Emerging market troubles


In recent weeks we have seen the old truths reassert themselves in international economics. Countries that are running large balance of payments deficits in the emerging world have suffered substantial falls in their currencies. This has of course made imports dearer, which may cut their deficit a bit, but it reflects the doubts some in markets share about how they will be able to borrow enough to carry on living beyond their means.

When the currency falls too far too fast for comfort, inflation starts to accelerate in  the country affected. The authorities then respond by putting up interest rates. They also sometimes reach for controls, seeking to stop people in their country taking so much money abroad, or preventing them from buying foreign products. Quite often it is the most socialist of governments that resorts to the highest interest rates and the most draconian controls. They clearly do not do this wanting  to hit the living standards of the poor, though that is what it does. They do it because they feel they have no alternative.

If their country is at the same time heavily in debt and the state os overspending, it adds to the agony. Argentina has suffered a large devalaution, and there are worries over when and how she will repay her debts. Argentina defaulted on her debts in 2002. Now the government has doubled public spending over the last 11 years, only to set up another debt and inflation crisis. Far from being kind to the poor, the new squeeze is unpleasant. It includes curbs on internet purchases.  Inflation is around 30%.

Venezuela is also in deep trouble. Turkey now has had to increase interest rates by 400 basis points – an extra 4% on a loan – to try to buttress its position. The Argentinian peso has fallen almost 20% this year, the Turkish lira 5% and the South African rand 7%.

So to all thsoe who say a country can carry on borrowing, spending more in the public sector  and printing as much as it likes, I just ask why isn’t that magic formula working in emerging market countries these days? If socialist policies of spending much more in  the public sector worked, Argentina would have one of the most successful economies, along with Venezuela.

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  1. Lifelogic
    Posted February 6, 2014 at 5:57 am | Permalink

    Indeed this is clear to all sensible economists and relational people. Politicians however, so often seem totally unable to restist the temptations to rob the public,attempt to buy votes and destroy economies in this way.

    The UK is not much different in this respect.

  2. Arschloch
    Posted February 6, 2014 at 6:22 am | Permalink

    John will you please stop taking the mick? The other day you said I was making allegations about the banks and I should take them to the FCA. This is despite that they were all based upon events where the FCA, FSA and FOS have already either fined or censured the banks Today its “If socialist policies of spending much more in the public sector worked, Argentina would have one of the most successful economies, along with Venezuela.” . Why not add the UK to your list of examples? Its not as if we have do not have a bloated public sector e.g, why does the MoD need 300 press officers though it has aircraft carriers without any aircraft? If anything its the US and UKs socialist money printing to keep interest rates low that drove a load of hot money into the EMs in the first place. While as soon as though it looks as though interest rates may rise here (fat chance) it flows back out again wrecking their economies at the same time.

  3. Mark W
    Posted February 6, 2014 at 6:23 am | Permalink

    Socialists are always right. They are nice and well meaning. How ever many times they pull stunts like automatic weapons on the internal German border to shoot their own citizens in order to protect them from the evil capitalist west or build Berlin Walls it will be forgotten. The list of socialist tyrants is huge, but they and the believers or this absolute failure of an idea are so convinced of their own righteousness the world will never be free of them.

    • alan jutson
      Posted February 6, 2014 at 10:07 am | Permalink

      Mark W

      Strange how many of these leaders tend to end up with living the high life in another country and a small fortune at the same time.
      The very lifestyle they have argued against.

      Do not remember it being reported that any of them have to line up to recieve State benefits after they have failed with their policies.

      • APL
        Posted February 7, 2014 at 7:39 am | Permalink

        Alan Jutson: “Do not remember it being reported that any of them have to line up to recieve State benefits after they have failed with their policies.”

        [Drum roll] I give you ‘Lord’ Chris Smith, putative head of the Environment agency. But doesn’t do anything, but run around self importantly telling everyone how busy he is. Then off to his next sinecure at the Lords, where he does nothing of much merit except preen himself at the public expence.

        Fact is, all these sort, Smith, Mandleson, Kinnock are all on State benefits.

        • alan jutson
          Posted February 7, 2014 at 5:23 pm | Permalink


          “….State Benefits…..”

          Ah a good point.

          Silly me, I was thinking of the rather more basic kind, I had completely forgot about all the Gold plated schemes for the chosen few..

  4. lifelogic
    Posted February 6, 2014 at 6:30 am | Permalink

    I see we cannot protect a small section of main line rail track at Dawlish yet Boris wants a whole multi runway airport in the sea and we have enough money to blow on HS2 and pointless wind farms it seems. A few selective sea walls, a little re-routing and general maintenance would be a far better investment. Just protecting and improving the existing infrastructure is the way to do. But politicians always go for huge, nonsense grand projects.

    • Excalibur
      Posted February 7, 2014 at 5:15 am | Permalink

      Pertinent, lifelogic. Six weeks to repair the damaged line ? My guess is the Chinese would have it done and working in three days. Perhaps they could be induced to build “Boris island’ (which I know you oppose). It is though, such an audacious and farsighted idea. One yearns for the bold leadership it shows.

  5. Richard1
    Posted February 6, 2014 at 7:10 am | Permalink

    Voters in Scotland might want to think about this. Most elected politicians in Scotland are left wing – both the nationalists and Labour (and most libDems). So they are likely to favour borrow tax and spend policies. Alex Salmond has also said an independent Scotland would default on its debt to the UK as a negotiating tactic. Scots voters should look at Argentina, Venezuela, Greece and other countries pursuing these policies and ask themselves whether they really want to be ‘independent’.

    • Posted February 6, 2014 at 12:26 pm | Permalink

      If Salmond defaulted on its share of the UK debt, it would either scare off any potential lenders or they would charge exorbitant interest rates should Scotland need to borrow. Perhaps he would then emulate Argentine and declare war on England in order to recover the Scottish Scilly Isles.

  6. Gary
    Posted February 6, 2014 at 7:18 am | Permalink

    If it is like 2008, then this is ominous. In 2008 dollars were repatriated from emerging markets(ie emerging market currencies were sold and dollars purchased) in order to stave off debt defaults in the western banking system. We know what happened next. This emerging market selloff is worse than 2008.

  7. Mike Stallard
    Posted February 6, 2014 at 7:54 am | Permalink

    Super! Well noticed.

    Of course, it could never happen here.

    Could it!

  8. oldtimer
    Posted February 6, 2014 at 8:33 am | Permalink

    This is the inevitable consequence for politicians who over promise on measures and benefits for their electorates that they cannot deliver. Europe, including the UK and much of the EZ, is in the same position – the only difference is the degree of difference between countries. In Europe, the challenge for the political class is to wean their electorates off welfare entitlements that are far beyond the economic capacity of the countries for which they are responsible. Some appear to recognise their predicament. Others, such as M Hollande and Mr Miliband, either do not, or choose to ignore the problem.

    • alan jutson
      Posted February 6, 2014 at 10:11 am | Permalink


      They have got away with it in Europe for so long because the savers and workers are paying for it.
      Thus the real effect has yet to be felt.

      Wait until the savers money runs dry, and the workers give up working because of ever rising taxation, then you will really see the fiancial chaos.

    • JA
      Posted February 6, 2014 at 7:43 pm | Permalink

      Fat chance (welfare)

      Today I took a tax, driven by a foreign national.

      “I have not been paid my Christmas money.”

      A discussion followed whereby it was established that he was taking about £200 a week. Barely enough to cover the rent on his family home. I asked him how he was surviving bearing in mind my own children can’t afford to live where he does.

      “Is OK. I have large family. Government help me.”

      I had to tell him several times that he needed to keep at least one hand on the steering wheel. So not only is his work heavily subsidised, it is also sub standard and dangerous and this is, sadly, not untypical of the many taxi drivers from abroad which I have to use in my work.

      By what measure is the Government getting a grip on welfarism ? From where I’m viewing it things have got a lot worse since 2010.

  9. margaret brandreth-j
    Posted February 6, 2014 at 9:04 am | Permalink

    If imports are to be more expensive then perhaps the uk can begin to Buy British

    • alan jutson
      Posted February 6, 2014 at 10:19 am | Permalink


      “Buy British”

      That would be a good idea if we made a bit more here, and the label meant what it said.

      Take food labeling for example, simply packaged here means a British label appears on it, if I am not mistaken.

    • Posted February 6, 2014 at 12:17 pm | Permalink

      I need a new computer, the best I can get is a UK assembled one from mainly Chinese made parts. The same with a music system, British names on the packaging but made in the far east! A toy for my 5yr old grandson, again British names but not made here. My car was assembled in Swindon, but I wonder what percentage of the parts were made here. The list is endless. Only with food can one make a deliberate attempt to buy British, but even when in season, there are more apples in the supermarkets from abroad than here and the same applies to most other produce.

    • MickC
      Posted February 6, 2014 at 12:26 pm | Permalink

      And which particular British products have you in mind?

      The main product of the UK economy is rules and regulations, together with the associated paperwork. Purchase of this product is compulsory in the UK(because no-one would actually want to buy it), but it cannot be exported because there is no market.

      We are, as Patricia Hewitt wanted us to be, world leaders in regulation-but nothing else.

      I would be more than happy to buy British, but British goods now fall into the super luxury class (and therefore overpriced). Long gone are the good quality mid range brands, together with the middle classes which were their market.

      • margaret brandreth-j
        Posted February 7, 2014 at 2:03 pm | Permalink

        Your comments underline the problems where management think that buy buying elsewhere is cheaper and better in the long term, when it actually demonstrates , that if we rely on others to manufacture and create an environment of dependency then we will be prosperous. It doesn’t seem to tally does it?

  10. Brian Tomkinson
    Posted February 6, 2014 at 9:18 am | Permalink

    I have noticed this in the financial pages but it never seems to attract more media attention. Perhaps they don’t like to admit that : ” If socialist policies of spending much more in the public sector worked, Argentina would have one of the most successful economies, along with Venezuela.”
    Meanwhile Osborne is still borrowing £2bn per week.

  11. Gary
    Posted February 6, 2014 at 9:27 am | Permalink

    This is probably an effect of Triffin’s Dilemma. Where a country that prints the world’s reserve currency has a blank cheque to create as much debt as it wants, underwritten by the rest of the world which in turn requires the reserve currency to trade.

    The country of the reserve currency becomes that which is able to consume the most and so runs a trade deficit. As the reserve country gets deeper into debt and deficit, and inflation picks up at home, they may choose to tighten, nt least to shore up their overextended banks. This immediately causes a squeeze in dollars and trade in the rest of the world. Emerging markets get hammered.

    This financial system has no solution. Only collapse.

  12. acorn
    Posted February 6, 2014 at 10:57 am | Permalink

    The Federal Reserve is a monetary superpower. As David Beckworth said, The Fed has this power because it manages the world’s main reserve currency and many emerging markets are formally or informally pegged to the dollar. As a result, its monetary policy gets exported to much of the emerging world. The ECB and Bank of Japan are also influenced by the Fed’s decisions because they are careful not to let their currencies becomes too expensive relative to these dollar-pegged currencies and the dollar itself. U.S. monetary policy, consequently, gets exported to the Eurozone and Japan as well. This understanding helps explains why there is a global liquidity glut during housing boom periods; simply recycling loose U.S. monetary policy.

    China also acts as a monetary superpower, at least for the emerging markets and commodity exporters. The actions, then, of both the Federal Reserve and the People’s Bank of China, matter immensely to the rest of the world. This seems especially true now as the expected tightening of monetary policy by these central banks is hitting emerging market exports hard. You may have noticed that UK M4 lending hit the skids in December. It begins.

  13. ian wragg
    Posted February 6, 2014 at 11:03 am | Permalink

    is Gideon listening.
    I see the Eurozone is almost in a deflationary spiral and Jeremy Warner(DT) is calling for outright junk bond purchases by the ECB.
    When will they admit failure and pull the stumps on the Euro.??

  14. Bert Young
    Posted February 6, 2014 at 11:52 am | Permalink

    The flight of capital away from risky countries is entirely understandable ; those countries that hike up their interest rates in the hope of retaining funds are usually the irresponsible spenders . The USA is pulling slowly away from its QE with every sign that its growing economy will pull it back into a healthy balance in a relatively short space of time ; this being the case it is bound to attract investment as share values climb . Before Greece finally tumbled into its bottomless pit , it attempted to attract funds offering as much as 19% interest ; at the same time there was no indication of belt tightening or a willingness to accept the rigours of its position . The position in this country post Osborne and Co is different ; the public have swallowed the bitter pill , have lived with reduced standards and have experienced the results of their discipline ; the QE programme here has kept interest rates low and enabled borrowings to boost building and infrastructure development . This could not have been achieved in an undisciplined culture ; it is an illustration of why the same approach will not succeed throughout Europe .

  15. Posted February 6, 2014 at 1:22 pm | Permalink

    “So to all those who say a country can carry on borrowing, spending more in the public sector and printing as much as it likes, I just ask why isn’t that magic formula working in emerging market countries these days?”

    OK, as you are asking, I would say firstly that “magic” should be left to stage shows not economic management. Many emerging market countries make the mistake of borrowing far too much in foreign currencies, usually the US$, rather than their own currencies. Superficially it can seem more attractive as it keeps the pressure of the exchange rate but that’s only temporary.

    Furthermore, they compound the problem by trying to peg their currencies against the US$. It can be very expensive for a small country to defend its exchange rate if the speculators move against it.

    I’d be interested to know if you can point to a country where that hasn’t been the general problem. But, of course no country can “print as much as it likes”. If any country spends too much then inflation can arise as the major problem. Everyone always points to that as a problem, but the problem of getting it wrong the other way by spending too little has to be recognised as equally mistaken.

  16. Gary
    Posted February 6, 2014 at 3:22 pm | Permalink

    “Barclays bank is expected to say that
    it is paying out close to £2.5bn
    in bonuses for 2013 despite a
    £6bn share sale, Sky News


    Ever get the feeling you are being
    taken for a ride ? Maybe we would be better off if this “talent” went somewhere else?

  17. Posted February 6, 2014 at 4:30 pm | Permalink

    Agree wholeheartedly with you blog post, John.

    However the right wing appeals to the head and the left wing appeals to the heart.

    Notwithstanding the in-built bias of the BBC, right wing messages can be dry. The right wing always wins the argument using evidence based and logical reasoning (such as your post).

    However, who is listening?

    These should be the right wing slogans:


    …for these are surely the ultimate aims of all of us.

    The difference is that the socialists try to take a short cut and end up making all the above a lot worse.

    I hear too many free market politicians on the media talking defensively. I am sure that they imagine an invisible Evan Davis or Justin Webb on their shoulders wherever they go.

    Unless the Conservative Party starts to coach politicians to be more assertive and appeal to real life I don’t know how you and your colleagues are going to punch through in time for the next general election.

  18. Antisthenes
    Posted February 6, 2014 at 5:51 pm | Permalink

    Are we not in the west going to follow these emerging nations who having followed the socialist way are now virtually bankrupt. After all have we not also embraced socialism with varying amounts of the same vigor. Think of Brown, Hollande, Obama and others and soon RedEd. No doubt most will point out that we are not bankrupt even though we have employed socialist policies and practices and so we are having better outcomes from the same inputs. My answer to that would be is that we are somewhat luckier because for centuries we followed the likes of Adam Smith and used free market capitalism to build our economy so have a healthier financial base which we are drawing on to keep us afloat. When that reduces to a level that can no longer sustain the excesses of socialism, greens and other assorted loons then we will find we are just as bankrupt as the rest. Then what nationalise everything and build the socialist paradise that the left want so much.

    • uanime5
      Posted February 7, 2014 at 1:55 am | Permalink

      My answer to that would be is that we are somewhat luckier because for centuries we followed the likes of Adam Smith and used free market capitalism to build our economy so have a healthier financial base which we are drawing on to keep us afloat.

      Adam Smith warned against low wages because if a salary wasn’t enough to support a family it would lead to companies being unable to obtain the next generation of workers. Perhaps the free market should follow Adam Smith’s advice and pay a living wage.

      • Edward2
        Posted February 7, 2014 at 8:37 am | Permalink

        Do you sense employers are short of staff?
        You regularly tell us how many apply for every vacancy.
        I think Adam Smith would understand why wages are not currently rising much at the lower levels of the labour market.
        If employers found no applicants when they placed a vacancy then wages would rise rapidly.
        One reason allowing several million new arrivals into the UK in a short period of time has not helped your demand for much higher wages Uni.

  19. Vanessa
    Posted February 6, 2014 at 6:48 pm | Permalink

    The UK is very pointedly missed out of this doom laden article but our currency has fallen and probably will fall again – pity we don’t learn the lessons you speak of in the emerging markets !!

    Reply For two reasons – one it is about emerging markets, two we are not collapsing as the countries highlighted are.

    • Vanessa
      Posted February 7, 2014 at 3:21 pm | Permalink

      Reply to reply : We will collapse, nothing built on a debt bubble lasts for very long and with the amount of money given by this government to prospective house buyers there will come a crunch. The “feel-good” factor cannot last very long. I only hope it is before 2015 but it will probably limp on into the next parliament.

      A country cannot borrow the humungous amounts we are without some kind of retribution soon. We are all going to be “bitten on the bum” very soon and I would not be surprised if sterling collapses. Not a very cheerful prospect.

  20. uanime5
    Posted February 7, 2014 at 1:55 am | Permalink

    So to all thsoe who say a country can carry on borrowing, spending more in the public sector and printing as much as it likes, I just ask why isn’t that magic formula working in emerging market countries these days?

    Isn’t this what the chancellor has been doing since he took office? If so does this mean the UK will soon suffer higher rates of inflation?

    Good thing the eurozone is trying to prevent this by not printing money to resolve any problems they may have. The high interest rates also prevent countries such as Greece and Italy from borrowing too much, though this doesn’t seem to have helped their economies.

  21. Posted February 7, 2014 at 2:16 am | Permalink

    The Australian dollar exchange rate fallen 15% in the last couple of months. Is that to do with a high Debt to GDP ratio? Hardly – it is less than half of the UK’s ratio and is really no problem at all despite attempts by some politicians to play up debt fears to justify cuts in spending.

    There are complaints when currencies go up. There worries when they go down. Free floating non convertible currencies are meant to do exactly that. ie Float up and down. Its no big deal!

    It is a big deal when they are artificially fixed and a country can’t adjust its exchange rate to suit changing economic realities. It is even worse if they are locked into using someone else’s currency like the Euro.

    • Gary
      Posted February 7, 2014 at 10:44 am | Permalink

      “Free floating
      non convertible currencies are
      meant to do exactly that. ie Float
      up and down. Its no big deal!
      It is a big deal when they are
      artificially fixed and a country
      can’t adjust its exchange rate to
      suit changing economic realities.
      It is even worse if they are
      locked into using someone else’s
      currency like the Euro.”

      On the contrary. Free floating currencies are used by profligate govts and bankers to rig prices of goods and services by currency debasement instead of becoming efficient producers of goods and services. This malfeasance produces long term economic rot and uncompetitiveness for short term gains.

      • Denis Cooper
        Posted February 7, 2014 at 3:02 pm | Permalink

        Glad you two have got together at last.


  22. Posted February 13, 2014 at 9:01 pm | Permalink

    The formula of borrowing, spending more and printing more does not work. I think we have seen that first hand for countries who have decide to use this type of formula.

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

    Promoted by Fraser McFarland on behalf of John Redwood, both of 30 Rose Street Wokingham RG40 1XU

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