Emerging markets have fallen victim to unstable capital flows in the wake of the financial crisis. In an attempt to mitigate the accompanying asset bubbles and exchange rate pressures that come with such volatility, a number of emerging markets resorted to capital controls. Although these actions have largely been supported by the International Monetary Fund, some policy-makers and economists have decried capital controls as protectionist measures that can cause spillovers that unduly harm other nations.

Recently-published research shows that these claims are unfounded. According to the new welfare economics of capital controls, unstable capital flows to emerging markets can be viewed as negative externalities on recipient countries. Therefore regulations on cross-border capital flows are tools to correct for market failures that can make markets work better and enhance growth, not worsen it.

This work has been developed by economists Anton Korinek, Olivier Jeanne, and others, and is summarised by Korinek in the August issue of the IMF Economic Review. According to this research, externalities are generated by capital flows because individual investors and borrowers do not know (or ignore) what the effects of their financial decisions will be on the level of financial stability in a particular nation. A better analogy than protectionism would be the case of an individual firm not incorporating its contribution to urban air pollution. Whereas in the case of pollution the polluting firm can accentuate the environmental harm done by its activity, in the case of capital flows a foreign investor might tip a nation into financial difficulties and even a financial crisis.

This is a classic market failure argument and calls for what is referred to as a Pigouvian tax (named after the 20th century Cambridge economist Arthur Pigou) that will correct for the market failure and make markets work more efficiently.

Of course, economists such as Keynes argued long ago that capital controls are important to prevent crises and to maintain an independent monetary policy that can strive for full employment and financial stability. This new work however elegantly models capital flows and capital controls in a broader contemporary economics context and thus could be seen by some to be a more rigorous justification for policy action on capital flows.

This work is not just for the blackboard. With quantitative easing, and as interest rates were lowered for expansionary purposes in the industrialised world between 2008 and 2011, capital flows returned to emerging markets at an alarming rate, where interest rates and growth were relatively higher. With eurozone jitters in the final quarter of 2011, capital flight occurred to the “safety” of the US and beyond. This has caused significant asset and exchange rate volatility that has made for an uncertain environment for policy-making and investment alike.

In response, many nations deployed capital controls to regulate the negative effects of cross-border capital volatility. Like earlier studies confirming that capital controls can change the composition of inflows, make for more independent monetary policy, and ease exchange rate tensions, new studies are emerging that show how nations such as Brazil, Taiwan, and South Korea have been at least moderately successful as well.

In addition to the cries of protectionism by Gordon Brown and others, some have also argued that controls create negative spillovers to neighbouring nations. MIT economist Kristin Forbes and colleagues examined Brazil’s numerous taxes on capital inflows from 2008 to 2011 to test whether such measures were harming Brazil’s neighbours.

On the one hand, Forbes and colleagues found that Brazil’s controls were meeting their stated objectives. However, in some attempts the authors did find that Brazil’s actions impacted other emerging market nations. Some of these spillovers were positive — some fund managers steered away from not only Brazil but from other nations that have regulated cross-border capital in the past. In other cases global investors did indeed increase their allocations to neighbouring nations.

These mixed findings miss some of the broader context, especially when seen in the light of the new welfare economics of capital controls. First, Brazil’s taxes can be seen as Pigouvian measures to correct against the negative spillovers generated from quantitative easing and the dollar/real carry trade. Second, the ‘costs’ that Forbes et al find to a small number of nations are not juxtaposed with the benefit of preventing a crisis in Brazil — one only has to look at Brazil’s 1999 crisis to see its contagious effect on the region then.

Over a dozen  years ago, prominent trade theorist Jagdish Bhagwati reminded us that capital account liberalisation is not analogous to trade liberalisation and that measures to regulate capital flows are not inherently evil.  The new welfare economics of capital controls further show that such measures can be seen as the new “correctionism” rather than the new protectionism — at exactly a time when nations need as many tools in their crisis preventing arsenal as possible.

This piece was originally published at the Financial Times. It is based on Gallagher’s new working paper, ‘The Myth of Financial Protectionism:The New (and old) Economics of Capital Controls’.

The Obama administration has launched a “21^st Century” trade negotiation with a number of pacific-rim nations referred to as the Trans-Pacific Partnership (TPP).  While the full details of the proposed treaty are yet to be made public, early estimates show that the economic benefits of the agreement will be relatively small and the regulatory costs could be significantly high—especially for the emerging market and developing countries engaged in the negotiations.

The gains of the agreement may be a mere $20 billion, or just over one percent of GDP on average for the nations involved.  To get those small gains nations will have to trade away the ability to use measures to prevent and mitigate financial crises, to develop a growth-based innovation system, to protect public health and the environment, and more.

That’s right, according to a study by the East-West Center, at best the agreement will bring a one-time boost in GDP to participating countries of just over one percent. The accompanying table to this note shows how these gains would be distributed.



Vietnam and Malaysia seem to stand to gain more than half the benefits of the treaty, but those two countries would likely have to bear the most in terms of regulatory cost.  Both of these nations are significant low-wage assembly manufacturers that would export more goods to the US and Australia, and also import more intermediate goods for final assembly from those and other TPP nations.

These gains should also be seen as gross over-estimates as well.  The models deployed by the authors have estimates not only for goods trade, but also for services trade, and for the amount of foreign direct investment flows to the region.  The methods for the latter two estimates have little traction in the economics profession and are often not reported in official reports by the World Bank and others. Indeed, work by myself and others show that such models should be viewed in a very critical manner.

These over-estimated but still small benefits need to be juxtaposed with the costs.  The provisions for investment and intellectual property will bring significantly high costs to these nations.  What is more, the treaty will divert trade that probably should occur among others worse off.

In terms of investment, the treaty would rob the ability of parties to deploy regulations on the flow of cross-border capital flows to prevent and mitigate financial crises.  Such regulations are a cornerstone of Vietnam’s exchange rate and export policy.   Malaysia’s regulation of capital outflows in the wake of the Asian financial crisis is credited with making Malaysia among the least worse off due to that crisis.  If these tools were used, the treaty’s “investor-state” dispute system that allows private firms to directly sue host country governments would kick in.

The agreement will also make it harder for nations to establish the appropriate innovation policies that are necessary to diversify the economy toward higher value added goods.  While nations like Brazil and China—with only commitments under the WTO and not a deal with the US—are free to learn from foreign firms and spur domestic industries, this will be much more difficult for nations under its deal with the US.

Finally, the agreement will make other area nations worse off.  The treaty will distort markets in the Asian region such that Indonesia, the Philippines, Thailand, Japan, China, and South Korea would all be worse off.

Prominent trade theorist Jagdish Bhagwati has said that if TPP nations accept this deal they will truly be “bamboozled.”  When looking at the potential gains and the real costs it is hard to come up with a rival conclusion.

As members of the Eurozone are now acutely aware, the lack of a sovereign debt restructuring regime is one of the most glaring gaps in the international financial architecture. That said, this summer’s decision by a tribunal of the International Centre for Settlement of Investment Disputes (ICSID), which grants a bilateral investment treaty (BIT) jurisdiction over Argentina’s restructuring of its sovereign debt in the wake of its 2001 financial crisis, shows that a de-facto regime may be arising whereby international investment agreements (IIAs) can serve as a way for disgruntled investors to circumvent debt restructuring.  This amounts to mission creep on the part of IIAs. Creeping into such territory is too much to take on for the world of IIAs. Sovereign debt restructuring should be left to national governments and international financial and monetary authorities.

This short article discusses how sovereign debt restructuring is seen as grounds for private bondholders to file arbitral claims under IIAs; that safeguards under IIAs are limited, particularly in US IIAs, meaning that it is not clear which measures provide governments with policy space to effectively restructure debt in times of crises; and if claims against sovereign debt restructuring become more widespread they could threaten the already fragile regime for financial crisis recovery. Finally, technical options for reforming treaties to delegate debt restructuring to the proper regimes are outlined.

Background: Debt, the SDRM and CACs

Though it increasingly has a bad name in the current crisis, debt is an important component of economic growth and development. But if it is not managed properly debt can become unsustainable and force nations to default or restructure their loans. At the turn of the century, the International Monetary Fund (IMF) proposed a global mechanism for working out debt problems, but it was rejected by the US government and the global business community. In its place are collective action clauses that have not become widespread and face a number of obstacles to becoming adequate.

If managed appropriately, government borrowing can be an essential ingredient for economic development, and has been for centuries. However, as we are witnessing in Europe, even when nations manage to keep its debt to GDP ratio in good shape, they can still spiral into a debt crisis—simply defined as when a nation cannot (or is no longer willing) to service its debt.  Contagion from other crises or herd-like bouts expressing a lack of investor confidence could prevent creditors from rolling over or increasing loans. Moreover, debt is sometimes denominated in a foreign currency, so when interest rates rise or the value of nation’s currency falls (on its own or relative to its neighbors) the cost of debt service can skyrocket.

Even nations with low budget deficits can quickly be affected as governments borrow to bailout frivolous banks or stimulate an economy during a recession, but then experience slow growth and low tax revenue thereafter. These tensions are exacerbated with developing nations that are overly exposed to international financial markets. Any number of the factors discussed above could cause massive inflows of debt and large swings in outflows that can cause financial instability

Coordinated global bailouts have been part of the traditional response to prevent and mitigate debt crises, but receive a great deal of criticism because of their costliness and lack of effectiveness. Europe allocated $1tn in May of 2010, over $100bn in July 2011, and proposes yet another $109bn in its October 2011 package. These bailouts go from the pockets of taxpayers to private creditors. The record on the effectiveness of bailouts is limited at best, with many nations taking years to recover, if at all. Moreover, bailouts can encourage moral hazard where nations and investors will engage in more risky behavior because they think they will be bailed out in the end (Eichengreen, 2003).

Sovereign debt restructuring (SDR) is increasingly seen as an alternative to bailouts.  However, the international community views the SDR regime to be greatly lacking.  When a sovereign government is no longer willing or able to pay its debts, sovereign restructurings occur during what amounts to a formal change to debt contracts negotiated between creditors and debtors. SDRs (or “workouts”) often take the form of reducing the face value of the debt, “swaps” where new bonds with lower interest rates and longer maturities are exchanged for the defaulted bonds, and so forth.  Such workouts are usually highly discounted and result in a loss for bondholders. Losses or discounts are commonly referred to as “haircuts”.

In the early 2000s the IMF proposed a “Sovereign Debt Restructuring Mechanism” (SDRM). The SDRM sought to provide a fair forum for negotiation between bondholders and governments; a standstill clause whereby bondholders can’t yank their money out of a debtor nation in a herd; a facility to provide short-term financing and to prioritise a debtor nations’ debt schedule; and clauses that limit the ability of disgruntled minority bondholders to file lawsuits against debtor nations.  The SDRM was swiftly rejected by the US government and the business community.

Instead, the US proposed normalizing the use of collective action clauses (CACs). CACs have the following features: a collective representation component where a bondholders’ meeting can take place where they exchange views and discuss the default/restructuring; a majority restructuring component that enables a 75% “supermajority” of bondholders to bind all holders within the same bond issue to the terms of restructuring; and a minimum enforcement component whereby a minimum of 25% of the bondholders must agree that litigation can be taken. Unfortunately, the majority of the bonds in the Eurozone do not have CACs and even if they did, a restructuring would not be burden free. The International Swaps and Derivatives Association can rule out a CAC and pay out insurance to bondholders instead. CACs also do not apply across bond issuances and thus it may be hard to get agreement on a whole swath of debt that a nation in trouble would like to swap. And it may be the case that CACs are no cover for IIAs.

Hello Argentina:  IIAs and Sovereign Debt Restructuring

Readers of this publication know that an increasing number of the more than 2,000 trade and investment treaties that govern international investment flows cover “any type of asset.” What may be news to some is that a recent ICSID panel has seen Argentina’s restructuring of debt in the wake of its 2001 financial crisis as falling under the jurisdiction of the Italy-Argentina BIT. Indeed, sovereign debt is “any kind of asset” and thus a BIT may be a place where investors can seek to recover the full value of their bonds.

When Argentina restructured its debt in 2005 close to 180,000 Argentine bondholders filed a claim under the Italy-Argentina BIT for approximately $4.3bn. Some of those investors settled in a 2010 restructuring and now there are believed to still be approximately 60,000 Italian bondholders seeking upwards of $2 billion from Argentina at ICSID. This September, a majority of a private World Bank tribunal decided that Argentina’s bond restructuring indeed does fall under the jurisdiction of these treaties. The case will therefore continue, despite a scathing dissent from a third member of the tribunal (IAR, 2011). The bondholders seeking their investments through the trade treaty are among the few remaining holdouts.

Box 1 outlines where IIAs can tangle with sovereign debt restructuring. And it is not clear that the small number of safeguard measures in place can assure that a nation can have a debt workout without also getting snared in an ICSID process.

The safeguards and exceptions in many IIAs are not adequate enough to provide cover for nations to restructure their debt. For most cases the only possible safeguard are “essential security” provisions. A handful of the United States’ treaties have an annex that discusses sovereign debt restructuring that is very limited.

It may be possible that a nation can claim that actions taken during a financial crisis are measures needed to protect the ‘essential security’ of the nation. Language like Article 18 of the United States Model BIT is found in many treaties:

… to preclude a Party from applying measures that it considers necessary for the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests (USTR, 2004).

The article does not mention economic crises per se, but “all tribunals that have considered the matter thus far have interpreted the rules broadly enough to include such crises” (Salacuse, 2010: 345). However, tribunals differ greatly over how grave the difficulties may be. In Argentina, again, tribunals came to opposite conclusions, and only one of three tribunals ruled that Argentina could not be held liable for actions it took to halt its crisis. A key matter is whether or not a measure by a nation to stem a crisis can be seen as “self-judging”. In other words, can the host nation using the control be the judge of whether or not the measure taken was necessary to protect its security. The language quoted above in the 2004 Model BIT, which says “that it considers” is now seen as to mean that a measure is self judging (because of the “it”), but Argentina’s BITs with the United States and others did not include as precise language at the time (Salacuse, 2010).

Some of the recent IIAs negotiated by the United States clearly define sovereign bonds as covered investments and provide explicit guidelines for the interaction between SDR and certain IIAs. The US is usually reluctant to negotiate such guidelines, as it sees CACs as sufficiently safeguarding sovereign debt restructuring.  However, when negotiating partners insist, the US is sometimes willing to compromise with an annex.

What is found in the US-Uruguay BIT, and in FTAs with Central America, Chile, Peru, and Colombia is a special annex on sovereign debt restructuring.  Though the specific text varies across the treaties with such an annex, they usually prohibit claims against ‘negotiated debt restructuring’, unless an investor holds that a restructuring violates national treatment (NT) or (MFN). Such treaties usually define “negotiated restructuring,” as a restructuring where 75% of the bondholders have consented to a change in payment terms. If an investor does file a claim in the event of a restructuring that is not a “negotiated” one, s/he must honor a ‘cooling off’ period usually lasting 270 days before a claim may be filed. There is no cooling off period for a non-negotiated or negotiated restructuring that violates NT or MFN.

These annexes are not standard in US treaties after NAFTA (NAFTA excludes sovereign debt from the definition of investment altogether). Indeed, the US-Australia, US-South Korea, US-Morocco, US-Oman, US-Panama and US-Singapore agreements included bonds and debt as covered investments but do not include annexes for sovereign debt restructuring.

The Dominican Republic-Central America Free Trade Agreement resembles the Chile FTA much more closely. Like the above agreements, bonds and other debt instruments are considered covered investments under the agreement. Annex 10-A then specifies very clearly that sovereign debt restructuring is subject only to Articles 10.3 (National Treatment) and 10.4 (MFN). The additional cooling off period does not seem to apply and there is no mention of “negotiated restructuring” as a prerequisite.

These annexes can be seen as a step in the right direction given that parties to the agreement recognize that restructuring is a special case, yet they remain far from adequate for at least four reasons. First, CACs will not alleviate the possibility that nations will seek claims for restructuring. As indicated earlier, vulture funds and other holdouts can acquire a supermajority within a bond issuance and neutralize the bond issue and a 25 percent minority can still agree to litigate and arbitrate. Second, the definition of investment and umbrella clauses allow for investor-state arbitration under treaty obligations regardless if such obligations are also covered by domestic law. Third, most restructurings are multi-issue restructurings and suffer from the aggregation problem described above. Again, collective action clauses only apply within a bond issue, not across multiple issues that are often bundled together in a restructuring.

Fourth and very importantly, economists and international financial institutions have repeatedly held that, in contradiction with the national treatment principle, domestic bondholders and financial institutions sometimes needed to be treated differently during a crisis. Prioritizing domestic debt may be in order so as to revive a domestic financial system, provide liquidity and manage risk during a recovery (Gelpern and Setser, 2004, 796).

Reforming the Mission

This short note has outlined how some IIAs have provisions that may prevent the ability of financial and monetary authorities to effectively manage debt crises. Argentina is thus far the only country subject to claims, but the numerous investment treaties negotiated since the Argentine crisis of 2001 and the fragility of the global financial system unfortunately mean that similar cases may arise in the future.

The following are three non-exclusive policy remedies that would enable IIAs to grant nations the policy space to conduct effective SDRs in the future:

• Exclude sovereign debt from IIAs. The exclusion of sovereign debt from “covered” investments under future treaties would relegate sovereign debt arbitration to national courts and to international financial bodies. Some IIAs already exclude sovereign debt, such as NAFTA and others. Argentina’s new model BIT is reported to be moving in this direction as well.
• Clarify that mitigating financial crises is “essential security”. Clarify that the Essential Security exceptions cover financial crises and that sovereign debt restructuring taken by host nations is ‘self-judging’ and of ‘necessity.’
• State-to-State dispute resolution for SDR and crisis related instances may be more prudent than investor-state arbitration given that governments need to weigh a host of issues in such circumstances. States attempt to examine the economy-wide or public welfare effects of crises whereas individual firms rationally look out for their own bottom line. Investor-state tips the cost-benefit upside down, giving power to the “losers” even when the gains to the “winners” (the larger public and the future of a nation) of an orderly restructuring may far outweigh the costs to the losers.

References:

Eichengreen, Barry (2003), “Restructuring Sovereign Debt,” Journal of Economic Perspectives vol. 17(4), pages 75-98.

Gelpern, Ann and Brad Setser, (2004), “Domestic and External Debt: The Doomed Quest for Equal Treatment,” Georgetown Journal of International Law, v35, n4, 795-814.

Investment Arbitration Reporter (IAR), “Argentine sovereign bond arbitration at ICSID”   Vol. 4, No. 16, November 3, 2011.

Salacuse J (2010). The Law of Investment Treaties. Oxford. Oxford University Press.

United States Trade Representative (2004), US-Model BIT, Washington.

Gillian Tett (“Fears of worse to come fuel debate over capital controls”, December 16) highlights the new and important Bank of England paper on capital flows and financial crises that argues how cross-border capital flows continue to plague the world economy and will continue to do so in alarming ways to 2050. The Bank rightly argues for cross-border regulation and co-ordination on capital flows – traditionally referred to as capital controls.

Traditionally, policymakers and the financial press would shudder when talk of regulating cross-border flows arises. Many have made the wrong analogy to trade, where tariffs are seen as distortionary to economic activity and thus a drag on potential growth. New research in economic theory and in econometric evidence shows that capital account regulations can make markets work better and that such regulations are effective. As the Bank of England notes, if nations co-ordinated such regulation they might work even better.

In the August issue of the International Monetary Fund Economic Review, economist Anton Korinek shows how, in an environment of uncertainty, imperfect information and volatility, capital account regulations are more analogous to Pigouvian taxes that actually correct for a market failure rather than cause a distortion. In other words, capital controls are “correctionist” not “protectionist”.

These theoretical advances come on the heels of a mountain of evidence by the IMF and the National Bureau of Economic Research that shows how developing countries that have used regulations were among the least hard hit during the crisis and have been stemming the tide ever since. This is truly amazing given that all the burden has been on capital recipient nations, not nations that are the source of the problem.

Like the Bank of England suggests, if industrialised countries co-ordinated with emerging market countries and, as Keynes said, regulated capital on “both ends”, the world would be a much more stable place for growth and prosperity.

This piece was originally published in the Financial Times.

The G20 meeting in Cannes earlier this month was derailed by the pressing eurozone crisis. Actors were disappointed if they were looking for concrete action on global imbalances and the food crisis, let alone the new global monetary system that French President Nicolas Sarkozyboasted would be the goal of the summit when he first took the helm as host. But behind the scenes, the G20 actually delivered on a set of “coherent conclusions” on the management of speculative capital flows in emerging markets that should not be overlooked, especially by the International Monetary Fund (IMF).

Sarkozy assumed his role as head of the G20 during a period of excessive volatility in global capital markets that continues to this day. Because of loose monetary policy, low interest rates and a slow recovery in the North Atlantic, accompanied by high interest rates and rapid growth in emerging markets, the world’s investors flocked from north to south – to Brazil, Chile, South Korea, Taiwan and others. More recently, in response to eurozone jitters, capital has retreated from emerging markets to the “safety” of the United States – showing how dangerous speculative capital flows can be. New work released by the IMF this week suggests they are picking and choosing their direction from the G20.

In a significant reversal of past policy, in 2010 the IMF began recommending that nations deploy capital controls to mitigate the effects of speculative capital. Indeed, IMF work in 2010 showed that those countries that deployed capital account regulations were among the least hard-hit during the worst of the global financial crisis. As numerous countries across the globe began using controls in 2010-2011, further IMF work showed that those measures showed signs of working, too.

Sarkozy thus called for a code of conduct on capital controls and tasked the IMF to propose a set of guidelines for reform. The IMF delivered a set of guidelines in April of this year that met stiff resistance from the emerging market and developing countries that have been most successful in deploying capital controls. The IMF’s proposed guidelines recommend that countries deploy capital controls only as a last resort – that is, after such measures as building up reserves, letting currencies appreciate and cutting budget deficits.

Developing countries thought the guidelines missed the point. In the cases where the IMF found controls to be effective, such measures were part of a broader macroeconomic toolkit, and were deployed alongside other measures – not as a “last resort”. In October, these concerns were echoed by an independent task force of academics and former policy-makers that I co-chaired. We stressed that “consigning such measures to ‘last resort’ status would reduce the available options precisely when countries need as many tools as possible to prevent and mitigate crises.”

By the runup to the Cannes meeting, most of the G20′s apparatus was focused on the eurozone. However, a working group was formed to take the capital flows issue to the highest level. Headed by Germany and Brazil, the group forged the “G20 Coherent Conclusions for the Management of Capital Flows Drawing on Country Experiences”. The document was “endorsed by the G20 finance ministers and central bank governors in October, then endorsed by the G20 leaders themselves in Cannes.

In stark contrast to the IMF guidelines, the G20′s conclusions say that “there is no ‘one-size fits all’ approach or rigid definition of conditions for the use of capital flow management measures”, and that such measures should not be solely seen as a last resort. Instead, the G20 now calls on nations to develop their own country-specific approach to managing capital flows and, as Sarkozy said in his final Cannes speech, “the use of capital controls, and this is very important, is now accepted as a measure of stabilisation.”

Throughout the crisis, the IMF has usually been keen to accept new direction from the G20, but there are signs that it may be resisting the new G20 consensus on capital flows. The IMF’s latest report addresses the fact that industrialised country policies trigger unstable capital flows to developing countries and that the rich nations need to design policies that are mindful of such negative “spillovers”. Yet, the IMF merely adds that such principles will be added to their existing guidelines – seemingly ignoring the fact that those guidelines have now been superseded by the G20′s decisions.

The IMF should not ignore the G20′s direction on capital flows. Rather than pushing ahead on a globally enforceable code of conduct that could eventually lead to capital account liberalisation across the globe, the IMF should instead work to reduce the stigma attached to capital controls, protect countries’ ability to deploy them, and help nations police investors who evade regulation. G20 finance ministers, central bankers and heads of state have endorsed the use of capital controls by emerging markets, and on their own terms. The IMF should not pick and choose which directions by world leaders it will follow.

This post was originally published in The Guardian.

During the early 1990s, many Latin American and U.S. analysts expressed concerns about an Asian giant that was buying Brazilian iron ore and investing in Mexican manufacturing, while at the same time showing signs of out-competing Latin American and U.S. firms in the region. That giant was Japan.

Hysteria heightened and academic research accumulated. But today few people worry about Japan’s role in the region—despite the fact that it is a top-five trading partner and has a large diaspora that includes Peru’s Alberto Fujimori, a former (now jailed) Latin American president.

Is history repeating itself? The new source of hand-wringing in the region is China, which, like Japan years earlier, is portrayed by many as stealing Latin American jobs, plundering the region’s resources and creating diplomatic alliances that could erode the rule of law. At the same time, some U.S. observers see China’s inroads as a threat in the U.S.’s backyard.

How do we make sense of China and Latin America? Are China’s ever-expanding ties a significant threat to Latin American development and/or U.S. strategic interests in the region? These are the questions that a burgeoning group of scholars are beginning to ask. Among them are the editors of China Engages Latin America: Tracing the Trajectory—Adrian H. Hearn of the University of Sydney and José Luis León-Manríquez of the Universidad Autónoma Metropolitana in Mexico City. This is a must-read for those seeking to better understand Chinese engagement in Latin America.

Not only is their book one of the broadest and most balanced in a steady stream of volumes dedicated to the topic; it truly breaks new ground. It does so by presenting the latest and most dispassionate economic analyses of the China–Latin America relationship and anthropological evidence on how this relationship is playing out in communities.

As the Eurozone crumbles before them, European leaders are begging for help to bailout Greece and create a facility to insure that the crisis doesn’t sweep through Italy, Spain, Portugal and beyond.  For the last sixty years the United States would have been the nation to step up and lead with ideas and resources to the rescue.  Sadly, the US is nowhere to be found: out of ideas and out of cash.  In desperation, Europe has turned to the BRICs.  Rather than direct bi-lateral payments, the Brics are starting to say that they prefer to channel their resources through the IMF. Brics shouldn’t let this crisis go to waste.

China, Brazil, and India are right to prefer a rescue being channeled through the IMF rather than giving direct payments.  But given that they are in the position to write checks, they should condition such an increase in outlays on greater quotas and voting power at the IMF–something they have been pushing for quite a long time.  They should also pitch the condition that the Eurozone uses the funds to expand the Eurozone economies rather than to use taxpayer dollars in nations with a combined hundreds of millions of people living below two dollars per day to pay bankers in the upper few tenths of a percent of world income distribution.  Saving the Eurozone through growth will come back to emerging markets in terms of demand for their products.  Saving the Eurozone for another week through banker bailouts will be money wasted–just look at the July package and the package last week.

Emerging markets know well that conditions can be put on IMF loans.   In the case of Brazil and India, the IMF has given loans in the past with far more draconian conditions.  These nations learned their lessons, rid themselves from IMF programs, and created macroeconomic and industrial policies that prevented the crisis from severely affecting them.  They have the moral and economic upper hand now.  They should only lend on that basis:  condition bailouts through the IMF only if you get greater say and only if the Eurozone uses the funds for growth, not the rich.

Read other Triple Crisis posts on capital controls.
Read more about GDAE’s work on capital controls.