UPDATING SOME VERY IMPORTANT DATA ...

AM | @agumack

When governments and companies are able to sell bonds in their own currencies, it means that the quality of governance is improving. You can have enormous amounts of local-currency debt, but the source might be state-onwed banks (like in China). Alternatively, governments and companies can issue large amounts of bonds ... in US dollars (or euros). That is why I take the ability to issue local-currency bonds as the litmus test of the quality of governance. I want to thank Prof. John D. Burger at the Sellinger School of Business (Loyola University Maryland) for sending me the revised calculations of the stock of local currency bonds in terms of GDP for a number of countries [1]. The new calculations update the data from one of my favorite articles, published in 2006 [2].

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Speaking of local-currency bonds, there are some interesting news coming from Argentina: the government has just issued a 10-year bond in pesos. While the yield looks pretty high (15.5%), it shows the impact of renewed confidence in the ability of the Argentinean central bank to deal with the country's perennial inflation problem [3].

[1] John D. Burger, Rajeswari Sengupta, Francis E. Warnock, Vernica Cacdac Warnok: "Us Investment in Global Bonds: As the Fed Pushes, Some EMEs Pull", Economic Policy, October 2015.

[2] John D. Burger & Francis E. Warnock: “Local Currency Bond Markets”, IMF Staff Papers, Vol. 53, 2006. This is one of the most striking findings from the paper: "To gauge the importance of various factors, our estimates in column 1 of Table 3 imply that (other things being equal) if Brazil had Denmark’s rule of law, its bond market as a share of GDP would be 43 percentage points higher"

[3] Nicolás Dujovne: "Menos inflación y crédito más barato, claves del porvenir", La Nación, 17 October 2016.
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AN IMPORTANT PAPER!

George Magnus, the UBS advisor, has published an important paper about the so-called 'middle-income trap' (*). The idea is simple enough: developing countries that hit the $12,000/$15,000 level (in terms of GDP per capita) will find it difficult to grow beyond that level if they fail to improve governance:

The appetiser to this discussion is the recent slowdown in growth in China, India, Brazil and elsewhere since 2011, notwithstanding signs of stabilisation in recent months. The cyclical issues are well understood, including weak Western demand. [To escape the middle-income trap, countries must] built trust, rules, good macro, corporate and social governance, and property rights and the rule of law, into national institutions … High levels of prosperity, which are ultimately about investment and innovation, rest on important political foundations, namely strong central government, and inclusive economic, social and political institutions, political checks and balances.

Political checks and balances! I like the idea! In fact, I have cooked up my own Checks and Balances Index [see, in Spanish].

(*) “Hitting a BRIC Wall: the risk of the middle income trap”, UBS Investment Research, 21 January 2013. See also the article: "China can yet avoid a middle-income trap", Financial Times, June 2011: "Richer, more complex economies need high-quality institutions, especially in the legal arena, to sustain human development. This is far more important than national output, steel production or any other metric".
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