International Monetary System Dysfunctional: Dr. Kemal Derviş

Dr. Kemal Derviş

In an exclusive interview to the ECSSR Website, Dr. Kemal Derviş—the economist and political leader responsible for Turkey’s remarkable recovery after the devastating financial crisis of February 2001—shares his views on the future of the international monetary system. Derviş, who is Vice-President for Global Economics and Development at the Brookings Institution and former head of United Nations Development Program (2005-09), gave the interview on the sidelines of ECSSR’s 16th Annual Conference entitled “Global Strategic Developments: A Futuristic Vision”. Following is the edited version of the interview:

Q: Since the financial crisis of 2008, the world has witnessed a period of economic recovery, thanks to the unprecedented fiscal expansion and monetary easing measures introduced by several countries around the world. However, many economists fear this recovery is not self-sustaining and is still on life-support. Do you support this view?

A: Well, I think you are correct in saying that unprecedented fiscal expansion and monetary easing played a huge role in stopping a really catastrophic recession. The scale of the fiscal and monetary policy expansion was historic but it was the right and only thing to do given the enormity of the crisis. Now we are in a recovery phase, but the recovery is very uneven. On the one hand, the emerging markets—in East Asia, South Asia, Brazil and my own country Turkey—have recovered strongly, but advanced countries—like the US and Japan—are still in a much weaker position, although they are out of recession. For example, the US is experiencing a recovery but with very little job creation. Then there are many structural problems in advanced countries, such as the problem of an ageing population, which is causing big fiscal concerns, budgetary problems and healthcare issues. On top of all this is the fiscal expansion and all advanced countries, some more than others, are now faced with major budgetary adjustment problems. Now, the challenge will be on how to continue to support the recovery, even as governments have to engage in deep reforms on the fiscal side. This is not going to be easy.

Q: Do you think the dollar-based international monetary system suits the global economy considering the US frames its monetary policies to serve its interests?
A: I think the international monetary system, the behavior of reserves and exchange rates, was very closely linked to the way the crisis ensued, mainly because too much liquidity was coming into the US and so the combination of this excessive liquidity with the lack of good supervision of the banking system and the risky behavior of the banks led to the crisis. So I do believe that a healthier flow of capital and management of international liquidity is needed. It is not natural for some countries to have huge surpluses and for some to have huge deficits, as then liquidity accumulates on one end and does not flow onto the other. At the same time if you look at the matter from a historical standpoint, you find that international monetary systems are the result of the decisions of many economic actors, so you cannot really dictate a system from the top. It would simply not work. Currently, we have a system which is not a very good one and is dysfunctional.

Q: Do you really mean the system is dysfunctional? Would you qualify it in such harsh terms?

A: Yes, the current international monetary system is dysfunctional because it allows the US to run large deficits without really creating the pressure for an adjustment, because they can really just print the money. That said the dollar still remains the most liquid asset by far. The financial markets still consider it as almost the only asset that can be held in the long term.

The euro has become a little bit of an alternative but the problems in the south of Europe have somewhat undermined the confidence. The Japanese yen is a good currency that everyone wants to hold but it does not have the dimension of the dollar. The sterling is still surviving amazingly, but again it has limited value and the renminbi is now becoming a very important currency in the world, but because the Chinese capital markets are fairly closed it cannot be easily transacted. Therefore, in spite of all the problems the dollar still remains very dominant and very desirable. So I don’t think there will be an immediate change, but a gradual change.

I personally believe that we are moving from a uni-polar system in the world of economic and financial power, as was characterized in the 1990s, towards a multi-polar system where we could see China becoming one major pole and Europe (despite its divisions) becoming another. In the same vein, Japan would continue to be an important economy and India is expected to become an increasingly important economic power in terms of its size with 1.2 billion people. So in the next 10-20 years I believe we would see a reflection of this change in the international monetary system. The big question is, will we move toward a system of two or three major reserve currencies, with the Chinese yuan undoubtedly becoming a reserve currency, or will the international community be able to create a synthetic asset, like the SDR (Special Drawing Rights), which might play a much bigger role. I think, this is the big question.

Q: But there is also some talk in certain conservative circles of going back to commodity-based currencies like gold or a basket of commodities. Do you think it is a feasible proposition?

A: I do not think it is viable. The interest in gold has been revived because of the present difficulties but there is no rationale in going back to a commodity backed system, in my view. You see, history does not tend to go back, it tends to go forward. I think the world had a gold standard, but it was not really appropriate because in a way it was arbitrary, begging the question why gold and not copper etc. Moreover, it also limits the policy space of governments, and governments don’t like that.

Q: There are some that say gold-backed currency would also limit derivatives trade and other shadow banking activities because it would restrict monetary expansion?

A: I don’t think so, because you can trust them to invent very complicated derivatives based on gold. At the same time, governments will not give back to gold their monetary policy space. I think it is more likely, that just as we moved from gold to dollar standard, one day the US dollar would be less important than an SDR or an SDR-like system. In fact, this will be a more appropriate reflection of the world of the 21st century. So I think a cooperative system, with the SDR as a basket of various important currencies, managed by the international community eventually will come into existence, but this may take decades.

Q: Should the GCC states be wary of a sudden fall in the value of US dollar reserves?

A: I don’t think the dollar will lose its reserve asset position dramatically. But what might happen to the exchange rate, nobody knows. I would argue that some diversification is a good thing, but sudden diversification is not because that would hurt everybody and it would hurt the international system. Whether it is the GCC countries or China—that sits on huge dollar reserves—there is a worry on what happens if these reserves lose value. And that is why we come back to the question of the system. The system is not functioning properly because you want to accumulate reserves and at the same time you worry about the value of these reserves. If your reserves constitute a basket of currencies—including the dollar, the euro, the yen, the yuan, the swiss franc—then one would be safer because all of them would not lose value together. I think we will move towards that system, but I think the movement should be gradual and careful and should not upset the equilibrium in the world economy.

Q: Do you think the global financial system is prone to another crash like that of 2008?

A: These days, especially after the 2008 financial crisis, one cannot completely discount such possibilities.

http://ecssr.com/ECSSR/print/ft.jsp?lang=en&ftId=/FeatureTopic/ECSSR/FeatureTopic_1388.xml

Nuclear Power Was in Decline Even Before Fukushima

In an exclusive interview with the Website of the Emirates Center for Strategic Studies and Research, Anthony P. Froggart (Senior Research Fellow, Energy, Environment and Development Program, Chatham House, UK), pointed out that the rapid advancements in technology

Antony Froggart

and economics of renewables are forcing even the most nuclear-intensive countries to question the viability of their nuclear programs. Speaking on the sidelines of the ECSSR’s Annual Energy Conference 17 titled: “Global Energy Markets: Changes in the Strategic Landscape,” held on Nov.1-2, 2011, Froggart averred that the Fukushima tragedy has further accentuated the trend away from nuclear. Following is the text of the interview:
Q: Do you see there has been a change in public perception and the perception of governments around the world against nuclear power after the Fukushima tragedy earlier this year?A: What we have seen as a result of Fukushima is that a number of countries who already had concerns about nuclear power are accelerating their decision-making and the obvious example in this regard is Germany. In the late 1990s, Germany introduced legislation to phase out nuclear power. This was later overturned. But post-Fukushima, Germany has reverted back to the decision of phasing out nuclear power. Again, in other European countries we see an increase in skepticism toward nuclear power and legislation in this respect has followed or is in the process of being followed. For example, a referendum took place in Italy where people voted against the reintroduction of nuclear power. Similarly in Switzerland, the government is likely to reject the nuclear option and the new government in Belgium has also said it would phase out nuclear. However, some governments in Europe still say that they wish to continue with their nuclear programs. The varied reaction can be seen around the world. Thus post-Fukushima, we find construction of new reactors in India and Pakistan. However, a country like China—which currently has 40 percent of the world’s reactors under construction—has not started building any new reactors this year and it seems it has frozen its expansion program post-Fukushima.
Q: Does this mean China has put on hold its plans to build nuclear reactors? Do you think it is scaling back its projects in the wake of the Fukushima tragedy or are there other factors in play?A: China was early going very fast in building its nuclear reactors. Within its 12^th Five-Year Plan, it was extremely ambitious. I think it is very clear that it will now not be able to meet its objectives of the 12^thFive Year Plan, but as of yet they are not talking of abandoning nuclear, but are looking at what lessons might be drawn from the Fukushima tragedy and it is also believed that they might be using the event as a justification for a slowdown because they were going so fast beforehand that it was leading to engineering and oversight issues, and so they are taking a step back. So it is very clear that it will impact their nuclear development target.
I believe nuclear power was already having problems globally before Fukushima in terms of its development. The peak of nuclear output was in 2002, since then we have seen a decrease in the total number of reactors in operation as more have closed than have started up. The reasons behind this are multifold. Firstly, it is the availability of alternatives. In the last few years, for example, it was said that the United States would re-instigate the construction of new nuclear. This is now very unlikely, mainly because the price of gas has fallen to the extent that going nuclear makes no economic sense. In many parts of the world alternatives are available. You are seeing the development of renewables, in a way we haven’t seen before as well as the promise of the development of renewables.
Q: Are current financial issues also affecting some governments to move into renewables as opposed to nuclear energy?A: Right now there are concerns over public acceptance, when it comes to nuclear. But I think the price of nuclear is even more important in the current times—both in terms of price of construction and the fact that this price continues to increase. In addition, the price of capital is also becoming more expensive and so financial institutions that may have been willing to lend for the development of nuclear energy, may either be no longer willing to do so or at least the price of borrowing the money has increased substantially.
Q: What are the major advances taking place in the field of renewable energy that could reduce global reliance on nuclear energy in coming decades?A: The energy sector as a whole is in a flux like never before. This has happened with changes like the development of shale gas, the economic viability of carbon capture and storage, the development of renewable energies in their technologies and economics, the prospects of solar photovoltaic achieving grid parity. I think the prospects for solar photovoltaic technology are particularly bright. So you have all of these developments and if you invest in nuclear at the current time with all of the uncertainty both from a financial perspective and from a technological development perspective you lock yourself in a certain development path of energy. Therefore, it makes sense just to pause and assess how technologies of renewable energy would develop.

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IS: Securing India's Interests in Middle East

Adil Rasheed, Independent Security Analyst, New Delhi

Published on Indian Peace and Conflict Studies Website on June 16, 2014

The rabbit hole of Iraq springs up bizarre and devastatingly new challenges for the US even a decade after its invasion of the country. The embarrassment does not end there. The US is now forced to re-enter the quagmire and may fight alongside its arch-enemy Iran, much to the chagrin of its most ardent allies in the

region – the Arab Gulf states and Israel.

The Islamic State of Iraq and the Levant (ISIL), a new virulent strain of Wahhabi militancy, recently took control over the Iraqi cities of Mosul and Tikrit and according to some regional commentators threatens to rejig the region’s entire post-Ottoman shebang. Strangely, a large part of the ISIL’s forces comprises remnants of Saddam’s so-called secular regime – particularly the Naqshbandi Army operating under the command of the fugitive Ba’ath Party leader Izzat al-Douri. In response, Shiite militants have answered the call to arms by Grand Ayatollah Ali Al-Sistani in their thousands, raising fears that Iraq might soon disintegrate on sectarian lines.

These unforeseen events in Iraq follow other extraordinary developments that are fast transforming the geopolitical landscape of the region. Signs of a possible détente in relations between the US and Iran have taken the world by surprise. The six oil-rich Gulf monarchies that constitute the Gulf Cooperation Council (GCC) have been particularly outraged by the so-called US ‘double-cross’, with Saudi Arabia being so incensed that it refused to take the UN Security Council seat to which it was elected. The country has even warned of a major shift away from the US and is seeking to build an Asian pivot for a new security architecture.

The US-GCC relationship first came under strain in 2011, when Washington sided with democratic forces that deposed Hosni Mubarak in Egypt and then recognised the Muslim Brotherhood-backed president Mohamed Morsi. Fissures widened following the US’ inaction in Syria and its ‘neutrality’ during the Bahrain uprising, which confirmed GCC fears that Washington was no longer the guarantor of Gulf security. The last straw was the surreptitious nuclear deal with Iran last November, which apparently did not consider taking Gulf countries into confidence.

Thus, the trust is breached and the 40-year-long ‘oil-for-security’ pact seems past its sell-by date. The phenomenal increase in the US’ shale oil and gas production has helped the superpower outgrow its ‘addiction to Middle East oil’, allowing it to act more independently in the region. This has impaired confidence in regional security arrangements, which could have far-reaching implications for West Asia and the world.

For its part, India would have to continue walking a diplomatic tightrope between Iran and the GCC, building on the trust and goodwill it has earned among all sides in a volatile region. Interestingly, the early signs of thaw in the US-Iran relations augur well for New Delhi, as this had been a major point of contention in Washington-New Delhi relations. India has maintained diplomatic ties with Iran and both have shared geostrategic interests, particularly in Afghanistan and Central Asia. A breakthrough in the US-Iran negotiations could also allow India to increase its oil imports from the Gulf country – which are currently limited by the sanctions regime. There is also ample scope for trade and cultural exchanges. 

Still, a wide gulf exists between Washington and Tehran as the present thaw could dissipate any moment.

Moreover, any changes in regional relations should not come at the expense of India’s historic and strategically important ties with the GCC states. West Asia supplies over 62 per cent of India’s oil imports, most of which come from Arab Gulf countries. Moreover, the over 6 million-strong Indian Diaspora in the GCC states has created deep human links between the two societies. While 70 per cent of Indian expatriates in the GCC are blue collar workers, over 20 per cent are professionals. They remit about $30 billion to India every year.

Additionally, the GCC countries view the emergence of Indian economy with great interest. With the rise of major non-OPEC oil producers such as Russia and the US, the Gulf is looking toward the Indian and Chinese markets for sustainable demand. Again, following 9/11 and the 2008 global recession, Gulf capital is increasingly seeking investment out of the West. A significant degree of cultural comfort and confidence in India’s property rights protection and rule of law (unlike China’s) makes India an attractive investment destination. However, the policy paralysis that dogged India’s previous administration proved disappointing for some corporations. It is hoped that with the coming of a strong, new leadership in New Delhi, India may finally be able to meet expectations.

However, the security architecture of the Gulf remains a major concern for India. With the US influence in retreat, India needs to actively engage with the GCC, Iran and Iraq to secure its vital trade and energy interests. In cooperation with other Asian powers such as China, Japan, South Korea, Indonesia and Malaysia, it should initiate building a durable, non-hegemonic security architecture which ensures stability and peace in the region.

http://www.ipcs.org/article/suicide-terrorism/isil-iraq-and-securing-indias-interests-4517.html