David Cameron in Liberia: All that glitters is not gold

The Prime Minister will advocate his "golden thread" approach to aid this week - but does he know what he is talking about?

Following his visit to Algeria this week, David Cameron will travel to another African country for a lower profile, but crucially important meeting. The Prime Minister will chair a gathering of the world’s great and good, debating the details of an ambitious, inspirational plan to end extreme poverty within a generation. But is he the right person for the job?

The UN High Level Panel on the Post-2015 Development Agenda meets in Monrovia, Liberia, this week. They plan to define a successor framework to the Millennium Development Goals. Developing and developed countries will be represented by civil society, government, business, and academia. Cameron, along with the presidents of Liberia and Indonesia, will co-chair.

The defining concept of Cameron's development strategy is the so-called ‘golden thread of development.’ The idea is that development needs to reach beyond aid levels, to focus on other features, such as transparency and better governance. It is hardly revolutionary to suggest development policy needs to go beyond aid – and at the World Development Movement we couldn’t agree more. But Cameron’s emphasis on ‘beyond aid’ is somewhat ironic. His government, to its credit, has stuck to its 30 year promise to reach 0.7 per cent of UK national income in aid. Its record in beyond-aid areas is much less positive.

Development beyond aid is first and foremost about tackling inequality. This is because the extreme inequality we see in many countries today, not to mention at the global level, slashes social cohesion and wrecks children’s life chances. The world has moved on from the days of proclaiming intense relaxation about people being filthy rich. Few now defend extreme inequality; even the denizens of Davos discussed it last week. But Cameron is the man who risked his own political popularity by cutting the top 50 per cent tax rate on the wealthiest in the UK, at the same time as increasing the burden on the less well off. Will he really deal with global inequality? He hasn’t made a good start.

The post-2015 panel has to bring climate change into its deliberations, and it is doing so. This is the must-have component of any sensible blueprint for development. Climate change is already hitting the poorest people in the poorest countries. Worse, if not dealt with, it could completely derail any plan to end poverty. But David Cameron? He is determined to build as many as thirty new carbon-belching gas fired power stations in the UK, a move that will undermine investment in renewable energy for decades. This hardly helps his chances of progressing climate discussions on the global stage.

After the 2008 financial crash proved our financial system is as solid as a house of cards, a beyond-aid development agenda must plan to tame the dangerous power of the financial sector. Amongst a multitude of benefits, doing this would help stabilise and lower the price of food, which can consume as much as three quarters of poor people’s incomes. But Cameron has refused to take serious, common sense action to prevent another banking collapse. For example, he could have separated the high street banks from their gambling investment arms, but instead he has allowed them to remain too big to fail.

Overshadowing all this, is the big economic picture. Cameron is the man who continues to dole out austerity, against the advice of just about everyone – including Nobel prize-winning economists, the International Monetary Fund, and Goldman Sachs. This is similar thinking to the 1980s and 1990s structural adjustment programmes, which were disastrous for developing countries. Even the IMF, which spread these programmes around the world, now acknowledges they failed.

So while Cameron’s support for British aid is laudable, his wider record in government begs questions about his suitability to map out the vital post-2015 plan to end global poverty. Will he tackle inequality? Will he take climate change seriously? Will he tame the financial sector? His recent commitment to deal with corporate tax avoidance is a welcome stride in the right direction (as long as words are followed by action). We can only hope other brave and effective commitments – and reversals of policy to date – will follow.

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The Asian Financial Crisis 20 years on

In the four years between 1993 and 1996 the tiger economies of Asia led the world in terms of gross domestic product (GDP) growth and stock market returns as foreign and local investors piled in and embraced the opportunity.

In the four years between 1993 and 1996 the tiger economies of Asia led the world in terms of gross domestic product (GDP) growth and stock market returns as foreign and local investors piled in and embraced the opportunity. But trouble was brewing and Thailand was the canary in the coal mine. Strong growth was being funded by ever increasing levels of debt and with offshore interest rates far more attractive than those available at home, US dollars became the funding currency of choice.

While currencies remained pegged to the US dollar risks were minimal but as a growing trade and current account deficit and rising inflation led to increasing overvaluation of the Thai Baht, speculation grew and short-term money started to move out of the Thai currency.

In July 1997, after a futile attempt to stem the outflow, the Thai central bank removed the peg triggering an immediate 25% fall in the currency - by the end of the year it had lost half of its value. The impact on the economy was devastating. Interest rates initially spiked making dollar debt significantly more expensive. Loans started defaulting, peaking at almost 50% of total loans in 1999. The figures reflect the severity of the downturn: GDP took five years to return to pre-crisis levels, consumption – the use of good and services by households - was four years, and private sector loan growth only returned to positive territory in 2002.

Although Thailand was the trigger, the ticking time bomb of unhedged foreign currency debt and a  prolonged period of over-exuberance prevailed across all of South East Asia.  The Philippines and Malaysia were also significantly impacted but the most significant downturn occurred in Indonesia, which, although running a current account deficit only half the size of Thailand, saw its currency go from 2000 rupiah to the US dollar to 16000, and bank loan books fill up with defaulting loans.

Contagion and a severe lack of confidence dented the whole region and although Hong Kong managed to hold on to its peg to the US dollar, a prolonged period of high interest rates and slower growth resulted in a 40% fall in residential property prices and a deflationary period that took many years to recover from. Even South Korea, which was the 11th largest global economy at the time, had to call in the International Monetary Fund (IMF) as interest rates ballooned and the currency weakened.

The recovery, which on average took more than 5 years, was supervised by stringent IMF requirements and has put Asian economies on a much firmer footing. With a few exceptions Asian currencies are free floating, meaning their value is determined by the foreign exchange (forex) markets through supply and demand, and as a result they have much more flexibility to reflect domestic economic cycles ensuring that pressures don’t build. Current and trade accounts, with the exception of India and Indonesia, are now in surplus, with the practice of unhedged foreign borrowing all but ended. Short term foreign debt in ASEAN (the Association of South East Asian Nations) nations has dramatically dropped from 160% to now less than 30%.

The Global Financial Crisis (GFC) in 2008 was borne out of exuberance in the West but not in the East and although Asian economies were impacted by the slowdown in global growth, Asian economic credibility was never called into question.

The only economy that is showing a worrying trend is China. A credit boom following the GFC has seen debt-to-GDP balloon from 160% in 2008 to 260% in 2017. The nature of this debt however is different from that accrued by South East Asian Countries in the late 1990’s. Firstly, most of the debt lies with state owned enterprises (SOEs) and is hence backed by the >$3tn worth of foreign exchange reserves, and most of it is denominated in renminbi. Secondly, although China operates a managed exchange rate regime against a basket of trading currencies, the capital account is closed which restricts the amount of speculative flows. Finally, a lot of the debt is owned by domestic institutions and is long term in nature which reduces the likelihood of enforced withdrawal leading to a liquidity crisis.

The impact of the Asian crisis lives long in the memory of Asian corporates. The days of rapid expansion and growth for the sake of growth have gone and been replaced by conservatism and a focus on cash flow and profitability. Corporate debt levels are at all-time lows while cashflow compares favourably to any other region of the world. Interestingly it is developed economies that are now showing the stresses Asia encountered and recovered from 20 years ago; Asia in comparison looks favourable.

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