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June 27, 2008

Four Columbia Economists Lead 15th Annual World Congress
of the International Economist Association

Columbia professor and economist Guillermo Calvo, a professor at Columbia’s School of International and Public Affairs (SIPA), is presiding over an international gathering of economists from June 25 to 29 in Istanbul, Turkey, to discuss the challenges of globalization. He has been president of the International Economists Association (IEA) since 2003. The purpose of the association’s annual meeting is to bring economists together to discuss pressing international economic issues.

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Professor Guillermo Calvo on "Emerging Markets and the Subprime Crisis" at an April 24 conference at Columbia University
Video courtesy of SIPA

The IEA was founded in 1950 by UNESCO for the purpose of bringing economists together from around the world in order to foster mutual understanding among them through the conduct of scientific meetings, both regional and international. Members represent universities, think tanks, world banking and government banking institutions, including the Inter-American Development Bank, International Monetary Fund and the World Bank, among many others.  The Istanbul World Congress is the 15th international meeting of the IEA since it was established in 1950.

He is joined by three eminent Columbia economists—Ronald Findlay, Arvind Panagariya and Joseph Stiglitz, who won the Nobel Prize in economics in 2001. These four economists are the keynote speakers at four of the six individual plenary sessions at the global meeting.

“There are so many highly regarded people at Columbia in different stages of their careers, all with substantial credentials in international finance,” Calvo said. “It reflects on Columbia’s prestigious standing, which has a nucleus of very qualified economists.”

Calvo is also director of Columbia’s mid-career Program in Economic Policy Management and served previously as chief economist of the Inter-American Development Bank.

Main themes of the meeting’s more than 81 panels focus on international finance, migration, global imbalances, as well as the role of the state and institution in a globalized environment, political economic considerations, and macroeconomic policy. The economic situations of China, India, Latin America, Europe, Turkey and the U.S. will be examined by participants through the lens of globalization and the dynamics that play out in international markets and monetary systems, and how state institutions deal with these challenges, especially in emerging market economies.

The globalization of the economy has been dramatically affected by the subprime mortgage markets collapse, which is the subject of Calvo’s keynote address in Istanbul.

“The global economy is hot, hot, hot,” said Calvo. “Between the subprime mortgage collapse that continues in the G-7 countries—U.S., Britain for example—and the recent explosive spike in world prices of food and oil, things could not get hotter.”

What caught policy makers and financial experts by surprise earlier this year about the subprime mortgage collapse, Calvo said, was the substantial risk held by banks who had deeply invested in subprime mortgage markets to make money. When the bubble burst and the subprime mortgage markets collapsed, it prompted central banks like the U.S. Federal Reserve to lend to J.P. Morgan Chase to bail out Bear Stearns on Wall Street by aggressively pumping in cash in large amounts. This brought some relief to credit markets and prevented a massive contagion that Calvo said could have potentially brought down the entire financial system in the U.S.

“The subprime mortgage collapse has not involved countries in the South,” Calvo said.  “Following the 1998 economic crisis, Southern countries like Korea, Thailand, and Brazil worked with the International Monetary Fund to restructure their financial systems and created much stronger international reserves, but not by investing in credit markets, unlike the G-7 countries.”

The price increases in commodities like oil, soybeans, wheat and metals have actually increased these countries’ savings with their surpluses looking very strong, in the midst of economic turmoil in the G-7 countries, Calvo said.

The vexing problem that now confronts developed countries is that they run the risk of escalating inflation, which accompanies increased prices of food, for example, while wages remain stagnant. According to Calvo, the U.S. and other G-7 countries will need to tighten up monetary policy by raising interest rates.

Ben Bernanke, the chair of the U.S. Federal Reserve Board, has indicated he is prepared to change policy if there are negative developments in the future with regard to inflation. Calvo believes there is room for an anti-inflationary battle.

“I would expect that Bernanke will wait until after the presidential elections to raise interest rates at least 4 to 5 percent,” Calvo said. “If financial vulnerabilities remain unresolved, even if interest rates are sharply increased, the U.S. economy risks a deepening recession.”

Story by Tanya Domi