Carbon pricing will be a critical piece in global warming control.

Christine Lagarde and Jim Young Kim write:  Carbon pricing policies are already being implemented by some 40 national governments, including that of China, the world’s largest emitter, and 23 cities, states, and regions that are putting a price on carbon. Many other governments also are reforming energy prices, and more than 400 companies report using a voluntary, internal carbon price. That makes sense. Top companies must effectively manage exposure to climate risk in order to generate higher profits and ensure more stable earnings.  Carbon Pricing

Hovering over the annual International Monetary Fund/World Bank meeting in Lima, Peru, were the China-inspired Asian Infrastructure Investment Bank (AIIB) and New Development Bank (or “BRICS Development Bank,” as it was originally called). Will these new institutions behave like the World Bank or the more conventionally “bank-like” European Investment Bank (EIB)? Above all, will they be vehicles to promote – or, paradoxically, constrain – China’s interests?

Devesh Kapur writes”  The reality is that over the next decade, these new institutions will not be huge lenders. The paid-in capital of each is $10 billion; so, even with an equity-to-loan ratio of 20% (the current floor for the World Bank), each will be able to lend only about $50 billion  – not chump change, but hardly a game changer – unless they “crowd in” substantial private investment. What matters is that the larger emerging markets are putting substantial capital into institutions that will be dominated by China – an indication of how frustrated they are with the World Bank and the IMF.

In the 2015 financial year, the EIB lent more than twice the amount provided by the Bank, but with one-sixth the staff. Whether measured by flows (loan disbursements) or stock (loans outstanding), the World Bank is massively over-staffed.

When the Bank was formed, the key governance mechanism was a resident Board of Directors that reported to a Board of Governors.  Over time, new offices proliferated.

Most of this bureaucratic growth was the result of pressure from developed countries.

The Bank’s extreme risk-averse culture reflects a rational response to critics who make a huge fuss about every project or program failure. Critics who take failures in commercial projects in stride find the Bank sloth-like compared with the private sector and become indignant when its projects fail. Yet, instead of making the case that risk is intrinsic to economic development and developing a risk-balanced portfolio of projects (and loans priced accordingly), the Bank pretends that it can be infallible. As a result, the best has become the enemy of the good.

Risk aversion has gone hand in hand with skewed institutional priorities, as is evident in the Bank’s budget. In the 2015 financial year, $623 million was allocated to “Client Engagement,” while nearly 1.5 times that amount, or $931.6 million, went to “Institutional, Governance & Administration” (the remaining $600 million, for “Program and Practice Management,” is ostensibly for supporting lending operations). Expenses for the Executive Board alone were $87 million. The Bank loudly proclaims the virtues of research – and then spends almost as much – $44 million – on “External and Corporate Relations.”  The Future of the World Bank

Along the rocky road to globalization, US corporations get taxed twice as much as corporations in other countries.  If they’re going to be competitive in business worldwide, they can’t pay disproportionate taxes.  Some people argue that taxing corporations and dividends is double taxation and perhaps we should limit the tax to dividends, and eliminate the corporate tax.  In any case, we should probably modify our tax code to bring it in better conformity with other countries around the world.

Complaints from the IMF/World Bank meetings in Peru.

Nick Asheshov writes:  The IMF/World Bank AGM meetings were deeply confused. The muddle  came not from the third world, the usual suspects, much less from Peru,  but from the IMF itself together with the big shot central banks, led by the Fed in Washington, The European Central Bank in Frankfurt, the Bank of England and their equivalents in China and Japan.

It quickly became clear that the international financial system, which is run by the directors and staff of the Fund, is not only dangerously unstable but that there is worse to come.  The world economy, said Christine Lagarde, the Fund’s managing director, is barely growing, at only 3.1% — Fundspeak for 2.3%.

Mme. Lagarde could have added that economic growth is not actually her job.  Her job, the task of the International Monetary Fund, is to provide financial stability, which is, as we all understand it, the stepping stone for a successful economy.   No stability, no growth.

Instead Mme. Lagarde and others talked of the importance of increasing jobs and pay for women, for income equality, for more old age pensions and social inclusion, climate change and indigenous rights.

There was no talk, or  hardly any, about exchange rates, nor even interest rates.  Mme Lagarde and her crew  are paid to control exchange rates. Dollars, euros, yen, renmunbi, pesos, reales, fluctuate today as dramatically as, and more unpredictably than, oil, gold and silver.  Indeed, it is often the volatile currencies that push and pull the prices of commodities and most other things besides. Tails wagging  the dogs.   Carpet weavers in Kazakhstan and quinoa farmers on the Altiplano see their  fortunes zoom or doom if  the Fed in D.C. increases, or not, $ interest rates by a quarter  point..

This is exactly how it should not be.  The Fund was set up 70 years ago at the end of WWII to say Never Again to the disastrous competitive devaluations and desperate inflations and deflations that followed World War I.  It was these crashing swings and roundabouts that set the scene for  the Great Depression and World War II.

The IMF’s job was to keep European, and later the rest of the world, exchange rates fixed or at least stable.

The Fund never really knew, and as we see still does not know, what to do about exchange rates. Or rather, they always have had a theory but the theory keeps changing.

Fast forward to Lima 2015, with trillions of dollars and the others zooming beyond the control of the IMF, the Fed or anyone else.  Peru has chosen this past couple of years not to devalue the Sol against the euro and the yen, and only slightly against the US dollar.  Meanwhile neighbors like Brazil, Chile and Colombia have strongly  devalued their pesos and reales.

Peru has over the past two years burned $24bn of its reserves to stabilize, as the Central Bank puts it, its currency and, one is to suppose, the economy.  But the economy has slowed over the past 12 months to a whisker over 2%.  Certainly the IMF and the other experts provided no ideas, much less clear guidance.

Until the United States, Europe and Japan put their houses in order, which is their constant advice to third world backsliders, there is not much  the rest of us can do.

The rocky road to globaliation.  Should we support the TPP?

Jeffrey Frankel writes: Agreement among negotiators from 12 Pacific Rim countries on the Trans-Pacific Partnership (TPP) represents a triumph over long odds. Tremendous political obstacles, both domestic and international, had to be overcome to conclude the deal. And now critics of the TPP’s ratification, particularly in the United States, should read the agreement with an open mind.

Many of the issues surrounding the TPP have been framed, at least in US political terms, as left versus right. The left’s unremitting hostility to the deal – often on the grounds that the US Congress was kept in the dark about its content during negotiations – carried two dangers. A worthwhile effort could have been blocked, or President Barack Obama’s Democratic administration could have been compelled to be more generous to American corporations, in order to pick up needed votes from Republicans. In fact, those concerned about labor rights and the environment risked hurting their own cause. By seeming to say that they would not support the TPP under any conditions, Obama had little incentive to pursue their demands.

Seen in this light, the TPP that has emerged is a pleasant surprise. The agreement gives pharmaceutical firms, tobacco companies, and other corporations substantially less than they had asked for – so much so that US Senator Orrin Hatch and some other Republicans now threaten to oppose ratification. Likewise, the deal gives environmentalists more than they had bothered to ask for.

Perhaps some of these outcomes were the result of hard bargaining by other trading partners (such as Australia). Regardless, the TPP’s critics should now read the specifics that they have so long said they wanted to see and reconsider their opposition to the deal.Supporting TPP

The ongoing economic problems in the euro zone have led to more and more economists coming out in favour of significant reform or dissolution. Rolf Weder atÖkonomenstimme argues for an alternative, while public radio Deutschlandfunkreports that the German media reports views of Berlin and Brussels as objective truths without alternative.

The euro’s success has piqued the world’s interest in currency unions. The Gulf Cooperation Council is planning to establish one by 2010, the South African Development Community by 2018 and plans for an Asian currency union have circulated for years. Peter Kenen and Ellen Meade have a new book that surveys the prospects for regional monetary integration around the globe.

All this is about joining. What about quitting? Barry Eichengreen recently argued on Vox that euro adoption is irreversible since trying to quit would trigger ‘the mother of all financial crises’ in the leaver. But the Euro area is not the only currency union in the world. Since the end of the Second World War, 69 countries, territories, or other entities have left currency unions; 61 have remained continuously within currency unions. Does history have any lessons regarding potential departures from currency unions?   Exit from Currency Unions