Author Archive

Ruling Capital: Emerging Markets and the Reregulation of Cross-Border Finance

February 15, 2015 1 comment

Kevin Gallagher’s new book on emerging markets and the re-regulation of global finance

Trade Deals Must Allow for Regulating Finance

October 3, 2013 2 comments

World leaders who are gathering for the APEC summit next week had hoped to be signing the Trans-Pacific Partnership Agreement (TPP). The pact would bring together key Pacific-rim countries into a trading bloc that the United States hopes could counter China’s growing influence in the region.

But talks remain stalled. Among other sticking points,  the U.S. is insisting that its TPP trading partners dismantle regulations for cross-border finance. Many TPP nations will have none of it, and for good reason. The U.S. stands on the wrong side of experience, economic theory, and guidelines issued by the International Monetary Fund.

Indeed, it’s the U.S. that could learn a few lessons from the TPP countries when it comes to overseeing cross-border finance. Read more…

Should China Deregulate?

Kevin P. Gallagher

BOSTON – Rumor has it that China is set to accelerate the deregulation of its financial system.

For years, China has restricted the ability of its residents and foreign investors to pull and push their money in and out of the country. While that may be illiberal, there was a sound reason for this restriction: Every emerging market that has scrapped these regulations has had a major financial crisis and subsequent trouble with growth.

The world can’t afford for that to happen in China. China is too big to fail.

This issue came to the fore last year when the People’s Bank of China (PBOC) announced that it might “liberalize” its financial system in five to 10 years. Read more…

Mexico: Always Promising

October 15, 2012 1 comment

Kevin P. Gallagher

For more than a quarter century now, most emerging market and developing nations have been integrating themselves with the world economy. Some of these globalizers have done fairly well in terms of per capita income, but not Mexico. All of a sudden, Mexico is seen as one of the most promising destinations for emerging market trade and investment. Has Mexico learned the lessons of the past or will this spurt of attention be squandered like so many times in the recent past?

China and India sought to transform their economies around the same time as Mexico. These globalizers registered annual per capita growth rates of 9 and 4.7 percent since 1990. During this period Mexican GDP per capita has risen at just over one percent annually.

This is particularly devastating given that Mexico’s job was arguably easier—all they had to do was integrate with the world’s largest economy to the north. In 1994, they solidified a trade deal, the North American Free Trade Agreement (NAFTA), that gave them almost exclusive rights among developing countries to the US economy.

In its first five years, Mexico’s trade and investment doubled but income growth declined relative to the first five years of the 1990s. Foreign investment wiped out local firms, so domestic investment slid to 19% of GDP (levels similar to the “lost decade of the 1980s) from a high of 24 percent in the 1970s. Integration also increased economic vulnerability – decimating the agricultural sector. Job growth and wages were slow, leading a half-million Mexicans to flee to the US each year for a better life. Many others migrated to Mexican cities and tourist areas to work in the informal economy.

And those were the good years. In 2001, China’s entry into the WTO was a game changer. Despite higher tariffs and the Pacific Ocean, China lept over Mexico to become the largest supplier of manufacturing imports in the US. In 2000 both countries had close to 11 percent of the US manufacturing market, by 2010 China’s share had risen to almost 30 percent while Mexico’s stayed fairly still. For this period anyway, China beat Mexico at its own game—serving as the low-skilled export platform for manufacturing goods destined for the US.

From 2000 on, Mexico sat on the sidelines during the biggest developing country boom in recent history. Brazil, China, India and South Africa get praise for registering income growth rates of 5 and 9 percent annually for India and China, and over 2 percent for Brazil. Mexico’s post 2000 growth was less than one percent annually.

Not anymore says the investment community. Growth has slowed in most emerging markets and Mexico has become the most promising emerging market to invest in. In China, wages have been increasing at close to ten percent annually and its currency has been appreciating for the past few years. Mexico, by shifting from wage-work to contract employment and other measures to ensure “flexibility in labor markets” has kept wages down. As recently reported by the Financial Times, in 2001, Chinese manufacturing wages were 35 cents per hour, compared to $1.63 in 2011. The Mexican wage was $1.72 per hour in 2011 but was $2.10 in 2011.

Exports and investment are surging for Mexico, as are headlines to invest even more. Will Mexico translate these gains into broad-based growth? To do so, Mexico will have to actively manage the inflows of private capital into the country so as not to develop the currency appreciation and asset bubbles that led to the Tequila crisis after the last time Mexico was the favorite on the block. Mexico will also have to create parallel policies, like China did, where manufacturing is coupled with investment in innovation, making linkages to local firms, investment in agriculture, and benefits to workers.

Most emerging market and developing countries realized that unbridled neo-liberalism was not the recipe for economic development. They adopted a hybrid model of states with markets and have grown at record pace. Mexico should promise to learn from its peers this time, so once again surges of trade and investment don’t lead to busts that adversely effect the majority of Mexicans.

cross-post from

Trade rules should not constrain fixing global finance

September 26, 2012 Leave a comment

from Kevin P. Gallagher

Next week the World Trade Organisation (WTO) will consider a proposal by a group of emerging market and developing countries led by Ecuador requesting the WTO members to undertake a discussion on the relationship between recent financial regulatory reforms and global trade rules. Such a discussion is urgently needed to ensure that efforts to re-regulate global finance in the wake of the financial crisis are not constrained by trade commitments.

Whether it be in the form of preventing systemic risk, regulating securitisation, hedge funds, or credit rating agencies, revising accounting standards, or raising capital requirements, since 2009, there has been a significant effort across the globe to re-regulate the financial sector. The hope is that we will be able to prevent or better mitigate the next financial crisis and steer finance toward more productive and employment generating ends. Read more…

Let’s not get ‘carried away’ by Bernanke’s latest twist

September 25, 2012 1 comment

from Kevin P. Gallagher

Ben Bernanke, chairman of the US Federal Reserve, should be applauded for boldly putting employment over price stability in his latest move to keep interest rates low and to purchase mortgage-backed securities. Bernanke’s critics (and Bernanke himself) have rightly said that monetary policy is not enough, however. To truly generate employment-led growth in the US, those critics say more fiscal policy is needed.

There is also a need for stronger financial regulation in order to ensure that financial institutions do not steer newfound liquidity into currency and commodity speculation in emerging markets and developing countries—speculation that can wreak havoc on developing countries’ financial systems and growth prospects. Such was the case during previous rounds of interest rate declines and quantitative easing in the US, and could occur again.  Read more…

Brazil: Developing Countries Can Regulate Global Finance

Brazil: Emerging markets can regulate global finance
Kevin P. Gallagher
Financial Times
July 10, 2012

The development process can quickly unravel when a herd of speculative investors steers into a country. Brazil boldly attempted to regulate such speculation in 2010 and 2011. Their efforts were a modest success, but developing countries can’t bear the full burden of regulating cross-border capital flows.

“Hot money” in the form of short-term debt, currency trading, stock market, real estate speculation, all stampeded into emerging market developing countries in 2010 and 2011. Low interest rates in the developed world and higher rates in emerging markets triggered such financial flows. The fact that developing countries were growing faster than crisis-plagued industrial nations played a role as well. Via the carry trade, investors borrow dollars and buy Brazilian real. Then they short the dollar and go long on the real. Depend on the leverage factor an investor can make, well, a ‘killing.’  Read more…

Tired of Waiting for 21st Century Trade Deal: Developing nations challenge Obama on global finance

from Kevin P. Gallagher

Early on in his term, US President Barack Obama pledged that the Trans-Pacific Partnership Agreement (TPP) would be a 21st Century trade treaty.  This week a copy of the proposed investment chapter of the deal was leaked, only to reveal that the US still remains behind the times.

In these turbulent economic times for the world economy, what is among the most egregious aspects of the US proposal is that it would limit the ability of TPP members to regulate global finance.  Yet emerging market negotiating partners have proposed bold alternatives that are a big step in the right direction. Read more…

Obama’s Latest China Move: Blinded by the (solar) light

By Kelly Sims Gallagher and Kevin P. Gallagher

The Obama Administration’s preliminary decision to impose a 31 per cent tariff on solar panels imported from China is short sighted. The move could cause a trade war, hurt the US economy, jeopardize US security interests, and put the world further off course in terms of meeting its global climate change goals.

The decision opens the US up to a trade war in renewable energy, of all things. The US currently has a trade surplus with China in solar energy because of large US exports of poly-silicon to China. Not surprisingly, Li Junfeng, a senior Chinese government official, has already proposed imposing retaliatory tariffs on US polysilicon—and a trade war might not stop there.

The measure could also hurt one of the few bright spots in the US economy. Jobs in the solar sector grew by 7 per cent last year thanks to the combination of higher demand for solar PV (due to lower prices for the modules) and state and national incentives for renewable energy. Most of the new jobs are in the solar installation business. If the Obama Administration makes solar modules one-third more expensive by imposing these tariffs, US demand for solar PV will certainly fall, and new jobs in this sector will vanish. Chinese solar firms can shift their production to other countries to avoid the tariffs, and will still be more competitive than SolarWorld—the German company whose US subsidiary is behind the complaint.

The Obama Administration should be praising, not punishing Chinese support for renewable energy. By supporting renewable energy, China is appropriately correcting for market distortions, which the United States should be doing too. Global fossil fuel subsidies are estimated at $300bn per year. Fossil fuels also damage the environment when they are burned, which imposes costs on public health from air and water pollution. In a 2011 paper, the social cost of carbon dioxide emissions today was estimated by Yale economist William Nordhaus to be between $40 and $288 per ton carbon, depending strongly on one’s choice of discount rate. Fossil fuel imports also account for 59 per cent of the US trade deficit, and the US Navy spends countless dollars defending international shipping lanes for oil and other commodities. Recognizing these problems in the Chinese context, the Chinese government recently announced a modest carbon tax, created domestic feed-in tariffs for both wind and solar energy, and is effectively supporting their clean energy industries.

It is in the US’s interest to encourage China to reduce the growth of oil and gas imports, so that the global costs of these fuels will not continue to rise. Wind and solar-derived electricity can directly substitute for Chinese imports of natural gas for power generation. If China succeeds in developing an electric car industry, renewables could power their automotive fleet too.

It is also smart for the US to support China’s efforts to reduce emissions of greenhouse gases. Given China’s heavy reliance on coal, major investments in renewables and energy efficiency can enable China to reduce the carbon intensity of its economy. If the Chinese don’t make a big shift to renewables, there’s no chance of avoiding severe climate change because China is already the largest emitter of greenhouse gases in the world.

Finally, the merits of the actual case are dubious. Prices of Chinese-made PV modules in China are lower than they are outside of China, so it’s hard to see how they are “dumping” on the U.S. market. The true problem is overcapacity, which market forces will correct in time. The Chinese government has undoubtedly provided support to its solar industry, but so has the US government with its loan guarantees, investment tax credits, and production tax credits. At the local level, SolarWorld Industries America (the lead filer of the complaint) itself received millions in tax breaks and subsidies in Oregon when it decided to locate its manufacturing facility there. Indeed, the Commerce Department only found evidence of small Chinese subsidies in its March 2012 ruling. SolarWorld only had six co-filers, but more than 100 U.S. firms lined up against it.

Chinese government support for solar energy has already benefited the world in terms of improved welfare, climate mitigation, and reduced global energy prices. The rest of us are essentially free-riding on this support. Rather than punish China for its laudable efforts, the Obama Administration should applaud it and do its part to correct market distortions too.

Kelly Sims Gallagher is associate professor of energy and environmental policy at The Fletcher School, Tufts University. Kevin P. Gallagher is associate professor of international relations at Boston University.

Published in the Financial Times, May 22, 2012

Why Ocampo–Not Kim–Should be Next World Bank President

Kevin P. Gallagher

Emerging countries have gone on the offensive to put an end to the “wink-wink” succession rule whereby Europeans get to choose who heads the International Monetary Fund and the US picks the president of the World Bank.

On Friday, developing countries are expected to nominate at least two candidates – Ngozi Okonjo-Iweala, the Nigerian finance minister, and José Antonio Ocampo, former finance minister of Colombia. If the decision is finally based on merit, as it should be, Ocampo will win: he is far and away better than any on the list of credible names, including President Barack Obama’s nominee, Jim Yong Kim.  Read more…

Remembering Alice Amsden

from Kevin P. Gallagher

World renowned development economist Alice Amsden passed away this week.

Alice Amsden seared through conventional economics and political science with her analyses of East Asian development in the later part of the 20th Century. She will long be remembered as one of the best development economists, and political economists, of her time.

Her book “The Rise of the Rest: Challenges to the West from Late-Industrializing Economies” crystallized a lifetime of work that blended theory, quantitative analysis, and careful field work on “late development.” Other landmark books were “Asia’s Next Giant: South Korea and Late Industrialization” and “Beyond Late Development: Taiwan’s Industrial Upgrading.”

In each of these books Amsden empirically showed how many East Asian nations diversified themselves away from peasant agriculture to become some of the most vibrant industrialized economies the world has ever seen. Her findings flew in the face of neo-classical trade theories that were fashionable at the time. Read more…

Economists to issue statement on capital controls and the Trans-pacific partnership agreement

February 12, 2012 1 comment

GDAE and IPS circulated the following sign-on letter for economists demanding that the TransPacific Partnership Agreement (TPPA), now being negotiated, exclude current proposed restrictions on the use of capital account regulations to prevent and mitigate financial crises. They are seeking signatures from economists in the nine current TPPA countries: Australia, Brunei, Chile, Malaysia, Peru, New Zealand, Singapore, United States, and Vietnam.

Economists from these countries who wish to sign on to this call for action please send your name, affiliation and country to:

The TPPA is what US President Barack Obama hails as a “21st Century Trade Agreement” that improves upon and rectifies past problems in US trade and investment treaties. Thus this is a particularly opportune time to weigh in, as a major TPPA negotiation round will begin in Melbourne, Australia on March 1, 2012.

Since the financial crisis began, the Asian Development Bank, the United Nations Economic and Social Commission for the Asia-Pacific, the International Monetary Fund and others have all agreed that capital account regulations are legitimate tools to buffer nations from volatile capital flows. However, the U.S. government has used trade agreements to severely restrict a nation’s ability to deploy such regulations. Read more…

Capital Controls are Not Beggar thy Neighbor (2)

January 23, 2012 6 comments

from Kevin P. Gallagher

Emerging markets have fallen victim to unstable capital flows in the wake of the financial crisis. In an attempt to mitigate the accompanying asset bubbles and exchange rate pressures that come with such volatility, a number of emerging markets resorted to capital controls. Although these actions have largely been supported by the International Monetary Fund, some policy-makers and economists have decried capital controls as protectionist measures that can cause spillovers that unduly harm other nations.

Recently-published research shows that these claims are unfounded. According to the new welfare economics of capital controls, unstable capital flows to emerging markets can be viewed as negative externalities on recipient countries. Therefore regulations on cross-border capital flows are tools to correct for market failures that can make markets work better and enhance growth, not worsen it. Read more…

Capital Controls Not Beggar thy Neighbor

January 22, 2012 1 comment

from Kevin Gallagher


Kevin Gallagher, Ph.D., associate professor of international relations at Boston University, discusses the new economics of capital controls and how they are helping to correct international markets.

click here

IMF must heed G-20 Decisions

November 30, 2011 2 comments

from Kevin P. Gallagher

The G20 meeting in Cannes earlier this month was derailed by the pressing eurozone crisis. Actors were disappointed if they were looking for concrete action on global imbalances and the food crisis, let alone the new global monetary system that French President Nicolas Sarkozy boasted would be the goal of the summit when he first took the helm as host. But behind the scenes, the G20 actually delivered on a set of “coherent conclusions” on the management of speculative capital flows in emerging markets that should not be overlooked, especially by the International Monetary Fund (IMF). Read more…

The Eurozone Crisis and the G20

November 2, 2011 2 comments

from Kevin P. Gallagher

As Tuesday’s headlines from Greece prove, the latest eurozone rescue plan is far from a long-term solution. But it should prevent this week’s G20 meeting from being completely hijacked by Europe‘s short-term woes.

Instead of another round of fire-fighting, the G20 should address the larger issue of a mechanism to prevent sovereign debt crises in the future from spiraling like this one. If they don’t, Greece and defaulters of the future will suffer the fate of Argentina – a nation whose sovereign debt restructuring threatens to be taken over by trade and investment treaties. Read more…

The self-inflicted wound of US foreign aid cuts

October 14, 2011 1 comment

from Kevin P. Gallagher and Katherine Koleski

Slashing aid may seem like a no-brainer for congressional budget-cutters, but aid isn’t charity; it’s business. Ask China

It’s not every day that foreign aid is front page news in the United States, but it is because slashing foreign aid has become one of the few areas of bipartisanship in the US Congress. Such an act of retreat is short-sighted. Given that China and other emerging markets are ramping up their overseas development assistance, the US should be revamping and increasing aid, not cutting. Read more…

Occupy Wall Street: Getting the Target Right

October 14, 2011 5 comments

from Kevin P. Gallagher and Mark Blyth

Last week we paid a visit to the Occupy Boston outpost of the Occupy Wall Street Movement.  The group has pretty much taken over Dewey Square in front of the Federal Reserve.  They had a couple hundred people there, but the numbers seem to be growing by the day. We liked what we felt, though not always what we saw and heard.

What we felt was a brewing angst among activists, working people, and students that something is fundamentally wrong with the way the economy is ‘delivering the goods’ and to whom in the US. They may not know what they are for, but they do know who they are for: who they call the “99 percent”—those of us in the US who are not millionaires, and whose jobs and livelihoods are increasingly threatened. Read more…

The false promise of Obama’s trade deals

September 9, 2011 3 comments

Kevin P. Gallagher and Timothy A. Wise

It is bad enough that President Obama is reversing his campaign pledge and supporting Bush-era trade deals with Korea, Colombia and Panama. Starting this week in Chicago, the US will be hosting the first major trade negotiations since the “Battle in Seattle” World Trade Organisation talks came here in 1999. This occasion is for the Trans-Pacific Partnership (TPP) with a wide range of industrialised and developing Pacific Rim countries.

As part of his plan to revive the US economy and create jobs, Obama claims he will be unveiling “a trade agreement for the 21st century”. Ironically, though, he will be pushing the same “Nafta-style” trade pacts he campaigned against, and to howls of protest from his own electoral base. Let us not forget what he said:  Read more…

GOP bad faith on the debt ceiling

from Kevin P. Gallagher

President Obama has the economic and moral high ground on the debt ceiling debate – but won’t take it. With an eye next year’s elections, the Republicans are putting Obama on the defensive by using the debate to paint Obama as a big spending Democrat.

Let’s get the facts straight on a few things: the Republicans are largely responsible for the debt problem because they spent too much and taxed too little during the Bush years; and austerity economics doesn’t bring economic growth.

Why don’t we hear that from the White House?  Read more…

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