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Friday, 27 May 2016

Managing Complexity—Economic Policy Cooperation After the Crisis

G. Russell Kincaid (St. Antony’s College, Oxford)

Speakers: Tamim Bayoumi, Deputy Director, International Monetary Fund (IMF); Fred Bergsten, Senior Fellow and Director Emeritus, Peterson Institute for International Economics; Heidi Crebo-Rediker, Senior Fellow, Council on Foreign Relations; and Vitor Gaspar, Director Fiscal Affairs Department, IMF

Moderator: Kemal Dervis, Vice President and Director, Global Economy and Development, The Brookings Institution

According to Mr. Bayoumi, this new book adopts a Cubist Approach to analyzing economic policy cooperation. Like the art school, the 12 chapters in Managing Complexity—authored by various academics and practitioners, including two current PEFM Associates—do not depict the subject from a single vantage point, but provides multitude perspectives to picture all the intricacies. This event, was held at the Brookings Institution in Washington DC on May 16, followed similar presentations earlier in 2016 at Chatham House and in Shenzhen, China at a conference on global financial governance. The book’s main thesis rebuffs the “benign neglect” approach to policy cooperation owing to new challenges posed by interlinked financial stability and the “new normal” economic environment.

Fred Bergsten endorsed strongly the message that the benefits from policy cooperation are far greater in tough times—a point made in the chapter by David Vines—seeing a need to ensure that cooperation frameworks are in place and ready to respond promptly—like fire fighters. He added that having more policy issues on the table helps by opening up more trade-offs and allowing more avenues to a successful conclusion. He stressed the importance of inclusiveness—having all the policy actors at the table, in particular emerging market economies such as China. 

Continuing the latter point, Ms. Crebo-Rediker emphasized the complex interactions from spillovers and spillbacks especially from capital flows, resulting from our ever more multi-polar global economy. In this connection, she recommended the four chapters on policy responses to the crisis. She highlighted the important cautionary lessons in the chapter on the euro-area responses, which was accurately subtitled “A Case of Too Little, Too Late” written by an insider, Fabrizio Saccomanni.

Friday, 13 May 2016

What they do with your money: Does the finance industry do its job well?

Ivaylo Iaydjiev (D.Phil. Candidate, St Antony’s College, Oxford)

Speaker: David Pitt-Watson, London Business School
Chair: David Vines, Balliol College, Oxford

What does the financial industry do with your money? That is the misleadingly simple question that motivates David Pitt-Watson’s new book (co-authored with Stephen Davis and Jon Lukomnik). Given the large amounts of fees we pay in transparent or often less so ways to financial professionals, this is a particularly pertinent question. More broadly, it invites us to step back from the complex and technical details that dominate everyday financial news and revisit how we think about the role of the financial system and its contribution to society. 

Mr. Pitt-Watson examines in his talk whether the financial industry does its job well, and his conclusions are not particularly optimistic. Intriguingly, he decides to tackle the question by first reconnecting financial activity with its initial purpose. As he aptly points out, there is a voluminous literature on what financial institutions exist, but it tends to proceed by assuming that the existence of such institutions must serve a purpose, and then deducing what that purpose might be. Instead, it is necessary to be clear on what the original purpose is and work out the institutions from there.

For Mr. Pitt-Watson finance serves four key purposes, largely in line with the academic literature. The first key function is the safekeeping of assets, especially money. In turn, this is central to the second function – transaction-processing, or reducing the costs of financial exchange. The third function is the sharing of risk through the provision of insurance, which however does not reduce the aggregate amount of risk. Finally, the financial system’s most important purpose is to intermediate funds from savings to investment. 

These four functions demonstrate that finance does indeed have a socially beneficial purpose. However, he is careful to point out that this purpose relies on technical knowledge as much as on trust in the institutions and financiers themselves. When knowledge and trust are combined with a sense of purpose, the results can be transformative. Therefore, finance is key to our economies, to opportunities for social mobility and development, and to addressing our current challenges.

Friday, 6 May 2016

Financial Reform in Turkey: Responses to Past and Current Crises

Alexandra Zeitz (St Antony’s College, University of Oxford)

Speaker: Gazi Ercel, Former Governor of the Central Bank of Turkey
Chair: Nicholas Morris, St. Antony’s College, University of Oxford

How to prevent cycles of financial crises in emerging market economies? What interventions and reforms can stabilize and strengthen these economies in the aftermath of a financial crisis? Drawing on his extensive experience in Turkey, Gazi Ercel, former Governor of the Central Bank of Turkey, shared his insights on financial crises and reform in a PEFM seminar in late April, stressing the importance of reducing political uncertainties and ensuring post-crisis reforms are carried through once economic conditions improve.

Examining the record of financial crises in Turkey in the last four decades, Ercel identified common causes. In almost all crises the country has faced in recent history, public sector deficits had expanded, which provoked investors to withdraw short-term capital and in turn plunged the economy into crisis. For instance, Ercel attributed the inflows of large volumes of short-term capital in the lead up to the 1978-1979 crisis to a positive World Bank report. When these investors abruptly and rapidly withdrew in light of worsening public sector imbalances, the country experienced its worst foreign exchange crisis in three decades.

Domestic political economy, especially the pressure for a rising public sector wage bill, is at the root of the persistent public deficits that prompt financial crises, argued Ercel. The instability of Turkish politics exacerbates this problem, disincentivizing fiscal discipline as governments seek to maintain their hold on power.

In addition to identifying these Turkish political dynamics, Ercel argued that the particular causes of financial crises in emerging economies are distinct from those in developed economies. While industrialized economies are more likely to experience crises in their capital markets, emerging economies are frequently hit by debt crises. Emerging markets are likely to have weak and unsophisticated banking sectors, which may cause fragility, while instability in developed economies stems from the complexity and lack of transparency in banking sectors.