Tuesday 2 July 2013

What Threat Do The Monetary Policies of Developed Nations Pose to Emerging Economies?

I wrote this piece for the Diplomatic Courier back in March for their G8 issue.

There will be no currency wars. Or so the G7 tried to say February. A week later the G20 released a similar statement claiming its nations will not target their exchange rates in search of a competitive edge. Yet the message was deemed too vague by financial markets and did little to ease concerns from emerging economies that their growth will be hampered by monetary policies of major developed nations. 

Emerging markets have garnered much attention in the aftermath of the 2008 financial crisis as their improving infrastructure, competitive edge and strong growth potential attracted investment from the developed world. A relatively weaker currency is a key tool for emerging economies as it makes their exports more appealing to developed nations that have stronger purchasing power. 

So it was with little surprise that officials in numerous emerging economies reacted with cynicism late last year when new Japanese premier Shinzo Abe called for a weaker yen to boost his nation’s exports and revealed plans to spur growth by increasing Japan’s money supply through the purchasing of government bonds. The yen has consequently depreciated sharply across the board. The US Federal Reserve and Bank of England also utilize similar stimulus measures, albeit without directly stating their desire for a weaker currency.

Comparatively high inflationary pressures in many emerging economies prevent them from adopting comparable policies. As a result, there has been anxiety that emerging economies will react to any significant strengthening of their own currencies by launching large-scale intervention in markets to artificially manipulate exchange rates while also adopting “beggar-thy-neighbour” policies that could disrupt global growth. 

The “currency war” terminology was first used by Brazil’s finance minister in 2010 regarding the Federal Reserve’s quantitative easing – the buying of bonds with newly created money. The phrase was reignited in January by the Russian central bank when it accused Japan of potentially instigating “very serious, confrontational actions”. In February, the president of China's sovereign-wealth fund advised Japan against using its neighbors as a “garbage bin” by deliberately devaluing the yen. Later, several of South Korea’s biggest companies warned that a stronger domestic currency will lead to significant deterioration in profits. 

Fears have been compounded by some economists cautioning that reactionary devaluations could lead to a similar scenario that occurred following the removal of the gold standard in the 1930s. At that time, nations engaged in devaluations against each other and ultimately introduced trade barriers and protectionist policies that dislocated trade and segregated the global economy. Several countries such as Brazil and South Korea have already introduced controls to reduce speculative capital flows that may strengthen their currencies. 

A depreciation in currency value will be a short-term consequence of Japan’s policies and will likely have a negative impact on its smaller neighbors who trade in similar export markets. The possibility of lost jobs in manufacturing sectors is understandably difficult for political leaders in developing nations to accept. Yet despite this short-term prospect, the likelihood of a currency war scenario is exaggerated. The US, Japan and UK are not intervening in currency markets. Their monetary stimulus efforts are not direct attempts to weaken their currencies; the intention is to lower domestic lending rates and boost spending at home. 

Focusing on the policies of developed nations and overstating their threat gives authorities in emerging economies an opportunity to turn attention away from difficulties at home. The outlook for the major emerging economies is not as upbeat as in previous years. With further fiscal expansion unfeasible, China is incapable of sustaining rapid growth. A drop in Chinese demand will hurt the Brazilian economy, and a relaxation in monetary policy has left Brazil vulnerable to inflation risks. And while the Indian stock market is near record highs, the country is facing rising inflation, falling growth and potential political uncertainty following elections next year. Russia has the potential to perform well, although it too has been dealing with increased inflation and a stubbornly high dependency on oil prices leaves it with a precarious economic outlook.

Looking past the alarming rhetoric, emerging economies actually have much to gain from stronger currencies. In the longer-term, buoyant major economies result in increased demand for their trading partners’ output. Stronger emerging market currencies will give the developing economies an opportunity to ease inflationary pressures while spurring domestic consumption by making imports cheaper, potentially driving companies to develop more innovative products which will spawn higher-paying jobs. Moreover, the extent of a weaker yen is unclear. The Bank of Japan will have a considerable amount of expansion to do if it is to bring the yen to a level that will have a truly lasting impact on its exports market. It would be remarkable if this year the yen weakened to its pre-2007 levels.

The G7/G8 has not done enough to help the situation. While the G7 statement in February said its nations would not target exchange rates, the message was too ambiguous as it made no reference to Japan. The group needs to clearly state that large-scale currency manipulation by its members will not be tolerated. Such measures can help dismiss currency war rhetoric, allowing leaders of emerging economies to focus on addressing their own policies.

A Snapshot of the Role of Ethnicity in American Boxing

This is a short piece I wrote for TheSweetScience.com following a boxing event I attended in Connecticut.

MASHANTUCKET, Conn. – Ireland’s Matthew Macklin didn’t attend the press conference at the Foxwoods Casino following his fight with Gennady Golovkin. Media interaction wasn’t a priority for someone who had just been pummelled by one of boxing’s hardest punchers.

A few miles away, Danny O’Connor was in hospital receiving stitches to a damaged eye following his bout on the same card. But despite his facial appearance, O’Connor was victorious, outpointing Hector Munoz and helping bring some joy to the Irish-American bandwagon that drove the several thousand ticket sales for the event.

A promoter’s goal is to find fighters that can resonate with a community. That’s because boxing is among the few sports still driven by ethnic tribalism. Save for a couple of major fights each year, the US mainstream media generally ignores boxing, thus diminishing its exposure to the average sports fan. It’s left to those fuelled by factors of race and nationality to keep smaller shows alive.

HBO and much of the boxing media heralded Kazakhstan native Golovkin as a future star before Saturday’s bout, and while he may yet realize that status, it was Macklin and O’Connor that most of the crowd traveled to see. A fighter without an established fanbase must accomplish exceptional feats to attract a crowd. Not so for Irish fighters; their fervent support means that even unremarkable achievements can result in high-profile exposure. The Irish contingents don’t follow a fighter because they think he will be the next star. Their pursuit is based on ethnic pride.

Nobody went to Connecticut on Saturday thinking the 31-year-old Macklin was headed for greatness. Macklin, born in England to Irish parents, had 29 wins but was knocked out by the premier middleweight Sergio Martinez last year, was outpointed by another middleweight titlist Felix Sturm in 2011 and had two previous losses on his record. The oddsmakers made the unbeaten Golovkin a 1/8 favorite to win. Regardless, Irish fans still came to see him try to take Golovkin’s WBA piece of the middleweight crown.  

Yet the pro-Macklin chants of “Ole, Ole” quickly dissipated as the bell sounded and the out-numbed Kazakhs suddenly made their presence felt. Macklin was on the back foot from the start, unable to mount much offense. Avoiding thudding blows from Golovkin became the top priority. His face severely reddened after only two minutes, Macklin looked like he had completed an average fight. But Golovkin isn’t an average fighter. Every time Macklin attempted an attack, he was caught by head-snapping punches. The pattern continued until one minute into the third round when Golovkin forced Macklin onto the ropes and delivered a sickening left hook to the stomach. The challenger went down and remained there for several minutes, gasping for air.

“He never let me get started,” said Macklin after regaining his composure. “He has clubbing, solid power and you can feel the weight of every punch he throws. I tip my hat to him.”

“We knew Macklin would be brave, but we knew that once he stood and fought with us, it would be over,” said Golovkin’s trainer Abel Sanchez. Golovkin now has a record of 27-0 with 24 knockouts.      

The Irish-American fans were in better voice earlier in the night. Even though welterweight Danny O’Connor was fighting a man who entered the ring with a 21-10 record and a first round knockout defeat in his most recent bout, it was immaterial to the busloads of supporters from Massachusetts who wore green “Clan O’Connor” shirts. O’Connor, a proud Irish-American from the Boston suburbs, may have just one loss on his record but after another points victory on Saturday he has now scored only seven knockouts in 21 wins, a worrying stat given that concussive power is a typical requirement for a world-class prizefighter. O’Connor has rarely been in an easy bout. Although not powerful, he often adopts a straightforward, aggressive style that results in crowd-pleasing fights. So was the case on Saturday en route to a 79-73 points decision verdict from all three judges.

“I let it become a fight,” said O’Connor, 28, afterward. “He was a tough dude, but that was partially my fault. At the end of the day, I just like to fight. I guess I’m more old-school than some guys. Obviously it’s not the best route.”

An Irish fighter who achieves even a modicum of success can attract partizan fans who think their man is worth following regardless of how porous his defense or delicate his scar tissue. The Jewish and Italian groups that also drove US prizefighting in previous generations no longer have the same staunch loyalty to the sport. Excluding the Irish, enthusiastic American crowds in recent years have come from immigrants associated with poorer economies, such as Mexico, the Philippines and Puerto Rico. 

While many Irish have assimilated into the upper echelons of American society, large swathes of the community still band together for the fights, using the events as a vehicle to embrace their heritage. Boxing provides the perfect opportunity for ethnic groups to sing songs about the homeland, forget woes in a sea of alcohol and testosterone, and cheer on one of their own as he bravely takes the fight to the world.

And so it was that those with varying degrees of Irishness traveled to Connecticut on Saturday. The crowd would have been notably smaller if Macklin was waving the Union Jack or if O’Connor chose not to emphasize his roots.

While their performances weren’t overly inspiring, both Macklin and O’Connor fought like stereotypical Irishmen; game, tough and flawed enough to make the fights entertaining. Macklin’s journey may be coming to an end and O’Connor will need to make some tactical adjustments if he is to extend his career. But there’ll be others before long; Ireland’s severe economic recession will see continued emigration and more fighters looking for support from their US-based kindred. Before that, promoters can always dream that Golovkin will spur an awakening in the Kazakh community’s love for the fight game.