José Gabriel Palma

Homogeneous middles vs. heterogeneous tails, and the end of the ‘Inverted-U’: the share of the rich is what it's all about

This paper examines the current global scene of within-nations distributional disparities. There are three main conclusions: first, that the statistical evidence for the ‘upwards’ side of the “Inverted-U” between inequality and income per capita seems to have vanished, as many lowand low-middle income countries now have a distribution of income similar to that of most middle-income countries (other than those of Latin America and Southern Africa). That is, half of Sub-Saharan Africa and many countries in Asian, including India, China and Vietnam, now have an income distribution similar to that found in North Africa, the Caribbean and the secondtier NICs. And this level is also similar to that of half of the first-tier NICs, the Mediterranean EU and the Anglophone OECD (excluding the US). As a result, about 80% of the world population now live in countries with a Gini around 40. So, the pre-globalisation statistical evidence for the hypothesis that posits that (for whatever reason) from a distributional point of view “things have to get worse before being able to get better” is rapidly drawing to a close. Second, that among middle-income countries it is only Latin America and Southern Africa that are living in an inequality limbo of their own. And third, that within an overall trend of rising inequality, there are two opposite distributional forces at work. One is ‘centrifugal’, and takes place at the two tails of the distribution—leading to an increased diversity across country in the shares appropriated by the top 10 percent and bottom forty percent. The other is ‘centripetal’, and takes place in the middle—leading to a remarkable uniformity across countries in the share of income going to the half of the population located between deciles 5 to 9. Therefore, globalisation is creating a situation where virtually all the within-nation distributional differences are the result of what the very rich and the poor are able to appropriate. In turn, it seems that regardless of the political settlement at work current distributional outcomes are characterised by half of the population (located in the middle and upper-middle of the distribution) acquiring strong ‘property rights’ over half of the national income. The other half, however, seems to be increasingly up for grabs between the very rich and the poor. And if what really matters in distributional terms is the income-share of the rich—because the rest ‘follows’ (middle classes able to defend their shares, and workers with ever more precarious jobs in ever more ‘flexible’ labour markets)—everybody attempting to understand the within-nations disparity of inequality (including myself) should always be reminded of this basic distributional fact following the example of Clinton’s campaign strategist: by sticking a note in our notice boards saying “It is the share of the rich, stupid”.

How the full opening of the capital account to highly liquid financial markets led Latin America to two and a half cycles of ‘mania, panic and crash’

Latin America has recently experienced three cycles of capital inflows, the first two ending in major financial crises. The first took place between 1973 and the 1982 ‘debt-crisis’. The second took place between the 1989 ‘Brady bonds’ agreement (and the beginning of the economic reforms and financial liberalisation that followed) and the Argentinian 2001/2002 crisis, and ended up with four major crises (as well as the 1997 one in East Asia) — Mexico (1994), Brazil (1999), and two in Argentina (1995 and 2001/2). Finally, the third inflow-cycle began in 2003 as soon as international financial markets felt reassured by the surprisingly neo-liberal orientation of President Lula’s government; this cycle intensified in 2004 with the beginning of a (purely speculative) commodity price-boom, and actually strengthened after a brief interlude following the 2008 global financial crash — and at the time of writing (mid-2011) this cycle is still unfolding, although already showing considerable signs of distress. The main aim of this paper is to analyse the financial crises resulting from this second cycle (both in LA and in East Asia) from the perspective of Keynesian/ Minskyian/Kindlebergian financial economics. I will attempt to show that no matter how diversely these newly financially liberalised Developing Countries tried to deal with the absorption problem created by the subsequent surges of inflow (and they did follow different routes), they invariably ended up in a major crisis. As a result (and despite the insistence of mainstream analysis), these financial crises took place mostly due to factors that were intrinsic (or inherent) to the workings of over-liquid and under-regulated financial markets — and as such, they were both fully deserved and fairly predictable. Furthermore, these crises point not just to major market failures, but to a systemic market failure: evidence suggests that these crises were the spontaneous outcome of actions by utility-maximising agents, freely operating in friendly (light-touched) regulated, over-liquid financial markets. That is, these crises are clear examples that financial markets can be driven by buyers who take little notice of underlying values — investors have incentives to interpret information in a biased fashion in a systematic way. ‘Fat tails’ also occurred because under these circumstances there is a high likelihood of self-made disastrous events. In other words, markets are not always right — indeed, in the case of financial markets they can be seriously wrong as a whole. Also, as the recent collapse of ‘MF Global’ indicates, the capacity of ‘utility-maximising’ agents operating in unregulated and over-liquid financial market to learn from previous mistakes seems rather limited.

Was Brazil's recent growth acceleration the world's most overrated boom?

As soon as international financial markets felt reassured in 2003 by the surprisingly neoliberal orientation of President Lula’s government, the ‘spot-the-new-Latin-tiger’ financial brigade became dazzled by Brazil — they just couldn’t have enough of it. So much so, that they had little difficulty in turning a blind eye to the obvious fact that (except for several commodities, finance, and a small number of other activities) Brazil’s economic performance since the beginning of neo-liberal reforms (c.1990) had been remarkably poor. This not only contrasted with its own performance pre-1980, but also with what was happening in Asia. I shall argue that the weakness of the new neo-liberal paradigm is rooted as much in its intrinsic flaws as in the particular way it was implemented. As in the rest of Latin America, Brazil’s economic reforms were undertaken primarily as a result of its perceived economic weaknesses — i.e., there was an attitude of ‘throwing in the towel’ vis-a-vis the previous state-led import substituting industrialisation strategy, because most politicians and economists interpreted the 1982 debt crisis as conclusive evidence that it had led the region into a cul-de-sac. As Hirschman has argued, policy-making has a strong component of ‘path-dependency’; as a result, people often stick with policies after they have achieved their aims, and those policies have become counterproductive. This leads to such frustration and disappointment with existing policies and institutions that is not uncommon to lead to a ‘rebound effect’. An extreme example of this phenomenon is post-1982 Latin America, where the core of the discourse that followed ended up simply emphasising the need to reverse as many aspects of the previous development strategy as possible. This helps to explain the peculiar set of priorities, the rigidity and the messianic attitude with which the reforms were implemented in Brazil, as well as their poor outcome. As the then President of Brazil’s Central Bank explained at the time, their main task was “...to undo forty years of stupidity.” With this ‘reverse-gear’ attitude, this experiment in economic reform almost inevitably ended up as an exercise in ‘not-very-creative-destruction’ — especially vis-a-vis its manufacturing industry. Something very different happened in Asia, where economic reforms were often intended (rightly or wrongly) as a more targeted and pragmatic mechanism to overcome specific economic and financial constraints. Instead of implementing reforms as a mechanism to reverse existing industrialisation strategies, in Asia they were put into practice in order to continue and strengthen ambitious processes of industrialisation. Although the Brazilian economy has been unable to deliver sustainable productivity-growth since the beginning of economic reforms (just a few short growth-dashes), Brazilian-style neo-liberal capitalism became unrivalled when it came to offering world-class commodities, an abundance of precarious (mostly service) jobs, stylish retail, extremely lucrative finance, and the ‘purity of beliefs.’

Why are developing country corporations more susceptible to the vicissitudes of international finance

About USD7 trillion of quantitative easing funds has flooded emerging markets since 2008. These funds, created to stimulate a recovery in the Organisation for Economic Cooperation and Development and to stabilise financial markets, ended up mostly as emerging markets’ corporate bonds and loans (often after being leveraged into many multiples of their original value). Not for the first time, emerging markets became the financial markets of last resort. These funds were then either mainly invested (Asia) or used (as in Latin America and South Africa) for almost anything except for creating additional productive capacities. Enquiries into these issues, especially how corporations financed their investment, were subjects that fascinated economist Ajit Singh. He was the first to find out that corporations in emerging markets relied much more on external finance than those in the Organisation for Economic Cooperation and Development (where retained profits played a major role). The implication was that they were likely to be more susceptible to the vicissitudes of financial markets, and these have become even more weird since quantitative easing, as Northern ‘investors’, in search for elusive yields, have been happy to take on ever higher risks, leverage and illiquidity in the South. This is a key difference between current global financial fragilities and those at the onset of the current global financial crisis in 2007. The stakes for emerging economies and international financial markets could scarcely be higher, but unfortunately these huge new challenges occur at the worst possible time, as our social imagination has seldom been so barren.

Why corporations in developing countries are likely to be even more susceptible to the vicissitudes of international finance than their counterparts in the developed world: A Tribute to Ajit Singh

All things considered, anything up to US

How to create a financial crisis by trying to avoid one: the Brazilian 1999-financial collapse as "Macho-Monetarism" can't handle "Bubble Thy Neighbour" levels of inflows

7 trillion of so-called quantitative easing (QE) funds has flooded emerging markets since the 2008 global financial crisis. These funds, created to stimulate a recovery in the OECD and to stabilise international financial markets, ended up mostly as emerging markets’ corporate bonds and loans (often after being leveraged into many multiples of their original value). They were then either mainly invested (Asia), or used (as in Latin America and South Africa) at best to finance economic activities which do not enhance productive capacities, such as residential construction, or used to finance deficits, MA but the downside is the risk of more volatile asset prices (including commodities), and unchartered financial fragilities all over. Closer regulatory scrutiny worldwide, therefore, should have been an intrinsic part of such risky reflationary and monetary policies. But try to get speculators, traders and rentiers (or politicians in need of donations) to understand something, when their (shortterm) earnings, bonuses, share options and corporate-sponsored retirement plans depended on them not understanding it. The stakes for emerging markets’ corporations, their economies, financial markets and wider society (and everybody else in the world for that matter) could scarcely be higher - but unfortunately these huge new challenges occur at the worst possible time, as our social imagination has seldom been so barren.

The Revenge of the Market on the Rentiers.: Why Neo-Liberal Reports of the End of History Turned Out to Be Premature

Brazil, as the rest of Latin America, has experienced three cycles of capital inflows since the collapse of the Bretton Woods system. The first two ended in financial crises, and at the time of writing the third one is still unfolding, although already showing considerable signs of distress. The first started with the aftermath of the oil-price increase that followed the 1973 ‘Yom Kippur’ war; consisted mostly of bank lending; and finished with Mexico’s 1982 default (and the 1980s ‘debt-crisis’). The second took place between the 1989 ‘Brady bonds’ agreement (which also marked the beginning of neo-liberal reforms in most of Latin America) and the Argentinian 2001 crisis. This second cycle saw a sharp increase in portfolio flows and a rise of FDI, and ended up with four major crises (as well as the 1997 one in East Asia) as newly-liberalised middle-income countries struggled to deal with the problems created by the absorption of those sudden surges of inflows — Mexico (1994), Brazil (1999), and two in Argentina (1995 and 2001). Finally, the third inflow-cycle began in 2003 as soon as international financial markets felt reassured by the surprisingly neoliberal orientation of President Lula’s government; this cycle intensified in 2004 with a (mostly speculative) commodity price-boom, and actually strengthened after a brief interlude following the 2008 global financial crash. The main aim of this paper is to analyse the Brazilian 1999-financial crises during the second inflow-cycle from the perspective of Keynesian/ Minskyian/ Kindlebergian financial economics. I will attempt to show that no matter how diversely the above mentioned countries tried to deal with the inflow absorption problem — and they did follow different routes, none more unique than Brazil — they invariably ended up in a major financial crisis. As a result (and despite the insistence of mainstream analysis and different ‘generation’ models of financial crises), these crises took place mostly due to factors that were ‘intrinsic’ (‘endogenous’ or ‘inherent’) to middle-income countries that opened up their capital account indiscriminately to over-liquid and excessively ‘friendly-regulated’ international financial markets. As such, these crises were both fully deserved and fairly predictable. Therefore, I shall argue that the general mechanisms that led to Brazil’s 1999-financial crisis were in essence endogenous to the workings of an economy facing i) full financial liberalisation; ii) several surges of inflows, especially immediately after the Mexican 1994 and the East Asian 1997 crises — and as a spillover of the respective rescue packages —, following a new ‘bubble thy neighbour’ speculative-strategy by international financial markets, as ever more liquid, volatile, politically-reassured, and progressively unregulated financial markets were anxiously seeking (and allowed to create artificially) new high-yield investment opportunities via a new sequential speculative-strategy; and iii) ineffective domestic financial regulation — especially lack of effective capital controls. I shall also argue that within this general framework, the specificity of the Brazilian crisis was given by having been affected by i) several external shocks; ii) by a naive ideology directing economic reform; iii) by a exuberant (post-‘second generation’ models)-style monetarism, or ‘macho-monetarism’, that although successful in achieving initially price-stabilisation, and in avoiding that Brazil became ‘another Mexico’ (in terms of keeping Brazil away from an inflow-led Kindlebergianmania), it did so at a growing (and mostly unnecessary) cost; iv) the creation of several major financial fragilities in the banking sector (private and public) and in State finances — leading the Federal Government to sleepwalk into a Minskyian ‘Ponzi-finance’; and v) by this ‘Ponzi’ being turbo-charged by both the Government’s indiscriminate absorption of nonperforming debt, and by it paying a huge amount (mostly in the form of subsidies) in order to get the constitutional re form that would allow the President to run for a second term.