Question from Tuesday

HOW does an economy become internationally illiquid?

Brazil in the News

http://online.wsj.com/articles/brazils-currency-shares-slump-on-rousseff-re-election-1414413609

After discussing and reading about financial panics and the economic consequences of loss of confidence, I thought I'd blog about Brazil's buzz in the news. President Dilma Rousseff's re-election has created pessimistic reactions, socially and economically (this article covers reactions over social media, especially Facebook, possibly contributing to Facebook's increased stock price: http://online.wsj.com/articles/after-vote-brazilians-lash-out-on-social-media-1414443541). 

Economically, investors are reluctant and skeptical about Rousseff's capabilities and plans to pull Brazil out of its slump. This lack of confidence and skepticism is reflected in the devaluation of its currency and its expectation for slow growth (less that 0.5% according to this article). Although Rousseff promises reform, investors are still not quite confident that she can sustain these promises.  Going off of Chang's piece, it seems that investors are showing broader feelings of "bad policy." It seems that they are holding expectations of poor policy initiatives carried over from Rousseff's previous term. According to the article, the only way to "calm" these concerns and further calm the markets is to "quickly name a new economic team, including a finance minister who can reassure investors that the country’s fiscal situation is under control." The problem: empty promises. What are the global implications? Well, if there is loss of confidence internally, especially with quantitative evidence like currency and poor growth statistics, then external confidence probably won't be strong either, discouraging foreign investment. Maybe this devaluation can encourage some export promotion, but for now it looks like the government needs to get moving on these promises, before every Facebook status sh*ts on them.  

China is still planned, but what's next?

Looking back at our discussion from Day 3, we summarized that Wolf and Stiglitz have two different perceptions on the reasons behind China's success. Wolf, with his push for unfettered, liberal globalization, argues that China's economic growth has stemmed from its movement towards more liberal policies, ultimately fostering more growth. Stiglitz, who advocates for a more highly regulated globalization process, would agree that China has opened its economy, but it has done so slowly, and is still classified as a highly planned economy. Alon et. al's piece reminded me of this distinction between previous authors. This Economic Letter acknowledges China's increased foreign investment with the goal of accessing resources (natural), technology and capital inputs. China's growth, along with this pattern, according these authors, suggests that the country will continue to expand in hopes of continuing their growth spurt. This piece also mentions, on several occasions, the state's involvement in investments. On the one hand, between the 1960-2008, China accumulated financial wealth and relaxed restrictions on outflow. Alon et. al writes, "Nevertheless, despite Chinese reforms over the last decade that removed bans on foreign direct investment by the country’s private sector, most outward direct investment during this period was conducted by state-owned or quasi-state-owned firms." Ending here, one could argue that it backs Stiglitz's argument: that although China has liberalized in some aspects, the economy is still largely state-owned, contributing to its expansion. Reading on, the article names 2 motivations that Chinese banks have for seeking a broader international role, both of which deal with the banks looking for ways to develop and escape strict controls ("China’s strict controls on international capital flows and foreign exchange transactions have prompted Chinese banks to look for ways to get around these restrictions"). So, the question remains: what has had a larger impact on China's economic growth? Further, will the state continue to control outward investment, or will Chinese banks push for a more liberalized process?