Isard, P. 2005. Globalization and the international financial system. Cambridge New York.
Ch. 2: The Evolution of the International Monetary System
"At the core of the international financial system is a set of official institutions and arrangements that govern payments between nations and exchange rates among currencies--a core referred to as the international monetary system" (13).
This system promotes stable exchanges of currencies, which is seen to expand international trade, which is then seen as driving economic growth and improved living standards.
The policy trilemma was explored explicitly by Mundell and Flemming in papers written in the early 1960s, but also must have been at least tacitly held by the framers of the IMF in the 1940s: the system was designed to achieve fixed exchange rates, domestic monetary and fiscal autonomy and constrained capital mobility.
The Gold Standard system that existed from 1870-WWI was based on convertibility of currency to gold reserves. This system suffered crises, which were mitigated in part through the cooperation of major players in the monetary system. "As these episodes suggest, preservation of the international gold standard regime required the core countries of the system not only to cooperate to help each other in times of crisis but also to accommodate over time the growing and somewhat volatile demand for gold in countries on the periphery of the system, including the United States...A second factor that contributed importantly to the credibility and longevity of the gold standard regime was a social and political environment in which it was feasible for national monetary authorities to give the maintenance of currency convertibility precedence over other possible goals of economic policy" (17).
After WWI, and a temporary stoppage of currency convertibility, countries began to return to the gold standard. First the US, and then other European countries pegged their currencies to gold and established currency exchanges, etc. The US left in 1933.
Then, after 1929, a global depression took hold, with production falling by a full 26%. "At least seven countries left the gold standard between 1929 and August 1931" (24).
During WWII, there were very tight exchange pegs.
At the end of WWII, the Bretton Woods institutions were formed, with an eye towards bridging the divide between those who ardently supported free trade agendas, and those who believed in full employment and government spending. "The outcome was a managed multilateral system that left individual countries with considerable autonomy to pursue domestic economic policy objectives but subjected their exchange rate practices and international trade and payments restrictions to international agreement" (28).
"Through period adjustments of exchange rates pegs and a resort to capital controls, the Bretton Woods system survived for a quarter century. The demise came after internationally mobile private capital had grown substantially in both volume and agility, thereby becoming a major force that was difficult to control" (30).
"The policy-oriented literature of the 1960s characterized the prevailing international monetary system as incapable of simultaneously resolving the problems of liquidity, adjustment, and confidence. With the production of new gold being inadequate to meet the increasing demand for official international reserves in a growing world economy, and with gold and reserve currencies comprising the principal reserve assets in the international monetary system, the liquidity problem could be solved, or so it was perceived, in only two ways: by continuing to increase the liabilities of the reserve-currency countries, especially those of the United States, or by raising the purchasing power of gold. This choice presented what was known as the Triffin dilemma. The first solution would lead to a persistent balance of payments deficit for the United States on an official settlements basis, which many economists viewed as an adjustment problem. The second solution, moreover, would create a confidence problem, undermining faith in the reserve system. In particular, an increase in the official dollar price of gold...could induce attempts by foreign governments to convert their dollar reserve holdings into gold and would also induce speculative investments in gold by private market participants. This would rapidly drain the gold reserves of the United States and destroy the ability of the US authorities to defend any fixed gold parity for the dollar" (32-3).
In order to solve this conundrum, special drawing rights (SDRs) were created. This was a new asset held by the IMF in reserve.
The Euro-Dollar market was created. These were dollars held in banks primarily in Britain. This eventually led to speculation on the dollar that caused Nixon to suspend convertibility in 1971. By 1973 the international monetary system had moved to a floating exchange rate system.
In the 70s, the countries of Europe moved towards creating a monetary union.
The remainder of the chapter deals with the different kinds of forms that monetary systems and policies can take in the post-Bretton Woods system, as well as the implications of moving to fiat money and relatively floating exchange rates.
Friday, January 30, 2009
Grabel: Trip Wires and Speed Bumps
Grabel, I, United Nations Conference on Trade and Development, Group of Twenty-four, and Intergovernmental Group of Twenty-four on International Monetary Affairs. 2004. Trip wires and speed bumps: managing financial risks and reducing the potential for financial crises in developing economies. United Nations.
There are four things outlined in the abstract that are accomplished by this paper: "First, it demonstrates that efforts to develop EWS [early warning systems] for banking, currency and generalized financial crises in developing countries have largely failed...Second, the paper advances an approach to managing financial risk through trip wires and speed bumps. Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed...Third...the proposal for a trip wire-speed bump regime is not intended as a means to prevent all financial instability and crises in developing countries...Fourth, the paper responds to likely concerns about the response of investors, the IMF and powerful governments to the trip wire-speed bump approach" (abstract).
It is assumed that there is a link between financial liberalization and financial crises. It is also assumed that developing countries are keen to avoid financial crises, as recoveries can be quite difficult.
"Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed. Among the most significant of these vulnerabilities are the risk of large-scale currency depreciations, the risk that domestic and foreign investors and lenders may suddenly withdraw capital, the risk that locational and/or maturity mismatches will induce debt distress, the risk that non-transparent financial transactions will induce financial fragility, and the risk that a country will suffer the contagion effects of financial crises that originate elsewhere in the world or within particular sectors of their own economies" (2).
EWS models have an incredibly poor track record. When a model is calibrated to be able to identify a crisis, it is thus tuned to a certain set of circumstances and is unable to predict subsequent crises.
"I argue that the failings of existing predictive models stem from the fact that they are based on six misguided initial assumptions" (6).
The assumptions about informational accuracy are too rigid, the people analyzing the data do not take into consideration that the analysis and the economy are overdetermined, crises do not have the same set of causal drivers, crises will not be averted with EWS systems, it has never been possible to predict economic tipping events, and investors do not necessarily have to respond to increased information with stabilizing actions.
The trip wire solution proposed by the author is distinct from the EWS method. Trip wires are diagnostic tools. They are designed to potentially stop market transactions when a certain point has been reached. They can be designed to solve a variety of problems associated with financial crises.
Speed bumps work in conjunction with trip wires: "Speed bgumps are narrowly targeted, gradual changes in policies and regulations that are activated whenever trip wires reveal particular vulnerabilities" (11).
There are four things outlined in the abstract that are accomplished by this paper: "First, it demonstrates that efforts to develop EWS [early warning systems] for banking, currency and generalized financial crises in developing countries have largely failed...Second, the paper advances an approach to managing financial risk through trip wires and speed bumps. Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed...Third...the proposal for a trip wire-speed bump regime is not intended as a means to prevent all financial instability and crises in developing countries...Fourth, the paper responds to likely concerns about the response of investors, the IMF and powerful governments to the trip wire-speed bump approach" (abstract).
It is assumed that there is a link between financial liberalization and financial crises. It is also assumed that developing countries are keen to avoid financial crises, as recoveries can be quite difficult.
"Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed. Among the most significant of these vulnerabilities are the risk of large-scale currency depreciations, the risk that domestic and foreign investors and lenders may suddenly withdraw capital, the risk that locational and/or maturity mismatches will induce debt distress, the risk that non-transparent financial transactions will induce financial fragility, and the risk that a country will suffer the contagion effects of financial crises that originate elsewhere in the world or within particular sectors of their own economies" (2).
EWS models have an incredibly poor track record. When a model is calibrated to be able to identify a crisis, it is thus tuned to a certain set of circumstances and is unable to predict subsequent crises.
"I argue that the failings of existing predictive models stem from the fact that they are based on six misguided initial assumptions" (6).
The assumptions about informational accuracy are too rigid, the people analyzing the data do not take into consideration that the analysis and the economy are overdetermined, crises do not have the same set of causal drivers, crises will not be averted with EWS systems, it has never been possible to predict economic tipping events, and investors do not necessarily have to respond to increased information with stabilizing actions.
The trip wire solution proposed by the author is distinct from the EWS method. Trip wires are diagnostic tools. They are designed to potentially stop market transactions when a certain point has been reached. They can be designed to solve a variety of problems associated with financial crises.
Speed bumps work in conjunction with trip wires: "Speed bgumps are narrowly targeted, gradual changes in policies and regulations that are activated whenever trip wires reveal particular vulnerabilities" (11).
Babb and Buria: Mission Creep, Mission Push and Discretion in Sociological Perspective: The Case of IMF Conditionality
Babb, S, and A Buira. 2004. Mission Creep, Mission Push and Discretion in Sociological Perspective: The Case of IMF Conditionality. In , 24:8-9.
"A term that has gained popularity among World Bank and IMF critics is 'mission creep,' or the systematic shifting of organizational activities away from original mandates" (2).
"The IMF's original purpose as it was conceived in 1944 was to establish a code of conduct that would enhance economic cooperation, and avoid the 'beggar-the-neighbor' policies that led to the economic turbulence of the thirties. This code of conduct required members to establish par values...and to work toward lifting restrictions on past payments...Over time, however, the functions and activities of the Fund changed along with the introduction and expansion of 'conditionality'--the policy measures member countries must adopt in order to have access to the IMF's resources" (2).
Critics of the IMF point to this mission creep as being fundamentally problematic. However, these authors argue that it is not unique to the IMF. In fact, institutional sociologists have experienced the creeping kind of nature within institutions for some time. While institutions are created for a certain purpose, they certainly morph into their own entities that pursue their own ends irrespective of the reasons for their initial creation. In fact, these institutions become much more keenly interested in their own survival than anything that may tie them to their original mandate.
"This paper examines historical evidence of mission creep at the IMF, and explores the organizational dynamics that may have contributed to this process...Synthesizing this evidence, we describe and account for three separate phases in the expansion of conditionality: the establishment of fiscal and monetary conditions in the 1950s; the introduction o debt-related conditions in the 1970s; and the introduction of liberalizing, governance, and a host of other reforms since the 1980s.
"In contrast to these two first phases, we argue that the most recent phase has marked a significant break with the past. Whereas the first period in the Fund's evolution was associated with the development of standardized rules, this latest stage is linked to the rise of 'discretional conditionality:' the increased dependence of disbursements and lending arrangements on the judgments of Management and Staff, rather than on clear rules determined at the outset. We conclude that this reversal cannot be attributed primarily to internal bureaucratic factors, but rather responded to the demands of the Fund's most powerful organizational constituent: the US Treasury. Thus, 'mission push' seems to be the most accurate way of describing recent developments in IMF conditionality" (4).
The evidence for this is presented systematically. I will not document it here.
"A term that has gained popularity among World Bank and IMF critics is 'mission creep,' or the systematic shifting of organizational activities away from original mandates" (2).
"The IMF's original purpose as it was conceived in 1944 was to establish a code of conduct that would enhance economic cooperation, and avoid the 'beggar-the-neighbor' policies that led to the economic turbulence of the thirties. This code of conduct required members to establish par values...and to work toward lifting restrictions on past payments...Over time, however, the functions and activities of the Fund changed along with the introduction and expansion of 'conditionality'--the policy measures member countries must adopt in order to have access to the IMF's resources" (2).
Critics of the IMF point to this mission creep as being fundamentally problematic. However, these authors argue that it is not unique to the IMF. In fact, institutional sociologists have experienced the creeping kind of nature within institutions for some time. While institutions are created for a certain purpose, they certainly morph into their own entities that pursue their own ends irrespective of the reasons for their initial creation. In fact, these institutions become much more keenly interested in their own survival than anything that may tie them to their original mandate.
"This paper examines historical evidence of mission creep at the IMF, and explores the organizational dynamics that may have contributed to this process...Synthesizing this evidence, we describe and account for three separate phases in the expansion of conditionality: the establishment of fiscal and monetary conditions in the 1950s; the introduction o debt-related conditions in the 1970s; and the introduction of liberalizing, governance, and a host of other reforms since the 1980s.
"In contrast to these two first phases, we argue that the most recent phase has marked a significant break with the past. Whereas the first period in the Fund's evolution was associated with the development of standardized rules, this latest stage is linked to the rise of 'discretional conditionality:' the increased dependence of disbursements and lending arrangements on the judgments of Management and Staff, rather than on clear rules determined at the outset. We conclude that this reversal cannot be attributed primarily to internal bureaucratic factors, but rather responded to the demands of the Fund's most powerful organizational constituent: the US Treasury. Thus, 'mission push' seems to be the most accurate way of describing recent developments in IMF conditionality" (4).
The evidence for this is presented systematically. I will not document it here.
Boughton: From Suez to Tequila
Boughton, JM. 2000. From Suez to Tequila: IMF as Crisis Manager. The Economic Journal 110: 273-291.
This paper explores the changing role of the IMF. It was initially created, in 1944, to provide resources in a short-term fashion to shore up economies.
"What brought Mexico to seek the assistance of the Fund was a formerly latent balance of payments problem that swiftly became manifest in response to a financial crisis, which shall be defined here as a sudden and catastrophic loss of net international assets that makes continuation of the existing policy regime impossible" (275).
The Fund was originally created in a world of limited capital mobility. That world clearly no longer exists in the same way, as capital movement is much less restricted.
"During the first decade of the IMF's life as a financial institution, what little lending the Fund did was aimed at helping countries establish currency convertibility for current account transactions at fixed exchange rate parities" (279).
In 1956, Egypt required the Fund's first major allotment of capital. This occurred because the Egyptian government nationalized the Suez canal, and French, British and Israeli governments attacked. Each of these four countries approached the Fund.
"The capital accounts as an independent force became a more general issue in the early 1960s, after most industrial countries had reestablished convertibility for current account transactions. When countries with the most advanced financial systems began dismantling capital controls, the Fund treated it as a welcome development and thus began to distance the institution further from the view that had prevailed at Bretton Woods" (281). This loosening of capital controls caused tension, eventually leading to the collapse of the Gold Pool, the institution of developed countries that attempted to keep the price of gold at 35$ an ounce.
After the collapse of the Gold Standard, in 1971 with Nixon separating the dollar from gold and in 1973 with the exchange market crisis, the world of international finance changed drastically.
"The major turning point both for the international financial system and for the crisis-management role of the IMF came in 1982" (284). Banks stopped lending.
The IMF response was large, and paved the way for IMF responses throughout the 1990s.
This paper explores the changing role of the IMF. It was initially created, in 1944, to provide resources in a short-term fashion to shore up economies.
"What brought Mexico to seek the assistance of the Fund was a formerly latent balance of payments problem that swiftly became manifest in response to a financial crisis, which shall be defined here as a sudden and catastrophic loss of net international assets that makes continuation of the existing policy regime impossible" (275).
The Fund was originally created in a world of limited capital mobility. That world clearly no longer exists in the same way, as capital movement is much less restricted.
"During the first decade of the IMF's life as a financial institution, what little lending the Fund did was aimed at helping countries establish currency convertibility for current account transactions at fixed exchange rate parities" (279).
In 1956, Egypt required the Fund's first major allotment of capital. This occurred because the Egyptian government nationalized the Suez canal, and French, British and Israeli governments attacked. Each of these four countries approached the Fund.
"The capital accounts as an independent force became a more general issue in the early 1960s, after most industrial countries had reestablished convertibility for current account transactions. When countries with the most advanced financial systems began dismantling capital controls, the Fund treated it as a welcome development and thus began to distance the institution further from the view that had prevailed at Bretton Woods" (281). This loosening of capital controls caused tension, eventually leading to the collapse of the Gold Pool, the institution of developed countries that attempted to keep the price of gold at 35$ an ounce.
After the collapse of the Gold Standard, in 1971 with Nixon separating the dollar from gold and in 1973 with the exchange market crisis, the world of international finance changed drastically.
"The major turning point both for the international financial system and for the crisis-management role of the IMF came in 1982" (284). Banks stopped lending.
The IMF response was large, and paved the way for IMF responses throughout the 1990s.
Thursday, January 29, 2009
Evans and Finnemore: Organizational Reform and the Expansion of the South's Voice at the Fund
Evans, P, M Finnemore, Harvard University. Center for International Development, UNCTAD. Project of Technical Support to the Intergovernmental Group of Twenty-four on International Monetary Affairs and Development, and UNCTAD. 2001. Organizational Reform and the Expansion of the South's Voice at the Fund. United Nations.
"In this paper we argue that a variety of organizational changes are both feasible and could substantially increase the ability of developing countries to articulate policy alternatives and advance change. We focus particularly on changes in the recruitment, training, career paths and deployment of the Fund's staff. Our recommendations address two general issues. First, we explore ways to diversity the 'intellectual portfolio' of the staff by drawing more effectively on hands-on knowledge of the concrete circumstances that shape policy outcomes in the South....Second, large asymmetries in workload currently make it difficult for those working on the needs of developing members to formulate and advocate alternative policies. We suggest a number of ways in which even modest reallocation and addition of staff resources might create breathing space that would allow Executive Directors from developing countries to play a larger role in shaping the Fund's policies" (from abstract).
The first suggestion requires a substantive restructuring of the Fund's organization. The second is perhaps a simpler fix. Both of these fixes requires political capital to be spent.
The authors argue that The Fund should represent a unique source of global human capital, as it is comprised of hundreds of the best economists in the world. However, this is not how The Fund is seen by policy makers who are compelled to work within its constraints. This can be reconciled with a more granular approach to assessing different fund prescriptions that relies on local knowledge and resources.
The Fund is also not governed according to the principle of one state, one vote. Instead, voting takes place based on the amount of money that countries have given to Fund reserves. This is then exacerbated by the amount of consensus needed to reach agreements: a full 85%. With a voting bloc that is larger than 15%, the US effectively wields a veto hammer for all Fund decisions.
The degree of professional homogeneity at the Fund is also remarkable: almost all of its staff are Western trained macro-economists.
"In this paper we argue that a variety of organizational changes are both feasible and could substantially increase the ability of developing countries to articulate policy alternatives and advance change. We focus particularly on changes in the recruitment, training, career paths and deployment of the Fund's staff. Our recommendations address two general issues. First, we explore ways to diversity the 'intellectual portfolio' of the staff by drawing more effectively on hands-on knowledge of the concrete circumstances that shape policy outcomes in the South....Second, large asymmetries in workload currently make it difficult for those working on the needs of developing members to formulate and advocate alternative policies. We suggest a number of ways in which even modest reallocation and addition of staff resources might create breathing space that would allow Executive Directors from developing countries to play a larger role in shaping the Fund's policies" (from abstract).
The first suggestion requires a substantive restructuring of the Fund's organization. The second is perhaps a simpler fix. Both of these fixes requires political capital to be spent.
The authors argue that The Fund should represent a unique source of global human capital, as it is comprised of hundreds of the best economists in the world. However, this is not how The Fund is seen by policy makers who are compelled to work within its constraints. This can be reconciled with a more granular approach to assessing different fund prescriptions that relies on local knowledge and resources.
The Fund is also not governed according to the principle of one state, one vote. Instead, voting takes place based on the amount of money that countries have given to Fund reserves. This is then exacerbated by the amount of consensus needed to reach agreements: a full 85%. With a voting bloc that is larger than 15%, the US effectively wields a veto hammer for all Fund decisions.
The degree of professional homogeneity at the Fund is also remarkable: almost all of its staff are Western trained macro-economists.
Cooper: Chapter 11 for Countries
Cooper, RN. 2002. Chapter 11 for Countries. Foreign Affairs 81: 90.
This article explores the possibility of a changing IMF policy towards debtor nations: let them temporarily suspend payments to the creditor in order to get things in order and resume payments. In essence, it is, as the title of the article indicates, the ability for countries to file for bankruptcy.
This would allow countries who fall on hard times to avoid the rush of creditors attempting to get their assets as quickly as possible. Also, if this type of provision follows US bankruptcy law, it would allow a majority of creditors to determine the repayment structure. Currently, countries must pay back and renegotiate with all of the different creditors separately.
The remainder of the article discussed two things: the exact mechanics of how a Chapter 11 type of provision within the IMF would take form and the nature of financial crises.
This article explores the possibility of a changing IMF policy towards debtor nations: let them temporarily suspend payments to the creditor in order to get things in order and resume payments. In essence, it is, as the title of the article indicates, the ability for countries to file for bankruptcy.
This would allow countries who fall on hard times to avoid the rush of creditors attempting to get their assets as quickly as possible. Also, if this type of provision follows US bankruptcy law, it would allow a majority of creditors to determine the repayment structure. Currently, countries must pay back and renegotiate with all of the different creditors separately.
The remainder of the article discussed two things: the exact mechanics of how a Chapter 11 type of provision within the IMF would take form and the nature of financial crises.
Pauly: Opening Financial Markets
Pauly, LW. Opening financial markets. Cornell University Press.
"Technological innovation, market deepening, and capital mobility are widely credited with linking formerly discrete markets so inextricably that a truly global financial marketplace has finally emerged. That marketplace, it is often said, now overwhelms the political forces that once clearly controlled it. National governments are seen to be fundamentally constrained" (1).
However, this may be quite simplistic. Look, for example, at a case where a company from one country attempts to buy assets in another company (a bank, or ports, for example). The reaction that is created is indicative of the continued importance of the political within this process. This text explores these issues.
"Through an examination of a key aspect of increasing international financial interdependence--the institutional interpenetration of banking markets in advanced capitalist countries--this book demonstrates that considerable distance remains between the vision of a truly global market and contemporary reality" (1-2).
The global village of finance is not something that evolves without constraint from the political process. In fact, the political process is instrumental in the creation of this global village. This book explores how that international community of financiers and financial institutions has been changing; how this group with relatively uniform interests has moved to decrease things like heterogeneity in regulatory frameworks and instruments. What is the process of policy convergence vis-a-vis banks in this era of globalization?
Another interrelated focus of this work is the banking sector. Banks are creatures of states, and thus contain a certain amount of institutional uniqueness in relation to the charge for which they were created. Banks are also unique institutions, as they represent a kind of nexus between the political power and the economic power that seem to butt heads in these debates about national autonomy and international financial deregulation.
A history of bank and finance regulation is glossed over nicely: "Among the countries examined in the following chapters, a tacit consensus emerged around regulatory norms that allowed enduring pressures of nationalism, competition, and integration to coexist in the banking sector. Comparable domestic regulatory policies converged toward an acceptance of market openness. They did so by extending the scope of nondiscriminatory treatment for foreign institutions operating in national markets and by rendering more equivalent the conditions of access across those markets. By the late 1980s effectively reciprocal developments created a normative base that helped sustain the institutional interpenetration of markets still structurally distinct. The character of those developments provided evidence that states remain the central actors in the real global village" (7).
"Although the United States, Japan, Canada, and Australia developed access policies within unique domestic structures, the convergence of policy toward more common standards of regulatory treatment suggests an overarching process of interstate communication. The four states did not simply set ground rules for foreign banks interested in operating inside controlled markets. They communicated expectations to one another, and through their actual practices began to create an intersubjective normative framework that helped stabilize their relations in this sector" (177-8).
"After three decades of policy development, the institutional interpenetration of national banking markets in the advanced industrial world is now well developed. Convergent domestic laws and practices are creating a basic normative foundation for necessary interstate coordination on market access issues. Increasingly accepted regulatory standards, embedded in unique domestic structures, are important elements in any evolving process through which competition in one sector of modern capitalism is broadened and equilibrated by the interaction of the states at its core" (184-5).
"Technological innovation, market deepening, and capital mobility are widely credited with linking formerly discrete markets so inextricably that a truly global financial marketplace has finally emerged. That marketplace, it is often said, now overwhelms the political forces that once clearly controlled it. National governments are seen to be fundamentally constrained" (1).
However, this may be quite simplistic. Look, for example, at a case where a company from one country attempts to buy assets in another company (a bank, or ports, for example). The reaction that is created is indicative of the continued importance of the political within this process. This text explores these issues.
"Through an examination of a key aspect of increasing international financial interdependence--the institutional interpenetration of banking markets in advanced capitalist countries--this book demonstrates that considerable distance remains between the vision of a truly global market and contemporary reality" (1-2).
The global village of finance is not something that evolves without constraint from the political process. In fact, the political process is instrumental in the creation of this global village. This book explores how that international community of financiers and financial institutions has been changing; how this group with relatively uniform interests has moved to decrease things like heterogeneity in regulatory frameworks and instruments. What is the process of policy convergence vis-a-vis banks in this era of globalization?
Another interrelated focus of this work is the banking sector. Banks are creatures of states, and thus contain a certain amount of institutional uniqueness in relation to the charge for which they were created. Banks are also unique institutions, as they represent a kind of nexus between the political power and the economic power that seem to butt heads in these debates about national autonomy and international financial deregulation.
A history of bank and finance regulation is glossed over nicely: "Among the countries examined in the following chapters, a tacit consensus emerged around regulatory norms that allowed enduring pressures of nationalism, competition, and integration to coexist in the banking sector. Comparable domestic regulatory policies converged toward an acceptance of market openness. They did so by extending the scope of nondiscriminatory treatment for foreign institutions operating in national markets and by rendering more equivalent the conditions of access across those markets. By the late 1980s effectively reciprocal developments created a normative base that helped sustain the institutional interpenetration of markets still structurally distinct. The character of those developments provided evidence that states remain the central actors in the real global village" (7).
"Although the United States, Japan, Canada, and Australia developed access policies within unique domestic structures, the convergence of policy toward more common standards of regulatory treatment suggests an overarching process of interstate communication. The four states did not simply set ground rules for foreign banks interested in operating inside controlled markets. They communicated expectations to one another, and through their actual practices began to create an intersubjective normative framework that helped stabilize their relations in this sector" (177-8).
"After three decades of policy development, the institutional interpenetration of national banking markets in the advanced industrial world is now well developed. Convergent domestic laws and practices are creating a basic normative foundation for necessary interstate coordination on market access issues. Increasingly accepted regulatory standards, embedded in unique domestic structures, are important elements in any evolving process through which competition in one sector of modern capitalism is broadened and equilibrated by the interaction of the states at its core" (184-5).
Wednesday, January 28, 2009
Fischer: In Defense of the IMF
Fischer, S. 1998. In Defense of the IMF-Specialized Tools for a Specialized Task. Foreign Affairs 77, no. 4: 103-6.
"Martin Feldstein makes three criticisms of the International Monetary Fund's remedies for the Asian crisis...First, he argues that they are simply the same old IMF austerity medicine, inappropriately dispensed to countries su8ffering from a different malady. Second--and the main theme--he contends that by including in the program a number of structural elements, the IMF is unwisely going beyond its essential task of correcting the balance of payments and intruding into the countries' political processes. Third, he is troubled by the problem of moral hazard--the bailout issue" (103).
Fischer argues that the first two considerations are linked: the structural elements make IMF policies towards SE Asia very different from previous IMF SAP applications, and that the structural elements must be addressed in order for crises like this to not happen in the future. As to the issue of moral hazard, it is, according to this author, overstated.
This crisis stemmed from the following: "First, Thailand and other countries were showing signs of overheating in the form of large trade deficits and real estate and stock market bubbles. Second, pegged exchange-rate regimes had been maintained for too long, encouraging heavy external borrowing, which led, in turn, to excessive foreign exchange risk exposure on the part of domestic financial institutions and corporations. Third, lax prudential rules and financial oversight had permitted the quality of banks' loan portfolios to deteriorate sharply" (104).
Fischer argues that, though Feldstein proposed three questions that the IMF should consider before prescribing structural adjustment, each of these miss the most important question: "Does the program address the underlying causes of the crisis?" (105). "Financial sector and other structural reforms are vital to the reform programs of Thailand, Indonesia, and South Korea because the problems of weak financial institutions, inadequate bank regulation and supervision, and the complicated and non-transparent relations among governments banks, and corporations were central to the economic crisis. IMF lending to these countries would serve no purpose if these problems were not addressed. Nor would it be in the countries' interest to leave the structural and governance issues aside: markets are skeptical of halfhearted reform efforts" (105).
"Martin Feldstein makes three criticisms of the International Monetary Fund's remedies for the Asian crisis...First, he argues that they are simply the same old IMF austerity medicine, inappropriately dispensed to countries su8ffering from a different malady. Second--and the main theme--he contends that by including in the program a number of structural elements, the IMF is unwisely going beyond its essential task of correcting the balance of payments and intruding into the countries' political processes. Third, he is troubled by the problem of moral hazard--the bailout issue" (103).
Fischer argues that the first two considerations are linked: the structural elements make IMF policies towards SE Asia very different from previous IMF SAP applications, and that the structural elements must be addressed in order for crises like this to not happen in the future. As to the issue of moral hazard, it is, according to this author, overstated.
This crisis stemmed from the following: "First, Thailand and other countries were showing signs of overheating in the form of large trade deficits and real estate and stock market bubbles. Second, pegged exchange-rate regimes had been maintained for too long, encouraging heavy external borrowing, which led, in turn, to excessive foreign exchange risk exposure on the part of domestic financial institutions and corporations. Third, lax prudential rules and financial oversight had permitted the quality of banks' loan portfolios to deteriorate sharply" (104).
Fischer argues that, though Feldstein proposed three questions that the IMF should consider before prescribing structural adjustment, each of these miss the most important question: "Does the program address the underlying causes of the crisis?" (105). "Financial sector and other structural reforms are vital to the reform programs of Thailand, Indonesia, and South Korea because the problems of weak financial institutions, inadequate bank regulation and supervision, and the complicated and non-transparent relations among governments banks, and corporations were central to the economic crisis. IMF lending to these countries would serve no purpose if these problems were not addressed. Nor would it be in the countries' interest to leave the structural and governance issues aside: markets are skeptical of halfhearted reform efforts" (105).
Feldstein: Refocusing the IMF
Feldstein, M. 1998. Refocusing the IMF. Foreign Affairs 77, no. 2: 20-33.
"The IMF's recent emphasis on imposing major structural and institutional reforms as opposed to focusing on balance-of-payments adjustments will have adverse consequences in both the short term and the more distant future. The IMF should stick to its traditional task of helping countries cope with temporary shortages of foreign exchange and with more sustained trade deficits" (20).
"Today's emphasis on structural and institutional reforms has not always been part of IMF programs. The IMF was founded in 1945 to help operate a system of fixed exchange rates, in which all currencies were pegged to the dollar, in turn fixed with respect to gold, that experts then considered necessary to encourage international trade. Although that system succeeded temporarily, differences in inflation between countries forced many to alter their currency values. When the fixed system collapsed completely in 1971, the IMF was forced to find a new raison d'être" (20).
Their new motivation can be seen as building from the Mexico financial crisis. Mexico indicated that it would be unable to satisfy its international commitments. If they were to default on this loan, that had the potential to push many US banks into insolvency, as it would have wiped out a substantial chunk of credit. The US provided a bridge loan to Mexico so that they would be able to pay back these loans eventually. Many of the loans that were about to be defaulted upon were restructured. This was not only accomplished in Mexico, but in Central and South America more generally.
In order to meet these restructured loans, countries embarked on a process of increasing exports and decreasing imports in order to earn foreign exchange. The IMF was a part of overseeing that restructuring of these economies towards a goal of accruing more international capital was proceeding smoothly.
The next step in IMF development involved country restructuring after the fall of the Soviet Union. The IMF brought much experience to countries that had little experience with market based economic decisions. It also did not hurt that their advice came with substantial financial incentives to adopt these market orientated policies.
"The IMF is now acting in Southeast Asia and Korea in much the same way that it did in Eastern Europe and the former Soviet Union: insisting on fundamental changes in economic and institutional structures as a condition for receiving IMF funds. It is doing so even though the situations of the Asian countries are very different from that of the former Soviet Union and Eastern Europe. In addition, the IMF is applying its traditional mix of fiscal policies...and credit tightening...that were successful in Latin America" (22).
There is then an exploration of the SE Asian currency crisis:
"The Southeast Asian currency collapse that began in Thailand was an inevitable consequence of persistent large current account deficits and of the misguided attempt of Thailand, Indonesia, Malaysia, and the Philippines to maintain fixed exchange rates relative to the dollar" (22).
Thailand had a current account deficit that was quite large, and a currency pegged to the dollar. This meant that Thailand had to attract much foreign capital to service its debt. However, there were also pressures that kept investors coming back: the government ran a budget surplus, the population saved heavily. This was an untenable situation, especially with the baht tied to the dollar: when the yen fell relative to the dollar, Japanese investments in Thailand were discounted substantively. This caused a massive selling off of the baht. "At that point the IMF stepped in with a multibillion dollar rescue plan" (23).
This spread to the Philippines, Malaysia and Indonesia, as all had fixed currencies and current account deficits.
The author believes that a similar role to the one played by the IMF in Latin America would have been appropriate, but that the Fund went well beyond that measure. The structural adjustment programs were extensive and excessively detailed.
"In deciding whether to insist on any particular reform, the IMF should ask three questions: Is this reform really needed to restore the country's access to international capital markets? Is this a technical matter that does not interfere unnecessarily with the proper jurisdiction of a sovereign government? If the policies to be changed are also practiced in the major industrial economies of Europe, would the IMF think it appropriate to force similar changes in those countries if they were subject to a fund program? (27).
"The IMF's recent emphasis on imposing major structural and institutional reforms as opposed to focusing on balance-of-payments adjustments will have adverse consequences in both the short term and the more distant future. The IMF should stick to its traditional task of helping countries cope with temporary shortages of foreign exchange and with more sustained trade deficits" (20).
"Today's emphasis on structural and institutional reforms has not always been part of IMF programs. The IMF was founded in 1945 to help operate a system of fixed exchange rates, in which all currencies were pegged to the dollar, in turn fixed with respect to gold, that experts then considered necessary to encourage international trade. Although that system succeeded temporarily, differences in inflation between countries forced many to alter their currency values. When the fixed system collapsed completely in 1971, the IMF was forced to find a new raison d'être" (20).
Their new motivation can be seen as building from the Mexico financial crisis. Mexico indicated that it would be unable to satisfy its international commitments. If they were to default on this loan, that had the potential to push many US banks into insolvency, as it would have wiped out a substantial chunk of credit. The US provided a bridge loan to Mexico so that they would be able to pay back these loans eventually. Many of the loans that were about to be defaulted upon were restructured. This was not only accomplished in Mexico, but in Central and South America more generally.
In order to meet these restructured loans, countries embarked on a process of increasing exports and decreasing imports in order to earn foreign exchange. The IMF was a part of overseeing that restructuring of these economies towards a goal of accruing more international capital was proceeding smoothly.
The next step in IMF development involved country restructuring after the fall of the Soviet Union. The IMF brought much experience to countries that had little experience with market based economic decisions. It also did not hurt that their advice came with substantial financial incentives to adopt these market orientated policies.
"The IMF is now acting in Southeast Asia and Korea in much the same way that it did in Eastern Europe and the former Soviet Union: insisting on fundamental changes in economic and institutional structures as a condition for receiving IMF funds. It is doing so even though the situations of the Asian countries are very different from that of the former Soviet Union and Eastern Europe. In addition, the IMF is applying its traditional mix of fiscal policies...and credit tightening...that were successful in Latin America" (22).
There is then an exploration of the SE Asian currency crisis:
"The Southeast Asian currency collapse that began in Thailand was an inevitable consequence of persistent large current account deficits and of the misguided attempt of Thailand, Indonesia, Malaysia, and the Philippines to maintain fixed exchange rates relative to the dollar" (22).
Thailand had a current account deficit that was quite large, and a currency pegged to the dollar. This meant that Thailand had to attract much foreign capital to service its debt. However, there were also pressures that kept investors coming back: the government ran a budget surplus, the population saved heavily. This was an untenable situation, especially with the baht tied to the dollar: when the yen fell relative to the dollar, Japanese investments in Thailand were discounted substantively. This caused a massive selling off of the baht. "At that point the IMF stepped in with a multibillion dollar rescue plan" (23).
This spread to the Philippines, Malaysia and Indonesia, as all had fixed currencies and current account deficits.
The author believes that a similar role to the one played by the IMF in Latin America would have been appropriate, but that the Fund went well beyond that measure. The structural adjustment programs were extensive and excessively detailed.
"In deciding whether to insist on any particular reform, the IMF should ask three questions: Is this reform really needed to restore the country's access to international capital markets? Is this a technical matter that does not interfere unnecessarily with the proper jurisdiction of a sovereign government? If the policies to be changed are also practiced in the major industrial economies of Europe, would the IMF think it appropriate to force similar changes in those countries if they were subject to a fund program? (27).
Tuesday, January 27, 2009
Ruigrok and van Tulder: The Logic of International Restructuring
Ruigrok, W, and R van Tulder. 1995. The Logic of International Restructuring. Routledge.
1: Introduction
"This book aims to shed light on the patterns by which large, primarily manufacturing, firms are trying to manage domestic and international restructuring, and on the type of 'solutions' produced by these patterns. We shall illustrate that many (best-practice) 'solutions' stem from a specific interest. This book tries to explore and assemble the building blocks of an alternative framework of analysis based on two assumptions. Firstly, it is assumed that not just firms but a multitude of other actors as well are involved in restructuring processes...A second assumption in this book is that firms are not only seeking profits, but that they may also seek to influence the rules of the game of profit-making" (2).
There are three debates as highlighted by the authors: the first debate was over the nature of the restructuring of industry. The second issue explored throughout the 1980s explored technology through the lenses of globalization with an eye towards finance. The third debate explored different drivers of motivation for industrial production, either domestic or global.
The author notes that there is surprisingly little continuity, or attempts at continuity, between these three debates.
The concept of an "industrial complex" is introduced in order to facilitate better understanding of the potential linkages between the earlier debates. The contents of an industrial complex are the following: the core firm, the supplying firms, the dealers and distributors, the workers, the financiers, and the government (7-8).
2: The Elusive Concept of Post-Fordism
"Put simply, Fordism refers to the simultaneous growth of productivity and consumption. Fordism has two varieties: micro-Fordism, where such growth had been generated at the level of the firm, and macro-Fordism, where this simultaneous growth was realized at a societal level, also involving actors such as governments and national trade union federations" (12).
Definitions of post-Fordism are harder to concretize.
There is then an extensive overview of the ambiguous nature of post-Fordism and the need to provide something more concrete.
1: Introduction
"This book aims to shed light on the patterns by which large, primarily manufacturing, firms are trying to manage domestic and international restructuring, and on the type of 'solutions' produced by these patterns. We shall illustrate that many (best-practice) 'solutions' stem from a specific interest. This book tries to explore and assemble the building blocks of an alternative framework of analysis based on two assumptions. Firstly, it is assumed that not just firms but a multitude of other actors as well are involved in restructuring processes...A second assumption in this book is that firms are not only seeking profits, but that they may also seek to influence the rules of the game of profit-making" (2).
There are three debates as highlighted by the authors: the first debate was over the nature of the restructuring of industry. The second issue explored throughout the 1980s explored technology through the lenses of globalization with an eye towards finance. The third debate explored different drivers of motivation for industrial production, either domestic or global.
The author notes that there is surprisingly little continuity, or attempts at continuity, between these three debates.
The concept of an "industrial complex" is introduced in order to facilitate better understanding of the potential linkages between the earlier debates. The contents of an industrial complex are the following: the core firm, the supplying firms, the dealers and distributors, the workers, the financiers, and the government (7-8).
2: The Elusive Concept of Post-Fordism
"Put simply, Fordism refers to the simultaneous growth of productivity and consumption. Fordism has two varieties: micro-Fordism, where such growth had been generated at the level of the firm, and macro-Fordism, where this simultaneous growth was realized at a societal level, also involving actors such as governments and national trade union federations" (12).
Definitions of post-Fordism are harder to concretize.
There is then an extensive overview of the ambiguous nature of post-Fordism and the need to provide something more concrete.
Boyer: The Convergence Hypothesis Revisited
Boyer, R, and CEPREMAP (Center). 1993. The Convergence Hypothesis Revisited: Globalization But Still the Century of Nations? CEPREMAP.
The convergence argument seed domestic institutions and unique attributes being increasingly homogenized as the logic of capital dictates a certain kind of economic performance and institutional construction so as to maximize efficiency of production and transaction. However, Boyer argues that this strong hypothesis may miss the mark a bit, and that the end of the nation-state should not be glibly foretold. Instead, one should see this transition as a diverse process where different institutions matter.
"The argument proceeds along the following lines: First, ambiguities in the definition of convergence are spelled out by disentangling three distinct meanings: economic convergence, similarity in the style of development, and finally the characteristics of institutional settings that organize interactions between economy and polity. Second, when precise tests of the main macroeconomic variables are built, we see that no clear trend to convergence or divergence emerges. Third, even though the socialist bloc has collapsed, this has not reduced diversity. Rather it has revealed the coexistence and competition of various kinds of capitalism" (30).
"According to the first definition of convergence, the globalization of finance, labor, technologies, and products proceeds so that each nation comes to resemble a small-or medium-size firm in an ocean of pure and perfect competition. Consequently, any Keynesian-style intervention is bound to fail, given that the competition is now international and foreign producers will capture the domestic market if local producers do not adjust to the costs and prices achieved by competitors" (30).
"For many social scientist, convergence has another meaning: not pure economic performance, but the basic constitutional order, organizing interactions between polity and economy...Convergence in this sense is to be demonstrated by the collapse of authoritarian regimes and their replacement by more democratic constitutions" (31).
The third possibility is the most complex option, and involved mixed convergence: each economy is a combination of a wide variety of distinct factors that help to shape its output. If these institutions matched closely with the institutions of another economy and that economy was performing better, it would be possible to converge.
Boyer then explores empirical data on convergence of productivity since WWII. The author finds the evidence to be mixed and argues that results depend heavily on sample size and selection.
There is some evidence that things have converged in the late 20th century. However, this is not universal, and this evidence does not take into consideration that convergence typically occurs within a core set of countries that have already experienced a certain degree of industrialization and development.
"The 1990s and the next century, too, are likely to be still the epoch of nations. The complex set of contradictory forces that are pushing simultaneously toward convergence and divergence are far from moving toward a single best institutional design" (59).
The following chapter is also excellent, though I did not write an abstract:
Wade, R. 1996. Globalization and its limits: reports of the death of the national economy are greatly exaggerated. National Diversity and Global Capitalism: 60-88.
The convergence argument seed domestic institutions and unique attributes being increasingly homogenized as the logic of capital dictates a certain kind of economic performance and institutional construction so as to maximize efficiency of production and transaction. However, Boyer argues that this strong hypothesis may miss the mark a bit, and that the end of the nation-state should not be glibly foretold. Instead, one should see this transition as a diverse process where different institutions matter.
"The argument proceeds along the following lines: First, ambiguities in the definition of convergence are spelled out by disentangling three distinct meanings: economic convergence, similarity in the style of development, and finally the characteristics of institutional settings that organize interactions between economy and polity. Second, when precise tests of the main macroeconomic variables are built, we see that no clear trend to convergence or divergence emerges. Third, even though the socialist bloc has collapsed, this has not reduced diversity. Rather it has revealed the coexistence and competition of various kinds of capitalism" (30).
"According to the first definition of convergence, the globalization of finance, labor, technologies, and products proceeds so that each nation comes to resemble a small-or medium-size firm in an ocean of pure and perfect competition. Consequently, any Keynesian-style intervention is bound to fail, given that the competition is now international and foreign producers will capture the domestic market if local producers do not adjust to the costs and prices achieved by competitors" (30).
"For many social scientist, convergence has another meaning: not pure economic performance, but the basic constitutional order, organizing interactions between polity and economy...Convergence in this sense is to be demonstrated by the collapse of authoritarian regimes and their replacement by more democratic constitutions" (31).
The third possibility is the most complex option, and involved mixed convergence: each economy is a combination of a wide variety of distinct factors that help to shape its output. If these institutions matched closely with the institutions of another economy and that economy was performing better, it would be possible to converge.
Boyer then explores empirical data on convergence of productivity since WWII. The author finds the evidence to be mixed and argues that results depend heavily on sample size and selection.
There is some evidence that things have converged in the late 20th century. However, this is not universal, and this evidence does not take into consideration that convergence typically occurs within a core set of countries that have already experienced a certain degree of industrialization and development.
"The 1990s and the next century, too, are likely to be still the epoch of nations. The complex set of contradictory forces that are pushing simultaneously toward convergence and divergence are far from moving toward a single best institutional design" (59).
The following chapter is also excellent, though I did not write an abstract:
Wade, R. 1996. Globalization and its limits: reports of the death of the national economy are greatly exaggerated. National Diversity and Global Capitalism: 60-88.
Berger and Dore: National Diversity and Global Capitalism
Berger, S, and RP Dore. 1996. National Diversity and Global Capitalism. Cornell University Press.
Suzanne Berger: Introduction:
Do advanced economies converge on a set of practices or not? In the positive: "...competition, imitation, diffusion of best practice, trade and capital mobility naturally operate to produce convergence across nations in the structures of production and in the relations among economy, society, and state. Variations may be found from country to country, because of different historical legacies" (1).
Neoclassical economic theory would predict that convergence of factor prices would generally take hold in countries that were involved within the system of globalization, however, not all are in agreement. Some argue (Boyer) that it depends on what is being looked at when; at times one can see convergence, and at other times, convergence is a bit more difficult to notice.
"The fundamental cleavage cuts between one group of the authors who conclude (with varying degrees of enthusiasm or regret) that national diversities are likely to disappear; and on the other side, the authors who (with varying degrees of enthusiasm or regret) predict the long-term persistence of fundamentally different national models" (11).
"In sum, those who see convergence on the horizon of advanced countries have very different conceptions of how this process is likely to operate. Among the contributors to the volume, three distinct notions emerge: convergence as the triumph of market forces, abetted by complicit or passive governments; convergence as the result of diffusion of best practice and competition among institutional forms; and convergence as the internationally negotiated or coerced choice of one set of rules and institutions" (16).
"A second cluster of contributions in this volume sharply opposes the convergence perspective. The common theme here is the long-term resilience and expansion of diverse national systems and models of capitalism. The arguments against convergence laid out in these essays build on different analyses of how markets work, ideas about institutional coherence and adaptation, and alternative understandings of how politics shapes the economy" (19).
These views argue that the diversity of institutions is not necessarily a problem, that the ideal-type global market to which people should converge is just that: not a reality; and that domestic political considerations and push-backs should not be discounted.
"The conclusion that emerges from the essays in this volume is that the space for political vision and choice--and for a diversity of choices--is open and wide. The biggest question left unanswered is not whether politics can seize and use this space, but which politics and for whom?" (25).
Suzanne Berger: Introduction:
Do advanced economies converge on a set of practices or not? In the positive: "...competition, imitation, diffusion of best practice, trade and capital mobility naturally operate to produce convergence across nations in the structures of production and in the relations among economy, society, and state. Variations may be found from country to country, because of different historical legacies" (1).
Neoclassical economic theory would predict that convergence of factor prices would generally take hold in countries that were involved within the system of globalization, however, not all are in agreement. Some argue (Boyer) that it depends on what is being looked at when; at times one can see convergence, and at other times, convergence is a bit more difficult to notice.
"The fundamental cleavage cuts between one group of the authors who conclude (with varying degrees of enthusiasm or regret) that national diversities are likely to disappear; and on the other side, the authors who (with varying degrees of enthusiasm or regret) predict the long-term persistence of fundamentally different national models" (11).
"In sum, those who see convergence on the horizon of advanced countries have very different conceptions of how this process is likely to operate. Among the contributors to the volume, three distinct notions emerge: convergence as the triumph of market forces, abetted by complicit or passive governments; convergence as the result of diffusion of best practice and competition among institutional forms; and convergence as the internationally negotiated or coerced choice of one set of rules and institutions" (16).
"A second cluster of contributions in this volume sharply opposes the convergence perspective. The common theme here is the long-term resilience and expansion of diverse national systems and models of capitalism. The arguments against convergence laid out in these essays build on different analyses of how markets work, ideas about institutional coherence and adaptation, and alternative understandings of how politics shapes the economy" (19).
These views argue that the diversity of institutions is not necessarily a problem, that the ideal-type global market to which people should converge is just that: not a reality; and that domestic political considerations and push-backs should not be discounted.
"The conclusion that emerges from the essays in this volume is that the space for political vision and choice--and for a diversity of choices--is open and wide. The biggest question left unanswered is not whether politics can seize and use this space, but which politics and for whom?" (25).
Obstfeld and Rogoff: The Six Major Puzzles in International Macroeconomics
OBSTFELD, M, and K ROGOFF. 2000. The Six Major Puzzles in International Macroeconomics: Is There a Common Cause? NBER Working Paper.
"Why do people seem to have such a strong preference for consumption of their home goods (the home bias in trade puzzle)? Why do observed OECD current account imbalances tend to be so small relative to saving and investment when measured over any sustained period (the Feldstein-Horioka puzzle)? Why do home investors overwhelmingly prefer to hold home equity assets (the home bias portfolio puzzle)? Why is consumption less correlated than output across major OECT countries (the consumption correlations puzzle)? How is it possible that the half-life of real exchange rate changes can be three to four years (the purchasing power parity puzzle)? Why are exchange rates so volatile and so apparently disconnected from fundamentals (the exchange rate disconnect puzzle...)?" (2).
The authors attempt to explain all of these puzzles through the lenses of costs to trade conferred by distance in transport, a key assumption of the gravity trade model.
Each of the puzzles are explored separately. I skimmed them and will not document them.
"An obvious potential criticism of our central theme is that transport technology has been steadily improving over the past half century, and tariffs have fallen dramatically, especially among the OECD countries...while transport technology has steadily improved, labor costs have risen sharply so there is actually some debate about whether net transport costs have fallen" (43).
"Why do people seem to have such a strong preference for consumption of their home goods (the home bias in trade puzzle)? Why do observed OECD current account imbalances tend to be so small relative to saving and investment when measured over any sustained period (the Feldstein-Horioka puzzle)? Why do home investors overwhelmingly prefer to hold home equity assets (the home bias portfolio puzzle)? Why is consumption less correlated than output across major OECT countries (the consumption correlations puzzle)? How is it possible that the half-life of real exchange rate changes can be three to four years (the purchasing power parity puzzle)? Why are exchange rates so volatile and so apparently disconnected from fundamentals (the exchange rate disconnect puzzle...)?" (2).
The authors attempt to explain all of these puzzles through the lenses of costs to trade conferred by distance in transport, a key assumption of the gravity trade model.
Each of the puzzles are explored separately. I skimmed them and will not document them.
"An obvious potential criticism of our central theme is that transport technology has been steadily improving over the past half century, and tariffs have fallen dramatically, especially among the OECD countries...while transport technology has steadily improved, labor costs have risen sharply so there is actually some debate about whether net transport costs have fallen" (43).
Das: Trade and Global Integration
Das, Dilip. Trade and Global Integration. CSGR Working Paper No. 120/30.
"This paper focuses on the post-war process of creation of a global trading system and integration of world trade. As the former came into being, multilateral trade liberalization became an on-going feature of the global economy facilitating international trade, consequently importance of international trade in the global economy increased dramatically...Although the industrial economies were the primary beneficiaries of the multilateral trade liberalization in the past, for the developing economies trade, particularly trade in manufacturing goods, went on increasingly monotonically. The kaleidoscope of global trading system turned several times and international trade has enormously expanded over the preceding half century, which in turn contributed substantially to global integration through trade, albeit in a selective manner" (2).
This paper has two distinct foci: firstly, it is concerned with exploring how a global trading regime with liberal characteristics developed over time. Secondly, it is interested in the different shape that this global trade regime took as it evolved: how has the structure of international trade shifted over time?
The International Trade Organization was formed shortly after WWII, with the goal of merging with the other two Bretton Woods organizations to help orchestrate international economic interaction. The ITO fell short (US congress hesitation and fear of loss of control), and thus the General Agreement on Tariffs and Trade (GATT) was instituted instead. This was instituted in 1948. The Uruguay Round (1986-94) helped create the World Trade Organization, which incorporated the GATT along with other more specialized international agreements (on agriculture, textiles, etc.).
"Like the United Nations and the World Bank, [the WTO] became a key institution of global governance. Its essential functions are: (i) administering WTO trade agreements, (ii) providing a forum for multilateral trade negotiations, (iii) handling trade disputes between members, (iv) monitoring national trade policies, (v) providing technical assistance and training for developing countries, and (vi) handling economic co-operation with other international organizations" (7).
"Four trends can be clearly identified in the global trading system during the preceding half century: (i) highly uneven pace of liberalization of markets in goods and services in both developing and industrial economies, (ii) increasing differentiation in treatment for different levels of developing economies by the global trading system, (iii) a growing number of regional trading agreements...among both developing and industrial economies, and (iv) expanding scope and strength of[regional trade agreements]" (10).
"Measured in constant...dollars, the ratio of global trade in goods and services to global GDP increased from 8 percent in 1950 to 29.5% in 2000" (10).
Economic growth occurs because of trade liberalization for the following: "Essentially there are there sources of economic growth, namely, growth in inputs, improvement in efficiency of resource allocation and innovation" (11).
The author explores empirical claims that there is little evidence of globalization in trade. This is accomplished using the gravity model of trade. However, the proxy used within that model to measure the ease of trade between different parties is physical proximity. Globalization trends have imposed technologies that increasingly make those proximate relationships less impacting, and thus the gravity model is brought into question.
"This paper focuses on the post-war process of creation of a global trading system and integration of world trade. As the former came into being, multilateral trade liberalization became an on-going feature of the global economy facilitating international trade, consequently importance of international trade in the global economy increased dramatically...Although the industrial economies were the primary beneficiaries of the multilateral trade liberalization in the past, for the developing economies trade, particularly trade in manufacturing goods, went on increasingly monotonically. The kaleidoscope of global trading system turned several times and international trade has enormously expanded over the preceding half century, which in turn contributed substantially to global integration through trade, albeit in a selective manner" (2).
This paper has two distinct foci: firstly, it is concerned with exploring how a global trading regime with liberal characteristics developed over time. Secondly, it is interested in the different shape that this global trade regime took as it evolved: how has the structure of international trade shifted over time?
The International Trade Organization was formed shortly after WWII, with the goal of merging with the other two Bretton Woods organizations to help orchestrate international economic interaction. The ITO fell short (US congress hesitation and fear of loss of control), and thus the General Agreement on Tariffs and Trade (GATT) was instituted instead. This was instituted in 1948. The Uruguay Round (1986-94) helped create the World Trade Organization, which incorporated the GATT along with other more specialized international agreements (on agriculture, textiles, etc.).
"Like the United Nations and the World Bank, [the WTO] became a key institution of global governance. Its essential functions are: (i) administering WTO trade agreements, (ii) providing a forum for multilateral trade negotiations, (iii) handling trade disputes between members, (iv) monitoring national trade policies, (v) providing technical assistance and training for developing countries, and (vi) handling economic co-operation with other international organizations" (7).
"Four trends can be clearly identified in the global trading system during the preceding half century: (i) highly uneven pace of liberalization of markets in goods and services in both developing and industrial economies, (ii) increasing differentiation in treatment for different levels of developing economies by the global trading system, (iii) a growing number of regional trading agreements...among both developing and industrial economies, and (iv) expanding scope and strength of[regional trade agreements]" (10).
"Measured in constant...dollars, the ratio of global trade in goods and services to global GDP increased from 8 percent in 1950 to 29.5% in 2000" (10).
Economic growth occurs because of trade liberalization for the following: "Essentially there are there sources of economic growth, namely, growth in inputs, improvement in efficiency of resource allocation and innovation" (11).
The author explores empirical claims that there is little evidence of globalization in trade. This is accomplished using the gravity model of trade. However, the proxy used within that model to measure the ease of trade between different parties is physical proximity. Globalization trends have imposed technologies that increasingly make those proximate relationships less impacting, and thus the gravity model is brought into question.
Monday, January 26, 2009
SMART 2020: Enabling the Low Carbon Economy in the Information Age
The Climate Group on Behalf of the Global eSustainability Initiative (GeSI). 2008. Smart 2020: Enabling the Low Carbon Economy in the Information Age.
This report was compiled by the ICT industry. GeSI is an industry organization that attempts to promote sustainable development through the adoption of ICT technology. This report begins by noting that there are wide ranging goals to reduce carbon emissions to their 1990 levels by 2020. This can be partially accomplished through the further adoption of ICT technologies. This report attempts to show how ICT can be used to accomplish these goals.
"The ICT sector's own emissions are expected to increase, in a business as usual (BAU) scenario, from 0.53 billion tonnes (Gt) carbon dioxide equivalent...in 2002 to 1.43 [billion tonnes] by 2020. But specific ICT opportunities identified in this report can lead to emission reductions five times the size of the sector's own footprint, up to 7.8 [billion tonnes], or 15% of total BAU emissions by 2020" (6).
"Aside from emissions associated with deforestation, the largest contribution to man-made GHG emissions comes from power generation and fuel used for transportation. It is therefore not surprising that the biggest role ICTs could play is in helping to improve energy efficiency in power transmission and distribution...in buildings and factories that demand power and in the use of transportation to deliver goods" (9).
These ICT based savings on carbon emissions, not to mention efficiency improvements and thus other savings, can be achieved most readily in a few, key areas, as identified by this report: Smart Motor Systems; Smart Logistics; Smart Buildings; Smart Grids (9).
Their report draws on IPCC conclusions about the effects of carbon emissions and climate change.
The report makes a claim that, by 2020, ICT will provide for 5 times the reduction in carbon emissions than its own footprint. This is achieved through the following: standardization of energy consumption and emissions; monitoring energy use; accounting improvements relative to energy consumption and emissions; a rethinking in the way that people work, live and play; as well as a transformation through integrating systems (ch 1 pg 15).
ICT represents about 2% of global carbon emissions. "In 2007, the total footprint of the ICIT sector--including personal computers...and peripherals, telecoms networks and devices and data centres--was 830 [metric tons of carbon dioxide], about 2% of the estimated total emissions from human activity released that year. Even if the efficient technology developments outlined in the rest of the chapter are implemented, this figure looks set to grow at 6% each year until 2020"
(ch 2 pg 17).
The relative footprints of personal computers, data centers and telecoms are explored out to 2020.
ICT can help by increasing the efficiency of a variety of sectors within the global economy, from smart grids to improved efficiencies in industrial production. "ICT can make a major contribution to the global response to climate change. It could deliver up to a 15% reduction of BAU emissions in 2020.k..representing a value of [553 billion Euros] in energy and fuel saved and an additional [91 billion Euros] in carbon saved assuming a cost of carbon of [20 Euros/tonne] for a total of [644 billion Euros] savings" (ch 3 pg 51).
The assumptions out to 2020 are the following: elimination of all CDs and DVDs; 3% reduction in emissions from shopping transport; 25% reduction in global paper use; 30% reduction in business air travel for video conferencing; work related travel in urban areas decreased 80%; non work related travel down by 20%; 15% reduction in residential building emissions; 60% decrease in office emissions applied to 80% of office buildings; 30% increase in industrial motor systems; 15% decrease in electricity consumption; 14% reduction in road transport; 24% reduction in inventory; 5% reduction in carbon emissions from lack of congestion; 12% reduction based on improved driving style; 1% reduction in fuel consumption; 32% reduction in ground fuel consumption; 3% reduction in flight time; 2.5% reduction in rail transport b/c of better scheduling; 4% reduction in shipping transport b/c better use of ships; 3% increase in ship performance; 5% reduction in packaging material; 40% reduction in retail buildings; 25% reduction in retail and warehouse space; 13% reduction in HVAC consumption; 16% reduction in lighting; 30% reduction of T&D losses for developed countries and 38% for developing; 5% reduction in energy consumption; 10% reduction in carbon intensity of generation of developed countries; 5% reduction in carbon intensity of generation of developing countries (Appendix 3 pg 66-70).
This report was compiled by the ICT industry. GeSI is an industry organization that attempts to promote sustainable development through the adoption of ICT technology. This report begins by noting that there are wide ranging goals to reduce carbon emissions to their 1990 levels by 2020. This can be partially accomplished through the further adoption of ICT technologies. This report attempts to show how ICT can be used to accomplish these goals.
"The ICT sector's own emissions are expected to increase, in a business as usual (BAU) scenario, from 0.53 billion tonnes (Gt) carbon dioxide equivalent...in 2002 to 1.43 [billion tonnes] by 2020. But specific ICT opportunities identified in this report can lead to emission reductions five times the size of the sector's own footprint, up to 7.8 [billion tonnes], or 15% of total BAU emissions by 2020" (6).
"Aside from emissions associated with deforestation, the largest contribution to man-made GHG emissions comes from power generation and fuel used for transportation. It is therefore not surprising that the biggest role ICTs could play is in helping to improve energy efficiency in power transmission and distribution...in buildings and factories that demand power and in the use of transportation to deliver goods" (9).
These ICT based savings on carbon emissions, not to mention efficiency improvements and thus other savings, can be achieved most readily in a few, key areas, as identified by this report: Smart Motor Systems; Smart Logistics; Smart Buildings; Smart Grids (9).
Their report draws on IPCC conclusions about the effects of carbon emissions and climate change.
The report makes a claim that, by 2020, ICT will provide for 5 times the reduction in carbon emissions than its own footprint. This is achieved through the following: standardization of energy consumption and emissions; monitoring energy use; accounting improvements relative to energy consumption and emissions; a rethinking in the way that people work, live and play; as well as a transformation through integrating systems (ch 1 pg 15).
ICT represents about 2% of global carbon emissions. "In 2007, the total footprint of the ICIT sector--including personal computers...and peripherals, telecoms networks and devices and data centres--was 830 [metric tons of carbon dioxide], about 2% of the estimated total emissions from human activity released that year. Even if the efficient technology developments outlined in the rest of the chapter are implemented, this figure looks set to grow at 6% each year until 2020"
(ch 2 pg 17).
The relative footprints of personal computers, data centers and telecoms are explored out to 2020.
ICT can help by increasing the efficiency of a variety of sectors within the global economy, from smart grids to improved efficiencies in industrial production. "ICT can make a major contribution to the global response to climate change. It could deliver up to a 15% reduction of BAU emissions in 2020.k..representing a value of [553 billion Euros] in energy and fuel saved and an additional [91 billion Euros] in carbon saved assuming a cost of carbon of [20 Euros/tonne] for a total of [644 billion Euros] savings" (ch 3 pg 51).
The assumptions out to 2020 are the following: elimination of all CDs and DVDs; 3% reduction in emissions from shopping transport; 25% reduction in global paper use; 30% reduction in business air travel for video conferencing; work related travel in urban areas decreased 80%; non work related travel down by 20%; 15% reduction in residential building emissions; 60% decrease in office emissions applied to 80% of office buildings; 30% increase in industrial motor systems; 15% decrease in electricity consumption; 14% reduction in road transport; 24% reduction in inventory; 5% reduction in carbon emissions from lack of congestion; 12% reduction based on improved driving style; 1% reduction in fuel consumption; 32% reduction in ground fuel consumption; 3% reduction in flight time; 2.5% reduction in rail transport b/c of better scheduling; 4% reduction in shipping transport b/c better use of ships; 3% increase in ship performance; 5% reduction in packaging material; 40% reduction in retail buildings; 25% reduction in retail and warehouse space; 13% reduction in HVAC consumption; 16% reduction in lighting; 30% reduction of T&D losses for developed countries and 38% for developing; 5% reduction in energy consumption; 10% reduction in carbon intensity of generation of developed countries; 5% reduction in carbon intensity of generation of developing countries (Appendix 3 pg 66-70).
Thursday, January 22, 2009
Baldwin and Martin: Two Waves of Globalizaiton
BALDWIN, RE, and P MARTIN. 1999. Two Waves of Globalisation: Superficial Similarities, Fundamental Differences. NBER Working Paper.
There are differences and similarities between the two eras of globalization roughly summed up as the 19th century up to WWI and the 1960s to the present. The authors argue that trade and capital flow ratios and reductions to international transactions are among the similarities. The differences can be seen in initial conditions (the world now is substantively divided between rich and poor, previously it was mostly poor) and the ability of ideas to be traded in lieu of goods.
This article represents an incredibly thorough account of the similarities and differences between the two eras of globalization. I will not document all of this nuance here, as it would be cumbersome.
The main point of the article is that, as the title indicates, there are some similarities between the two eras, but these are mostly superficial; the differences between the eras represent fundamental differences. One reason that the eras are so different is that trade in ideas has become a cornerstone of the second wave of globalization. Another reason is that the initial conditions of the second wave of globalization are so distinct from the first wave. Thirdly, there are great constraints on policy makers with populations wanting both welfare and low taxes. Additionally, the presence of IFIs makes for a qualitatively different trajectory of the process of globalization.
There are differences and similarities between the two eras of globalization roughly summed up as the 19th century up to WWI and the 1960s to the present. The authors argue that trade and capital flow ratios and reductions to international transactions are among the similarities. The differences can be seen in initial conditions (the world now is substantively divided between rich and poor, previously it was mostly poor) and the ability of ideas to be traded in lieu of goods.
This article represents an incredibly thorough account of the similarities and differences between the two eras of globalization. I will not document all of this nuance here, as it would be cumbersome.
The main point of the article is that, as the title indicates, there are some similarities between the two eras, but these are mostly superficial; the differences between the eras represent fundamental differences. One reason that the eras are so different is that trade in ideas has become a cornerstone of the second wave of globalization. Another reason is that the initial conditions of the second wave of globalization are so distinct from the first wave. Thirdly, there are great constraints on policy makers with populations wanting both welfare and low taxes. Additionally, the presence of IFIs makes for a qualitatively different trajectory of the process of globalization.
Reinhart and Rogoff: Is the 2007 US Sub-Prime Financial Crisis so Different?
REINHART, CM, and K ROGOFF. 2008. Is the 2007 US Sub-Prime Financial Crisis so Different? an International Historical Comparison. NBER Working Paper.
This paper explores the relationship between the sub-prime mortgage crisis and historical patterns that emerge before financial crises. The authors find that there is a great deal of parallels between these emerging patterns and other crises. Particularly, they find that large gluts in equity and housing prices are indicative of a pending crisis. The authors then engage in a historical comparison.
The results of the comparison are as follows: house prices followed similar patterns with other crises, though they rose more acutely and seem to be falling even more rapidly; real equity prices have yet to fall substantially as has been the case with other financial crises, though the growth trend is very sharply upward; the US current account balance is much less balanced than the average for other countries entering financial crises; real GDP growth per capita is following a similar, slightly contracted, trend as have other countries as they approach financial crises; public debt has also risen consistently, as was the case with previous crises.
The authors conclude by noting that all financial crises are surely different, and that most crises are preceded by a period of financial liberalization. While they note that there has not been substantial juridical liberalization, financial freedom can be seen in the removal of certain barriers and regulatory frameworks.
The authors also paralell the 1970s petro-dollar recycling that took place, and how that led to the debt crisis of the 1980s, where cheap money was freely given to countries. In the 1990s, however, the unsuitable debtor is not a de facto nation, but rather a slice of American borrowers who cannot afford to be home owners.
This paper explores the relationship between the sub-prime mortgage crisis and historical patterns that emerge before financial crises. The authors find that there is a great deal of parallels between these emerging patterns and other crises. Particularly, they find that large gluts in equity and housing prices are indicative of a pending crisis. The authors then engage in a historical comparison.
The results of the comparison are as follows: house prices followed similar patterns with other crises, though they rose more acutely and seem to be falling even more rapidly; real equity prices have yet to fall substantially as has been the case with other financial crises, though the growth trend is very sharply upward; the US current account balance is much less balanced than the average for other countries entering financial crises; real GDP growth per capita is following a similar, slightly contracted, trend as have other countries as they approach financial crises; public debt has also risen consistently, as was the case with previous crises.
The authors conclude by noting that all financial crises are surely different, and that most crises are preceded by a period of financial liberalization. While they note that there has not been substantial juridical liberalization, financial freedom can be seen in the removal of certain barriers and regulatory frameworks.
The authors also paralell the 1970s petro-dollar recycling that took place, and how that led to the debt crisis of the 1980s, where cheap money was freely given to countries. In the 1990s, however, the unsuitable debtor is not a de facto nation, but rather a slice of American borrowers who cannot afford to be home owners.
Reinhart and Rogoff: The Aftermath of Financial Crises
Reinhart, Carmen, and Kenneth Rogoff. 2008. The Aftermath of Financial Crises. NBER Working Paper (December 19).
In an earlier publication, these authors explored a variety of factors relating to the US economy. All of these indicators pointed towards the onset of a financial crisis. This paper also uses history to explore current events by looking at what happens to economies after a banking crisis has occurred.
This analysis includes some emerging countries that have experienced financial crises. The argument is that there is not a very substantive difference between the characteristics of those crises and the crises that strike more financially complex nations.
In general, there are three characteristics that can be inferred form the aftermath of a financial crisis: "First, asset market collapses are deep and prolonged...Second, the aftermath of banking crises is associated with profound declines in output and employment...Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes...In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn" (2).
Decline in house prices is explored. In financial crises, there is typically a decline of about 35.5% in house prices from the peak to the trough of the contraction. The average length of time that the decline is experienced is 6 years. In terms of equity prices, there is an average drop of 55.9% and an average duration of 3.4 years. In terms of unemployment, there is an average increase of 7% and a duration of 4.8 years. Decrease in Real GDP averages 9.3% with an average duration of 1.9 years. After three years, there is an average governmental debt increase of 86%.
"How relevant are historical benchmarks for assessing the trajectory of the current global financial crisis? On the one hand, the authorities today have arguably more flexible monetary policy frameworks, thanks particularly to a less rigid global exchange rate regime...On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors" (10).
In an earlier publication, these authors explored a variety of factors relating to the US economy. All of these indicators pointed towards the onset of a financial crisis. This paper also uses history to explore current events by looking at what happens to economies after a banking crisis has occurred.
This analysis includes some emerging countries that have experienced financial crises. The argument is that there is not a very substantive difference between the characteristics of those crises and the crises that strike more financially complex nations.
In general, there are three characteristics that can be inferred form the aftermath of a financial crisis: "First, asset market collapses are deep and prolonged...Second, the aftermath of banking crises is associated with profound declines in output and employment...Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes...In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn" (2).
Decline in house prices is explored. In financial crises, there is typically a decline of about 35.5% in house prices from the peak to the trough of the contraction. The average length of time that the decline is experienced is 6 years. In terms of equity prices, there is an average drop of 55.9% and an average duration of 3.4 years. In terms of unemployment, there is an average increase of 7% and a duration of 4.8 years. Decrease in Real GDP averages 9.3% with an average duration of 1.9 years. After three years, there is an average governmental debt increase of 86%.
"How relevant are historical benchmarks for assessing the trajectory of the current global financial crisis? On the one hand, the authorities today have arguably more flexible monetary policy frameworks, thanks particularly to a less rigid global exchange rate regime...On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors" (10).
Wednesday, January 21, 2009
Mody and Saravia: Catalyzing Capital Flows: Do IMF Programs Work as Commitment Devices?
A Mody and D Saravia, “Catalyzing Capital Flows: Do IMF Programs Work as Commitment Devices?,” in , 2003, 25-27.
“An objective of IMF programs is to help countries improve their access to international capital markets. In this paper, we examine if Fund programs influence the ability of developing country issuers to tap international bond markets and whether they improve spreads paid on the bonds issued. We find that the Fund programs do not provide a uniformly favorable signaling effect, i.e., the mere presence of the IMF does not act as a strong seal of good housekeeping. Instead, the evidence is most consistent with a positive effect of IMF programs when they are viewed as deteriorated significantly. The size of the Fund’s program matters, but the credibility of a joint commitment by the country and the IMF appears to be critical” (1).
“In this paper, we explore the possibility that successful catalysis depends on a credible joint commitment by the country and the Fund that leads to improved prospects for honoring debt contracts. In other words, the catalytic effect—or the Fund’s ‘seal of approval’—is not automatic and the mere presence of a Fund program does not lead to more capital flows. Rather, an IMF program is effective as a commitment device when other available information does not negate its credibility. As such, the value of the commitment implied by a Fund program and its ability to catalyze capital flows, is likely to depend on initial country conditions, program design, and the country-Fund relationship. Our contribution then is to move from a presumption of undifferentiated effects to identify country, program, and relationship characteristics that create the conditions for credible commitments and hence contribute to enhanced capital flows under IMF programs” (3).
They reach four conclusions:
1. Having a Fund program operative in a country decreased possible negative effects from a country’s volatility in exports
2. If reserves have not been reduced beyond recoverable levels, Fund programs are possibly helpful
3. Bigger Fund programs can be effective even when funds are not deployed
4. If a country and the Fund have an iterated interaction that is timely, success is also more likely.
They use a model of Eichengreen and Mody (2001) for their empirical analysis.
There is an excellent overview of the relationship between fund lending and improving access to international capital: while Fund lending may be quite small, it does provide the necessary sign to international capital that this country’s macroeconomic policies are on the right track.
There is a review of literature surrounding IMF lending policies. “Two early studies (Edwards 1989 and Khan 1990) reached three conclusions that have stood the test of time. First, Fund programs help improve the external payments position, this improvement takes effect relatively quickly, i.e., within a year, and is sustained beyond the program. Second, the impact on inflation is statistically insignificant. Third, growth actually suffers during the period of an IMF program but recovers once the program ends, though possibly not to the level prior to the initiation of the program” (8).
We adopt an estimation approach developed in earlier papers (see Eichengreen and Mody 2001). We estimate a two-equation model: the ‘spreads’ equation, which specifies the determinants of spreads charged, and the ‘selection’ equation, which is a probit for the decision to issue the bond” (11).
Skipped much here.
“…a Fund program is not an automatic or standardized ‘good housekeeping’ seal of approval. Investors appear to value the Fund’s participation in resolving the country’s external payment difficulties but only when they view it is as likely that the effort will be successful. Our further contribution, we believe, is to suggest the conditions under which programs are likely to succeed. Successful outcome, measured in this paper as improved access to international markets, depends on the market’s perception of credible reform measures” (22).
“An objective of IMF programs is to help countries improve their access to international capital markets. In this paper, we examine if Fund programs influence the ability of developing country issuers to tap international bond markets and whether they improve spreads paid on the bonds issued. We find that the Fund programs do not provide a uniformly favorable signaling effect, i.e., the mere presence of the IMF does not act as a strong seal of good housekeeping. Instead, the evidence is most consistent with a positive effect of IMF programs when they are viewed as deteriorated significantly. The size of the Fund’s program matters, but the credibility of a joint commitment by the country and the IMF appears to be critical” (1).
“In this paper, we explore the possibility that successful catalysis depends on a credible joint commitment by the country and the Fund that leads to improved prospects for honoring debt contracts. In other words, the catalytic effect—or the Fund’s ‘seal of approval’—is not automatic and the mere presence of a Fund program does not lead to more capital flows. Rather, an IMF program is effective as a commitment device when other available information does not negate its credibility. As such, the value of the commitment implied by a Fund program and its ability to catalyze capital flows, is likely to depend on initial country conditions, program design, and the country-Fund relationship. Our contribution then is to move from a presumption of undifferentiated effects to identify country, program, and relationship characteristics that create the conditions for credible commitments and hence contribute to enhanced capital flows under IMF programs” (3).
They reach four conclusions:
1. Having a Fund program operative in a country decreased possible negative effects from a country’s volatility in exports
2. If reserves have not been reduced beyond recoverable levels, Fund programs are possibly helpful
3. Bigger Fund programs can be effective even when funds are not deployed
4. If a country and the Fund have an iterated interaction that is timely, success is also more likely.
They use a model of Eichengreen and Mody (2001) for their empirical analysis.
There is an excellent overview of the relationship between fund lending and improving access to international capital: while Fund lending may be quite small, it does provide the necessary sign to international capital that this country’s macroeconomic policies are on the right track.
There is a review of literature surrounding IMF lending policies. “Two early studies (Edwards 1989 and Khan 1990) reached three conclusions that have stood the test of time. First, Fund programs help improve the external payments position, this improvement takes effect relatively quickly, i.e., within a year, and is sustained beyond the program. Second, the impact on inflation is statistically insignificant. Third, growth actually suffers during the period of an IMF program but recovers once the program ends, though possibly not to the level prior to the initiation of the program” (8).
We adopt an estimation approach developed in earlier papers (see Eichengreen and Mody 2001). We estimate a two-equation model: the ‘spreads’ equation, which specifies the determinants of spreads charged, and the ‘selection’ equation, which is a probit for the decision to issue the bond” (11).
Skipped much here.
“…a Fund program is not an automatic or standardized ‘good housekeeping’ seal of approval. Investors appear to value the Fund’s participation in resolving the country’s external payment difficulties but only when they view it is as likely that the effort will be successful. Our further contribution, we believe, is to suggest the conditions under which programs are likely to succeed. Successful outcome, measured in this paper as improved access to international markets, depends on the market’s perception of credible reform measures” (22).
Wade: Capital and Revenge: The IMF and Ethiopia
RH Wade, “Capital and Revenge: The IMF and Ethiopia,” Challenge 44, no. 5 (2001): 67-75.
“Ever since the financial crisis of 1997, the International Monetary Fund and the US Treasury have been less insistent on opening capital markets around the world. But the author has little doubt that when the dust settles, the push for unrestricted capital flows will strengthen again. Ethiopia provides a case study of the interest involved” (67). “Once memories of the Asian crisis fade, the Fund and the Treasury are likely to move again to secure the lifting of restrictions on capital movements worldwide” (68).
The story of Ethiopia is told in relation to IMF lending in the late 1990s. Ethiopia was elegiable for a loan from the IMF at very favorable conditions because their level of economic development was relatively quite low. They took the loan, though it came with a certain set of conditions that were tied to tranche payments. The first payments went according to plan and the government adjusted according to the agreement. The author then highlights an unfortunate situation involving a US banks, Ethiopian Airlines and the Ethiopian government. The airlines bought four planes from Boeing, and entirely financed by the US bank. The conditions of that loan were not entirely favorable. The airlines Wanted to renegotiate the conditions of that loan, but the US bank refused. The Ethiopian government then loaned the airlines the money to pay off the bad loan. This angered the US bank, and the IMF became more picky when it followed up with an assessment of Ethiopia’s progress according to the structural adjustment policies that were agreed upon. Ethiopia called in Stiglitz to help them understand what they could do with the IMF. Stiglitz went, thus angering the fund further.
Ethiopia eventually got its way and the Fund renegotiated the conditions of its loan. However, the following year, both the Fund and Ethiopia found themselves in another bind. This caused delay in Ethiopia’s ability to receive debt relief, for one.
“The other striking point about the story is the invisible power of the Fund officials as the gatekeepers to not only concessional finance but also country reputation. When they began to call Ethiopia a ‘reluctant reformer’ and to talk about the ‘break-down of the program,’ virtually no one who heard them was in a position to know that these comments were largely untrue—for example, that the apparent failure to meet the foreign exchange reserve requirement was a technical failure, not a real one” (74-5).
“Ever since the financial crisis of 1997, the International Monetary Fund and the US Treasury have been less insistent on opening capital markets around the world. But the author has little doubt that when the dust settles, the push for unrestricted capital flows will strengthen again. Ethiopia provides a case study of the interest involved” (67). “Once memories of the Asian crisis fade, the Fund and the Treasury are likely to move again to secure the lifting of restrictions on capital movements worldwide” (68).
The story of Ethiopia is told in relation to IMF lending in the late 1990s. Ethiopia was elegiable for a loan from the IMF at very favorable conditions because their level of economic development was relatively quite low. They took the loan, though it came with a certain set of conditions that were tied to tranche payments. The first payments went according to plan and the government adjusted according to the agreement. The author then highlights an unfortunate situation involving a US banks, Ethiopian Airlines and the Ethiopian government. The airlines bought four planes from Boeing, and entirely financed by the US bank. The conditions of that loan were not entirely favorable. The airlines Wanted to renegotiate the conditions of that loan, but the US bank refused. The Ethiopian government then loaned the airlines the money to pay off the bad loan. This angered the US bank, and the IMF became more picky when it followed up with an assessment of Ethiopia’s progress according to the structural adjustment policies that were agreed upon. Ethiopia called in Stiglitz to help them understand what they could do with the IMF. Stiglitz went, thus angering the fund further.
Ethiopia eventually got its way and the Fund renegotiated the conditions of its loan. However, the following year, both the Fund and Ethiopia found themselves in another bind. This caused delay in Ethiopia’s ability to receive debt relief, for one.
“The other striking point about the story is the invisible power of the Fund officials as the gatekeepers to not only concessional finance but also country reputation. When they began to call Ethiopia a ‘reluctant reformer’ and to talk about the ‘break-down of the program,’ virtually no one who heard them was in a position to know that these comments were largely untrue—for example, that the apparent failure to meet the foreign exchange reserve requirement was a technical failure, not a real one” (74-5).
Saturday, January 17, 2009
Momani: American Politicization of the International Monetary Fund
B Momani, “American politicization of the International Monetary Fund,” Review of International Political Economy 11, no. 5 (2004): 880-904.
The IMF has been criticized as being a tool used by the US to influence the politics of other countries. The IMF denies this, and makes the claim that conditionality agreements are created through highly technocratic processes that are widely separated from the corruption of political interests. “This article argues that political intervention in the terms and conditions of IMF agreements occurs when IMF staff recommendations are repeatedly disregarded. This method traces politicization in the IMF decision-making process, by comparing and contrasting IMF staff’s Article IV Consultations for slippages in recommended conditions” (881).
IMF contributions are used to determine the relative voice of different member countries in establishing policy. These quotas are determined as a product of GDP production as well as current account factors. The US has the largest share of votes in the IMF with a total of 17% of the overall vote followed by Japan (~6%) and Germany (6%). The combination of 23 African countries represent a total of 1.16% of the total vote. Because many decisions require 85% consensus to be had, the US essentially wields a veto.
The literature is reviewed. It shows a mixture of results that all lean towards the US exerting a certain kind of power through determining lending conditionality. The author argues that this study will provide added-value because it will utilize IMF archives that were previously not available. The method will explore Article IV Consultations, which are produced by IMF staff and are expected to be mostly apolitical. If final conditionality differs greatly from the Article IV Consultations, then political motivations are assumed to be in play. If the final conditionality does not differ greatly, the opposite is concluded.
Figure 2 (888) outlines a causal flow-chart that can be used to determine whether or not political pressure was applied in IMF conditionality being imposed. The case study explored is Egypt.
“Based on numerous interviews with IMF staff, staff members expressed resentment towards the Executive Board for interfering in their negotiations with Egypt and other countries. The staff argued that many countries had important allies in the Executive Board which helped them receive favoritism” (895). Executive Board members who were keen on making sure that a certain policy towards a certain country went through stayed abreast of that country’s negotiation with the IMF for political reasons, it was argued by some.
“While there is no clear algorithm for IMF decision-making, based on IMF written statutes, the IMF argues that its decision-making is apolitical, and based on its staff’s recommendations. The IMF claims that external factors, such as the distribution of power inn the international system, is perhaps symbolically reflected in IMF quotas, but does not affect the final outcome of decisions. This is based on the belief that the IMF staff, who are technocratic and not politically motivated, determine the conditions attached to loan agreements” (898).
“In 1987 and 1991, Egypt demonstrated to the US government that tough IMF conditions would undermine Egypt’s political stability in an already volatile region and therefore the United States intervened to ensure two lenient agreements by usurping staff recommendations. Lenient agreements that did not reflect the Article IV Consultations prepared by the IMF staff prevailed because of US pressure on the Executive Board. So, it can be learned that the staff did not succumb to US pressure by changing the post-agreement Article IV consultations. On the contrary, the United States was able to push lenient agreements through without the implicit support of th EIMF staff. Decision-making in the Fund did not follow the principle of consensus building, but rather reaffirmed that US power in the Fund is enforced at all levels within the process of determining conditionality” (898-90).
The IMF has been criticized as being a tool used by the US to influence the politics of other countries. The IMF denies this, and makes the claim that conditionality agreements are created through highly technocratic processes that are widely separated from the corruption of political interests. “This article argues that political intervention in the terms and conditions of IMF agreements occurs when IMF staff recommendations are repeatedly disregarded. This method traces politicization in the IMF decision-making process, by comparing and contrasting IMF staff’s Article IV Consultations for slippages in recommended conditions” (881).
IMF contributions are used to determine the relative voice of different member countries in establishing policy. These quotas are determined as a product of GDP production as well as current account factors. The US has the largest share of votes in the IMF with a total of 17% of the overall vote followed by Japan (~6%) and Germany (6%). The combination of 23 African countries represent a total of 1.16% of the total vote. Because many decisions require 85% consensus to be had, the US essentially wields a veto.
The literature is reviewed. It shows a mixture of results that all lean towards the US exerting a certain kind of power through determining lending conditionality. The author argues that this study will provide added-value because it will utilize IMF archives that were previously not available. The method will explore Article IV Consultations, which are produced by IMF staff and are expected to be mostly apolitical. If final conditionality differs greatly from the Article IV Consultations, then political motivations are assumed to be in play. If the final conditionality does not differ greatly, the opposite is concluded.
Figure 2 (888) outlines a causal flow-chart that can be used to determine whether or not political pressure was applied in IMF conditionality being imposed. The case study explored is Egypt.
“Based on numerous interviews with IMF staff, staff members expressed resentment towards the Executive Board for interfering in their negotiations with Egypt and other countries. The staff argued that many countries had important allies in the Executive Board which helped them receive favoritism” (895). Executive Board members who were keen on making sure that a certain policy towards a certain country went through stayed abreast of that country’s negotiation with the IMF for political reasons, it was argued by some.
“While there is no clear algorithm for IMF decision-making, based on IMF written statutes, the IMF argues that its decision-making is apolitical, and based on its staff’s recommendations. The IMF claims that external factors, such as the distribution of power inn the international system, is perhaps symbolically reflected in IMF quotas, but does not affect the final outcome of decisions. This is based on the belief that the IMF staff, who are technocratic and not politically motivated, determine the conditions attached to loan agreements” (898).
“In 1987 and 1991, Egypt demonstrated to the US government that tough IMF conditions would undermine Egypt’s political stability in an already volatile region and therefore the United States intervened to ensure two lenient agreements by usurping staff recommendations. Lenient agreements that did not reflect the Article IV Consultations prepared by the IMF staff prevailed because of US pressure on the Executive Board. So, it can be learned that the staff did not succumb to US pressure by changing the post-agreement Article IV consultations. On the contrary, the United States was able to push lenient agreements through without the implicit support of th EIMF staff. Decision-making in the Fund did not follow the principle of consensus building, but rather reaffirmed that US power in the Fund is enforced at all levels within the process of determining conditionality” (898-90).
Buira: An Analysis of IMF Conditionality
A Buira et al., An Analysis of IMF Conditionality (United Nations, 2003).
“IMF conditionality was introduced in the 1950s as a means to restore members’ balance-of-payments viability, to ensure that Fund resources would not be wasted and to ensure that the institution would be able to recover the loans it extended to member countries. For several decades, until the early eighties, Fund Conditionality centered on the monetary, fiscal and exchange policies of members. Over the last 20 years, while the resources of the Fund declined as a proportion of world trade, the number of Fund programmes increased steadily, and conditi8onality underwent substantial changes, expanding the scope of conditionality into fields that previously had been largely outside its purview. As the number of conditions increased, the rate of member country’s compliance with Fund supported programmes declined, and reviewing and streamlining conditionality became inevitable” (iii).
“Conditionality is perhaps the most controversial aspect of IMF policies. Among the traditional criticisms of Fund conditionality are that it is too short-run oriented, too focused on demand management and does not pay adequate attention to its impact on growth and the effects of programmes on social spending and on income distribution” (1).
The author explores some of the literature critical of IMF conditionality. This literature is specific in its criticism of the IMF’s overreaching through the imposition of structural modifying conditions that must be met in order to secure loans. Some have argued that the model of providing short-term stabilizing funding with conditions is fundamentally flawed, and that the IMF should approach countries with recommendations as to the changes that must be made structurally to their economy only when they are approached by said countries. The history of conditionality extends back to the US’ involvement in supplying much credit to The Fund after WWII. Initially, there was no conditionality. However, the Articles of the organization were amended.
“Conditionality may be defined as a means by which one offers support and attempts to influence the policies of another in order to secure compliance with a programme of measures. It is a tool by which a country is made to adopt specific policies or to undertake certain reforms that it would not otherwise have undertaken for support. Within the context of the IMF, conditionality refers to policies a member must adopt to secure access to Fund resources. These policies are intended to help the member country overcome its external payments problem and thus be in a position to repay the Fund in a timely manner, thereby ultimately assuring the ‘revolving character’ of Fund resources” (3).
What is the nature of conditionality? Is it possibly coercive? Probably. It depends mostly on the relationship between the Fund and the country that is seeking funding. For example, a country that has much access to global financial markets will be in a relatively stronger position vis-à-vis the fund than a country that has no ready access to global finance. Additionally, if a country is facing a balance of payments crisis, it may have to rely heavily on the Fund for liquidity, and that kind of a position would put countries in a compromising position, potentially. In another way, the Fund moves well beyond its mandate as a short-term financial stability institution and becomes an organization that imposes policies that directly affect development. That is clearly the mandate of The Bank. If Fund conditionality is not coercive, at its very least it has the potential of being overly paternalistic .
In another vein: is Fund resources assured through the practice of conditionality? Other institutions who are in the business of loaning sovereigns money do not provide conditions. In addition, the size of the Fund’s reserves has not grown apace with the economy at large. The “revolving character” of the resources is thus brought into question.
On September 20, 2002, The Fund agreed to four guidelines that were designed to overhaul the process of conditionality: “national ownership of programs…parsimony in the application of conditions…tailoring the programme to the member’s circumstances… clarity as to what essential aspect of the programme must be complied with, and what additional measures are contemplated whose non-observance will not constitute a breach of the agreement and impair the country’s ability to draw Fund resources” (10).
“IMF conditionality was introduced in the 1950s as a means to restore members’ balance-of-payments viability, to ensure that Fund resources would not be wasted and to ensure that the institution would be able to recover the loans it extended to member countries. For several decades, until the early eighties, Fund Conditionality centered on the monetary, fiscal and exchange policies of members. Over the last 20 years, while the resources of the Fund declined as a proportion of world trade, the number of Fund programmes increased steadily, and conditi8onality underwent substantial changes, expanding the scope of conditionality into fields that previously had been largely outside its purview. As the number of conditions increased, the rate of member country’s compliance with Fund supported programmes declined, and reviewing and streamlining conditionality became inevitable” (iii).
“Conditionality is perhaps the most controversial aspect of IMF policies. Among the traditional criticisms of Fund conditionality are that it is too short-run oriented, too focused on demand management and does not pay adequate attention to its impact on growth and the effects of programmes on social spending and on income distribution” (1).
The author explores some of the literature critical of IMF conditionality. This literature is specific in its criticism of the IMF’s overreaching through the imposition of structural modifying conditions that must be met in order to secure loans. Some have argued that the model of providing short-term stabilizing funding with conditions is fundamentally flawed, and that the IMF should approach countries with recommendations as to the changes that must be made structurally to their economy only when they are approached by said countries. The history of conditionality extends back to the US’ involvement in supplying much credit to The Fund after WWII. Initially, there was no conditionality. However, the Articles of the organization were amended.
“Conditionality may be defined as a means by which one offers support and attempts to influence the policies of another in order to secure compliance with a programme of measures. It is a tool by which a country is made to adopt specific policies or to undertake certain reforms that it would not otherwise have undertaken for support. Within the context of the IMF, conditionality refers to policies a member must adopt to secure access to Fund resources. These policies are intended to help the member country overcome its external payments problem and thus be in a position to repay the Fund in a timely manner, thereby ultimately assuring the ‘revolving character’ of Fund resources” (3).
What is the nature of conditionality? Is it possibly coercive? Probably. It depends mostly on the relationship between the Fund and the country that is seeking funding. For example, a country that has much access to global financial markets will be in a relatively stronger position vis-à-vis the fund than a country that has no ready access to global finance. Additionally, if a country is facing a balance of payments crisis, it may have to rely heavily on the Fund for liquidity, and that kind of a position would put countries in a compromising position, potentially. In another way, the Fund moves well beyond its mandate as a short-term financial stability institution and becomes an organization that imposes policies that directly affect development. That is clearly the mandate of The Bank. If Fund conditionality is not coercive, at its very least it has the potential of being overly paternalistic .
In another vein: is Fund resources assured through the practice of conditionality? Other institutions who are in the business of loaning sovereigns money do not provide conditions. In addition, the size of the Fund’s reserves has not grown apace with the economy at large. The “revolving character” of the resources is thus brought into question.
On September 20, 2002, The Fund agreed to four guidelines that were designed to overhaul the process of conditionality: “national ownership of programs…parsimony in the application of conditions…tailoring the programme to the member’s circumstances… clarity as to what essential aspect of the programme must be complied with, and what additional measures are contemplated whose non-observance will not constitute a breach of the agreement and impair the country’s ability to draw Fund resources” (10).
Wednesday, January 14, 2009
Garrett: Global Markets and National Politics
Garrett, G. 2005. Global Markets and National Politics: Collision Course or Virtuous Circle? International Organization 52, no. 04: 787-824.
"The nation-state is purportedly an outmoded and beleaguered institutional form, on a collision course with the ever more international scale of markets. Policy autonomy, if not de jure sovereignty, is considered the primary casualty. Governments competing for mobile economic resources are thought to have little choice but to engage in a policy race to the neoliberal bottom, imperiling the efficacy and legitimacy of the democratic process itself" (787-8).
"This article puts under the analytic microscope the proposition that global markets trump national politics as social forces. I focus on the relationships between three dimensions of integration into international markets-trade in goods and services, the multinationalization of production, and financial capital mobility-and the macroeconomic policy choices of the advanced industrial countries up until the mid-1990s" (788).
It is possible to look at globalization as the cause of constraints on domestic policy, especially in certain cases in regard to finance capitalism. However, it is not the case that domestic policies have been uniformly constrained.
"There are two basic reasons why globalization constraints on policy choice are weaker than much contemporary rhetoric suggests. First, market integration has not only increased the exit options of producers and investors; it has also heightened feelings of economic insecurity among broader segments of society...Second, although there are costs associated with interventionist government...numerous government programs generate economic benefits that are attractive to mobile finance and production" (788-9).
"It should be a central objective of globalization research to see how these two sets of dynamics-capital's exit threats versus popular demands for redistribution, and the economic costs and benefits of interventionist government-play out in different contexts. In this article I point to two sources of variation. The first concerns differences among various facets of market integration and aspects of government policy choice...The second source of variation concerns domestic political conditions. Countries in which the balance of political power is tilted to the left continue to be more responsive to redistributive demands than those dominated by center-right parties...In summary, I do not believe that 'collision course' is the correct metaphor to apply to the panoply of relationships between interventionist national economic policies and global markets. Peaceful coexistence is probably a better general image...One might go further to argue that, even in a world of capital mobility, there is still a virtuous circle between activist government and international openness. The government interventions emblematic of the modern welfare state provide buffers against the kinds of social and political backlashes that undermined openness in the first half of the twentieth century" (789).
"Market integration is thought to affect national policy autonomy through three basic mechanisms. These are trade competitiveness pressures, the multinationalization of production, and the integration of financial markets" (791). Governments stand in the way of efficient trade blocs, and thus are pressured to reduce their size to become more competitive. If governments spend, they must recoup that through taxes or borrowing, one of which harms firms' competitiveness and the other makes money more expensive through raising interest rates. The ability of firms to export production easily is another concern of globalization theorists. If companies can take their production and easily emigrate to another country who has a more favorable production environment, this will help to spurn on the race to the bottom. The third point in this discussion involves the integration of finance. This wave of money can move around the globe at the speed of light, threatening stability if governments do not meet their demands.
"In this section I have made two basic points. First, there are three different facets of globalization that many consider to constrain national autonomy...Second, contemporary arguments about these globalization pathways are nothing new. One could transplant much of the work published in IO in the 1970s on interdependence and dependency into the 1990s globalization literature without fearing for its rejection as outmoded. Indeed, with appropriate changes in lexicon, the same could be said for Adam Smith" (795-6).
"First, there are strong parallels between recent arguments about the constraining effects of globalization on national autonomy and those all the way back to the eighteenth century about the domestic effects of market integration...My second point is that, up until the mid-1990s, globalization has not prompted a pervasive policy race to the neoliberal bottom among OECD countries, nor have governments that have persisted with interventionist policies invariably been hamstrung by damaging capital flight...This is not to say, however, that no facet of globalization significantly constrains national policy options. In particular, the integration of financial markets is more constraining than either trade or the multinationalization of production. But even here, one must be very careful to differentiate among various potential causal mechanisms. Talk of lost monetary autonomy only makes sense if one believes that the integration of financial markets forces governments to peg their exchange rates to external anchors of stability. On recent evidence, the credibility gains of doing so are far from overwhelming; indeed, noncredible pegs...have promoted the most debilitating cases of financial speculation and instability. On the other hand, the costs of giving up the exchange rate as a tool of economic adjustment are great, and economies that allow their currencies to float freely seem to benefit as a result. Governments simply should not feel any compunction to give up monetary autonomy in the era of global financial markets" (823).
"My analysis is...considerably more bullish about the future of the embedded liberalism compromise than some of its earlier advocates suggest" (824).
"The nation-state is purportedly an outmoded and beleaguered institutional form, on a collision course with the ever more international scale of markets. Policy autonomy, if not de jure sovereignty, is considered the primary casualty. Governments competing for mobile economic resources are thought to have little choice but to engage in a policy race to the neoliberal bottom, imperiling the efficacy and legitimacy of the democratic process itself" (787-8).
"This article puts under the analytic microscope the proposition that global markets trump national politics as social forces. I focus on the relationships between three dimensions of integration into international markets-trade in goods and services, the multinationalization of production, and financial capital mobility-and the macroeconomic policy choices of the advanced industrial countries up until the mid-1990s" (788).
It is possible to look at globalization as the cause of constraints on domestic policy, especially in certain cases in regard to finance capitalism. However, it is not the case that domestic policies have been uniformly constrained.
"There are two basic reasons why globalization constraints on policy choice are weaker than much contemporary rhetoric suggests. First, market integration has not only increased the exit options of producers and investors; it has also heightened feelings of economic insecurity among broader segments of society...Second, although there are costs associated with interventionist government...numerous government programs generate economic benefits that are attractive to mobile finance and production" (788-9).
"It should be a central objective of globalization research to see how these two sets of dynamics-capital's exit threats versus popular demands for redistribution, and the economic costs and benefits of interventionist government-play out in different contexts. In this article I point to two sources of variation. The first concerns differences among various facets of market integration and aspects of government policy choice...The second source of variation concerns domestic political conditions. Countries in which the balance of political power is tilted to the left continue to be more responsive to redistributive demands than those dominated by center-right parties...In summary, I do not believe that 'collision course' is the correct metaphor to apply to the panoply of relationships between interventionist national economic policies and global markets. Peaceful coexistence is probably a better general image...One might go further to argue that, even in a world of capital mobility, there is still a virtuous circle between activist government and international openness. The government interventions emblematic of the modern welfare state provide buffers against the kinds of social and political backlashes that undermined openness in the first half of the twentieth century" (789).
"Market integration is thought to affect national policy autonomy through three basic mechanisms. These are trade competitiveness pressures, the multinationalization of production, and the integration of financial markets" (791). Governments stand in the way of efficient trade blocs, and thus are pressured to reduce their size to become more competitive. If governments spend, they must recoup that through taxes or borrowing, one of which harms firms' competitiveness and the other makes money more expensive through raising interest rates. The ability of firms to export production easily is another concern of globalization theorists. If companies can take their production and easily emigrate to another country who has a more favorable production environment, this will help to spurn on the race to the bottom. The third point in this discussion involves the integration of finance. This wave of money can move around the globe at the speed of light, threatening stability if governments do not meet their demands.
"In this section I have made two basic points. First, there are three different facets of globalization that many consider to constrain national autonomy...Second, contemporary arguments about these globalization pathways are nothing new. One could transplant much of the work published in IO in the 1970s on interdependence and dependency into the 1990s globalization literature without fearing for its rejection as outmoded. Indeed, with appropriate changes in lexicon, the same could be said for Adam Smith" (795-6).
"First, there are strong parallels between recent arguments about the constraining effects of globalization on national autonomy and those all the way back to the eighteenth century about the domestic effects of market integration...My second point is that, up until the mid-1990s, globalization has not prompted a pervasive policy race to the neoliberal bottom among OECD countries, nor have governments that have persisted with interventionist policies invariably been hamstrung by damaging capital flight...This is not to say, however, that no facet of globalization significantly constrains national policy options. In particular, the integration of financial markets is more constraining than either trade or the multinationalization of production. But even here, one must be very careful to differentiate among various potential causal mechanisms. Talk of lost monetary autonomy only makes sense if one believes that the integration of financial markets forces governments to peg their exchange rates to external anchors of stability. On recent evidence, the credibility gains of doing so are far from overwhelming; indeed, noncredible pegs...have promoted the most debilitating cases of financial speculation and instability. On the other hand, the costs of giving up the exchange rate as a tool of economic adjustment are great, and economies that allow their currencies to float freely seem to benefit as a result. Governments simply should not feel any compunction to give up monetary autonomy in the era of global financial markets" (823).
"My analysis is...considerably more bullish about the future of the embedded liberalism compromise than some of its earlier advocates suggest" (824).
Tuesday, January 13, 2009
Freeman: Single Peaked Vs. Diversified Capitalism
FREEMAN, RB. 2000. Single Peaked Vs. Diversified Capitalism: The Relation Between Economic Institutions and Outcomes. NBER Working Paper.
From the abstract: "Capitalist countries have historically had quite different labour market institutions and social policies. Do these differences produce sufficiently different economic outcomes to identify a single peak set of institutions? This paper shows that: 1. Labour market institutions have large effects on distribution, but modest hard-to-uncover effects on efficiency. 2. Institutional diversity is increasing among advanced countries, as measured by the percentage of workers covered by collective bargaining. 3. The case for the US having the institutions for peak economy status rests on its 1990s full employment experience, which arguably counter balances its high level of economic inequality. The historical pattern whereby some capitalist countries do better than others in some periods...then run into problems is more consonant with the view that capitalism permits national differences in institutions to persist than with the view that all economies must converge to a single institutional structure" (abstract).
"The labour market is potentially the most idiosyncratic market in advanced capitalism" (1).
The single peaked model of capitalism would argue that it would be possible for the US to achieve a full employment status with the right kind of labor market institution. A Diverse Capitalism approach would understand this to be problematic. In a diverse capitalism approach, "To move from one peak to a higher one or to the global optimum req1uires that the economy descend from the local peak before it ascends the higher one" (3). "The expense of changing institutions permits variety in the institutional environment" (3). There are a variety of different "landscapes", ie., the relationship between a kind of institutional labor market relationship and a certain kind of desired output. These provide an opportunity for comparative analysis. There is also a normative element to this analysis: it is possible to analyze the variety among countries by different metrics, with obviously different results.
There is then a various analysis of different forms in which a capitalist economy can form, as well as an exploration of whether or not the US represents a "Peak Economy".
The paper ends with three questions posed. As a summary:
Do different labor institutions and organization affect economic performance in different ways? Yes. Not in an absolute deterministic way, but yes.
Will distinct characteristics between institutions continue as the global economy becomes more integrated? Yes. Because institutions become embedded, because values differ and because different institutions do not preclude the same output.
Does the US represent a "peak economy"? No.
UPDATE:
There is a great variety in different capitalist countries in their institutional structure and consistency. From the US to Japan to Germany, three very successful capitalist countries operate with three very different kinds of institutional milieus. This study examines the claim that there is only one form of institutional structure and consistency that is agreeable to the interests of global finance and capital. This is identified as the single peaked verses diverse capitalist thesis.
The reason that there can be a multitude of structures within capitalist organization is that there are large costs associated with transitioning from one institutional structure to another.
If the single-peaked hypothesis was correct, it would be possible to note a few things: firstly, there would be one clear set of institutions that could be emulated; these should persist over time; countries who fall around the peak should be able to conform to these institutions and achieve gains in growth, and there should be long-term global convergence towards homogenous institutions of capitalism.
From the abstract: "Capitalist countries have historically had quite different labour market institutions and social policies. Do these differences produce sufficiently different economic outcomes to identify a single peak set of institutions? This paper shows that: 1. Labour market institutions have large effects on distribution, but modest hard-to-uncover effects on efficiency. 2. Institutional diversity is increasing among advanced countries, as measured by the percentage of workers covered by collective bargaining. 3. The case for the US having the institutions for peak economy status rests on its 1990s full employment experience, which arguably counter balances its high level of economic inequality. The historical pattern whereby some capitalist countries do better than others in some periods...then run into problems is more consonant with the view that capitalism permits national differences in institutions to persist than with the view that all economies must converge to a single institutional structure" (abstract).
"The labour market is potentially the most idiosyncratic market in advanced capitalism" (1).
The single peaked model of capitalism would argue that it would be possible for the US to achieve a full employment status with the right kind of labor market institution. A Diverse Capitalism approach would understand this to be problematic. In a diverse capitalism approach, "To move from one peak to a higher one or to the global optimum req1uires that the economy descend from the local peak before it ascends the higher one" (3). "The expense of changing institutions permits variety in the institutional environment" (3). There are a variety of different "landscapes", ie., the relationship between a kind of institutional labor market relationship and a certain kind of desired output. These provide an opportunity for comparative analysis. There is also a normative element to this analysis: it is possible to analyze the variety among countries by different metrics, with obviously different results.
There is then a various analysis of different forms in which a capitalist economy can form, as well as an exploration of whether or not the US represents a "Peak Economy".
The paper ends with three questions posed. As a summary:
Do different labor institutions and organization affect economic performance in different ways? Yes. Not in an absolute deterministic way, but yes.
Will distinct characteristics between institutions continue as the global economy becomes more integrated? Yes. Because institutions become embedded, because values differ and because different institutions do not preclude the same output.
Does the US represent a "peak economy"? No.
UPDATE:
There is a great variety in different capitalist countries in their institutional structure and consistency. From the US to Japan to Germany, three very successful capitalist countries operate with three very different kinds of institutional milieus. This study examines the claim that there is only one form of institutional structure and consistency that is agreeable to the interests of global finance and capital. This is identified as the single peaked verses diverse capitalist thesis.
The reason that there can be a multitude of structures within capitalist organization is that there are large costs associated with transitioning from one institutional structure to another.
If the single-peaked hypothesis was correct, it would be possible to note a few things: firstly, there would be one clear set of institutions that could be emulated; these should persist over time; countries who fall around the peak should be able to conform to these institutions and achieve gains in growth, and there should be long-term global convergence towards homogenous institutions of capitalism.
Tuesday, January 6, 2009
Jutila: Reconstructing Global Interconnectedness
Jutila, Matti. Reconstructing Global Interconnectedness: The Complementary Roles of Philosophy and Social Sciences: A conversation with Roy Bhaskar and Keikki Patomaki.
Critical Realism has a unique genealogy that can be traced back through the works of Bhakshar and Harre, among many others. "In short, the content of CR is understood with the help of three philosophical theses: ontological realism, epistemological relativism and judgmental rationalism. Ontological realism means that the world is not only real but it must also be differentiated, structured, layered and possess causal powers. This forms the basis for our knowledge of the different aspects of the world, but this knowledge is always socially produced, contextual and fallible...This interpretative pluralism does not mean that all knowledge claims are equally valid. According to judgmental rationalism, we can always compare various interpretations, explanations and models to make well-grounded and plausible judgments about their truth" (2).
The remainder of the piece is an interview with both Bhaskar and Patomaki regarding their positioning of critical theory within philosophy and social science.
Critical Realism has a unique genealogy that can be traced back through the works of Bhakshar and Harre, among many others. "In short, the content of CR is understood with the help of three philosophical theses: ontological realism, epistemological relativism and judgmental rationalism. Ontological realism means that the world is not only real but it must also be differentiated, structured, layered and possess causal powers. This forms the basis for our knowledge of the different aspects of the world, but this knowledge is always socially produced, contextual and fallible...This interpretative pluralism does not mean that all knowledge claims are equally valid. According to judgmental rationalism, we can always compare various interpretations, explanations and models to make well-grounded and plausible judgments about their truth" (2).
The remainder of the piece is an interview with both Bhaskar and Patomaki regarding their positioning of critical theory within philosophy and social science.
Patomaki: A Critical Realist Approach to Global Political Economy
Patomäki, H. 2003. A critical realist approach to global political economy. Critical realism (pp. 197Á220). London/New York: Routledge.
Cox wrote from a neo-Gramscian perspective about IPE. This derived from a critique of Wallenstein's approach to a global capitalist order, both as a critique and as an amendment. This was then built upon by Gill and Law. "...Gill and Law argued that a political economy analysis should not be narrowly limited to diplomatic relations between governments of modern nation-states, which are taken as given, and a few other actors such as NGOs and international organizations. The focus should not be on the actions of a few collective actors, particularly states, but rather on the underlying socio-economic processes and structures. Deeper and larger historical processes...determine, in part, forms of state and world orders. In contrast to Wallenstein, but in accordance with the rising literature on globalization, Gill and Law...also claimed that there is now a rather well integrated global political economy, 'whereas in the past, there was a less complex international political economy'" (2).
"GPE has opened a new perspective for fruitful studies of world politics and economy. It is the basic claim of this paper that critical realism can make a difference by enriching this approach in at least two crucial ways. Firstly, critical realism enables the building of bridges between heterodox economics and GEP...Secondly, CR can work as a philosophical 'underlabourer' for GPE by deepening basic ontological concepts such as causality, action, structure, power and open systems; by clarifying the epistemology of explanatory modeling and the role of explicitly hypotheses and empirical evidence; and by explicating the truly critical moment in social scientific explanations" (2-3).
"In the following, I make first an argument that the neo-Gramscian GPE fails to address the issues of economic theory and lacks adequate concepts of causality, explanation, hypothesis and empirical evidence. Second, I explain why the neo-classical orthodoxy in economics has become insulated from all other strands of social sciences, including political economy; and ask whether there are nay more open, pluralist and realist approaches in economics, which could enable the creation of bridges between GPE and economics. Third, in order to absent the absences of GPE, I introduce the critical realist notions of action, structure, causality and open systems; and the epistemological concepts of falsification, iconic model, existential and causal hypothesis, and evidence. I argue that these and related concepts provide a framework within which GPE can be made more systematic and open to falsification and revisions; and within which economics and political economy could be re-united. Fourth, by using explanations of the instability of global finance as an example, I take a few steps towards concretizing these suggestions in a pivotal contemporary context. Finally, I conclude by outlining briefly the relationship between causal explanations, social criticism, and transformative practice" (3-4).
Neo-classical economic theory has become separated from social science. The author traces the development of both neo-classical economic theory growth and the growth of heterodox approaches. A critical realist ontology also rejects the false method of looking at the world through closed systems in place of open systems.
Cox wrote from a neo-Gramscian perspective about IPE. This derived from a critique of Wallenstein's approach to a global capitalist order, both as a critique and as an amendment. This was then built upon by Gill and Law. "...Gill and Law argued that a political economy analysis should not be narrowly limited to diplomatic relations between governments of modern nation-states, which are taken as given, and a few other actors such as NGOs and international organizations. The focus should not be on the actions of a few collective actors, particularly states, but rather on the underlying socio-economic processes and structures. Deeper and larger historical processes...determine, in part, forms of state and world orders. In contrast to Wallenstein, but in accordance with the rising literature on globalization, Gill and Law...also claimed that there is now a rather well integrated global political economy, 'whereas in the past, there was a less complex international political economy'" (2).
"GPE has opened a new perspective for fruitful studies of world politics and economy. It is the basic claim of this paper that critical realism can make a difference by enriching this approach in at least two crucial ways. Firstly, critical realism enables the building of bridges between heterodox economics and GEP...Secondly, CR can work as a philosophical 'underlabourer' for GPE by deepening basic ontological concepts such as causality, action, structure, power and open systems; by clarifying the epistemology of explanatory modeling and the role of explicitly hypotheses and empirical evidence; and by explicating the truly critical moment in social scientific explanations" (2-3).
"In the following, I make first an argument that the neo-Gramscian GPE fails to address the issues of economic theory and lacks adequate concepts of causality, explanation, hypothesis and empirical evidence. Second, I explain why the neo-classical orthodoxy in economics has become insulated from all other strands of social sciences, including political economy; and ask whether there are nay more open, pluralist and realist approaches in economics, which could enable the creation of bridges between GPE and economics. Third, in order to absent the absences of GPE, I introduce the critical realist notions of action, structure, causality and open systems; and the epistemological concepts of falsification, iconic model, existential and causal hypothesis, and evidence. I argue that these and related concepts provide a framework within which GPE can be made more systematic and open to falsification and revisions; and within which economics and political economy could be re-united. Fourth, by using explanations of the instability of global finance as an example, I take a few steps towards concretizing these suggestions in a pivotal contemporary context. Finally, I conclude by outlining briefly the relationship between causal explanations, social criticism, and transformative practice" (3-4).
Neo-classical economic theory has become separated from social science. The author traces the development of both neo-classical economic theory growth and the growth of heterodox approaches. A critical realist ontology also rejects the false method of looking at the world through closed systems in place of open systems.
Friday, January 2, 2009
Khan: Making Globalization Work
Khan, H. 2008. Making Globalization Work: Towards Global Economic Justice.
"Globalization as a corporate-led process has come under much justifiable criticism. This paper attempts to give the term analytic content distinct from its more ideological formulations. It then focuses on a normative analysis of globalization from the capabilities perspective. A freedom-centered perspective such as the capabilities approach emphasizes policies and institutions that can enhance freedom globally and locally. A global governance structure based on transparent principles of both economic efficiency and social justice is shown to be a desirable state of affairs; however, the present fractured process of globalization is more likely to end up in a fragmenting regionalism or even national protectionism and rivalry. Multilateral cooperation on the basis of the framework advanced here is an urgent necessity. To this end the creation of international regimes of cooperation in areas ranging from trade and finance to ecological and women's and minorities rights issues must be put on the international and national social and political agendas" (1).
How is it possible to move towards regionalism if the overall stated goal of globalization is to increase international cooperation and openness? "The main argument offered is that there is a contradiction in the heart of the current US and the IFIs-led globalization that stems from their seeming refusal to understand the implications of unevenness in the real world. This also has led to their neglect of some vital principles of global justice" (2).
Globalization has become a term that is tossed about with abandon in certain circles; its meaning has become amorphous. The effects of increased international openness are not universally felt, for example, standard H-O models would claim that the global south should find itself increasing parity with the global north and less-skilled positions move in that direction while less skilled workers in the global north should expect to suffer. The empirical evidence of this is not at all clear. Some call this a fractured-globalism.
"In this paper globalization is conceptualized as asset of cross-cutting economic, technological, cultural and communicative processes that have grown enormously since the end of WWII. In simple terms globalization refers to the integration of the world economy in such a way that what is unfolding in one part of the world has clear, sustained and observable repercussions on the socioeconomic environment and lifestyles of individuals and communities elsewhere" (5).
In an earlier work, the author highlighted 5 areas where global justice can take root within the globalization debate: international trade and monetary regimes; international capital flows; international ecological considerations; asset redistribution and human development; and gender issues (6-7).
"Capabilities can be construed as general powers of human body and mind that can be acquired, maintained, nurtured and developed" (9). There is then a reproduction of Crocker's taxonomy of both Sen and Nussbaum's capabilities approach (9-10).
"Regarding the intense discussion on the effect of globalization on the welfare and economic growth of developing countries, the dominant view appears to be that closer economic integration will enhance the flow of goods and services as well as factors of production, and hence promote economic growth and the welfare of all people. It is believed that globalization will result in a better division of labor, allowing developing countries...to specialize in labor intensive commodities while permitting developing countries to use their workers in more productive ways...Others...reject this argument and contend that globalization and regionalization has largely benefited the powerful economic entities, thereby marginalizing weak regions and nations. It is argues that globalization, while increasing the importance of service industries and skilled labor, also reduces the importance of primary commodities and unskilled labor...Consequently, countries which were once considered wealthy, endowed with natural resources, are no more in the list of rich countries...In modern economy, technology, knowledge and skills stand as the only course of comparative advantage" (12-3).
The Asian Financial Crisis of the late 90s is explored as an example of the contradiction of globalization.
"Globalization has obviously had some positive impacts such as the transfer of technology, raising of productivity in specific sectors, and the improvement of the living standard of some people in developing and developed countries. However, current type of globalization generally, while benefiting certain regions or groups, is marginalizing and distressing the vulnerable and disadvantaged regions and people. This type of corporate-led globalization is also forging imbalances among different human needs by privileging the acquisition of material wealth over human and spiritual values, resulting in violence, alienation and despair" (18).
"Globalization as a corporate-led process has come under much justifiable criticism. This paper attempts to give the term analytic content distinct from its more ideological formulations. It then focuses on a normative analysis of globalization from the capabilities perspective. A freedom-centered perspective such as the capabilities approach emphasizes policies and institutions that can enhance freedom globally and locally. A global governance structure based on transparent principles of both economic efficiency and social justice is shown to be a desirable state of affairs; however, the present fractured process of globalization is more likely to end up in a fragmenting regionalism or even national protectionism and rivalry. Multilateral cooperation on the basis of the framework advanced here is an urgent necessity. To this end the creation of international regimes of cooperation in areas ranging from trade and finance to ecological and women's and minorities rights issues must be put on the international and national social and political agendas" (1).
How is it possible to move towards regionalism if the overall stated goal of globalization is to increase international cooperation and openness? "The main argument offered is that there is a contradiction in the heart of the current US and the IFIs-led globalization that stems from their seeming refusal to understand the implications of unevenness in the real world. This also has led to their neglect of some vital principles of global justice" (2).
Globalization has become a term that is tossed about with abandon in certain circles; its meaning has become amorphous. The effects of increased international openness are not universally felt, for example, standard H-O models would claim that the global south should find itself increasing parity with the global north and less-skilled positions move in that direction while less skilled workers in the global north should expect to suffer. The empirical evidence of this is not at all clear. Some call this a fractured-globalism.
"In this paper globalization is conceptualized as asset of cross-cutting economic, technological, cultural and communicative processes that have grown enormously since the end of WWII. In simple terms globalization refers to the integration of the world economy in such a way that what is unfolding in one part of the world has clear, sustained and observable repercussions on the socioeconomic environment and lifestyles of individuals and communities elsewhere" (5).
In an earlier work, the author highlighted 5 areas where global justice can take root within the globalization debate: international trade and monetary regimes; international capital flows; international ecological considerations; asset redistribution and human development; and gender issues (6-7).
"Capabilities can be construed as general powers of human body and mind that can be acquired, maintained, nurtured and developed" (9). There is then a reproduction of Crocker's taxonomy of both Sen and Nussbaum's capabilities approach (9-10).
"Regarding the intense discussion on the effect of globalization on the welfare and economic growth of developing countries, the dominant view appears to be that closer economic integration will enhance the flow of goods and services as well as factors of production, and hence promote economic growth and the welfare of all people. It is believed that globalization will result in a better division of labor, allowing developing countries...to specialize in labor intensive commodities while permitting developing countries to use their workers in more productive ways...Others...reject this argument and contend that globalization and regionalization has largely benefited the powerful economic entities, thereby marginalizing weak regions and nations. It is argues that globalization, while increasing the importance of service industries and skilled labor, also reduces the importance of primary commodities and unskilled labor...Consequently, countries which were once considered wealthy, endowed with natural resources, are no more in the list of rich countries...In modern economy, technology, knowledge and skills stand as the only course of comparative advantage" (12-3).
The Asian Financial Crisis of the late 90s is explored as an example of the contradiction of globalization.
"Globalization has obviously had some positive impacts such as the transfer of technology, raising of productivity in specific sectors, and the improvement of the living standard of some people in developing and developed countries. However, current type of globalization generally, while benefiting certain regions or groups, is marginalizing and distressing the vulnerable and disadvantaged regions and people. This type of corporate-led globalization is also forging imbalances among different human needs by privileging the acquisition of material wealth over human and spiritual values, resulting in violence, alienation and despair" (18).
Nayyar: Globalisation, History and Development
Nayyar, D. 2006. Globalisation, history and development: a tale of two centuries. CPES.
"This paper situates globalization in historical perspective to analyze its implications for development. IT sketches a picture of globalization during the late nineteenth and twentieth centuries. A comparison of these two epochs reveals striking parallels, unexpected similarities and important differences. It shows that globalization did not lead to rapid growth and economic convergence in the world, either then or now. Indeed, growth slowed down, and income levels diverged, while the gap between the industrialized and developing countries widened, in both epochs. The story of globalization, it turns out, does not conform to the fairy tale about convergence and development" (137).
The author notes that the word globalization is used in both a descriptive and a normative sense: one is more passively attempting to explore a deepening global integration and the other is prescribing a development method. It can be explained as increasingly intense economic transactions across national borders occurring through one of the following: international trade, investment or finance. "More precisely, it can be defined as a process associated with increasing economic openness, growing economic interdependence and deepening economic integration in the world economy" (137).
The history of globalization before 1914 is explored. Trade openness increased dramatically in the years leading up to the Great War, in fact, more substantively than global economic output. However, it was not the case that this openness was entirely voluntary: many countries were coerced to join the international trading regime through gunboat diplomacy.
In the latter half of the 20th century, international openness to economic exchange also experienced rapid growth. This is true when explored through the metric of international trade or international finance/investment.
The two periods are compared: "There are four similarities that are worth noting: the absence or the dismantling of barriers to international economic transactions; the development of enabling technologies; emerging forms of industrial organization; and political hegemony or dominance" (144). "There are, also, important differences between the two phases of globalization. It is important to highlight four such differences: in trade flows, in investment flows, in financial flows and most important, perhaps, in labour flows, across national boundaries" (146).
"This paper situates globalization in historical perspective to analyze its implications for development. IT sketches a picture of globalization during the late nineteenth and twentieth centuries. A comparison of these two epochs reveals striking parallels, unexpected similarities and important differences. It shows that globalization did not lead to rapid growth and economic convergence in the world, either then or now. Indeed, growth slowed down, and income levels diverged, while the gap between the industrialized and developing countries widened, in both epochs. The story of globalization, it turns out, does not conform to the fairy tale about convergence and development" (137).
The author notes that the word globalization is used in both a descriptive and a normative sense: one is more passively attempting to explore a deepening global integration and the other is prescribing a development method. It can be explained as increasingly intense economic transactions across national borders occurring through one of the following: international trade, investment or finance. "More precisely, it can be defined as a process associated with increasing economic openness, growing economic interdependence and deepening economic integration in the world economy" (137).
The history of globalization before 1914 is explored. Trade openness increased dramatically in the years leading up to the Great War, in fact, more substantively than global economic output. However, it was not the case that this openness was entirely voluntary: many countries were coerced to join the international trading regime through gunboat diplomacy.
In the latter half of the 20th century, international openness to economic exchange also experienced rapid growth. This is true when explored through the metric of international trade or international finance/investment.
The two periods are compared: "There are four similarities that are worth noting: the absence or the dismantling of barriers to international economic transactions; the development of enabling technologies; emerging forms of industrial organization; and political hegemony or dominance" (144). "There are, also, important differences between the two phases of globalization. It is important to highlight four such differences: in trade flows, in investment flows, in financial flows and most important, perhaps, in labour flows, across national boundaries" (146).
Thursday, January 1, 2009
Frieden: Will Global Capitalism Fail Again?
Frieden, J. 2006. Will Global Capitalism Fall Again? Presentation for BRUEGEL's Essay and Lecture Series. Brussels, June.
"Over the past thirty years, the world economy has become increasingly integrated. Despite continued conflict over globalization, most people--especially in the industrialized nations--appear to accept that an international system in which goods and capital can move quite freely among countries has become the normal state of affairs, and is likely to continue for the foreseeable future" (7).
However, while there is agreement that a certain kind of phenomena is occurring, there is no consensus as to whether or not this change is occurring for the better. Many look back to the most notable previous era of globalization, that occurring in the years previous to 1914, and note that the system produced stable economic growth, high degrees of convergence over a great many of years. Understanding if our current economic system will fail requires that we possibly explore how the previous system failed.
"Why could the first era of global capitalism not be restored? It was not for lack of trying. For twenty years after World War I ended, statesmen and diplomats engaged in round after round of conferences and consultations. The nations of the world signed treaties, created international organizations, and committed themselves to new obligations, in unprecedented measure. Yet nothing seemed to work" (11).
"The underlying sources of weakness in the international economic order after 1918 were political" (11).
"International political problems introduced great instability into the inter-war political economy, but I would focus attention on an even more important source of conflict: domestic politics. For in addition to international political conditions conducive to a functioning, integrated international economy, there are also domestic political requisites. And in my view, the principal problems that affected and infected the international economy in the inter-war period were domestic and political" (12).
"The classical international economy of the gold standard era rested upon a consensus among elites about the priority of international economic commitments. In virtually every country, for virtually all of this period, economic and political leaders agreed that governments needed to ensure that their economies would adjust quickly to changing international economic conditions, rather than the other way around. They agreed on requiring the domestic economy to pay the price necessary to realize the benefits of integration into the world economy. And what was that price? What did it mean for the national economy to, as they said, 'take the strain?' Typically it meant allowing, or forcing, prices, profits, and wages to drop in response to adverse terms of trade or other shocks" (12).
Domestic politics did not represent such a constraint on elites controlling the flexibility of prices, wages in the interest of global economic stability. This was mainly because countries were either only slightly democratic or not democratic, and that organized labor had yet to establish itself firmly.
"To summaries and generalize, the first age of globalization worked because it was economically and politically feasible for governments to do what was necessary to sustain their international economic commitments. IT was not restored after World War I because these enabling conditions were no longer present. Keynes drew his conclusions early on: it was, he said exceedingly dangerous 'to apply the principles of an economics, which was worked out on the hypothesis of laissez-faire and free competition, to a society which is rapidly abandoning these hypotheses'" (14).
"Despite the warnings from Keynes and others, when difficulties arose in the 1920s, and especially in the 1930s, there was initially little or no political viable response" (15).
"The lessons of history are rarely simple. But there are some things we can learn from the experiences of the past century, especially from how the first era of global capitalism fell and how it rose again. In the aftermath of the age of globalization that ended in 1914, attempts to restore and sustain the system led to a resounding failure and a terrible backlash. While that backlash may not have been justifiable, it was at least understandable" (30).
"Compromises between globalism and nationalism, and between social reforms and markets, permitted the Western economies to grow rapidly and stably after World War II...Today capitalism is at least as global as it was in the decades before 1914, which raises the specter of a return to the failures that ended that earlier episode of global capitalism. And so the central challenge of our portion of the twenty-first century will be to avoid a repetition of past tragedies, of both sorts...This will require a delicate balancing act...The first part of it is to build and sustain a functioning, integrated, international political and economic order...The second part of the balancing act is to create and sustain domestic political and economic conditions that allow enduring support for international commitments" (31).
"Over the past thirty years, the world economy has become increasingly integrated. Despite continued conflict over globalization, most people--especially in the industrialized nations--appear to accept that an international system in which goods and capital can move quite freely among countries has become the normal state of affairs, and is likely to continue for the foreseeable future" (7).
However, while there is agreement that a certain kind of phenomena is occurring, there is no consensus as to whether or not this change is occurring for the better. Many look back to the most notable previous era of globalization, that occurring in the years previous to 1914, and note that the system produced stable economic growth, high degrees of convergence over a great many of years. Understanding if our current economic system will fail requires that we possibly explore how the previous system failed.
"Why could the first era of global capitalism not be restored? It was not for lack of trying. For twenty years after World War I ended, statesmen and diplomats engaged in round after round of conferences and consultations. The nations of the world signed treaties, created international organizations, and committed themselves to new obligations, in unprecedented measure. Yet nothing seemed to work" (11).
"The underlying sources of weakness in the international economic order after 1918 were political" (11).
"International political problems introduced great instability into the inter-war political economy, but I would focus attention on an even more important source of conflict: domestic politics. For in addition to international political conditions conducive to a functioning, integrated international economy, there are also domestic political requisites. And in my view, the principal problems that affected and infected the international economy in the inter-war period were domestic and political" (12).
"The classical international economy of the gold standard era rested upon a consensus among elites about the priority of international economic commitments. In virtually every country, for virtually all of this period, economic and political leaders agreed that governments needed to ensure that their economies would adjust quickly to changing international economic conditions, rather than the other way around. They agreed on requiring the domestic economy to pay the price necessary to realize the benefits of integration into the world economy. And what was that price? What did it mean for the national economy to, as they said, 'take the strain?' Typically it meant allowing, or forcing, prices, profits, and wages to drop in response to adverse terms of trade or other shocks" (12).
Domestic politics did not represent such a constraint on elites controlling the flexibility of prices, wages in the interest of global economic stability. This was mainly because countries were either only slightly democratic or not democratic, and that organized labor had yet to establish itself firmly.
"To summaries and generalize, the first age of globalization worked because it was economically and politically feasible for governments to do what was necessary to sustain their international economic commitments. IT was not restored after World War I because these enabling conditions were no longer present. Keynes drew his conclusions early on: it was, he said exceedingly dangerous 'to apply the principles of an economics, which was worked out on the hypothesis of laissez-faire and free competition, to a society which is rapidly abandoning these hypotheses'" (14).
"Despite the warnings from Keynes and others, when difficulties arose in the 1920s, and especially in the 1930s, there was initially little or no political viable response" (15).
"The lessons of history are rarely simple. But there are some things we can learn from the experiences of the past century, especially from how the first era of global capitalism fell and how it rose again. In the aftermath of the age of globalization that ended in 1914, attempts to restore and sustain the system led to a resounding failure and a terrible backlash. While that backlash may not have been justifiable, it was at least understandable" (30).
"Compromises between globalism and nationalism, and between social reforms and markets, permitted the Western economies to grow rapidly and stably after World War II...Today capitalism is at least as global as it was in the decades before 1914, which raises the specter of a return to the failures that ended that earlier episode of global capitalism. And so the central challenge of our portion of the twenty-first century will be to avoid a repetition of past tragedies, of both sorts...This will require a delicate balancing act...The first part of it is to build and sustain a functioning, integrated, international political and economic order...The second part of the balancing act is to create and sustain domestic political and economic conditions that allow enduring support for international commitments" (31).
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