EM Systolic Diastolic

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Last March, the global economy experienced a kind of coronary infarction. Covid-19 virulence coursed through the economy, prompting among other things draconian travel barriers and a sharp decline in trade. In its January 2021 World Economic Update release, the International Monetary Fund (IMF) estimates that global trade volumes declined -9.6% during 2020. A definite shock to the system.

For this year, though, the Fund believes that the center has held and that trade conducive conditions obtain. Global trade volumes are expected to recover, with world trade increasing by 8.1% in 2021. There is some rationale to believe so, given the pent-up global demand and responsive businesses around the planet. Ceteris paribus, everything should recover.

And yet, like any system which has undergone stress – has been stressed – the question is whether or not that system has been enervated. Perhaps one can question the fundamental balance of that system – whether it’s the global trading system, the international payments system, or a national political system or economy.

Was that system registering a pre-existing debility in the first place, say a kind of systemic hypertension?

If the answer is “no”, then one might say a natural healing process might be taking place for that system, and it would be reasonable to say so.

The “agents” in that system and of that system would rather feel better, and do better, than do worse. Those agents, or residents, would be reasonably inclined to respond to the system incentives to do so – that is to mend, to improve things, to do better.

Conversely, a system – such as a country – might be enervated from a crisis and its effects, especially if that country does have “pre-existing conditions” which could make recovery much more problematic.

Any investor or lender has to be an empiricist. In a sense, there has to be a “clinical” – which is not really such a nice word – but let’s say instead an “objective” consideration or “due diligence” of a system’s, or a specific country’s prospects and capacity.

One effective country diagnostic could be the World Bank’s periodic updating of its World Governance Indicators (WGI). We have spoken frequently about these metrics and they represent a powerful cross-comparative measure on the quality of a country’s institutions.

A country’s institutions are the rules/agreements that guide and govern how political, economic and legal interactions in that country take place. Where institutions are clear, understood, inclusive and reflect general confidence and compliance (eg “the consent of the governed”), lives of individuals and the life of the commonwealth tend to flourish. Setbacks, or rather crises, such as the Covid Pandemic put country institutional efficacies in sharp relief – do those institutions work or not? Can they provide succour, foster a rally, instill confidence, or not?

And so, understandably with that being said…now this: the daily Financial Times recently reported, “The world should be ready for an emerging market debt crisis as the global economy emerges from the corona virus pandemic and interest rates rise, drawing capital from vulnerable countries, the head of the IMF has warned.”

That head, the Managing Director for the IMF, Kristalina Georgieva, is calling for all hands on deck to brace for impact. The FT further reports, “Georgieva urged IMF member countries to support efforts to relieve pressures in middle- and lower-income countries, including the plan to issue USD 650 bln of new special drawing rights for the fund, which would give countries additional currency reserves without incurring more debt.”

By all means this could be a very good thing – building up resources to support foreign exchange liquidity can be vital to country crisis management. And, according to the Managing Director, managing crisis is critical now, since, as she put it per the Financial Times, “Poorer nations are at risk of missing out what is a historic transformation to a new global economy built on green and digital foundations…”

That sounds hopeful and inspiring, but elides the larger truth. It’s not the risk of a missed digital or green opportunity. So many countries themselves need instead to gauge and foster their institutions, whether there’s a crisis or not.

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