Topic: International Economics and Development

China: Hot Money In, Now Out

For some years, hot money flowed in, adding massively to China’s foreign reserve stockpile. Speculators borrowed cheaply in U.S. dollars and bought yuan-denominated assets in anticipation of an ever-appreciating yuan. Well, this carry trade has shifted into reverse, with $91 billion in net outflows in the last quarter of 2014. And with that, the ever-appreciating yuan story has come to a close, too. Indeed, the yuan has lost 1.8% against the greenback since the New Year.

A clear picture of the drag that the hot money outflows are putting on China is shown by inspecting the annual growth rate in the People’s Republic of China’s net foreign assets. With the reserve of the carry trade, the slowdown in net foreign assets growth has been pronounced.   

This, in turn, has reduced the foreign asset component of the growth in China’s money supply, putting a squeeze on the economy’s fuel supply. Indeed, China’s money growth rate has fallen well below its trend rate since mid-2012.

In an attempt to reverse the slump in China’s money supply growth, the People’s Bank has just reduced its benchmark interest rates for the second time in three months. A wise move.

Boris Nemtsov, RIP

The murder of Boris Nemtsov in the immediate proximity of the Kremlin seems to be an important milestone in Russia’s descent into darkness. As Deputy Prime Minister in the late 1990s and as an opposition politician during the era of Vladimir Putin, Mr. Nemtsov was a voice for a more liberal, open, and democratic Russia.

Notwithstanding a certain degree of restraint in his criticism of the Russian government, his work as one of the central figures of Russian opposition reflected great personal courage. In spite of a history of frequent arrests, in the past year, he positioned himself as an important domestic critic of Russia’s war against Ukraine.

He was not a stranger to free market ideas or to the work of the Cato Institute, which has been trying to support the transition of Soviet Russia to markets since its landmark 1990 Moscow conference, Transition to Freedom: The New Soviet Challenge.  One decade later, Mr. Nemtsov spoke at a Cato conference on the privatization of pension systems around the world.

The circumstances of Mr. Nemtsov’s death are extremely disconcerting, especially in the light of the track record of Mr. Putin’s regime. Mr. Nemtsov was killed two days before the planned demonstration against Mr. Putin’s war against Ukraine. He feared for his life as he was preparing to publish new evidence on the presence of Russian troops in Eastern Ukraine. And the ‘investigation’ of his murder started on Friday night, with the police ransacking his apartment and confiscating his documents and hard drives.

Mr. Putin’s facetious promise that he will “personally oversee the investigation” strongly suggests we will never learn the names of Mr. Nemtsov’s murderers. But it is safe to say that a country in which opposition politicians of Mr. Nemtsov’s stature have to fear for their lives is a on a very dismal path.

Casualties of the Drug War

Yesterday, the international aid organization Health Poverty Action released a new study on the effects of the global drug war. The report is entitled, “Casualties of War: How the War on Drugs Is Harming the World’s Poorest.”

From its introduction:

Since the mid-twentieth century, global drug policy has been dominated by strict prohibition, which tries to force people to stop possessing, using and producing drugs by making them illegal.

This approach, which has come to be known as the ‘War on Drugs’, has not only failed to achieve its goals—it is fuelling poverty, undermining health, and failing some of the poorest and most marginalised communities worldwide.

Both in the United States and around the world, the War on Drugs has been a humanitarian catastrophe and a financial money pit. Interdiction often harms indigent farmers who grow the coca and poppy plants for meager financial return while the global drug marketplace continues to meet high demand. Prohibition-fueled violence among rival cartels and gangs invariably spills over to claim innocent lives. For those reasons, it is no exaggeration to say that the $100 billion spent on global drug prohibition annually takes food off the tables of the poor and leaves many more dead from violence.

Well-meaning people can disagree about what is best to spend that $100 billion on—vaccines, food aid, micro-loans, infrastructure, clean water projects, drug treatment, etc.—but a growing number of people would say it would be better spent not fighting the Drug War.

Read the whole report here.

Ukraine Hyperinflates

Since the New Year, Ukraine’s currency – the hryvnia – has collapsed, losing 51 percent of its value against the U.S. dollar. To put this rout into perspective, consider that the Russian ruble has only lost 8 percent against the greenback during the same period.

Like night follows day, the hryvnia’s meltdown has resulted in a surge of inflation. The last official Ukrainian year-over-year inflation rate is 28.5 percent. This rate was reported for January and is out of date. That said, the official inflation rate has consistently and massively understated Ukraine’s brutal inflation. At present, Ukraine’s implied annual inflation rate is 272 percent. This is the world’s highest inflation rate, well above Venezuela’s 127 percent rate (see the accompanying chart).

When inflation rates are elevated, standard economic theory and reliable empirical techniques allow us to produce accurate inflation estimates. With free market exchange-rate data (usually black-market data), the inflation rate can be calculated. Indeed, the principle of purchasing power parity (PPP), which links changes in exchange rates and changes in prices, allows for a reliable inflation estimate.

To calculate the inflation rate in Ukraine, all that is required is a rather straightforward application of a standard, time-tested economic theory (read: PPP). At present, the black-market UAH/USD exchange rate sits at 33.78. Using this figure and black-market exchange rate data that the Johns Hopkins-Cato Institute for Troubled Currencies Project has collected over the past year, I estimate Ukraine’s current annual inflation rate to be 272 percent – and its monthly inflation rate to be 64.5 percent. This rate exceeds the 50 percent per month threshold required to qualify for hyperinflation. So, if Ukraine sustains its current monthly rate of inflation for several more months, it will enter the record books as the world’s 57th hyperinflation episode. 

Austerity, A New Weaselword

The financial press has become inundated with the word “austerity.” Since Greece’s left-wing Syriza proclaimed an “anti-austerity revolution,” strong adjectives, like “incredibly savage,” precede that overused word.

What was once a good word has become a weaselword. That, according to the Oxford Dictionary, is “a word that destroys the force of a statement, as a weasel ruins an egg by sucking out its contents.” How could that be?

Well, in the hands of an unscrupulous or uninformed writer, the inversion of a perfectly good word into a weaselword is an easy task. All one has to do is leave the meaning of a word undefined or vague, rendering the word’s meaning so obscure as to make it non-operational. With that, a meaningless weaselword is created.

In its current usage, the word austerity is so obscure as to evoke Fritz Machlup’s paraphrase of Goethe’s line from Faust: To conceal ignorance, Mephistopheles counsels a student to misuse words. Such is the story and fate of austerity.

Why Is the International Environmental Movement Silent about the Nicaragua Canal?

Nicaragua’s plan to build an Interoceanic Canal that would rival the Panama Canal could be a major environmental disaster if it goes forward. That’s the assessment of Axel Meyer and Jorge Huete-Pérez, two scientists familiar with the project, in a recent article in Nature. Disturbingly, the authors point out,

No economic or environmental feasibility studies have yet been revealed to the public. Nicaragua has not solicited its own environmental impact assessment and will rely instead on a study commissioned by the HKND [The Hong Kong-based company that has the concession to build the canal]. The company has no obligation to reveal the results to the Nicaraguan public.

In recent weeks we have seen similar opinions aired in the Washington Post, Wired, The Economist, and other media. In their article, Meyer and Huete-Pérez explain how the $50-billion project (more than four times Nicaragua’s GDP), would require “The excavation of hundreds of kilometres from coast to coast, traversing Lake Nicaragua, the largest drinking-water reservoir in the region, [and] will destroy around 400,000 hectares of rainforests and wetlands.” So far, the Nicaraguan government has remained mum about the environmental impact of the project. Daniel Ortega, the country’s president, only said last year that “some trees have to be removed.”  

Interestingly, despite this potential massive threat to one of the most pristine environmental reservoirs in the Americas, none of the leading international environmental organizations, such as Greenpeace, Friends of the Earth or the Sierra Club, has issued a single statement about the Nicaragua Canal.

We know for a fact that this is not out of lack of interest in Central America. After all, some of these organizations were pretty vocal in their opposition to CAFTA. Why isn’t the Nicaragua Canal proposal commanding the attention of these international environmental groups?

Good News from Hungary

In a recent article for the Weekly Standard, I noted that freedom in Hungary was under attack. In the past several years, the Prime Minister Viktor Orban has tightened its control over media, harassed civil society organizations, politicized the judiciary, nationalized $14 billion worth of assets from private pension funds, and populated the board of Hungary’s central bank by appointees of the ruling party, Fidesz. Mr Orban – who was once seen as a pro-market, liberal reformer – has also become Vladimir Putin’s most reliable partner in the EU, having hosted him for a working visit just last week.

But not all Hungarians are applauding as the country descends deeper into what could be called ‘goulash authoritarianism’. In fact, the parliamentary by-election in the county of Veszprem on Sunday has brought a very encouraging piece of news. A Fidesz candidate was defeated by an independent candidate, Zoltan Kesz, endorsed by a coalition of left-of-center parties.

“The left-right divide has been turned on its head in Hungary; the relevant distinction here is between the pro-Western and pro-Eastern political parties,” says Mr Kesz, referring to Mr Orban’s geopolitical allegiances. It should also be said that Mr Kesz is no ordinary politician. An activist and English teacher, he is the founder of Hungary’s premier libertarian think-tank, the Free Market Foundation. Interestingly, given the toxic political and ideological environment in Hungary, the organization has become known as the leading voice against racism in the country, and much of its efforts have been aimed to counter the rise of political forces such as the xenophobic Jobbik party, which is currently the third largest political force in the country.

Mr Kesz’ election is significant because it brings an end to the narrow supermajority, which Fidesz enjoyed in the Hungarian parliament since the election last year. In 2013, the parliament passed a number of controversial constitutional amendments, and many feared that the unchecked dominance of Fidesz could herald the demise of Hungarian democracy. While Mr Kesz’ electoral victory assuages those fears somewhat, he will be fighting an uphill battle to get his country back on track.