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1. MH BOUCHET/CERAM (c) GLOBALIZATION: A polarized debate September 2007
2. MH BOUCHET/CERAM (c) Economic Development Theories
3. MH BOUCHET/CERAM (c) A polarized debate
4. MH BOUCHET/CERAM (c) Summing up the key stances… Economic development is rooted in market-driven economic policies, in cautious monetary management, and in trade liberalization
Free trade is mutually beneficial as a positive sum game
Development catch-up takes place as capital flows from rich to poor countries
The State should limit its intervention to the strict minimum to avoid any market distortion Competition for profits leads to ever extending the capitalist system into developing economies where labor is cheaper, hence higher profits
Keen competition between multinationals gradually erode the dynamic stimulus of competition and leads to monopolies for the sharing of markets worldwide.
The State must intervene to foster a steady expansion of aggregate demand to fight unemployment
5. MH BOUCHET/CERAM (c) A polarized debate Neo-classical and monetarist economists
The lesser the state the better: the state’s intervention is dangerous and useless
The free market is the best tool to allocate and distribute resources
Rational behavior of the economic agent
Self-regulatory role of the market-based economy
Unemployment cannot drop below its natural rate or at the cost of rising inflation
Monetary policy is too important to be left in the hands of politicians! Keynesian economists
Necessary regulatory role of the state to smooth the consequences of economic cycles and to stimulate demand
Risk of long-term stubborn unemployment due to protracted demand weakness
Key role of multiplier
Temporary budget deficit should be accepted
6. MH BOUCHET/CERAM (c) I- Liberal & neo-classical school of thought Market-based economic policy
Minimum state intervention
Key role of competition
7. MH BOUCHET/CERAM (c) The neoclassical liberal school Economic development is rooted in market-driven economic policies, in cautious monetary management, and in trade liberalization:
Low taxes and minimum public sector budget deficit!
8. MH BOUCHET/CERAM (c) The emphasis on market-based economic policies “It is safe to say that we are witnessing this decade, in the United States, history’s most compelling demonstration of the productive capacity of free people operating in free markets”.
Alan Greenspan, December 1999
Globalization is an endeavor that can spread worldwide the values of freedom and civil contact – the antithesis of terrorism!”.
Alan Greenspan (2003)
9. MH BOUCHET/CERAM (c) From classical to neo-classical scholars
10. MH BOUCHET/CERAM (c) The founding fathers of the Liberal school Montesquieu, Gournay, Turgot: (XVIII° century): “Laissez-faire, laissez passer”
Adam Smith: 1776: The Wealth of Nations: Natural order stems from individual choices with minimal state involvement: “natural harmony”
David Ricardo (1817): Principles of Political Economy and Taxation: the law of comparative advantage: a positive sum game for all countries!
James Mill (1821): Elements of Political Economy: exporting for importing (against the mercantilists): trade is a >0 sum game
11. MH BOUCHET/CERAM (c) Convergence between trade, economic growth, peace and collective well-being
12. MH BOUCHET/CERAM (c) Adam Smith (1723 –1790)
Adam Smith, Scottish philosopher and economist: "The Wealth of Nations", on free trade and market economics (1776):
"Little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice." ADAM SMITH, 1755
13. MH BOUCHET/CERAM (c) Adam Smith Adam Smith heavily influenced economic thought throughout the Victorian Era. Generally considered the "father of modern economics”.
Competition, the market's invisible hand, would lead to proper pricing.
Strongly opposed any government intervention into business affairs. Trade restrictions, minimum wage laws, and product regulation are detrimental to a nation's economic health.
Smith was not an apologist for the capitalist class.
14. MH BOUCHET/CERAM (c) Theory of Absolute Advantage „Wealth of the Nations“ (1776): Adam Smith promoted free trade by comparing nations to households:
„Every prudent master of a family will never attempt to make at home what it will cost ... more to make than to buy. The tailor does not attempt to make his own shoes, but buys them from the shoemaker ...
What is prudence in the conduct of every private family, cannot be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the product of our own industry employed in a way in which we have some advantage.“
15. MH BOUCHET/CERAM (c) Absolute Advantage A country has an absolute advantage over another in the production of good X when an equal quantity of resources can produce > X in the first country than in the second =
higher productivity!
16. MH BOUCHET/CERAM (c) David Ricardo (1772 – 1823)
David Ricardo, working in the early part of the 19th century, realized that absolute advantage was a limited case of a more general theory:
Theory of Comparative advantage
Major work: „On the Principles of Political Economy and Taxation“ (1817)
17. MH BOUCHET/CERAM (c) David Ricardo In the aftermath of Napoléon’s defeat, in 1815, British peasants consider that maintaining agricultural protectionism is a key to national security.
Meanwhile, British industrialists want to achieve a decline in the price of wheat and of wages through import liberalization.
Rising food prices and rising wages will squeeze industrial profits and only trade can lower costs!
Each and every nation gets interest in specializing its production in those goods where it has « comparative advantage » depending on each nation’s endowments (labor, capital, land…).
Free trade will increase global welfare
18. MH BOUCHET/CERAM (c) Comparative Advantage What if one country can produce all commodities more efficiently than other countries?
In essence this was the question David Ricardo tackled in 1817 (industrial revolution)
Ricardo‘s answer underlies the theory of comparative advantage: potential gains from trade with >0 sum game for all players!
The gains from specialization and trade depend on the pattern of comparative, not absolute, advantage.
19. MH BOUCHET/CERAM (c) Comparative Advantage A difference in comparative costs of production – the necessary condition for international exchange to occur – does, in fact, reflect a difference in the techniques of production, the capital and labor inputs, and productivity.
The theory aims at showing that trade is beneficial to all participating countries: win/win!
Positive-sum game of international trade!
20. MH BOUCHET/CERAM (c) Productivity competition: Thailand vs Brazil
21. MH BOUCHET/CERAM (c) Productivity competition Thailand has an ABSOLUTE comparative advantage over Brazil. One Thai worker produces both more shoes and more stereo headphones than a worker in Brazil.
But …Thailand has also a larger relative advantage over Brazil in producing stereo (6/2) than shoes (12/10)
22. MH BOUCHET/CERAM (c) No Trade: each country divides its own production capacity between shoes and stereo 1000 workers= 300 work on shoes and 700 work on stereo
23. MH BOUCHET/CERAM (c) Complete specialization:
24. MH BOUCHET/CERAM (c) Trade at the ratio of 2 shoes/1stereo (i.e. Thailand’s internal trade ratio = Thailand’s domestic price.) All gains go to Brazil that consumes more shoes and more stereo while Thailand is not better off
25. MH BOUCHET/CERAM (c) Trade at the ratio of 5 shoes/1stereo (i.e. Brazil’s internal trade ratio = Brazil’s domestic price.) All gains go to Thailand that consumes more shoes and more stereo while Brazil is not better off
26. MH BOUCHET/CERAM (c) Trade negotiations produce a mid-range price of 4 shoes for 1 stereo with mutually fruitful exchange: Both Thailand and Brazil are better off!
27. MH BOUCHET/CERAM (c) The modern liberal economics school Samuelson (2004): Ricardo is right but…
Though they are both winners and losers, the winners’ gains can exceed the losers’ losses. Productivity gains in China’s export sector raise total wealth in each country: China and the US.
But technical progress in China can also improve productivity in export goods competing with the US (ex. China’s advances in semiconductors or India’s in financial services)
Then, trade can turn entirely to the « poor » country’s advantage.
28. MH BOUCHET/CERAM (c) Samuelson on the limits of trade benefits (2004) The aggregate economic gains to a nation from trade may decline in the future if other nations become more productive in those sectors in which the « rich » country now holds a comparative advantage. The benefits of trade that derive from specialization are diminishing.
However, protectionism breeds monopoly, crony capitalism and recession: pursuing open trade and competition is the better option for promoting overall growth and prosperity!
Endless productivity growth race!
29. MH BOUCHET/CERAM (c) Modern liberal approaches Walter Rostow : “take-off” paradigm
S. Huntington: the Institutional development school
The approach to development of the IFIs (IMF)
Arthur Laffer (Chicago, South Carolina)
Milton Friedman (Nobel Prize-Chicago): Monetarism
Gary Becker (Chicago, Nobel Prize 1992)
James Buchanan (Nobel Prize, 1986)
Robert Lucas (Nobel Prize)
Alan Greenspan
Paul Samuelson (Nobel Prize)
Jagdish Bhagwati
Martin Wolf (FT) = “The Fed should not save Main Street nor rescue Wall Street!”
N. Sarkozy… “The central banks tend to make life easier for speculators and harder for businessmen: moral hazard at play!” (09-2007)
30. MH BOUCHET/CERAM (c) The liberal “think-tanks” Mount Pelerin Society of liberal supply-side economists created in 1947 by Friedrich von Hayek
Hoover institution (Standford University)
Cato Institute (www.cato.org)
American Enterprise Institute
Washington -based Heritage Foundation
31. MH BOUCHET/CERAM (c) The neoclassical liberal school Robert J. Lucas, Robert Barro, and Thomas J. Sargent’s central assumption of "rational expectations“
Assumption: actors in the economy are smart and forward looking and therefore attempt to predict the policies that government is going to implement.
Excessive state intervention creates “moral hazard” (bail out of US Savings & Loans in 1990, Japan’s financial system in 1999, France’s Crédit Lyonnais, US subprime mortgage market in 2007?...)
32. MH BOUCHET/CERAM (c) Development and the neoclassical liberal school Robert Lucas
While income inequalities rose in the 20th century, the 21st century will see a convergence trend:
Today, all countries have access to the same technology and institutions and adopt market-friendly economic policies, with fully mobile capital
The process of catch-up will take place as capital flows from rich to poor countries.
33. MH BOUCHET/CERAM (c) The Liberal economics school James Buchanan & Gordon Tullock (“The Calculus of Consent”), against the distortion of majority rule in parliamentarian democracy (the dictatorships of organized minorities) influenced by Friedrich Hayek’s “The Constitution of Liberty”:
liberal interpretation of democracy ? rule of law and principle of generality ? simple majority rule can be applied only to general laws without any embodied discrimination.
34. MH BOUCHET/CERAM (c) Milton Friedman’s approach to economic growth and development Economic development’s roots?
? free-market economy +
minimum state intervention + cautious monetary management = non-inflationary economic growth
Consumers warrant more importance than citizens: “Capitalism and Freedom“-1962
35. MH BOUCHET/CERAM (c) Friedman’s approach to economic growth Diagnosis: from 1865 to 1965, average US economic growth (excepted 1930 crisis) has been 4.0%; since 1965, however = 2.5% due to excessive state intervention and over-regulation.
“Money matters”: Policy-makers cannot have long-term influence on interest rates, on employment rate, and on growth rate. The only justified policy mission is avoiding both inflation and depression. The only variable under the control of decision-makers is price stability through prudent monetary management: regular and moderate expansion of domestic money supply.
Keynesian anticyclical monetary policy is pointless and doomed to failure due to complex and uncertain lags between money supply, prices and growth.
36. MH BOUCHET/CERAM (c) Friedman’s approach to economic growth Liberal revolution could close the gap between potential output of 6% yearly and current average growth of 2-3%.
Recommendation: limiting public spending as a proportion of GDP as much as possible.
Hong-Kong as a target: 15/20% of GDP (vs. 50% in France) with GDP per capita equal to the US level.
“The lesser the state intervention,
the better!”
37. MH BOUCHET/CERAM (c) Theoretical bases of monetarism Monetary policy must be totally free from state intervention = independence of the Central Bank
Conclusion:
1. Economic crises have nothing to do with capitalism vulnerability but with bad economic policies;
2. The market remains the best coordination instrument with minimum state intervention;
3. The cause of most economic crises is the intervention of the welfare state;
4. The role of lender of last resort of the IMF and the resulting moral hazard increase the probability and the severity of financial crises.
38. MH BOUCHET/CERAM (c) The Stages of Growth
39. MH BOUCHET/CERAM (c) The Stages of Growth Expressing the growth process as a sequence of stages instead of a simple chronological story
Karl Marx: feudalism gave way to bourgeois capitalism to be followed by socialism and then communism
Karl Bücher and German historiography: « household economy » in the antiquity, then the « town economy » of the late Middle Ages, and thereafter the « national economy » of modern times
Walter ROSTOW
40. MH BOUCHET/CERAM (c) Walter ROSTOW’s “take-off” approach to economic development An historical approach to the underlying economic conditions of self-sustaining economic growth
41. MH BOUCHET/CERAM (c)
42. MH BOUCHET/CERAM (c) “Take-off approach” to economic development: Model based on a limited number of factors in different stages to help predict change Throughout economic development process, societies pass through 5 stages:
The traditional society,
the pre-conditions for take-off,
the take-off,
the drive to maturity, and
maturity (mass consumption)
43. MH BOUCHET/CERAM (c) Take-off approach to economic development 3 requirements for the take-off:
Rise in the rate of productive investment from 5% to >10% of national income
Development of manufacturing sectors
Existence of a political, social and institutional framework which exploits the impulses to expansion in the modern sector
44. MH BOUCHET/CERAM (c) A linear process of economic development... W. Rostow ’s Stages of Economic Growth: the « take-off approach » 5 étapes de la croissance
Sociétés traditionnelles (pas de science moderne)
Pré-conditions du décollage (période de transition entre sociétés traditionnelles et société moderne technologique)
Décollage (apparition des premières industries, forte augmentation de la productivité agricole)
Marche vers la maturité (dvpt au delà des secteurs qui ont initié le décollage)
Consommation de masse (économie de service)5 étapes de la croissance
Sociétés traditionnelles (pas de science moderne)
Pré-conditions du décollage (période de transition entre sociétés traditionnelles et société moderne technologique)
Décollage (apparition des premières industries, forte augmentation de la productivité agricole)
Marche vers la maturité (dvpt au delà des secteurs qui ont initié le décollage)
Consommation de masse (économie de service)
45. MH BOUCHET/CERAM (c) Economic growth in emerging market countries Annual Growth in GDP (real PIB/h base 100 en 1970)
46. MH BOUCHET/CERAM (c) Economic growth in emerging market countries Annual growth in GDP (real per capita GDP/ base 100 in 1970)
47. MH BOUCHET/CERAM (c) Net private capital flows to EMCs
48. MH BOUCHET/CERAM (c) Samuel HUNTINGTON
49. MH BOUCHET/CERAM (c) From Economic growth to sustainable development « Political order in changing societies »
Probing the conditions under which societies undergo rapid and disruptive social and political change:
The primary problem of politics is the lag in the development of political institutions behind social and economic change
Growth extends political consciousness, broaden political participation, and multiply political demands
Instability stems from rapid social change and rapid mobilization of new groups into politics coupled with slow development of political institutions
50. MH BOUCHET/CERAM (c) Political order (and disorder) in rapidly changing societies
51. MH BOUCHET/CERAM (c) Simon Kuznets (Nobel Prize 1971) Growth = long-term rise in capacity to supply increasingly diverse economic goods, based on advancing technology, and the institutional and ideological adjustments that it demands.
52. MH BOUCHET/CERAM (c) Simon Kuznets Characteristics of modern growth
High rates of growth of per capita product
Rise in the rate of productivity
High rate of structural transformation
Change in social and ideological structures
Globalization of technological and capital flows
Large income gap between developed and emerging countries
53. MH BOUCHET/CERAM (c) The IFIs Approach to Economic Growth and Development Development is economic growth + those conditions that make it sustainable, i.e. social mobilization, good governance, macro-economic stabilization; institutional development...
A country cannot have a sustained economic adjustment unless the government gets its budget in order
Setting the prices right: interest rates, exchange rates, domestic prices, agricultural and commodity prices
Institutional changes: staffing, training, education, procedures, laws, regulations...
54. MH BOUCHET/CERAM (c) The World Bank and the key role of structures and institutions Recent empirical research has focused on the role of institutions in overall economic performance
Robust and adaptive institutions help transforming rapid economic growth into long-term sustainable development
55. MH BOUCHET/CERAM (c) The IMF and World Bank Approach to Economic Growth and Development Sustainable development stems from a combination of sound economic policies, growth, and institutionalization with timely structural reforms:
Stabilizing the macroeconomic situation
Reducing the size of the public sector as the private sector is the main engine for growth
Reform of the regulatory framework
Good governance and strong institutions
56. MH BOUCHET/CERAM (c) Monetary Approach to the Balance of Payments J. Polak (IMF/1957); Harry Johnson (1975)
Robert Mundell (1975)
Easy to apply in LDCs as monetary statistics are readily available
Easy to modelize for IMF staff missions with macroeconomic projections
Easy to impose IMF’s domestic credit ceilings as major policy instrument of demand management: domestic credit is the appropriate policy instrument for the control of the balance of payments.
57. MH BOUCHET/CERAM (c) The IMF Approach to Economic Growth and Development
58. MH BOUCHET/CERAM (c) The IMF Approach to Economic Growth and Development: Policy implications To boost domestic economic activity, the government resorts to high public spending, laxist domestic credit policy, and low taxes. This results in sharp rise in PSBR that is financed by the government selling debt to the central bank:
? increase in the monetary base and money supply ? increase in domestic spending ? increase in imports and financial assets ? wider balance of payments deficit and downward pressure on the exchange rate ? offsetting central bank intervention on the exchange market ? reduction in monetary base and money supply to avoid a rise in import prices and inflation.
Monetary base MB = commercial bank reserves plus currency in circulation
59. MH BOUCHET/CERAM (c) The IMF Approach to Economic Growth and Development: Policy implications In terms of country risk assessment, central bank’s balance sheet information will convey timely signals about the direction of fiscal and monetary policies and about the foreign exchange operations of the central bank.
In particular, official foreign assets and domestic assets (loans to government and loans to banks) will be interpreted as signals of stabilization or run-away domestic policy.
61. MH BOUCHET/CERAM (c) Washington Consensus: “Ten rules” of sustainable market-economic development John Williamson (IIE 1990)
62. MH BOUCHET/CERAM (c) Thomas Friedman: Globalisation, The Lexus and the Olive Tree « the golden straitjacket » sums up today's neoliberal orthodoxy:
countries should privatise state-owned enterprises, maintain low inflation, reduce the size of government, balance the budget, liberalise trade, deregulate foreign investment and capital markets, make the currency convertible, reduce corruption and privatise pensions.
http://www.columbia.edu/cu/news/vforum/03/globalization_inequality/index.html
63. MH BOUCHET/CERAM (c) The anti-liberal school of thought Marx and his grandsons
Dependency School: Paul Baran/Sweezie, Samir Amin, Immanuel Wallerstein, A. Gunder Frank…
The “dissidents”: Krugman, Sachs, Stiglitz
64. MH BOUCHET/CERAM (c) Marxist approach to economic development
Development’s ingredients?
? Capital accumulation + labor exploitation to generate surplus value and profits!
? Overall revenue is based on the economic value stemming from C, V and PL. Over the long term, there is a declining trend in V vs C, due to technology progress and on-going capital investment.
65. MH BOUCHET/CERAM (c)
66. MH BOUCHET/CERAM (c) Capitalism: a contradiction-driven engine of growth and crisis
After years of scholarly research (in the British Museum Reading Room), Das Kapital was published in 1867. Engels edited the further two volumes which were issued posthumously in 1885 and 1894.
Marx offers his economic interpretation of history and the theory of class struggle.
Capitalism is a form of social order that contains its own inherent contradictions.
Labor theory of value + Exploitation and alienation of the worker + Falling rate of profit = inevitable crisis, leading to revolution and eventually to the socialist state.
67. MH BOUCHET/CERAM (c) Marxist approach to economic development World capitalism is doomed to systemic crises due to several internal contradictions:
1. The contradiction between labor exploitation and the need for stimulating consumption leads to overproduction crisis,
2. Competition for profits leads to ever extending the capitalist system into developing economies where labor is cheaper, hence long-term diminishing trend in profits
3. Keen competition between multinational companies gradually erode the dynamic stimulus of competition and leads to monopolies for the sharing of markets worldwide.
68. MH BOUCHET/CERAM (c) Marxist approach to economic development Overall Revenue Y = C + W + PL
Profit rate= PL/Y= PL + 1
69. MH BOUCHET/CERAM (c) The gloom approach Rosa Luxembourg (1871-1919)
German revolutionary leader, journalist, and socialist theorist, who was killed in Berlin in 1919 during the German revolution. Only socialism could bring true freedom and social justice.
Luxemburg was the advocate of mass action, spontaneity, and workers democracy.
In 1912 appeared her major theoretical work, The Accumulation of Capital, in which she tried to prove that capitalism was doomed and would inevitably collapse on economic grounds.
70. MH BOUCHET/CERAM (c) Marx’s comeback Joan Robinson (1903-1983), "one of the leading unorthodox economists of the 20th century ». Robinson incarnated the "Cambridge School ». She traveled extensively, especially to India and China.
« The Accumulation of Capital » (1956) extends Keynes's theory to account for long-run issues of growth and capital accumulation.
Strong sense of the historical context of social change and concern with the challenge of stable and shared economic development .
Robinson's 1942 Essay on Marxian Economics proved insightful, critical and among the first studies to take Marx seriously as an economist.
71. MH BOUCHET/CERAM (c) Marx ‘s grandsons: Dependency Approach Economic development’s roots of industrialized countries?
? Center-periphery interactions with massive exploitation of cheap labor and abundant raw materials in under-developed countries.
WHO?: Wallerstein, Baran, Sweezie, Samir Amin, Palloix, Gunder Franck... (The Capitalist World-Economy)
72. MH BOUCHET/CERAM (c) Dependency Approach The only kind of social system is a world system, defined as a unit with a single division of labor and multiple cultural systems.
The capitalist world-economy emerged in the mid-XVI° century and spread over the entire world. It is characterized by a situation of structural dependence of developing countries under the domination of “center-country economies”.
The capitalist world-economy’s objective is production for sale in a market in which the aim is to realize the maximum profit. In such a system, production is constantly expanded as long as further production is profitable.
73. MH BOUCHET/CERAM (c) Dependency Approach Engine of growth: capitalism is the only mode of production in which the maximization of profit creation is rewarded per se. The “rewards” and “penalties” are mediated through a structure called “the market”, that is the principal arena of economic power struggle. Thus the pressure is for constant expansion.
The world capitalist system involves not only appropriation of the surplus value by an owner from a worker, but an appropriation of surplus of the whole world-economy by core areas (Britain in the XIX° century, USA and industrialized countries in the XX° and XXI° centuries).
74. MH BOUCHET/CERAM (c) Dependency Approach Engine of growth and crisis? The ability of the system as a whole to expand and create more profit regularly runs into the bottleneck of inadequate world demand: crisis of overproduction, stock market crisis, deflation…
The role of the state as an institution in the world-economy is to regulate the market, i.e., to monitor the freedom of the market to minimize the risk of crisis.
The world economy does not tolerate any “socialist systems” because it is rooted in a single world system, capitalist in form.
75. MH BOUCHET/CERAM (c) Dependency Approach
76. MH BOUCHET/CERAM (c) The « DISSIDENTS » P. Krugman
J. Stiglitz
J. Sachs
Ha-Joon Chang
P. Bourdieu
M. Foucault
B. Stiegler
77. MH BOUCHET/CERAM (c) Paul Krugman’s view on economic crisis
78. MH BOUCHET/CERAM (c) Paul Krugman’s view on globalization In the 1980s, openness to trade was widely believed to reduce the likelihood of financial crises.
Today, growing global integration does predispose the world economy toward more crises because it creates pressures on governments to relax restrictions.
Economies are doing better in good times but are far more vulnerable to sudden crises due to rapid capital flight. The ride will continue to be very bumpy for many years to come!
79. MH BOUCHET/CERAM (c)
80. MH BOUCHET/CERAM (c)
81. MH BOUCHET/CERAM (c) Ha-Joon Chang: Necessary trade protectionism to protect infant industry in EMCs Globalization is too important to be left to free-trade economists, whose policy advice has so ill served the developing world in the past 25 years!
Japan, the US and the UK have based their economic take-off on trade protectionism
In the UK: 1721: average industrial tariff rate of 40-50 per cent, compared with 20 per cent and 10 per cent in France and Germany respectively. Britain moved to free trade only in the 1860s
In the US: 1789: protective tariffs, subsidies, import liberalisation of industrial inputs, patents for inventions and support of development of the banking system. Following the Anglo-American war in 1812, the US started shifting to a protectionist policy; by the 1820s, its average industrial tariff had risen to 40 per cent. By the 1830s, America's average industrial tariff rate was the highest in the world and, except for a few brief periods, remained so until the second world war, at which point its manufacturing supremacy was absolute
82. MH BOUCHET/CERAM (c) Joseph Stiglitz’s views
83. MH BOUCHET/CERAM (c) Stiglitz’s core ideas Poverty is an « affront to human dignity »
G7 governments urge liberalization on developing countries while maintaining trade restrictions and pushing intellectual property protection into the WTO.
The IMF's policies, in part based on the outworn presumption that markets, by themselves, lead to efficient outcomes, failed to allow for desirable government interventions in the market.
Asymmetries of information prevent markets from full efficiency. Government and market are complementary and there is an important role, if limited, for government to play.
84. MH BOUCHET/CERAM (c) What is asymmetry of information? It is the difference in information between two economic agents within an economic relation (e.g.: « the worker and his employer, the lender and the borrower, the insurance company and the insured »)
According to Stiglitz, financial markets cannot regulate themselves because anyone do not have the same information at the same moment. Therefore the aim is to find the best structure to regulate markets (and not to let them work by themselves).
85. MH BOUCHET/CERAM (c) Asymmetry of information’s consequences Deregulation will not promote financial development when information is asymmetric and competition inadequate. The economic efficiency is not secured. It will spur corruption and create an oligarchic elite that opposes the emergence of competitive markets.
The partisans of the « Washington consensus » overlook the importance of economic and corporate governance, underestimate the difficulty of building institutions, and forget that many countries lack the sophisticated public administrations needed to ensure adequate competition.
86. MH BOUCHET/CERAM (c) The challenges of the IMF To be an honest broker, the only remaining assets of the Fund are… its political legitimacy and its intellectual authority.
Increased transparency at the IMF is essential. Decisions there are made on the basis of ideology and bad economics (sic!). G7 monopoly.
When crises hit, the IMF prescribes outmoded, inappropriate, if standard solutions, without considering the effects they would have on the people in the countries told to follow these policies.
No discussions of the consequences of alternative policies. Ideology guides policy prescription…
87. MH BOUCHET/CERAM (c) Jeffrey Sachs’ views
88. MH BOUCHET/CERAM (c) Sachs: The situation in Asia There vas no « fundamental » reason for Asia ‘s financial calamity
Budgets were in balance or surplus
Low inflation
High private savings rates
Economies were poised for export growth
The IMF’s tough macro-economic conditionality for approving financial support led to recessionary monetary policy and increased panic
89. MH BOUCHET/CERAM (c) The Asian crisis: an unpredictable crisis In Thailand: currency overvalued + overcapacity in real estate
Bath devaluation required in 1997
Overstated financial panic of the investors in Asian countries + domino effect
Flight of capital in an opposite flow
Asian countries needed really significant financial sector reform
But not sufficient cause for panic and for harsh macroeconomic policy adjustments
90. MH BOUCHET/CERAM (c) IMF declarations Before the Asian crisis (April 1997):
« Directors welcomed Korea’s continued impressive macroeconomic performance [and] praised the authorities for their enviable fiscal record »
« Directors strongly praised Thailand’s remarkable economic performance and the authorities’ consistent record of sound macroeconomic policies »
IMF, 1997 annual report
91. MH BOUCHET/CERAM (c) Sources (I) Flood, Robert and Peter, Garber (1984, „Collapsing Exchane-Rate Regimes: Some Linear Examples“, Journal of International Economics 17, 1-13.
Friedman, Thomas (1999), „The Lexus and the Olive Tree“, New York.
Goldstein/Kaminsky and Reinhart (2000), „Assessing Financial Vulnerability“, Institute for International Economics.
Krugman, Paul (1979), „A Model of Balance-of-Payments Crises“, Journal of Money, Credit, and Banking 11, 3, pp. 311-25.
Krugman, Paul (1996), „Are Currency Crises Self-fulfilling?“, NBER Annual Macroeconomics Conference.
92. MH BOUCHET/CERAM (c) Sources (II) Obstfeld, Maurice (1986), „Rational and Self-fulfilling Balance-of-Payments Crises“, American Economic Review 76, pp. 72-81.
Obstfeld, Maurice (1994), „The Logic of Currency Crises“, Working Paper 4640 NBER, Cambridge.
Williamson, John (2002), „Is Brazil Next?“, International Economics Policy Briefs, PB 02-7, IIE.
