Periodic Report Summary - PEGGED (Politics, Economics and Global Governance: The European Dimensions) Project context and objectives: PEGGED is a collaborative project led by David Vines from Oxford University and coordinated by the Graduate Institute of International and Development Studies (IHEID) in Switzerland. Overall, it involves seven institutions across Europe. PEGGED research will help Europe to construct and project a vision of how the global system should evolve. The PEGGED project is running for a period of four years (1 July 2008 - 30 June 2012). The project is organised in four research-based work packages or 'research domains'. These work packages are in turn designed so as to make integration across disciplinary boundaries unavoidable, and to institutionalise these research practices over time. There is a clear commitment to maintaining the momentum after the funding has finished, a commitment which developed out of earlier collaborations. The four research domains are as follows (a fifth work package is devoted to policy outreach and dissemination): - international macroeconomic governance; - globalisation and financial stability; - the integration of markets for trade in goods and services; - migration and the mobility of labour. The four domains clearly overlap, and this calls for integrated cross-disciplinary research results. Financial instability deriving from rapidly-integrating capital markets has clear implications for macroeconomic governance, as do imbalances borne of rapidly changing trade relationships. Patterns of migration and labour mobility are integrally related to the unevenness of economic development and its distributional consequences, which are in turn related to the integration of trade and finance. Clearly, the findings across the four domains need to be shared and specialists need to work across the usual boundaries, so disciplinary specialists need to collaborate successfully to analyse the complementarities and tensions among these policy issues (e.g. economists who specialise in macroeconomics need to interact with specialists in financial markets; specialists in the political economy of trade need to collaborate with specialists in labour markets and migration). Project results: During the first 18 months of the project, PEGGED researchers have been particularly active in meeting the urgent needs of the European and global policy-makers who have been responsible for dealing with the global financial crisis. The collapse of Lehman Brothers happened just after the PEGGED project began. As the crisis grew during the week before the annual meetings of the World Bank and International Monetary Fund (IMF) in Washington, with dramatic announcements of bank recapitalisations by the United Kingdom (UK) government, and calls for the United States (US) and the European Union (EU) to act quickly, Richard Baldwin, leader of the IHEID team (and editor in chief of VoiceEU (VoxEU)) took action. On the 8 October he emailed a group of leading economists proposing a joint effort to encourage policy-makers to act quickly. Nineteen responded immediately, and by the next day VoxEU had published their proposals in a forty-page booklet. The booklet argued that policy-makers must move boldly to stabilise the financial system and that the basic elements of a rescue plan included: a quick bank recapitalisation with global coordination; a guarantee of deposits and/or loans with global coordination; and further, coordinated macroeconomic stimulus. The booklet was downloaded over 12 000 times in the first two days alone, and over 34 000 readers visited VoxEU over that weekend. The policy actions that emerged over the weekend in the EU and the US embraced these proposals. In the aftermath of the collapse of Lehman Brothers, it was decided to hold a summit meeting of the leaders of the G20 Group of nations. Richard Baldwin acted again to help bring research to bear on the choices facing the summit participants. In a second e-book released just before the summit, nineteen leading economists (including David Vines, leader of the PEGGED project) identified a set of priorities for policy-makers. They identified the macroeconomic initiatives which were necessary to fight the crisis. The summit also made a firm commitment to preserve free trade, by committing not to introduce new protectionist measures and to take steps by the end of 2008 to complete the Doha round of global trade negotiations. However, economists working in the PEGGED project saw a risk, as the recession spread and deepened globally, that this commitment could falter. With this threat in mind, Richard Baldwin (leader of the IHEID team) and Simon Evenett (from the Centre for Economic Policy Research (CEPR) team) gathered 17 leading trade scholars from across the globe to address the question: 'What must world leaders do to halt the spread of protectionism'. The essays written in the first week of December 2008 and published as in e-book a week later, provided an important set of proposals. The next G20 meeting took place in London in April. PEGGED economists were heavily involved in the preparation for that meeting. A meeting was held at on 31 January 2009, organised by CEPR, by PEGGED, and by the UK Treasury. The meeting was held at the UK Treasury. A well-balanced group of researchers, government officials, and private sector representatives was present. We invited individual deputies and private sector participants to comment briefly on the presentations, and this was followed by general discussion. The inaugural conference of the PEGGED programme was held in Brussels on 17 February 2009, with the title 'Global economic governance: systemic challenges, institutional responses, and the role of the new actors'. The meeting discussed two urgent global challenges - to do with the international financial system and the global trade regime. It considered the implications of these challenges for global institutions and for global governance, and it examined the role for emerging market economies in developing the appropriate global governance responses. It also assessed the role in which Europe might have played in promoting the necessary changes in governance. Each year the G7 deputies hold a retreat, which typically takes place a few weeks after the G7 summit. In 2009 the retreat took place in Rome, and a group of senior researchers met the deputies at the Italian Dipartimento del Tesoro to discuss the broad issue of global imbalances, fiscal policy and international policy coordination. This again fed into policy making, in response to the crisis, in G7 countries (and so in G20 countries). The individual objectives and achievements of each work package (WP) are specified below: WP 1 - Original objectives: 1.to make a contribution to emerging new research on the determinants of central bank allocation of reserves across currencies; the relation between central bank portfolio composition and private sector portfolio composition and currency allocation; and the determinants of the vehicle currencies in foreign exchange markets; 2.to contribute to the process of improving global macroeconomic cooperation and governance; 3.to examine the perspectives of four regions (Asia, Latin America, Middle East, and Africa) on global monetary cooperation. The objectives of this WP were drafted in the early summer of 2007, before the global financial crisis had begun to take hold. We were still then living in the era of the 'great moderation', in which nearly all policymakers remained confident in the fashionable inflation-targeting macroeconomic framework, and saw only a limited need for any change to this framework. This was, also, a period during which the objectives for any improvement in global coordination of macroeconomic policies were rather modest. The crisis has caused these views to be widely challenged. This has led to a considerable amount of research on global macroeconomic cooperation in the PEGGED project. Various policy findings were discussed in PEGGED publications. In 'Global imbalances' Richard Portes examines the vast current account deficits of the US and other advanced economies, and the equivalent surpluses elsewhere in the world - which are the ultimate cause of the current financial crisis. They have driven the rapid expansion of banks and other financial institutions, to facilitate the funding of vast current account deficits; the low interest rates that led to the 'search for yield' - the gallop towards riskier, higher-yielding assets; and the frenzied innovation that gave the world the 'Collateralised debt obligation squared (CDO-squared)'. The underlying problem in international finance over the past decade has not been greed, or poor incentive structures or weak financial regulation, however, egregious and important these may have been, but macroeconomic imbalances. Resolving these imbalances will require major policy initiatives, including all the G20 members - both the developed and the developing and emerging market countries. Implementation may fall to individual countries, to the group as a whole, the G20; or to the international institutions. Portes suggests that, regardless of the origins of the crisis, responsibilities for dealing with it lie with all countries, and are reciprocal. David Vines develops this theme in PEGGED policy brief 'Macroeconomic policies to resolve the crisis'. Vines also argues that the longer-term resolution of the financial crisis will require the resolution of global financial imbalances, if the crisis is not to be repeated. He suggests that this will require a disproportionate expansion of demand in the surplus countries, coupled with a devaluation of the real exchange rate of the deficit countries. Macroeconomic policies must - he says - be constructed to ensure that this happens. In 'Global imbalances: what changes with the crisis?' Giancarlo Corsetti also describes how the global recovery will require that global imbalances are reduced. This paper discusses how the crisis is changing the environment in which global rebalancing is expected to take place, concerning the world saving glut; the relative size of balance sheets and risk premia across the private and the public sector; the difference between the real interest rate 'r' and the growth rate 'g', and its consequences for 'bubbles' and the macroeconomic costs of fiscal consolidation; the degree of cross border integration of markets. The paper also analyses the role of global exchange rates in fostering rebalancing and recovery through their effects non-traded wealth across different countries. In 'After the crisis: Domestic politics and the challenge of rebalancing', Jeffry A. Frieden suggests that the ongoing crisis and its aftermath will have a profound impact on the politics of international economic relations. The crisis will - he says - change the ways in which major nations interact with the world economy, and with each other. Some of the most important changes will be in the domestic politics of economic policy in the nations most affected by the crisis. These changes are likely to affect the willingness and the ability of the great economic powers to collaborate in managing the international economy. In 'What G20 leaders must do to stabilise our economy and fix the financial system' Barry Eichengreen and Richard Baldwin describe how governments and central banks have staunched the bleeding in their financial systems for the moment by nationalising banks, guaranteeing their liabilities, and backstopping markets in debt securities. But they lack an exit strategy from the awkward position in which they now find themselves. Nor is it clear that they are prepared for the next round of financial difficulties that will follow as the crisis spreads from Wall Street to Main Street and from advanced countries to emerging markets. There is no agreement on what to do about the global economic downturn. Economically and financially there is a clear sense of things spiralling out of control again. Everyone agrees on the need to strengthen supervision and regulation, but there is no agreement on how to go about this. WP 2 - Original objectives: - to determine the correct balance between market efficiency and stability, avoiding the 'bad' equilibrium; - to analyse how financial market liberalisation interacts with macroeconomic governance and imbalances; - to consider what should be regulated and what should be left to private market exchanges, and what can be regulated most efficiently at what level of governance; - to analyse the role of side-payments and compensation in the sustainability and legitimacy of market liberalisation; - to analyse the effects of financial market integration on the preferences of economic agents and constituencies and of national actors and the EU; - to consider the role that the EU can play in encouraging more sustainable and legitimate outcomes in terms of financial liberalisation; - to study the impact of financial market integration on the institutional capacities of national governments and global institutions. The objectives for this WP were also drafted in the early summer of 2007, before the onset of the global financial crisis. During this period, there was a widespread belief that light-touch regulation of the financial sector was adequate. The crisis has caused this view to be challenged, and has led to much new thinking about how to restore international financial stability. The activities within the PEGGED project, in relation to the theme of globalisation and financial stability, reflect this new thinking, and in many ways have helped to lead it. The policy findings in this work package are indicated by the following four publications. In PEGGED policy brief 'The treatment of distressed banks', Mathias Dewatripont and Jean Charles Rochet argue that the current crisis shows how important it is to have harmonised, rule-based, ways of dealing with financial institutions in trouble. The intensity, severity and global nature of the current financial crisis is extraordinary, but banking collapses are nothing new - so it is surprising how little time the authorities in the world's major economies have spent in recent decades thinking about what they should do when banks get themselves into trouble. Regulators have devoted many thousands of hours to harmonising the minute details of capital adequacy ratios, in what has become known as the Basel II framework; yet despite the increasingly global nature of financial markets, there has been very little coordination on how distressed banks should be treated. Regulators face intense political and economic pressure during boom times, to be more lax and sympathetic to profitable domestic financial institutions. The current crisis, in which there are scores of distressed banks, many of which span several jurisdictions, underlines how important it is to deal with this issue. In 'Policy insights from the financial crisis', Stijn Claessens discusses the benefits of financially integrated markets. Such integration does bring many benefits, but as this crisis has made clear, it also beings risks - with significant real economic consequences. The hard learnt lessons include the need, globally, for better policy and financial sector reform - particularly in advanced countries, but also emerging markets and developing countries. As the financial crisis deepened, the temptations for each individual country to free ride increased and the need for coordination became more evident. Sound economic analysis is essential in designing the necessary coordinated response, but delivering this analysis is a formidable challenge. It requires, first, a rigorous analysis of the key features of the financial crisis using the latest empirical evidence; and second, careful use of the theory and empirics as the basis for policy recommendations. In 'Macroeconomic stability and financial regulation: Key issues for the G20', Mathias Dewatripont, Xavier Freixas and Richard Portes edited a set of issues in the form of an e-book, a list which was drawn up for consideration at the London summit on 2 April 2009. The authors of the papers in the e-book argued that the London summit would be central in ensuring a coordinated response, and they offered concrete, implementable results that could help restore confidence and lead the way to recovery. CEPR was delighted to join the reinventing Bretton Woods committee in organizing a seminar with the G20 Deputies on 31 January, hosted by Her Majesty's (HM) Treasury and the Bank of England, at which preliminary versions of the papers in the e-book were presented and discussed. As the financial crisis deepens, the temptations for each individual country to free ride increase and the need for coordination becomes more evident. Sound economic analysis is essential in designing a coordinated response. Even if particular policy recommendations are not adopted, sound theory and careful empirics will be at the core of the debate on the present collapse of financial markets and its macroeconomic causes and consequences. The policy report 'Macroeconomic stability and financial regulation: Key issues for the G20' by Mathias Dewatripont, Xavier Freixas and Richard Portes covers the macroeconomic as well as the microprudential aspects of the crisis. The systemic crisis is a global crisis. It involves the advanced countries, emerging market countries, and poor countries. There is no decoupling, and solutions must involve reciprocal commitments and actions. The G20 process offers the prospect of concrete, implementable results that can restore confidence and lead the way to recovery. This report is designed to be an input into the G20 process. WP3 - Original objectives: - to identify the economic, political and legal underpinnings of the changes that have challenged the WTO's centricity in the trade liberalisation process; - to develop a set of proposals aimed at keeping the World Trade Organisation (WTO) relevant to the new realities of international trade. The policy findings in this WP are indicated by the following three publications. Policymakers on both sides of the Atlantic have pointed to what they see as the 'green shoots' of economic recovery. However, the PEGGED policy brief 'This is no time for complacency in the fight against protectionism' by Simon Evenett shows that the people who undertake international trade aren't taking a sanguine view about trade protectionism. Governments need to eschew all forms of beggar-thy-neighbour policy and follow five steps outlined in the paper. This is no time for premature self-congratulation on a victory over protectionism. Trade has not been the cause of the current economic crisis, but is likely to be one of its most important casualties. The G20 summit in November 2008 recognised this when it noted 'the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty' and pledged to 'refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing WTO inconsistent measures to stimulate exports' and agreed to 'strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO's Doha development agenda'. These dangers were highlighted by Richard Baldwin and Simon J. Evenett in the policy paper No. 3 'Don't let murky protectionism stall a global recovery: Things the G20 should do'. The research papers contributed by several members of the trade team have gone some way to advance the understanding of challenges to WTO-centricity in the trade liberalisation process. In addition, they have begun to develop proposals aimed at keeping the WTO relevant to the new realities of international trade. Trade is not the cause of the current economic crisis, but is likely to be one of its most important casualties. The G20 summit in November recognised this when it noted 'the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty' and pledged to 'refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing WTO inconsistent measures to stimulate exports' and agreed to 'strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO's Doha development agenda'. No agreement on modalities was reached, and the agreement to conclude the Doha round has been overshadowed by continued instability and uncertainty in the financial sector and a rapid decline in economic activity throughout the world economy. In addition, the measures designed to stabilise the financial system and reduce the severity of the recession risk creating the very barriers to trade that the November summit agreed to avoid. This issue is discussed in the policy report 'The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20' by Richard Baldwin and Simon Evenett. WP4 - Original objectives - to measure and analyse patterns of migration and the resulting interdependencies between countries; - to measure and analyse the impact of emerging patterns of migration on citizen and party political preferences, on business and organised labour preferences, perceived national policy goals, and patterns of social and political bargaining within and across institutional and other jurisdictional boundaries; - to measure and understand the feedback through public opinion, cultural differences and organised interests of current policies and cross-border patterns of migration, in relation to the underlying sustainability and legitimacy of policy and systems of governance. The three objectives of this WP were drafted in the early summer of 2007, before the onset of the global financial crisis. The crisis has caused less change in the issues, and in the resulting thinking, in relation to migration than it has in relation to the subject matter of the other WPs. The main focus of the migration theme has been on the skill contents of migration flows, both from a receiving and sending country perspective. Some contributions are particularly interesting as they provide new cross-country collections of data on immigration stocks and flows, distinguishing among different education levels of migrants as well as qualitative information on migration policies. Policy findings The policy findings in this WP are indicated by the following four publications. The policy brief 'From attitudes towards immigration policy outcomes: Does public opinion rule?' by Giovanni Facchini and Anna Maria Mayda, which is also a CEPR discussion paper, begins from the observation in several recent studies (Anderson and Winters 2008, World Bank 2006) that substantial gains can be achieved from the liberalisation of international migration flows, both for sending and receiving countries. At the same time, recent estimates (Goldin and Reinert, 2006), suggest that only 11 million individuals, i.e. just 1 in 600, migrate each year. The stock of migrants is larger. The United Nations reports that, in 2005, 190 million individuals, or 3 % of the world population, lived outside their country of birth. Still, comparing these figures with the volume of trade or with the large flows of capital in international markets, many authors have concluded that what we are experiencing is a wave of globalisation that includes 'everything but labour' (Pritchett, 2006; Freeman, 2006). In policy brief No. 1, Facchini and Mayda argue that the small size of international migration flows is the consequence of restrictive migration policies that reflect high levels of opposition to immigration in public opinion across destination countries. In addition, policies would be even more restrictive if it were not for the action of interest groups, many of which are pro-migration. 'European public opinion, migration, and welfare benefits' by Tito Boeri discusses the fact that that public opinion is turning against migration during the recession, as generous European welfare states make migrants a potential fiscal burden. This policy brief warns against the excessively exclusionary solutions to which voters are turning and suggests decoupling migration and the welfare state. Negative perceptions about migrants in Europe, the continent with the largest social policy programmes, are driven by concerns that foreigners are a net fiscal burden. Paradoxically instruments of social inclusion are becoming a weapon of mass exclusion. Increasing concerns of public opinion are indeed pressing governments, in the midst of the recession, to reduce welfare access by migrants or further tighten migration policies. Are there politically feasible alternatives to these two hardly enforceable (and procyclical) policy options? In the policy paper 'Immigration to the land of redistribution', Tito Boeri looks at economic and cultural determinants of negative perceptions about migrants in Europe. Based on a simple model of the perceived fiscal effects of migration and on a largely unexploited database (European Union statistics on income and living conditions (EU-Silc)), we find no evidence that legal migrants, notably skilled migrants, are net recipients of transfers from the state. However, there is evidence of 'residual dependency' on non-contributory transfers and self-selection of migrants more likely to draw on welfare in the countries with the most generous welfare state. Moreover, redistribution does not find much support among those who are in favour of immigration. A way out of the migration into the welfare state dilemma facing Europe involves: i. coordinating safety nets across the EU; ii. adopting explicitly selective migration policies; and iii. improving activation programmes. Other options - such as restricting migration or welfare access by migrants - are however on the agenda of national governments. Skilled migration is a key component of the globalisation process. Recent theoretical literature shows that such migration affects the source countries in a number of ways. In particular, it has been suggested that remittances, return migration, network effects favoring international transactions and technology diffusion, as well as brain gain channels, may compensate the sending countries for their loss of human capital. These channels have been examined in the recent empirical literature, but have never been quantified so as to make them comparable. The policy report 'Quantifying the impact of highly- skilled emigration on developing countries' by Docquier and Rapoport brings them together in an integrated framework, which attempts to quantify the global impact of the brain drain on sending countries. Potential impact: The current financial crisis has revealed the need for a rethinking of global economic governance in all of the areas covered by these four themes. First, a clearer global system of macroeconomic governance is required, in which macroeconomic policies of countries are more closely coordinated, operating through the IMF and the emerging G20 process. Second, the instability which the crisis has revealed has shown the need for the development of stronger regulatory and supervisory policies and their international coordination through the new financial stability board, and through the IMF. Third, globalisation has led to increased competition in trade, with the possibilities of unevenness of economic development. The crisis has obvious implications for this global trading system, and for its management through the WTO. Finally, the distribution of costs and benefits of cross-border market integration have knock-on effects in terms of migration and the mobility of labour, creating political tensions when migrants arrive in significant numbers. These tensions have been enhanced by the crisis, yet there is as yet little institutional structure for managing it. In PEGGED, political scientists and economists are working together to develop workable, real-world policy solutions, in each of these four areas of international cooperation. The legitimacy of global governance, and the robustness of the policy frameworks adopted, will come to depend on the quality of such research and on the way in which it feeds into policy-making. Europe already has much experience with international cooperation, because such cooperation is necessary for the EU to cope with day-to-day problems. This has been particularly true in relation to cooperation within the Eurozone in relation to the current crisis. New developments stand to benefit from this experience, if it is put to good use, providing that it is built on a foundation of legitimacy and effectiveness. This collaborative research project will help Europe to construct and project a vision of how this can be done so as to help the global system evolve as well as possible. Documents connexes Periodic Report - PEGGED (Politics, Economics and Global Governance: The European Dimensions)
