Impact investing in Nepal

Here is a piece by Shabda Gyawali, published in Republica, about the prospect of impact investing in Nepal.

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Small is beautiful

by Shabda Gyawali

Foreign Direct Investment (FDI) can bring great advantage to the host country. It fuels economic growth, helps reduce poverty, creates employment opportunities and assists building of physical infrastructures. With the same intention, the government has decided to observe 2012-2013 as Nepal Investment Year and setup Nepal Investment Board (NIB) to spur and facilitate foreign investments in the country.

To attract foreign investment, NIB is launching promotional events like road shows in countries like India, UK and the US. NIB is targeting foreign firms that have the resources to invest in mega projects in sectors like energy, tourism, infrastructure development and commercial agriculture. Dr. Baburam Bhattarai-led cabinet has also passed Investment Board Act, which facilitates investments above Rs. 25 billion through single window policy. A population of 28 million, rising per capita income (mainly due to remittance), demographic dividend, underexplored natural resource, and Non Residential Nepalis’ global network provides enormous market size and opportunities for investors in Nepal.
Having said that, the government and other enthusiasts needs to recognize that simply declaring 2012-2013 as Investment year won’t be enough to attract foreign investment. Capital inflow in a particular country depends on domestic and international macroeconomic situation and investment climate. For a traditional foreign investor the risk in Nepal is very high. According to the World Bank established international sovereign rating standard, Nepal is rated CCC+. With this rating, Nepal is boxed under “High Default risk” category.

Additionally, due to perpetual “in-house” hurdles like militant labor, extortion, local opposition, arbitrary government policies, red tape, corruption, and bandas, Nepal’s foreign private capital attracting capability is also undeveloped and fragile. In 2010, Nepal attracted the least amount of private commercial capital in the South Asian region. According to the World Investment Report 2011, Nepal was ranked 134 out of 141 countries in the Inward FDI Performance Index. Despite the potential market opportunity in Nepal, traditional large scale investors will continue to be reluctant to invest until issues like high investment risk and cost of capital are addressed.

While the government should continue scouting for large scale investors through Nepal Investment Board, it should also create appropriate environment to lure in a small but a growing breed of financers called Impact Investors. These investors are willing to take investment risk in developing countries like Nepal and understand the market dynamics of low income countries to reduce the cost of capital through innovative financial products. The capital they deploy intends to create (beyond financial returns) positive social and environmental impact.

These investors believe in building entrepreneurial culture and invest in small businesses that use market-based approaches to provide scalable solutions to socio-economic problems. Investments are generally made in sectors that serve the people at the base of the economic pyramid (those earning less than US $3,000 per annum). Impact investors target sectors like affordable education, healthcare, renewable energy, access to finance and sustainable agriculture. While government or charity solutions will sometimes provide these products or services, impact investment can complement government and philanthropic capital to reach more people.

In recent year a board range of organisations has shown interest in adopting impact investing model in developing countries. The list includes but is not limited to investment banks, sovereign wealth funds, and endowments, philanthropic foundations and international development organizations. Traditionally, inflow of foreign capital (not including remittance) in developing countries like Nepal has taken place in the form of investment designed to maximize financial returns, with no consideration of its social impacts.

Likewise, foreign aid is structured to maximize social returns, with no expectation of monetary returns. Impact investing provides a platform to blend capital from both foreign aid and foreign investments to support entrepreneurship culture in developing world. The impact investor operates in the missing middle and fills the capital gap above micro-financing and below institutional financing. They structure their investment vehicles (like venture capital/private equity fund and investments in businesses) in the form of equity, quasi-equity and debt. Some of the investors are also willing to accept below-market financial returns in order to maximize social and environmental returns.

To the best of my knowledge, there are no impact investing funds currently operating exclusively in Nepal. However, there are few initiatives in the pipeline. One of them is Ventures Nepal, one of the funds in the International Financial Corporation’s (IFC) SME Ventures program, which will provide risk capital financing and complementary advisory services to small businesses in Nepal. With the fund size of US $10 million, Venture Nepal aims to make risk capital investments of up to US $500,000 in small and medium enterprises (SMEs).

Another is Dolma Development Fund (DDF), structured as a non-profit domiciled in United Kingdom, which is currently raising US $10 million for investment in SMEs in Nepal. DDF plans to deploy the money over a period of 3-5 years with a focus on target sectors like rural connectivity (internet/mobile), healthcare, affordable private education, clean drinking water, eco-tourism and off-grid renewable.

Small businesses are the backbone of any developing economy. Not only do small businesses/startups help job creation and poverty reduction they also bring wealth of replicable innovations to market. Attracting more impact investors in the Nepal means more startups will have access to capital. The scope of impact investing extends beyond meeting capital shortage though; it also includes establishing infrastructure and overlaying networks of intermediaries, institutions and investors.

Thus, one of the top priorities of NIB should be to put in place regulatory incentives and safeguards to attract impact investors. This will help build entrepreneurial culture and provide capital for sustainable growth and job creation. In the short run, it is the small-size foreign investments that will build appropriate FDI friendly environment in Nepal before the country can attract large scale commercial capital.

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Development-led globalization vs. finance-led globalization

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“The term finance-driven globalization characterizes the dominant pattern of international economic relations during the past three decades,” the report says. “This is intended to convey the idea that financial deregulation, concerted moves to open up the capital account and rapidly rising international capital flows have been the main forces shaping global economic integration. . . . Financial markets and institutions have become the masters rather than the servants of the real economy, distorting trade and investment, heightening levels of inequality, and posing a systemic threat to economic stability.”

“Financial and other resources should be channelled towards the right kinds of productive activities. Industrial development remains a priority for many developing countries…but a wider sectoral approach, including a focus on the primary sector in many least developed countries, is needed to ensure that measures to diversify economic activity are consistent with job creation, the security of food and energy supplies, and effective responses to the climate challenge”.

“rebalancing will need a global new deal that can ‘lift all boats’ in developed and developing countries alike. It is a basic truth that people everywhere want the same thing: a decent job, a secure home, a safe environment, a better future for their children and a government that listens to and responds to their concerns.

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Here is more from the latest UNTCAD report titled Development-led globalization: Towards sustainable and inclusive development paths.

Time to set Sustainable Development Goals

With the possibility of recession in the EU and slowdown in major economies, policymakers the world over are looking for pragmatic policy initiatives to avert further hardships brought about by a series of crises—food, fuel, financial, economic, environment and sovereign debt. Given this backdrop and the increasing anxiety over the long term resilience of people and the planet, it is high time the world chose to integrate economic, social and environmental dimensions of development and move on the path of sustainable development, which has been defined as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs".

To this end, recently, the High-level Panel on Global Sustainability urged in its report presented to the UN Secretary-General Ban Ki-moon that in order to achieve sustainable development, the people should be placed at the center of any development strategy. By urging for the integration of social and environmental costs while determining world prices and measuring economic activities, it calls for a set of sustainable development indicators that go beyond the traditional approach of Gross Domestic Product, and recommends that governments develop and apply a set of Sustainable Development Goals that can mobilize global action and help monitor progress.

The 22-member panel, established by the Secretary-General in August 2010 to formulate a new blueprint for sustainable development and low-carbon prosperity, was co-chaired by Finnish President Tarja Halonen and South African President Jacob Zuma. The Panel’s final report, “Resilient People, Resilient Planet: A Future Worth Choosing,” contains 56 recommendations to put sustainable development into practice and to mainstream it into economic policy. If fully implemented, these measures will have profound implications for societies, governments, and businesses.

The report argues that the eradication of poverty and improving equity must remain priorities for the world community and that empowering women and ensuring a greater role for them in the economy is critical for sustainable development. Furthermore, it calls for improving health and education; ending of subsidies on fossil fuels, which is around US$400 billion each year, and agricultural subsidies, which is also around US$400 billion in the OECD countries alone; changing financial market regulation to promote long-term, stable and sustainable investment; improving access clean water, sanitation and food; meeting the Millennium Development Goals (MDGs) and going beyond them; ensuring universal access to affordable sustainable energy by 2030; and having universal telecommunications and broadband access by 2025.

The Panel’s report underscores the importance of science as an essential guide for decision-making on sustainability issues. It calls on the Secretary-General to lead efforts to produce a regular Global Sustainable Development Outlook report that integrates knowledge across sectors and institutions, and to consider creating a Science Advisory Board or Scientific Advisor.

The report provides a timely contribution to preparations for the UN Conference on Sustainable Development (Rio+20) in Brazil in June 2012. A recently leaked draft agenda document for the Rio+20 asks countries to sign up for 10 new sustainable development goals for the planet and promise to build green economies at the first earth summit in 20 years. Importantly, the recommendation of the panel, if implemented, will put the world in a path of sustainable development that will not only propel prosperity, but also ensure measures to sustainably utilize natural resources and environment to meet that end.

As global population reaches 9 billion by 2040 and middle-class consumer increases by 3 billion over the next 20 years, the world will need at least 50 percent more food, 45 percent more energy and 30 percent more water. These cannot be addressed with the existing development paradigm. The world needs to adopt a new approach to the political economy of sustainable development to address the sustainable development challenges in a new and operational way. It is time to work for a sustainable planet, a just society and a growing economy.

Book review: Economic growth and the private sector of Nepal

[This review was published in The Week (Republica), February 2, 2012]

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An attempt to fill the void

Often students and researchers express frustration over the lack of books and journal publications about Nepali economy. It is even harder to get hold of a book that focuses exclusively on economic growth and private sector development in Nepal. Samriddhi, The Prosperity Foundation’s new book Economic Growth and the Private Sector of Nepal attempts to fill that void. Edited by Prateek Pradhan, the book has contributions from eleven authors who look into a range of issues – including economic reforms, stability, tourism, hydropower, state-owned enterprises, financial market, and trade – affecting Nepal’s economic growth and its private sector.

Prem Khanal delves into the resistance to economic reforms and its impact on democracy. He argues that the Panchayat regime plundered the state’s resources to influence the Referendum in 1980 and controlled licenses for production and imports, partially contributing to a balance of payments crisis and macroeconomic instability. This forced the country to knock on the doors of the IMF and the World Bank for loans to balance its budget sheets. No wonder, the Panchayat regime was unhappy with the implementation of Structural Adjustment Program in 1985, which forced austerity measures in a number of areas. The Nepali Congress government headed by the Prime Minister Girija Prasad Koirala enacted liberalization reforms after 1992 by introducing a range of policy reforms related to trade, labor, industry, investment, finance, and currency convertibility. Khanal provides a narrative of the evolution of this process and focuses on how resistance to reforms on three particular aspects –financial, labor, and public enterprises – attenuated faith in democracy.

He argues that it was precisely because of resistance to financial sector reforms that the two largest state-backed banks—Nepal Bank Limited and Rastriya Banijya Bank—failed to recoup bad loans and reduce share of non-performing assets in their portfolio. The resistance came from “financially powerful and politically influential defaulters.” It was aided by the incapacity of the central bank to effectively supervise the building up of bad loans in these banks. As the discussion starts to get interesting and enriching, Khanal stops there, leaving readers to wonder about the nature of resistance to financial reforms and the power dynamics between defaulters and political leaders. On labor reforms, he explains the opposition to change the rigid provisions, such as permanent status and hire and fire rules, in the Labor Act and its impact on industrial production and productivity.

The resistance to such reforms is continuing to this day, something apparent from the fact that the amended Labor Act of 1992 is still not enacted by the Parliament. Meantime, we are seeing the decline of industrial strength and demise of many sectors, chief among them the garment and textiles sector. Similarly, the resistance to restructure and reform financially insolvent and inefficient public enterprises has cost taxpayers billions of Rupees for decades now. Khanal tries to score the point that resistance to reforms has impeded economic growth and prosperity, diminished productive capacity, and fueled public discontent. It would have been even more revealing if Khanal had delved into the dynamics of the power play between interest groups and the political system, and its impact on Nepal’s private sector development. Nevertheless, his chapter is one of the few comprehensive contributions in the book.

Dr. Dandapani Paudel attempts to chart out a new approach to fiscal and monetary policy in general and articulate a new approach to the IMF’s and World Bank’s macro management strategies in particular. He argues that had it not been for remittances, the macroeconomic stability would have been horribly derailed by unsustainably high trade deficit. On top of currency stability, interest rate, fiscal deficit and debt, he outlines a set of additional indicators (inflation, real GDP growth, broad money supply, and trade deficit) to gauge macroeconomic stability. However, these are not new indicators and are in fact a part of the indicators to assess stability. As importantly, he also omits balance of payments (BoP) surplus as an important indicator of stability. It was precisely because of BoP deficit that Nepal took loans from multilateral donors to finance restructuring of the economy in 1985. While discussing the flaws of monetary and fiscal policies, Paudel falls short of linking them to economic growth and elaborate how deterioration of macroeconomic indicators affected private sector development over the years.

Meanwhile, Dr. Durga P. Paudyal reflects on development agendas for New Nepal and its relation to stability, prosperity and equality. He argues that there is no point bashing political leaders who seem to be more responsive to donors than to their own citizens when the entire system is flawed. While outlining how donors are corrupting political leaders and influencing them to be towed along with the donors’ development agendas, Paudyal accentuates the need to have a greater debate on forward-looking development policies. Unfortunately, he fails to provide the baseline arguments for a serious discussion on these issues. Equally importantly, he also falls short of explaining how these will affect stability, prosperity and private sector.

Dipendra Purush Dhakal focuses on tourism policies to spur economic growth. While outlining the evolution of policy initiatives for tourism development, starting with the Tourism Master Plan of 1952 and ending with the Tourism Vision 2020, he argues that the private sector has played a decisive role in this sector by constantly introducing a slew of innovative tourism packages. Dhakal maintains that success of tourism sector should not be measured by the number of tourist arrival, but by tourism receipts, average days of stay, and quality of services. Even though Dhakal emphasizes the role of private sector in tourism development, he overlooks the process of how that happened and in what way the government facilitated or hindered their participation. Gyanendra Lal Pradhan writes about growth through private sector-led hydropower development, which has so far been limited to 174MW. The country needs at least 2,500MW of electricity by 2015 to end load-shedding, and there is no alternative to this source of power supply, given the increasing demand for energy. Pradhan argues that lack of affordable credit, favorable purchasing agreements, and insecurity has been the biggest constraints to private sector-led hydropower development.

Rameshore Prasad Khanal writes about the sorry state of state-owned enterprises (SOEs) due to poor liability management. His contribution is more like a primer on liability management. Not all SOEs, whose contribution is around 11% of the GDP, suffer from the same problems, and liability management is an issue in only some of them. Note that out of the 36 public enterprises, 16 earned profits in 2009/10. A focused discussion on specific liability management issues of key SOEs and the hurdles in correcting them would have been more interesting to readers. The evolving operational domain of private sector and SOEs is also little explored.

Siddhant Raj Pandey writes about the role of financial market openness in capital inflows. He argues that even though the gradual opening up of the financial sector to international players has enhanced value and standard of domestic financial industry, without total capital account convertibility, however, the prospect for huge capital inflows is low. Pandey’s brief contribution lacks the depth needed to understand why capital inflows would remain subdued without total capital account convertibility and whether this is the main indicator looked at by foreign investors to decide on investing in Nepal. Many countries have not fully liberalized capital account, for fear of exchange rate volatility and sudden negative shocks on economy, but still have managed to entice huge sums of foreign investment.

Dr. Jagadish C. Pokharel discusses the benefits of connecting the country with the two bordering economic giants. Pokharel argues that Lumbini, Pokhara, Nijgad, and Kathmandu will be the economic centers in the future if appropriate infrastructure linking the economy with India and China are constructed. The export of herbal products to China and energy to India and tourism to both countries will generate tremendous benefits to the country, he asserts. Pokharel emphasizes the role of infrastructure, the most binding constraint to growth, in spurring growth but does not look at the role of private sector in this endeavor.

Ratish Basnyat has one of the most consistent and comprehensive contributions on international market access for Nepali exports. He outlines a range of supply-side constraints that are hampering exports growth, both in regional as well as international markets, despite being a member of free trade blocs like WTO, SAFTA, and BIMSTEC. He also argues that Nepal’s exports to India failed to pick up steam because our exporters relied more on tariff preference to India rather than increasing competitiveness of products. As the preferences are declining along with the liberalization of Indian economy, Nepali exporters are finding hard to compete there was well. The failure of private sector to read preference erosion correctly and do the needful on their part to sustain exports growth is to blame for the dismal performance. He argues for the creation of Infrastructure Development Fund, skill development, and area-specific product development for industrial and exports promotion.

On the same issue, Tarka Raj Bhatta writes about what needs to be done to boost export diversification and competitiveness. Despite being a very important and profound issue, Bhatta offers general arguments without substantive discussion on the role of private sector and the impact of low export diversification on growth. Finally, Shiv Raj Bhatt tries to explain how the Nepal-USA Trade and Investment Framework Agreement (TIFA) can help revive Nepal’s trade with the US. As with the preceding contribution, Bhatt offers general points without meaty discussion on how exactly Nepal can exploit the provisions in TIFA to boost exports to the US in the face of the slump in exports of garments, our main product of interest in the US market.

In general, the major strength of the book is that now we have a publication about growth and private sector. Apart from the few comprehensive contributions, the book is a disappointment to serious readers who are in hunt for substantive and measured arguments on growth and private sector development. Readers will wonder why the editor did not even have a foreword or an introduction or a chapter contribution. Furthermore, there is serious editing slackness with regard to clarity and consistency of arguments in some chapters (sometimes even in the same paragraphs), lack of complete reference, and up-to-date data. Contributors such as Khanal, Pradhan and Basynat have tried to focus on the core theme, but others have digressed from it, giving readers a sense of a lack of unifying theme or message that relates to the title of the book.

[Published in The Week, Republica, February 3, 2012, p.11]

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South Asian growth prospect: Optimistic & pessimistic scenarios

Ejaz Ghani outlines two scenarios for South Asia: optimistic and pessimistic. Here are the major points:

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Optimistic scenario:

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• The optimistic outlook is based on the favourable structural trends including improved governance, the demographic dividend, the rise of the middle class, and the new faces of globalisation.
• All countries in the region have an elected government for the first time since independence. Governance has improved in two ways that will enhance the politics of democratic accountability. The first is the diminishing importance of identity politics, and the second is that the rates of incumbency – the likelihood of a sitting legislator or state government being re-elected – are down.
• The demographic dividend [=(working-age population)/(non-working age population)*100] will benefit growth not only through the swelling of the labour force, as the baby boomers reach working age, but also due to society’s ability to save more because working age happens to be the prime years for savings, and the increased fiscal space that will divert resources from spending on children to investing in infrastructure and technology.
• A massive shift towards a middle class society is already in the making. India’s middle class (daily expenditure of $10-$100 in PPP terms) will rise more rapidly compared to China, because Indian households will benefit more from growth than Chinese households, given the prevailing distribution of income. The size of the middle class will increase from 60 million in 2010 to more than one billion people by 2025. Growth, education, home ownership, formal-sector jobs, and better economic security are cause and consequence of an expanding middle class.

• The world has already benefited from global capital flows and trade in goods. It is now the turn of trade in services and migration. Technology has enabled services to be digitised, transported, and traded, long distance, at low cost, without compromising on quality. Trade in services are the fastest growing component of world trade during the last two decades. India’s service export is growing at a much faster pace compared to goods export form China.
• Global migration rates have been sluggish over the last 50 years. But this will change. Current demographic trends suggest a rapidly ageing population in OECD countries, and a young population in South Asia. This generates powerful incentives for labour mobility, as well as unique opportunities for improved global efficiency.

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Pessimistic scenario:

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• Growth in the region could be derailed by lopsided spatial transformation, lack of entrepreneurship, large informal sectors, high levels of conflict, gender disparities, and deep pockets of poverty.
• Rapid growth has produced billionaires in India. But, the broad character of the region remains agrarian and rural. This has more to do with the peculiarities of growth patterns -- services-led growth, which is more skill-intensive, compared to manufacturing-led growth, which is less skill-intensive, and the fragmented nature of transformation, than the pace of growth.
• Slow growth in manufacturing despite rapid GDP growth should by itself not be a worry, provided it is not in the way of growth in employment opportunities for unskilled and low-skilled workers at decent wages in industry and services so that these sectors still manage to rapidly pull the underemployed workers in agriculture into gainful employment.

• Entrepreneurship is central to job creation. But South Asia has too few entrepreneurs. While India has a disproportionately high rate of self-employment and many small firms, this has not as readily translated into as many young entrepreneurial firms as could be hoped. Yet there is no question that entrepreneurship works. Formal-sector job growth has been strongest in regions and industries that have exhibited high rates of entrepreneurship and dynamic economies.

• The informal sector remains overwhelmingly large and persistent. Around nine out of ten employees in India do not have formal jobs. What is worrying is that informal employment does not seem to disappear with rapid growth. There is a strong association between informality and poverty.

• South Asia has experienced high levels of internal conflict. Most countries in South Asia are currently immersed in, or are just emerging from, conflicts of varying nature and scope, ranging from the recently ended civil wars in Sri Lanka and Nepal and insurgency in Afghanistan and Pakistan to low-level localised insurgency in India. The result is human misery, destruction of infrastructure and social cohesion, and death. The knock-on effects are huge.

• India, despite reaching middle-income status, is home to the largest concentration of poor people in the world. More than one billion people lived on less than $2 a day in 2005 in South Asia. Nearly 250 million children are undernourished and suffer from hidden hunger. Child mortality and malnutrition levels are among the highest in the world. More than one third of adult women are anaemic. One woman dies every five minutes from preventable, pregnancy-related causes. The share of female employment in total employment is among the lowest in the world.

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How much is India’s software and IT services sector contributing to growth and development?

Countering the claims that India’s India’s Software and Information Technology Services (SWIS) has few forward linkages to Indian firms, uses few domestic inputs, has limited employment effects and prefer foreign clients to domestic ones, Grace Kite argues that this sectors contribution to the Indian economy is now “over twice as large as its share of GDP”, which includes its forward linkages to other firms and its overall demand stimulus. In the financial year 2010-11, it produced US$ 60 billion of output, accounted for a fifth of the country’s exports and employed 2.5 million employees.

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First, how has the domestic market for India’s software and IT services fared? Over 20 years through 2010-11, domestic sales have registered a compound annual rate of growth of over 27%. And since 2005-6, their rate of growth has significantly accelerated, so that it now equals the rate of growth of the sector’s export revenue. The increase in domestic revenue has averaged US$ 1.7 billion per year since that structural turning point.

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Kites estimated that between 2005 and 2008 the impact of the SWIS sector’s domestic forward linkages (financial services, communications and manufacturing) contributed an average 1.3 percentage points per year to the country’s total GDP growth. This represented, on average, about 15% of the total.

Furthermore, regarding backward linkages, Kites argues that in 2005-06, 84% of the combined inputs of SWIS, IT enabled services and business process outsourcing (ITES-BPO)were purchased domestically.

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Taking the direct effect of such purchases plus the indirect impact of the demand generated thereby for other products in the economy, estimates suggest that for every rupee spent on inputs by the SWIS and ITES-BPO sectors in 2005-6, another 0.6 rupee was generated somewhere else in the Indian economy. These combined direct and indirect effects accounted for 2% of India’s GDP.

What about the domestic effect of the consumer spending of SWIS workers? Estimates of this additional demand effect, both direct and indirect, have ranged between 0.6% of GDP (for 2005-6) to 0.75% of GDP (for 2008-9).

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Regarding employment generation, in 2005-6, for example, it was estimated that the SWIS sector (together with ITES-BPO) contributed indirectly to the creation of 3.64 million non-IT jobs.

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This total implies that for every worker employed directly in these IT sectors, jobs were created for an additional two workers in the Indian economy as a whole. The majority of these additional workers had much lower skill and education levels than those in the IT sectors.

The tight labour market for SWIS workers has also led to the rapid rise of educational institutions catering to the employment needs of this sector. India’s colleges and universities now turn out 300,000 technical graduates a year, more than any other country in the world except for China. Hence, employment in the educational sector has been significantly expanded.

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Overall, the sector’s direct impact contributed 4.6% of India’s GDP. The impact of the sector’s forward linkages contributed another 2.8% of GDP. And the effect of its backward linkages contributed an additional 2.7% of GDP. India’s Software and IT Services Sector accounted for 10.1% of India’s GDP in 2005-6. So, its total impact was more than double the size of its own output (i.e., 4.6%).

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There are good reasons to believe that these figures are significant under-estimates. The first reason is that the growth of the sector, as previously stressed, has been particularly rapid since 2005-6. Secondly, these estimates ignore the informal SWIS sector (namely, the effects of those firms not registered with the Indian government).

Lastly, these estimates do not account for indirect forward linkages, which are likely to be substantial. For example, if software and IT services help to improve health services or to enhance the provision of education, the indirect effects on labour productivity are likely to be significant.

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What caused the global financial crisis?

Justin Yifu Lin and Volker Treichel argue that it is not the global imbalances, but excess demand in the US that caused the global financial crisis. Here is an abstract of their recent paper:

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The world is currently still struggling with the aftermath of the worst economic crisis since the Great Depression. Following a description of the eruption, evolution and consequences of the global crisis, this paper reviews alternative hypotheses for the causes of the global financial crisis as well as their empirical evidence. The paper refutes the frequently voiced view that the global crisis was caused by global imbalances that reflected economic policies of East Asian countries. Instead, it argues that global imbalances were the result of excess demand in the United States, resulting from both the public debt in the United States arising from the Afghanistan and Iraqi wars and tax cuts and the overconsumption by households supported by the wealth effect from the housing bubble in the United States. The housing bubble itself was the outcome of the Federal Reserve's low interest rate policy in the aftermath of the burst of the "dot-com" bubble in 2001, the lack of appropriate financial regulation, and housing policies aimed at expanding the mortgage market to low-income borrowers. It was possible to maintain the large trade deficits of the United States for such a long period of time because of the dollar's reserve currency status. When the housing bubble in the United States burst, the global crisis ensued. The paper also analyzes why China's trade surplus increased significantly in general and with the United States in particular in recent years, and argues that this increase was caused by both the relocation of the labor-intensive tradable sector of East Asian economies to China and high corporate saving rates in China as a result of its dual-track approach to reform.

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