the commodity markets, we had dramatic increases in food and fuel prices. Right? Till the middle of 2022, there was a massive increase in wheat prices because of the myth that was propagated that the Ukraine war will dramatically reduce supply of wheat. Turns out it was all nonsense, but that was what we were all told. And then of course the second half of 2022 the wheat price comes down again because it was all a myth. Similarly oil price okay you can say Russia is a major exporter of oil. US has put sanctions therefore global oil supplies reduced.

[00:37:39]Well it wasn't actually again but prices went up then came down.

[00:37:44]That's what causes this dramatic increase in spread.

[00:37:49]But the weird thing is that it happens for the oil exporters and the oil importers. For the wheat exporters and the wheat importers.

[00:37:58]So it's really not to do about any so-called fundamental of any kind that you can think of. It's entirely investor perceptions. And how do we define these investor perceptions? I mean, forgive my being a little rude. You can kind of think of it as these pimply youth working for Morgan Stanley and so on who basically can't find all these places on a map but they say oh yeah developing countries yeah let's move out of that one you know so that it's really how these investor perceptions get generated that's why you get this extraordinary increase in spread some subsaharan African countries the spread goes up to 1100 basis points in this period okay this is another way of talking about this. Uh the blue lines are for 2017 to 19 the pre- pandemic period. Red lines are July 2022. Yellow lines at January 2024 after the pandemic. So massive increase. Of course there are some countries better off than others. But as you can see all the emerging countries basically end up with these higher spreads.

[00:39:06]And so what happens the trouble is that once you have integrated with global financial markets you have legacy capital you know you've got either debt or stocks or something you've got other people's money or other people's investment in your financial assets.

[00:39:24]Once you have that then anything that happens especially the macroeconomic policies of the rich countries will impact you through that legacy. You know if if there's an interest rate hike in the rich countries which happens as we know through 2002 up onwards then you will actually not just face that interest rate hike yourself you will also face an outflow of capital which will result in these increased spreads.

[00:39:51]Okay. And so the cost of servicing debt goes up dramatically. Even if you haven't been able to take on new debt you are still paying more and more effectively.

[00:40:02]And the bond holders demand much higher risk premier because expectations become self-fulfilling.

[00:40:09]Yeah. So the result of this is that you then worry about the capital flight leading to your exchange rate devaluation which will then generate inflationary pressures. What do you do before that? you raise interest rates domestically to protect yourself from that likely capital flight which as I said doesn't really save you but the rise in domestic interest rates is bad news for you because it affects economic activity in all these different ways but in addition you then do further fiscal contraction to avoid the problem which is going to come at you in any case but you think it'll be even worse if you cannot do that fiscal contraction I want to now compare countrywise. I did groups. So here's the US, Japan and Brazil. Okay. Um the US is the big one as you the blue you can see the dramatic increase in the deficit uh which stays high of course uh as a share of GDP and I as I told you in absolute numbers it's much much higher because it's a much larger economy. Um, Japan is the orange line and Brazil is the only one of these three countries that actually immediately goes for a primary surplus. Oh no. Yeah, it's a primary surplus having done a little bit of counter not a little quite a lot to be honest much more than India did but it did do counteryclical stuff in 2020 but it quickly moves to a surplus because it doesn't dare to hold on to a deficit for too long. Yeah. for all of the reasons that I have mentioned and then yes it's a much more minor deficit later on and very close to balance thereafter Brazil's gross debt to GDP ratio is ridiculously low ridiculously and it doesn't even have external debt in the sense that it's not doesn't have debt denominated in dollars it has only debt denominated in realale and it is so well behaved relative to us and of course Japan is just crazy, right? 250 270.

[00:42:25]Yeah, it goes up to 280 at one point but settles nicely at around 250% of GDP.

[00:42:31]Can you imagine one of our countries trying to do that? Okay.

[00:42:36]But then despite this well be you know this excellent behavior on the part of Brazil, what's the interest rate? Who pays the highest interest rate? The worst the worst most badly behaved economy in terms of fiscal deficit pays the lowest interest rate. The next badly behaved economy pays slightly higher interest rates which do also slightly go up a bit. But Brazil pays much higher interest rates. This is by the way the actual interest rate paid. It's not the available rate at the time. This is the IMF you know balance payments data that is telling us how much was actually paid in each of these years. Let's look at the real yields on long-term government bonds.

[00:43:19]Again, the badly behaved Japan, just fine. Thank you. Zero.

[00:43:24][laughter and gasps] Negative.

[00:43:27]The US significantly negative.

[00:43:31]Yeah.

[00:43:33]Brazil, after all that good behavior, pretty high yields, certainly relative to the badly behaved ones. Yeah. And after much effort and fiscal uh restraint and and so on, it manages to allow the markets to bring the bond prices up so that it gets a slightly lower yield here, but it goes up again.

[00:43:58]Not because it's done anything wrong. It has done nothing wrong, but because the Ukraine war has happened.

[00:44:04]Okay? And then interest rates have been hiked.

[00:44:08]So it's a double whammy for developing countries. It's not only that you get the interest rate hike which remember was 5 percentage points in that period of about one and a half years but you get the additional yield on yours the uh sorry not the um senior moment you know the the difference between yours and the US the spread the spread rising okay all right there is another issue supposing you're not even a debtor country. Supposing you're not in the world where you are necessarily holding a I mean indebted in terms of net debt, you still have a problem and that's because of senorage costs. So what are senorage costs? They are the difference between the returns that you get on financial assets held abroad compared to what finan people abroad get on the financial assets that they hold in your country. So we all have higher interest rates. We all have higher we all have to offer higher returns on capital domestically to attract the foreigners. And that difference then gives you this extraordinary diff tendency. This is not uh from me. This is Gaston NAS and Ali Sodano. They're two excellent young researchers from the Paris School of Economics who have done this work. And I just want to show you the uh I mean you know people say there's no such thing as global south anymore and so on. Oh boy look at this. Okay so Japan yeah this the senurage advantage this is what it gets in terms of the differential rate of return and this is in terms of share of GDP. Japan in 2020 it's getting tw 5% of GDP as senorage as an inflow net inflow because of that difference in rates of return okay everybody talks about the United States um uh exorbitant privilege and that is certainly the case the United States despite its very bad fiscal behavior etc etc has this massive extern exorbitant privilege and it's positive throughout this period Okay. And similarly the Euro zone despite well not really until 2000 but in the subsequent period also has an exorbitant privilege. So the currency hierarchy is not just about US versus everybody else. It's US and shall we say cousins of the US or now we know they all they also behave like the subordinate you know allies or whatever.

[00:46:46]So the the subordinate allies of the US, they all do very well out of this international financial system. The extraordinary thing to me is look at the the black dotted line. That's the bricks. The bricks as a whole does really badly.

[00:47:01]The Russia does very badly. The shocker to me is China.

[00:47:07]That also does very badly. China supposedly the most powerful supposedly able to you know everybody's saying okay the next hgeimon if will renmin be take over from US dollar that's a whole different discussion but the point is China also suffers okay from this so this is not because these countries are riskier I mean maybe Russia is but actually it hasn't been okay this is not because of the greater actual risk This is because of some weird investor perception. Okay. And also because the rich countries tend to invest in more profitable assets. I I mean well no not because they're investing in more profitable riskier assets but because their monetary policy is so loose that they can access liquidity at very very low interest rates and then flood the place. Yeah. Whereas our capital doesn't have that advantage of being able to access cheap liquidity that they can go out and get wherever they want.

[00:48:15]Okay. So it's the holding of international reserve currencies that gives this huge advantage. So these are senorage gains or losses. But what I want to emphasize is that these senurage gains are there for not just the US but a set of rich countries. and the senurage losses are therefore what people think are the most powerful of the low and middle inome countries.

[00:48:42]Okay, this is something um in fact related to work that I had done for Esteeban uh uh looking at the net yields for specific countries. Why these countries? Because again these are seen as success stories, right? When you're thinking China, of course, let's leave China out because it's much more complicated. But if you are thinking of success stories in the developing world, Malaysia comes up very often. Per capita incomes have also risen. Thailand comes up, it's a full employment economy that has been doing growing very rapidly. India pretends to be growing rapidly. I don't think it's a success story, but oh, I cannot resist telling you that, you know, we've had a fascist government for 12 years now. And since yesterday actually since day before yesterday we have had major street protests like humongous street protests across the country starting in New Delhi led by Gen Z by young people but now going well beyond that and so it's a moment of hope for a lot of for certainly for Chandru and me don't dare hope too much but anyway okay but so in India the senurage losses are relatively less But they're still substantial. Okay. So in this later period that is the the period after the global financial crisis 2010 to 2018 1.6% of GDP on average. Now this may not seem like that much. I have to tell you our total public health spending of the center and state governments put together is 1% of GDP.

[00:50:20]So imagine if we could actually not waste this money in senurage losses. But Indonesia 4.1%.

[00:50:29]Okay. Malaysia 2.4%. It's still a huge amount. Thailand 5.2% of GDP is going as a senurage loss which is by the way more than all forms of capital inflow put together.

[00:50:44]All the net foreign inflow is much much less than 5% of GDP. So you're giving away because you have these open open capital accounts that allow lots of gross inflows and gross outflows.

[00:51:00]Okay?

[00:51:01]Once again I repeat, it's not the fundamentals. Okay? It's not because there's greater risk of a expropriation that we're going to nationalize your assets and so on. Can you see in Thailand they're not going to nationalize any assets? No. It's not because of more volatility. Thailand is one of the most stable economies for example nor because of currency depreciation it's been nominally not depreciating at all the taibat relative to the dollar in fact it's slightly appreciated it's really that all of that means that investors from rich countries have received high returns and capital gains and it's not only because rich countries public debt has low returns because that's true right they have low interest rates they very low returns on the public debt. It's because priv because private debt shows very similar patterns. Okay. So what is it about? It is about power which is something we don't talk about enough when looking at macroeconomics.

[00:52:03]You know we kind of think power is a separate thing. Macroeconomics is just some laws etc. No, this is about power.

[00:52:09]Not just geopolitical and uh military and all that, but the power over the international institutions, the international financial institutions, the credit rating agencies, etc. And the power over global rule setting, the kinds of rules that for example enable what are called trade agreements, economic partnership agreements, all of those things. Okay?

[00:52:33]the ability to lobby for policies in lower inome countries that force them to do things that are really against their own interest including these open capital accounts and basically ensure that all of us low and middle inome countries engage in policies and institutions that are favorable for globally mobile capital which is from the rich countries. Yeah.

[00:52:56]Okay.

[00:52:58]Second point. How much time do I have? I should lots. Oh, yay. Okay. [laughter] So the other thing I wanted to just talk about which I just mentioned before. So these are if you like the costs of that capital market integration but there's another cost and it's not about the loss of fiscal space or monetary policy space which of course both are massively lost.

[00:53:24]Okay. But it's about exchange rate management and um we know that monetary policy, fiscal policy etc have to respond. They have and we've seen how they respond right much more constrained. You can't do countercyclical stuff. You can't even do counteryical monetary policy. You have to generally be very very behave well behaved even though markets will not reward you because you're worried that they will punish you even more if you if you didn't. That's how we're always made to internalize it. But because of that, we are then subject to these dramatic flows of capital which determine the movement of nominal exchange rates. Nominal exchange rates.

[00:54:08]Okay. And that of course then generates another set of processes. nominal exchange rates. Typically, devaluations certainly impact domestic inflation to the extent that wages do not respond.

[00:54:22]And of course, the the less indexed your wages are or the more informal workers you have, the less they will respond.

[00:54:29]And so there distributional effects.

[00:54:31]It's not just inflation per se, but there are very strong distributional effects. And then you also have this adverse spiral. You can have exchange rate depreciation that gives you domestic inflation that then generates more exchange rate depreciation and so on now you know there's always talk about this open economy trillemma right to me this is not a trilemma because you know I think in a sense it's more like a triple whammy yeah because even the exchange rate is eliminated as a potential instrument so it's not that you know you can choose between interest rate and this and that because it doesn't save you. You can raise your interest rate. You still could have a significant depreciation.

[00:55:14]And this then impacts you certainly your fiscal policy but also your monetary policy.

[00:55:22]Again let's consider some specific countries uh Brazil, India, South Africa. Now I looked at Brazil not only because I'm in Brazil but you know it's almost like a textbook case of um the internalizing of this problem. Yeah. And it's also a particularly interesting case because it doesn't have externally denominated debt. That is debt denominated in a foreign currency which is what we told is the original sin that you shouldn't borrow in dollars you know because then you'll have to repay in dollars and it would be a problem.

[00:55:56]Brazil doesn't have that problem. So it should be immune.

[00:56:01]Okay. So they have now why are they important? These are countries that have had higher growth rates than most advanced economies. All of the ones that were misbehaving that I told you about.

[00:56:12]They are not debt stressed. Okay.

[00:56:15]External debt to GDP for Brazil is only 17%. But that's private. It's not even public. Okay. 20% in India, 47% in South Africa.

[00:56:26]compared to 96% for the US, 105% for Japan, the external debt, the earlier numbers I gave you were the public debt, okay? And 270% for the UK. Yeah. 150% for Canada and Austria. This is the external debt to GDP ratio. I mean, if one of our countries, if any of these three countries had those numbers, the crisis would be beyond describing, right? It would be just complete it would be a complete bloodbath.

[00:56:59]So it would seem that they are not debt stressed but all of them have liberalized external accounts. Uh particularly they have deregulated crossber capital flows. Okay.

[00:57:11]And this now affects domestic fiscal and monetary policy and it effectively disables exchange rate management. So instead of saying you can't trlemma this is now like a zero lema. you you don't have any instruments. You're kind of at the mercy. What you can do is shift around within the aggregate. You can't do what it used to be called macroeconomic policy. You cannot say we're going to have this base interest rate because it's determined by your fear of the kind of capital outflow or the kind of inflow you want to attack uh attract.

[00:57:49]So here's Brazil. I'm sorry for this very billious yellow but uh this is the policy interest rate which of course we all know is very high in Brazil. Um and in the latest year it was 15%.

[00:58:05]Okay.

[00:58:07]The blue line is the nominal exchange rate for Brazil. I could only get uh US dollar exchange rate. It wasn't the effective nominal rate but nonetheless an approximation.

[00:58:20]The orange line is the real exchange rate. It's the real effective exchange rate. So what's so interesting here is that the nominal interest rate depreciates quite sharply if you look at it over this 8-year period by about 40%.

[00:58:37]Yeah, very sharp decline in the nominal interest rate. The real exchange rate no stays high. Yeah, it actually appreciates over this period because relative prices move against right it basically completely not just counterbalances the nominal depreciation but it exceeds it.

[00:59:00]Now did that high policy rate at least help your financial account?

[00:59:06]I do hope you realize all these numbers are negative.

[00:59:09]The zero line is over there. This is the zero line. Okay. So again, I suppose you could say, well, you know, this is the net financial account, the net current account. So what's an exchange rate depreciation supposed to do? It's supposed to improve your balance of trade and your therefore current flows and it's ideally maybe with the high interest rate you will attract foreign capital. So you'll have a net inflows.

[00:59:37]Okay? So you have a dramatic nominal exchange rate. your current account well doesn't get better certainly gets worse in the later period. You could say that's because your real exchange rate has been remained higher. It's in fact has appreciated. So you could argue that. But if you have a policy rate that is so high then you should surely be attracting net inflows.

[01:00:04]But instead you've got net outflows throughout this period and those net outflows are larger today than they were earlier. Okay, despite a much higher policy rate than you began with in the beginning of this period.

[01:00:20]Okay, India similar kind of tendency again the same billas yellow is the policy interest rate. There are increases we're not as high as Brazil but nonetheless there's a very substantial increase. So we all bring it down. I should mention during the pandemic we all brought it down. Oops.

[01:00:40]Brazil brings it much lower. Actually brings it down to only 2%. But then there's a quick recovery. My god. Just like the fiscal balance you know you spend a lot in one year and then you say my god what have I done? So you quickly cut spending and you quickly bring up the interest rate in one year. Okay. Um but India too we did bring it down not by as much but we brought it up again fairly quickly the policy rate and yes we did get a positive financial account in the later years okay net financial account our real exchange rate again doesn't really change in other words the devaluation is associated with inflationary pressures I'm not doing causation here, but there's no doubt that the two happen together. Yeah. So, you get a nominal devaluation, it doesn't translate into a real devaluation.

[01:01:36]You don't get any real benefit in the current account. Okay?

[01:01:42]and South Africa slightly less in the sense that you do get some real exchange rate depreciation but certainly much less than the nominal depreciation. South Africa is also interesting because I haven't understood why one needs to explore this more but the two pandemic years you actually get net inflows.

[01:02:06]It could be remittances coming from workers abroad. I mean it it needs more uh well not remittances it uh investments from South Africans abroad or whatever we don't know exactly but these two are outliers but over the entire period has that dramatic increase in the base policy rate led to an improvement in the financial account if you leave out these two outlier years no okay so basically no didn't help in any of these countries so look these are very different economies.

[01:02:41]South Africa is dominantly a mineral exporter. Yeah. Uh Brazil what to say?

[01:02:47]Okay. Combination [laughter] [gasps] India weird semi-industrial kind of you know not not a mineral exporter largely an oil importer and base mineral importer etc. But very very different economies uh India much more informal more than 90% of our workers are informal. So our inflationary pressures should be less because you know really there's no bargaining power of workers to demand higher nominal wages or returns and so on. But nonetheless the pattern is the same. Okay. There's a substantial nominal exchange rate devaluation but it is not matched by real devaluation.

[01:03:28]In the case of Brazil and India not at all and in the case of South Africa much less. It's a very small real devaluation. So what happens? Well, there's an initial exchange rate devaluation, depreciation, whatever, which generates inflationary pressures which makes their inflationary pressures higher the inflation higher than those of the main trading partners because these are effective exchange rates for all 40 trade top 40 trading partners.

[01:03:56]Okay. As a result, this has little or no positive effect on the trade balance and domestic economic activity. And I've already told you it has very strong impacts distributionally negative distributional effects. Yeah. Um but meanwhile the pressures that cause the devaluation which are typically capital flows in other words exchange rates today are not current account determined. They are capital account determined. So the very pressures that cause that dev devaluation persist and so your devaluation doesn't save you from the next round of the devaluation. That's why we get that continuous nominal decline in the value of our currencies. Okay. So what do we do? We raise interest rates. That's all we can think of to protect our currency.

[01:04:47]We do a lot of we do some open market operations especially since we've saved up reserves. In India, we have already used up a significant part of that trying to protect our currency. So yes, some central bank open market operations, but mostly it's interest rates which is the only weapon that is perceived in addition to being fiscally well behaved, but then we're fiscally well behaved anyway. So you know how much better can you get, right? And once you do that interest rate hike, then it further reduces economic activity. Yeah.

[01:05:19]And causes livelihoods to shrink.

[01:05:21]Meanwhile, all of these nominal depreciations, not real, the nominal depreciations shift income from your economy to other economies. I mean, that's the income terms of trade effectively, right?

[01:05:39]So, finally, what's the real insight we have to get from Kanees in this globalized finance world is what he said. Above all, let finance be primarily national. In other words, financial deglobalization is essential.

[01:05:54]What we have seen is that it, you know, so-called trade disruption, fragmentation, all the terms that everyone's saying about trade and how Trump is messing it up, etc. Some of it may be happening, but financial globalization is untouched. It persists.

[01:06:09]It's stronger than ever. Okay? But we know it has not served countries well.

[01:06:15]Uh even if you're an successful economy, you're paying these very very high senurage costs. You're not a gainer from this at all. Okay. And the fact that you can get this broadly similar trajectory of nominal and real exchange rates, interest rates, and capital flows in very different economies means that there is this it's it's really about these investor perceptions in a world of currency hierarchies.

[01:06:42]It's not about so-called fundamentals in any one country and so on. What does that mean? It means that capital flow movements are beyond the capacity of individual governments to influence.

[01:06:54]Yeah, you cannot really do it. And the problem is that neither fear nor courage saves you. Quoting TS Elliott here. Why?

[01:07:04]If you're fearful, you have very strict discipline. Well, we saw what happens with very strict fiscal discipline.

[01:07:10]Yeah. The spreads zoom on your sovereign debt. And if you're courage, courageous, you attempt counteryclical policies, then you can get bashed on the head for that. Yeah. So either way, so what can save us? Well, ultimately the only thing that can save us is controls. Okay, capital controls. The polite word for it which the IMF now uses is capital management techniques. So let's all adopt capital management techniques. In other words, we have to move away from a model that relies on external debt driven development. We have to move and that that it doesn't matter whether that debt is in foreign currency terms or domestic currency terms. If it is foreigners holding your debt, you're in trouble. Okay? So, we have to move away from that and we have to move away from the notion that external financing is essential for your own development trajectory. In fact, I would argue it is currently an in a sort of essential prerequisite for autonomous development.

[01:08:13]Okay, let me stop here. THANKS.

[01:08:16][applause] [applause] OKAY, SURE.

[01:08:39]>> YEAH.

[01:08:42]>> OH, WELL, we can share here briefly. So, we'll open up for questions. I'm going to go running with the other microphone so that so so the people that are on YouTube or whatever, they can listen to the questions and and so we open up for questions.

[01:08:57]We have uh Marvel over there.

[01:09:02]Please all say your name and what institution you're coming from.

[01:09:07]>> Maru Davila, Colorado State University.

[01:09:10]Thank you very much for a very stimulating talk. And I was wondering, I mean, if I got you right, the mismatch between expectations and fundamentals seem to be very important to explain at least partially what is happening. So I was wondering if I could interpret your talk as an invitation to integrate kynasian and postcanasianic approaches to behavioral behavioral finance or or uh yes a more behavioral approach to postcanes and economics perhaps. Thank you.

[01:09:40]>> Um that's a very interesting question and I would actually look at the other side. I would say this notion of the fundamentals is wrong. That what we are told are fundamentals are not fundamentals because the US can get away with huge amounts of deficits and huge amounts of public debt to GDP like Japan. So it's not a fundamental. So maybe we're looking at the wrong thing, you know. So I would I would put the focus on the other side rather than on the perception side. behavioral economics and capital market behavior. Um, no because you know the kanes was right about this expectations become self-fulfilling in global finance. So they are it's not that they are being stupid. It's not that you can nudge them to behave better. It is that yes finance uh once it's it's the stock market where you have to do what you think everybody else does. Right. So uh uh on it the beauty contest where you have to guess what who everybody else finds the most beautiful and the most ugly and therefore it's not about you know it's it's much more complicated than I I don't think behavioral economics would be a solution to this.

[01:10:58]Let me also put my cards on the table. I don't think behavioral economics is a solution too much. [laughter] Thank you. Um I'm Siwir. I'm based in Vienna, Vienna University of Economics and Business. Well, >> I just went to your university.

[01:11:17]>> I I saw you there. I really like your >> contribution to talk.

[01:11:24]>> Um thank you for the presentation. Um I'm also working on something related and I wanted to ask you how what is your perspective on how developing countries could increase the liquidity of their currencies >> uh from a let's say domestic strategy like how how do you make uh internal actors um let's say deepen the the financial um se uh financial um yeah integrate uh so that you know you generate markets within and I can I don't know the the percentage of uh foreign actors that hold Brazilian uh depth uh denominated in Brazilian currency >> but you know there are actually uh the pa who published this uh paper on uh original redux [clears throat] there are other um problems that can emerge even though your depth is denominated in your own currency so how do you >> yes absolutely no I that's precisely what I was saying is that it's a relatively small proportion but it can make big changes at the margin but denominating in your own currency doesn't save you if there are if you are enabling the outflow that is to say they will sell the assets and therefore exchange money and go back so you know so um how can developing countries escape this trap let me put it that way I'm not so okay now again I'm being kind of out there I don't know what the Deepening financial markets helps. Let's look at all the countries with very deep financial markets. They keep having financial crisis, right? And they don't necessarily develop. Let's look at at a country that doesn't have very deep financial markets. China, you know, I mean, so I may again, maybe we're looking at the wrong thing. Maybe we're constantly being told that the way to develop is to develop your financial sector and make it deeper and etc. Maybe that's not the right way. So I would say yes it's absolutely important to make sure that credit is available especially to small micro etc enterprises to women borrowers financial inclusion is absolutely critical long-term finance patient finance is absolutely critical development banks are again hugely important are all these associated with financial deepening no so maybe it's broadening and specific kinds of finance you know I finance but but not necessarily deepen >> well thank you professor for this amazing lecture I was really looking forward to it [laughter] >> and um after listening I could >> you don't know your name >> ah yes I'm leia I'm office of the federal university of Rio and after listening to your lecture I couldn't help but to think about something like a political aspects of government spending >> because uh to me that looking at the Brazilian macroeconomic conjuncture I feel like um everything that's related to the government increasing spending is very bad but when it comes to increasing the policy rate or the uh the policy interest rate.

[01:14:55]>> No one says anything about it even though the government is trying to keep it uh to keep the government uh balance uh balanced actually. So I would like to uh listen to your perspective on the come redistribution these high policy rates uh bring over the polic over the public debt because on one side the government can spend on social but on the other uh the interest rate is always increasing. So >> we have some literature on financialization of that. I would like to listen to you more about your thoughts and everything.

[01:15:37]>> No, I mean you're absolutely right that a high policy rate is a regressive thing.

[01:15:42]>> Yeah, it's it's deeply regressive. Of course, it raises the cost of borrowing.

[01:15:46]It makes it much harder for small enterprises. It has all kinds of negative impacts on ordinary people, mortgages, etc., etc. But of course, it gives much more money to rounders.

[01:15:57]Yeah. Um, okay. Again, I don't know whether I can say this in a but I've often thought that you've had progressive governments that have made a kind of fouian pact with finance in your country and you've basically said okay you know let us do some social policy and stuff and don't bug us then you know don't do capital flight we'll give you the high interest rates just let us allow us some social policy you know so yeah this is a very difficult dilemma and the trouble is that it's now so internalized ized that you have to be financially integrated which frankly you don't have to be you know but it is now so deeply internalized that you have to be financially integrated that mo most policy makers even if they think maybe they wouldn't dare say it because then there would be a capital you know what I mean then the legacy capital thing would so it's a tough one in terms of how to deal with it but on the other hand if enough countries get together and do it if you had let's say some kind of regional thing that enabled it that you know if you and then you combined it with that if you joined flour and actually combined it with a more effective flour that provided a kind of cushion and so on then perhaps you could you know take that additional step >> I I'm I'm informally taking questions here so Carlos Medos will go next to I'm going to take my privilege as the presenter and ask you a question in that order >> thank you um my congratulations brilliant conference I appreciate very much and uh I enjoy a lot but one point I I think that u you said >> that um the privilege the power of the rich countries is the main uh difference >> in comparison with devel developing and less developed countries and uh but when you say that the capital could be the answer uh for um these kind of countries the poor countries and less developed countries. I think that there is a kind of coordination problem >> because uh if you impose it in a in a national base maybe this is will not work. So uh as you have institutions in power for rich countries I think that the po the poor countries has to be coordinated in order to to get something in comparison.

[01:18:28]Yeah. No, Carlos, you're right. You're right. But a big country like Brazil has more power than smaller countries for sure. But yes, in general, it's ideal if you do it in a group. It doesn't necessarily have to be regional. It could be like-minded and similar countries that are thinking along similar lines who, you know, do it. But a big country like Brazil could, you know, if the political situation is sufficient, it's big enough. Yeah. I mean let's also I mean Matias can correct me or Martin but didn't Argentina do really well when it was left out of the capital markets in the 2000s that period when you had reedged on your relative to how you have done otherwise let me put it that way >> yeah well commodity prices also went up and they there was space you know they did spend fiscally so there is a difference there of how much they spend fiscally >> so >> but but what I'm saying is that you you didn't need therefore the capital market integration. In other words, commodity price whereas when you have a period of high commodity prices but your capital market integrated, you're probably losing in senorage costs anyway.

[01:19:40]So, you're not getting the full benefit of that commodity price increase. Am I making sense? you know that [laughter] um yeah but so Carlos I would put it this way for medium and smallsized economies yes you can't do it alone and you will get you know bashed pretty large economies Brazil India you know a lot more can be done but it is really in the interests of countries like Brazil to think of regional activities that would enable you to you know step out of that that shroud of you know the capital markets basically. Yeah.

[01:20:24]>> Uh Tom Pal uh Ji thank you very much for a wonderful lecture. Um >> I want to make one point about China and then a bigger point. The point about China paying scenerage needs to be seen strategically. I think you need to take it out of the sample. What China has been doing for 25 years is running surpluses, taking a low yield on uh treasuries in order to have an very successful export-led growth model. So they are really getting something very important out of that and and they're not the same as the other countries.

[01:21:02]>> Now I I listening to you I think there's an absolute iceberg underneath all of this and that is politics and class war.

[01:21:11]What's going on here is that the real trouble is the domestic elites and I see this in Argentina, in Brazil, they having the ability to take money out of the country. They they can hold the country hostage and and they're the ones we always blame the foreign foreign vulture funds and they are a menace.

[01:21:32]>> They're not nice people. But the the the crises are normally caused by some sort of domestic capital flight and the flight is there for a reason of class war. They are afraid at some level of expropriation or not let's call it politic restriction of property rights which is maybe a different thing a new property right regime not not expropriation but taking away power [clears throat] for them to do things within the domestic economy and therefore they want to salt away wealth in the United States and Europe which are the centers of global capitalism and property rights are as powerful carefully organized as possible in favor of capital. And this is the Titanic.

[01:22:18]This is the iceberg because I don't know how we go about challenging that situation. Um you will be so penalized the moment you begin to talk about some sort of restrictions on on domestic wealth holders ability to do things including by the way being punished by the United States. The United States will immediately turn they've done this for 60 years in Central in Central America and South America. Anyone arriving with a vaguely social democratic inclination >> will be smashed. And this is there is really a very deep power question. It's the relationship of domestic elites >> to a center that does not want to see any form of social democracy develop in in in these other countries.

[01:23:11]>> Yes, you're right. It's very depressing, right? And [laughter] uh no, but what I mean is um surely it can't be an entirely closed box that you know there's just no way out of it. stuck in this cage and you got to live with it because the US you know you are what is it so close to the US so far from God so you you have no choice right I I again I don't know if that's how we can think of the future because let's face it the US uh yes at the moment it certainly has a lot of military power and it exercises it and so on and so forth but there are limits to it and there are more options today than there were before. I mean there there certainly China but there are lots of other you know potential you what you're saying is they'll come and invade you and kill you and kidnap you and d you know >> the problem and then we can do deal with it. The great mistake in political economic discourse is to put the wrong question on the table to put the wrong problem on the table. That's in fact what our Democratic party does in the United States.

[01:24:26]Hey, don't you dare compare me with your Democratic party. [laughter] >> That's what the British Labor Party has been doing. I'm not I'm not comparing it. I'm talking to all of us in a way [laughter] that what we need to do is to frame the problem right and that will what will raise awareness and I think we already have the answer.

[01:24:44]>> Oh, then tell us.

[01:24:47]>> Oh, no. Uh you you mean like the regional and so on and so forth? Yes.

[01:24:52]No, I I think that's true. But what all I'm saying is that also I think the world today is more uh complicated than it has been for a while. I mean it is unfortunate that the US has turned its attention once again to Latin America after a period of looking but it's it hasn't resolved the problem in Iran. So it will be occupied with that. There is a potential domestic politics is always a constraint. The US will definitely try and interfere in the elections. It will definitely try and install a right-wing government. doesn't mean you don't try and prevent that. So I I also think that the potential for negotiating a way of lower reliance I mean look Brazil already moved out of having dollar denominated debt which was a huge issue right it doesn't have any dollar denominated debt so it just got rid of that which surely would not have been popular with domestic elites. It is possible to imagine a situation where you're saying, "Okay, foreigners cannot buy debt." You are right. The domestic elites will still fix you, but you can put in controls that say you cannot sell more than this much or you pay this amount of tax if you sell and so on. So there are there are available policies.

[01:26:09]I completely agree with you that the the class configurations and the domestic political economy will determine what happens to them. But it's not as if there aren't available tools to do it, right? I mean, >> okay.

[01:26:24]>> Yeah.

[01:26:25]>> Yeah. Just put it out there.

[01:26:29]>> Yeah. But I think they know it, right?

[01:26:31]They're living with the shadow of Uncle Sam, right? I mean, >> um [laughter] Oh, I don't know. We're going till 6:30. So, I'm going to I'm going to take the privilege of uh making the la last uh questions and and and I'm going to be a little bit of the devil's advocate here. So, I I want to think a little bit about some of the limits of what you're suggesting. So, you're suggesting going back to capital controls and and a world that you know vanished in the golden age and in the golden age of capitalism with all the problems that the golden age had to some extent that was possible. the political economy. What allowed that globally was a situation in the United States, the central country by far, you know, I mean the the amount all of the geopolitical power that you put in in the US back then it's to the stratosphere. 50% of manufacturing production in the world.

[01:27:21]You know, you you go down the line everything and a situation that internally because of domestic class conflict there was a significant support for compression of of you know of of the increase in wages and compression of the benefits of the financial sector, repression and and and of you know the capitalist sector in general. and the Soviet Union that globally allowed also for an extension of some of these policies on a global level that has vanished and there's nothing you know in a sense that would push for this uh you know return of the golden age so how feasible it is to go to a world that we have capital controls the second thing >> which is connected because you you did say something that I think it's more relevant that you sort of suggested I used to joke all the time that we don't need to the IMF to come to Latin America. You basically said it. I said we internalized. We have we I always say we carry I always say to with respect to Latin America, but we carry the IMF in our hearts.

[01:28:24]>> So we don't we don't need the IMF to come and tell us to do >> and part of the problem is so the country Brazil because you know I'm I'm the sort of Brazilian Argentinian. So my point is always I always say Argentina doesn't grow because it can't because we hit the you know the constraint of lack of dollars and what Brazil can't. So even if they kept interest rates high even you know even if they allowed which they probably did too much of lowering it and inflation sort of and exchange rate one you know and perhaps you may have a point that it doesn't need to be that high so that's that's to be discussed but the point is why is Lula not doing more fiscal policy there's no restriction on his ability to do it even if some of the debt is in the hands of foreigners and so I I think that there is an issue of the political economy that's even not limited by the connections with financial market. It's simply connected with, you know, an an older Kletkian thing of why elites want to go for full employment policies or not, which is at the domestic level. And that would make less relevant at least in certain context, not all context, not Argentina, but yes, in Brazil, the domestic questions rather than the financial issues.

[01:29:32]>> You see, devil's advocate means depressing. Okay, [laughter] let let's take the first one first. I look I I I I agree with you. I understand domestic political economy is pretty grim in in pretty much all of our countries. Our elites are awful. They suck. They are totally subimperialist.

[01:29:51]They totally want to be part of a global elite and to milk the rest of the population and extract and and be part of that. Yeah. So all that agreed. Does it mean it can't change?

[01:30:04]And has it not changed at all ever? Even in the last 30 years, it has. It has. I think it has. I don't think you know I mean there is a difference between Alula government and uh the he who cannot be named governments, right?

[01:30:20]uh there's a difference in uh so I'm saying that these things in Brazil >> okay let there was okay for example I was very critical in India of the previous pre Modi government but there is a big difference between that government and this one in terms of also domestic macro policies in terms of distributional policies etc good enough not what we wanted but a damn side better than we've got at the moment. So I'm not sure that I don't think domestic political economy is written in stone. I think states are always arenas of contestation. So it really depends on how things change. It it it's not a closed system. It's a system that is porous and can be shifted around and has different implications with those shifts I think. So yeah thank you. uh on the international. I just finish on the international. Similarly, it's not >> listen, I mean the world is crazy right now. It is changing very dramatically.

[01:31:23]Oh, I'm going on too long. Last point, the US is is not the hedgeimon it was.

[01:31:30]There is and it's not just because of the rise of China. There are all kinds of different things that are going on.

[01:31:36]And in that period of confusion is when if you look back over the last two centuries it's those periods of confusion and instability that have enabled countries to do some autonomous industrialization.

[01:31:49]So I'm not and in fact through various what are they called unorthodox measures like the controls speaking of which I'm pretty sure Trump will institute capital controls himself at some point. So you know it's in that sense a lot of things are much more open than they were I would say.

[01:32:09]>> Well thank you very MUCH [applause] RECEPTION. You want to say something about that? So there's a reception you know so I hope you stay around and you can talk to Jadi and ask more pointed questions. Thank you everybody for coming.

[01:32:42]>> [music]