A Voice for the Developing World - Raghuram Rajan, India's Central Banker
When articles like this inspire me to write a blog post, I realize my taste in news is getting maybe a bit bizarre.
Raghuram Rajan, Indian's central bankers, is telling Washington to take the developing world into consideration when contemplating changes to its monetary policy.
A recent podcast from the London School of Economics explained to me the significant differences between the economic outlooks of the advanced and emerging markets. The most striking piece of information came when UNCTAD (a UN agency focused on emerging market development) began raising concerns about a bubble in the global economy meanwhile the institutions in the developed world, in this case the IMF were claiming in mid 2006 (in 2006!) "in recent times the world economy has rarely been in better shape than it is today. The global economy appears to be more resilient in the face of shocks than it it was even a short time ago." In mid 2007 the OECD forecast said "a smooth rebalancing was expected with Europe taking over the baton from the United States in driving OECD growth. The current economic situation is in many ways better than what we have experienced in years."
The greater issue is the way that rich countries use their power to shape global economic policy in their own interest. One example of this comes from the most recent dispute between developed and emerging markets over the functions of the IMF. (I'll admit, I don't remember exactly what the dispute is about and am too lazy to look.) As a consequence, the BRIC's are considering forming their own development bank to better serve the needs of the developing world.
If such a BRIC's bank where to come into existence it would provide an additional outlet for Chinese capital, which may (and I am really speculating there) reduce the Chinese demand of US treasuries. Who knows what consequences this could have, or even if it would ever happen, but it is interesting to consider a world where China isn't buying all of the US debt and to consider the consequences of such a change.
Now back to Mr. Rajan. When the Fed hinted they were considering tapering their bond buying the Indian rupee dropped 25% (25% just on a hint!). This is the reason why Rajan is encouraging the Fed to be more global in its consideration of its monetary policy. The US dollar is the reserve currency of the world. This afford us may privileges (such as low borrowing costs - even when the risk comes from the US economy itself. As a funny sidenote, just as when the US credit rating was downgraded a flight of US treasuries ensued, if the government didn't raise the debt ceiling, a similar flight would most likely ensue. Ironic to think that the threat of default on US debt, would lead investors to pile into US treasuries), but with these privileges comes responsibility.
There is a simplified version of why changes in Fed policy has such a great effect on the developing world. When interest rates are at rock bottom, investors take their money elsewhere in search of greater returns. One of the places they go is in the developing world. However, when the Fed increases the interest rate on treasuries, investors come back to US treasuries as they offer a lower risk, with a reasonable return. This flow of capital out of developing countries into treasuries decreased demand for assets in developing countries. As a consequence, their currencies depreciate and the economy slows.
I do think the Fed should put more importance on the affairs of the developing world. It's not as if the Fed needs the take care of everyone, but I find the response from the Fed for developing countries to take care of their own affairs to be unthoughtful.
As the article puts it -
The standard response from advanced countries has been that emerging markets should respond to the capital outflow by letting their currencies adjust. But this isn't always practical advice, Mr. Rajan said, since it can lead to a sharper-than-warranted depreciation as, he said, happened in India in the summer.
"You're using special tools because you're saying the economy doesn't work as advertised," said Mr. Rajan. "Then you're telling us" to follow a textbook response, he said.
Raghuram Rajan, Indian's central bankers, is telling Washington to take the developing world into consideration when contemplating changes to its monetary policy.
A recent podcast from the London School of Economics explained to me the significant differences between the economic outlooks of the advanced and emerging markets. The most striking piece of information came when UNCTAD (a UN agency focused on emerging market development) began raising concerns about a bubble in the global economy meanwhile the institutions in the developed world, in this case the IMF were claiming in mid 2006 (in 2006!) "in recent times the world economy has rarely been in better shape than it is today. The global economy appears to be more resilient in the face of shocks than it it was even a short time ago." In mid 2007 the OECD forecast said "a smooth rebalancing was expected with Europe taking over the baton from the United States in driving OECD growth. The current economic situation is in many ways better than what we have experienced in years."
The greater issue is the way that rich countries use their power to shape global economic policy in their own interest. One example of this comes from the most recent dispute between developed and emerging markets over the functions of the IMF. (I'll admit, I don't remember exactly what the dispute is about and am too lazy to look.) As a consequence, the BRIC's are considering forming their own development bank to better serve the needs of the developing world.
If such a BRIC's bank where to come into existence it would provide an additional outlet for Chinese capital, which may (and I am really speculating there) reduce the Chinese demand of US treasuries. Who knows what consequences this could have, or even if it would ever happen, but it is interesting to consider a world where China isn't buying all of the US debt and to consider the consequences of such a change.
Now back to Mr. Rajan. When the Fed hinted they were considering tapering their bond buying the Indian rupee dropped 25% (25% just on a hint!). This is the reason why Rajan is encouraging the Fed to be more global in its consideration of its monetary policy. The US dollar is the reserve currency of the world. This afford us may privileges (such as low borrowing costs - even when the risk comes from the US economy itself. As a funny sidenote, just as when the US credit rating was downgraded a flight of US treasuries ensued, if the government didn't raise the debt ceiling, a similar flight would most likely ensue. Ironic to think that the threat of default on US debt, would lead investors to pile into US treasuries), but with these privileges comes responsibility.
There is a simplified version of why changes in Fed policy has such a great effect on the developing world. When interest rates are at rock bottom, investors take their money elsewhere in search of greater returns. One of the places they go is in the developing world. However, when the Fed increases the interest rate on treasuries, investors come back to US treasuries as they offer a lower risk, with a reasonable return. This flow of capital out of developing countries into treasuries decreased demand for assets in developing countries. As a consequence, their currencies depreciate and the economy slows.
I do think the Fed should put more importance on the affairs of the developing world. It's not as if the Fed needs the take care of everyone, but I find the response from the Fed for developing countries to take care of their own affairs to be unthoughtful.
As the article puts it -
The standard response from advanced countries has been that emerging markets should respond to the capital outflow by letting their currencies adjust. But this isn't always practical advice, Mr. Rajan said, since it can lead to a sharper-than-warranted depreciation as, he said, happened in India in the summer.
"You're using special tools because you're saying the economy doesn't work as advertised," said Mr. Rajan. "Then you're telling us" to follow a textbook response, he said.
I'm am pleased to hear that someone is championing the needs of the developing world because in this regard, I do not believe the US is wielding it's economic power as effectively as it should.
Source
India's Central Bank Chief Pressures Fed - WSJ
If you don't have a subscription (like me) click to top link in the google search:
https://www.google.com/search?q=India's+Central+Bank+Chief+Pressures+Fed&oq=India's+Central+Bank+Chief+Pressures+Fed&aqs=chrome..69i57.1266j0j3&sourceid=chrome&espv=210&es_sm=91&ie=UTF-8
LSE - Podcast
Source
India's Central Bank Chief Pressures Fed - WSJ
If you don't have a subscription (like me) click to top link in the google search:
https://www.google.com/search?q=India's+Central+Bank+Chief+Pressures+Fed&oq=India's+Central+Bank+Chief+Pressures+Fed&aqs=chrome..69i57.1266j0j3&sourceid=chrome&espv=210&es_sm=91&ie=UTF-8
LSE - Podcast
