The politics of quantitative easing
This report analyses the problems that monetary policies in developed economies pose for developing countries. Given the history of debt crises in emerging economies, with profound and long-lasting socio-economic and political consequences, we must be alert to signs of another emerging debt crisis.
Urgent action is needed to address this problem, including:
- reversing the global trend of liberalising capital controls
- introducing an internationally accepted debt restructuring arrangement
- preventing the abuse of debt crises by imposing a market-led restructuring programme.
What is QE?
Quantitative Easing (QE) is a monetary policy established by central banks in which newly created money is used to buy state debts (so-called ‘sovereign bonds’) or to buy corporations’ debts (‘corporate bonds’). The QE programmes were initiated to stabilise and revitalise the global economy after the 2008 financial crisis. From 2008 to 2018, the US, Japan and the Eurozone increased the money supply by US$12 trillion dollars through QE programmes.
However, QE has several negative consequences: it fuels wealth inequality; it increases the systemic risks of the global financial system, and it perpetuates an unsustainable debt-led economic model. This has a particularly severe consequence on emerging economies and the poorest developing countries.
QE has led to an increase in capital flows into developing regions and correspondingly a rise of foreign debt. For example, the stock of international bonds from Latin America and the Caribbean region increased from US$297 billion in 2009 to US$757 billion in 2017. In the Asia and Pacific region, the stock of international bonds increased from US$253 billion in 2009 to US$637 billion in 2017. Once the period of QE ends, these capital flows may reverse, leaving behind a stock of unpayable debts.
Consequences for developing countries
In the 1980s we saw debt crises in many parts of the developing world. This was followed by ‘Structural Adjustment Programmes’ of the World Bank and the IMF: in exchange for debt relief, indebted countries had to pursue austerity policies, privatise state enterprises and liberalise their economies. In the 1990s, global financial markets were further liberalised, creating opportunities for speculative funds to take advantage. This resulted in new debt crises in regions like East Asia. Recently we have also seen the handling of the Greek debt and the severe adjustment package imposed upon Greece.
The QE programmes have placed the financial world in a new phase, leading to the severe risk of another round of debt crises. The surplus of capital and low interest rates are leading to a rise in capital flows to developing countries. This money – in the form of buying government and corporate bonds – has gone to both states and private companies. In contrast to earlier decades, many of these bonds are held by institutional investors such as private pension funds, instead of private or government-backed banks. These investors look to these emerging economies because they can expect higher returns. However, as this money can be easily withdrawn due to the lack of capital controls, this results in ever larger and more aggressive fluctuations of cross-border capital flows. The money can flow in and out within seconds if the yield is bigger elsewhere.
This rising tide of capital flows, in particular in emerging economies, could result in a new period of ‘lost decades’, provoked by debt crises. The International Monetary Fund (IMF) has already issued a warning about very high debt levels for low-income countries. Many companies have very high rates of indebtedness. When investors in developed countries decide to withdraw their investments in emerging economies – due, for example, to higher interest rates – these companies may go bankrupt, which can result in a downward economic spiral.