Saturday, March 29, 2008

Was League of Nations better than IMF?

Rogoff and Reinhart's forthcoming book is a real gem-This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises. Some excerpts related to data issues on public debt below;

Until very recently, domestic debt was not on the radar screen of the multilateral institutions. Neither the International Monetary Fund nor the World Bank systematically collected such data. In fact, cross-country historical time series on domestically issued debt are also absent from private data collections. Reinhart, Rogoff and Savastano (2003), with extensive help from IMF staff and country sources, put together an annual series going back to 1990 for a limited number of emerging market countries.

The topic of domestic debt is so important, and the implications for existing empirical studies on inflation and external default are so profound, that we have broken out our data analysis into an independent companion piece (Reinhart and Rogoff, 2008). Here, we focus on a few major points. The first is that contrary to much contemporary opinion, domestic debt constituted an important part of government debt in most countries, including emerging markets, over most of their existence

One would think that with at least 250 sovereign external default episodes during 1800– 2007 and at least 70 cases of default on domestic public debt (not to mention the significant economic disruption associated with these events), it would be relatively straightforward to find a comprehensive long time series on public sector debt. Yet, this is not the case—far from it.

Government debt is among the most elusive of economic time series. For the advanced economies, the most comprehensive data comes from the OECD, which provides time series on general government debt since 1980. However, this data has several important limitations: it only includes a handful of emerging markets; for many advanced economies (France, Finland, Greece, and the U.K., to name a few), the data actually begins much later in the 1990s, which cannot be considered as much of a time series; and only total debt is reported, with no particulars provided of the composition of debt (domestic versus foreign) or its maturity (long-term versus short-term). To state that the IMF’s well-known World Economic Outlook (WEO) database extends to public debt requires a stretch of the imagination. Data is only provided for the G-7 from 1980 onward (out of 180 countries covered in the WEO).

The most comprehensive data on public debt comes from the World Bank’s Global Development Finance (GFD, known previously as the World Debt Tables). It is an improvement on the other databases in that it begins (for most countries) in 1970 and it provides extensive detail on the particulars of external debt. Yet, GFD also has serious limitations. There are no advanced economies included in the database (nor newly-industrialized countries (such as Israel, Korea, or Singapore, for that matter) to facilitate comparisons. Unlike data from the IMF and the World Bank for exchange rates, prices, government finances, etc., there is no data prior to 1970. Last, but certainly not least, these data only cover external debt. In a few countries, such as Panama or Côte
D’Ivoire, external debt is a sufficient statistic on government liabilities, since domestic public debt levels are relatively trivial. As Reinhart and Rogoff (2008) illustrate, however, for most countries domestic debt accounts for an important share of total government debt. The all-country average oscillates between 40 to 80 percent during 1900–2006.

In search of the elusive data on total public debt, we examined the archives of the global institutions’ predecessor, the League of Nations, and found that this institution collected information on, among other things, public domestic and external debt in its Statistical Yearbook (1926–1944). While, neither the IMF nor the World Bank continued this practice after the war, the newly-formed United Nations (UN) inherited the data collected by the League of Nations and in 1948 its Department of Economic Affairs, published a special volume on public debt, spanning 1914–1946. From that time onwards the UN continued to collect and publish the domestic and external debt data in the same format as their pre-war predecessor on an annual basis in their Statistical Yearbooks. As former colonies became independent nations, the database expanded accordingly. This practice continued until 1983, at which time the domestic and external public debt series were discontinued altogether. In total, these sources yield time series that span 1914– 1983 for the most complete cases. It covers advanced and developing economies. For the most part, it also disaggregated domestic debt into its long-term and short-term components. To the best of our knowledge, this data is not available electronically in any database, hence it required going to the original publications. This data provides the starting point for our public debt series, which have been (where possible) extended to the period prior to 1914 and post-1983.

For data prior to 1914 (including several countries that were then colonies), we consulted numerous sources, both country-specific statistical and government agencies and individual scholars. Data Appendix II provides details or the sources by country and time period. When no public debt data is available prior to 1914, we proceed to approximate the foreign debt stock by reconstructing debt from individual international debt issues. This debenture data also provide a proximate measure of gross international capital inflows. Much of the data come from scholars including Lindert and Morton, Marichal, Miller, and Wynne, among others. From these data, we construct a foreign debt series (but, not total debt). This exercise allows us to examine standard debt ratios for default episodes for several newly-independent nations in Latin America as well as Greece and important defaults such as that of China in 1921, and Egypt and Turkey in the 1860s– 1870s. These data are most useful for filling holes in the external debt time series, when countries first tap international capital markets. Their usefulness (as measures of debt) is acutely affected by repeated defaults, write-offs, and debt restructurings that introduce disconnects between the amounts of debt issued and the subsequent debt stock.

For some countries (or colonies in the earlier period) where we have only relatively recent data for total public debt, but have reliable data going much further back on central government revenues and expenditures, we calculate and cumulate fiscal deficits to provide a rough approximation to the debt stock.31
To update the data for post-1983, we mostly rely on GFD for external debt. Two very valuable recent studies facilitate the update: Jeanne and Guscina (2006) compile detailed date on the composition of domestic and external debt for 19 important emerging markets for 1980–2005; Cowan, Levy-Yeyati, Panizza, Sturzenegger (2006) perform a similar exercise for all the developing countries of the Western hemisphere for 1980–2004. Last, but certainly not least, are the official government sources themselves, which are increasingly forthcoming in providing domestic debt data, often under the IMF’s 1996 initiative, Special Data Dissemination Standard.

It is all the more interesting since both Rogoff and Reinhart have worked at the IMF's Research Department. Let us hope they put their dataset online.

One of the takeaways from the paper; it's the same old story. Look at what's happening in Argentina right now - a defacto partial default on domestic domestic debt by playing around with inflation numbers.

Five-year credit default swaps based on Argentina's debt increased 13 basis points to 576 basis points, the highest since March 17, according to Bloomberg data. That means it costs $576,000 to protect $10 million of the country's debt from default.

Lessons From Prior Banking Crises

The great emerging market inflation of 2007 and 2008

IMF asks Argentina to clarify inflation figures

Argentina 2008: Is the (already High) Inflation Rate Accelerating?
So far what the government is doing is clearly not going to control inflation. It does not anchor inflation expectation neither with its monetary policy, nor with its exchange rate policy or its fiscal policy. On the contrary, it looks more likely to make it get worse—inflation seems to be accelerating. The median voter seems to be happy with this policy, though. But it’s the policy maker’s role to appropriately consider and internalize the future effects of the current policies and adjust its present behavior accordingly—something not seen yet with the current administration.

It could be much better if the government would focus on reducing government expenditures (not just reduce the rate of growth to be lower than the growth rate of tax revenues—which are just casually high do the unusually high commodities’ prices) to achieve not only a higher and stronger primary fiscal surplus but also to enhance its sustainability. It should also let all relative prices be really free to adjust to equilibrate demand and supply (i.e. eliminate all the price controls and any type of capital controls) and let the exchange rate float. If relative prices are let to adjust, as well as the exchange rate, they will stop the growth rate of prices (i.e. inflation) and contribute, together with a non spurious fiscal surplus to contain inflation expectations—and thus wage negotiation adjustment (in quantity and frequency.) Core inflation would then be tackled with an inflation targeting regime, letting an independent central bank focus on its only goal: to preserve the value of the (domestic) currency. As of now, it will probably be better to raise interest rates to control the inflation in the short run while the rest of the reforms are put in place (including property rights that we could believe in—i.e. proper long-term institutions.). The question is, will this government be interested in implementing these and thus pursuing long-term and sustainable growth? I truly hope it. Unfortunately, I still have my doubts

Credit derivatives provide useful early warnings for the macroeconomy

Is Argentina turning the corner?- Dani Rodrik
Not at all clear, according to Guillermo Calvo. I am sitting at a colloqium on Argentina organized by my colleague Federico Sturzenegger. Argentina has recovered nicely from its crash and has been growing at Asian rates since. Calvo thinks this is just a process of recovery: the country is only making up for lost time. But could this time be different? What is encouraging is that this recovery is export and investment- led, and investment focuses on tradables instead of nontradables. The government has had an active policy of keeping the currency undervalued. So an alternative, more optimistic view would be that Argentina is turning itself into an Asian country. But there is a long way to go...

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