Globalization and Its Discontents-Stiglitz

Globalization And Its Discontents- Joseph E. Stiglitz
Preface-“ while at G 8, I saw first hand the devastating effect that globalization can have on developing countries”.
-Globalization-Removal of barriers to free trade.
-Closer integration of national economies.
Decisions of US government and WB often made because of ideology and politics…fit with the interest…people in power…government needs to and can adopt policies…and growth can be shared more equitably.
Asymmetries of information between 1-workers and employers, 2- insurance and insured, 3- lender and borrower.
Markets-Why don’t they work.
1-Credit rationing-most who need it can not get it.
2-Why unemployment-macroeconomics, recession and depression. Market capitalism since beginning of IMF. Interest rates go up, firms with high loans go bankrupt. IMF insists on that.
3-IMF-mantra, markets to be left to them selves lead to efficient outcome, no need of government intervention.
4-1997-98. East Asian crisis, IMF and US treasury role of government least transparent.
5-Do not allow those affected any say in decisions.
(Government/market work should be complimentary. Inequality, unemployment, pollution, government should have a role).
6-Intervention for-thinly veiled special interests.
7-Crises-IMF offers outmoded solutions with out considering effects on the people, alternatives not considered, frank discussion discouraged.
8-IMF remedies failed more often than they worked-structural adjustment-poor get poorer, hunger-riots, increased division, any benefits are to the better off.
9-Poor countries too scared to question, do it only privately. Inside IMF feeling was whatever suffering was necessary (a rural physician gave a purgative to a patient, he got worse, kept on giving the same medicine, foul material was coming out, the patient died, relatives protested, the doctor said after so much dangerous material taken out, still he died, what would have happened if the filth had stayed in!).
10-Developing countries forced to open their market, developed countries keep theirs closed.
,For LDC’s peasant and business IMF is taxation without representation. Fuel subsidy cut in poor countries, AIDS increased with cutbacks in health (Thailand) Children especially girls not sent to school.
They had no alternative to rioting.
Consensus benefited the well off at the expense of the poor. Commercial interest supersedes-environment, HR, Democracy and social justice. Cost of transport and communications fell far lower than it had been in 19th CCE. Markets expanded. Government using constitutional power, national economy and national company backed by courts to regulate interstate commerce, regulate financial system, minimum wage, working conditions, unemployment and welfare, helped some industries. Telegraph , agriculture, train farmer, new techno, gave land grants.
Now communication and transport cost fallen more than ever, but no world agency accountable to people to regulate globalization as nationalization was. IMF, WB, WTO, banks ,corporations tied with official domination. The system has to be democratized.
Global Institutions: The promise of Chap 1-1999 protest at Seattle were a shock-2001 a protester died in Genoa. There had been riots in LDC for long. In DCs they are new.-NAFTA free movements of goods, not people. Jacques Chirac a conservative-“globalization not making life better…” (1)-Export led growth centerpiece of industrial policy…much of Asia…millions of people better off but increased divide between the rich and the poor.-Globalization decreases isolation and increases dissemination of knowledge-internet links led to landmines treaty, debt of poorest countries forgiven.Globalization associated with triumphant capitalism in US styleActual number of people living in poverty has increase by nearly a 100 million (2) while total world income increased by 2.5% annually.-Africa has descended deeper into misery-poverty and AIDS.-even no success in ensuring stability, crisis all over (sub-prime in US and the rest of the world, rising US deficit with increasing military spending). Market economy worsened the lot of the people former communist countries . In 1990 china GDP 60% of Russia, in 2000 it was reversed. Russia poverty up, in China down.DC hypocritical, own barriers up, poor countries down, Agriculture US prices up, taxes underwrite agriculture, sugar and textiles dominate, subsidy to industry as well.Globalization agent of the west which gets most benefit.Uruguay round 1986 led to 8th agreement, terms of trade concluded Marrakech 12/15/93, 117 countries Clinton signed 12/08/94, WTO final effect 1/1/95..convert GATT to WTO. Poor countries got less for their product relative to what they paid for imports.Western banks benefited but poor countries crippled by sudden outflow of hot money., strengthened intellectual property rights-drug companies profits increased enormously, stopped India and Brazil from giving cheap drugs to the poor, thousands condemned to death.. In case of AIDS outcry. Drug companies backed down a bit.Projects-recommended d by the West, designed by the West and financed by the WB, when they fail as they often do, the countr4y has to pay, environment destroyed, corruption rises, no time for adaptation, massive unemployment, social demolition, urban and ethnic violenceConditionability undermines sovereignty.Globalization –closer integration of countries and people due to much lowered cost of transportation and communication, lowered barriers to flow of goods and service, knowledge (not people). Throw up new institutions. Globalization driven by MNCsEconomic aspects of Globalization- imperialistic- highlighted in the main by IMF, WB, WTO and lesser regional banks, UNO, ILO, IMF with little attention to workers rights, WHO, Asian Development bank-competitive plurality-Asian model-government takes active part in shaping guiding markets.IMF- global economic stability, WB reconstruction and development as decided in UN monetary and financial conference at Bretton-Woods NH 7/1944-part of effort to rebuild Europe.IMF-1930 depression in mind-25% workforce unemployed. John Maynard Keynes, British economist, lack of demand leads to economic downturn. Government help increases demand, increase in expenses with lowered taxes. The work has been refined but basics still valid. IMF to put pressure on countries to maintain demand, provide liquidity. The original conception of the market did not always work out, need collective action at global level for economy funded by tax money from all over the world, reports to finance ministries, central banks. Voting system based on economic power at the end of WW II. US hold a veto.Now champions market supremacy as a religion., provides funds for countries which reduce deficit and increase taxes, increase interest rate, originally favored increase expenses, lower taxes and lower interest rates.Change under Reagan and Thatcher in 1980s. McNamara, world bank president 1968 directed Hollis Chenery foremost development economics at Harvard assembled a team from all over the world, purged in 1981.New president William Clauser and economist Ann Krueger specialist in helping special interests in enriching themselves at the expense of others, so emphasis for government helping the poor to government as public free market panacea.WB and IMF got intertwined.WB besides loan for projects gave structural adjustment loan at the instance of IMF and conditionality. IMF enhanced from crisis manger to LDC dictator/With fall of Berlin wall IMF got active in East Europe and brought in WB as junior partner in financing IMF-macroeconomics- budget deficit, monetary policy, inflation, trade deficitWB-structural issues, items of expenditure, financial institutions, labor market, trade policy.IMF took an imperialist view, everything its concern and dictated to WB, no need to discuss with WB.Both controlled by G7 (US, Japan, France, Germany, Britain, Canada, Italy plus Russia to make it G 8) fossilized like the UN Security Council).IMF failed, crises frequent in 100 countries (3) due to premature market liberalization leading to global instability, during a crisis matters made worse.Beggar thy neighbor policies (trade) blamed for depression. GATT also a product of Bretton Woods, tariff lowered but WTO only in 1995-provides a forum, does not make rules for trade negotiations and ensures compliance with agreements.Keynesian market failure a possibility and government role replaced by the free market creed-Washington consensus-WB, IMF, and US treasury to dictate the right policies for developing countries to adopt. The consensus was essentially in response to Latin American countries out of control budgets and rampant inflation. The policies were ill suited to countries in early stages of development and even for Latin Americans.Developed countries built up economies by selectively protecting their industries till strong enough to compete. Forcing developing countries to open up led to disastrous consequences, social and economic. Farmers could not compete with highly subsidized European and American agriculture. , lost jobs, committed suicide, before and if industry could provide alternatives. Tight monetary policies increased the interest rate and job creation became an impossible.European countries banned free flow of capital till 1970, why should the less developed countries with a barely functioning bank system not do it? In and outflow of hot money subsequent to market liberalization plays havoc.End of physical colonialism and implosion of the USSR gave the predators a chance to go into underdeveloped countries, not tuned to capitalist machinations and have to seek their approval to access capital markets.IMF blunders in development, crisis management, transition from communism. Excessive authority stunted growth Successful economic plan requires careful sequencing and pacing (4). 1997 East Asian Crisis Indonesia and Thailand down the drain. Latin America not recovered from IMF help in 1980s. Unemployment up to double digits, Argentina the worst. Even in countries which benefited, top 10% were helped.IMF and WB and other international economies governed by corporations of the countries which rule them. Though their work in less developed countries , heads of IMF European) and WB ( American) often have no experience of developing world *IMF consists of finance ministers of developed countries. WTO trade ministers and business owners, allied with their interests and owned by them.Trade barriers are raised for imports, lowered for exports, no matter if tax payers are crushed, focus is profit.Finance ministers and financial institution rotate. Robert Rubin came from Goldman Sacks, largest investment bank. Stan fisher number 2 at IMF from Citi-group incestual relationship.

Broken Promises: Chap 2
-WB charged with eradicating poverty
-IMF with global stability
Both send teams to less developed countries for 3 week missions. WB keeps teams based in the countries. IMF has only one representative.. IMF dictated from DC, undertake short missions, staying in 5 star hotels. One can’t learn about conditions sitting in hotels poring over numbers. If you travel, you would see the poor-rich divide growing and people who live on less than a dollar a day (absolute poverty).
Colonist mentality persists. USA tarred with cold war attitudes. 1.2 billion live on less than 1 dollar, half the world population on less than 2 dollars a day. Major obstacle to reduction of poverty is IMF.
Ethiopia 1997. Per capita $ 110.00, famine and drought killed 2 million. PM Menes Zenawi fought 17 years against Marxist Menigistu Haile Marium, won in 1991. All IMF parameters fulfilled, no inflation, growth 9%, (1) Macroeconomics aggregate behavior-growth up, unemployment down, inflation down-IMF gives A grade with double digit inflation, high unemployment but balanced budget low inflation. IMF suspended aid to Ethiopia. With IMF others suspended aid too.
Ethiopia had concentrated on 85% of the population. IMF did not like that. It had increases funding to villages, reduced military expenditure.
Like many LDCs much of its revenue came from foreign aid. IMF worried that would dry up. IMF philosophy, aid should not be spent but kept in reserve to pay foreign creditors (total foreign aid… total interest earned by the West on aid…)
IMF position made no sense, based on the absurd supposition that aid was unstable, more so than local taxes. Appropriate response to instability of revenues-set aside revenues, flexible response, cut back if revenues down.
Ethiopians were building schools and health clinics and had flexible policies, but IMF could not see the logic.
Ethiopia had pad back some loans early using its reserves which was getting lower interest than it was paying on the IMF loan it had taken. IMF objected to the repayment without its approval.(2). IMF standard operating procedure is neo-colonialism.
Good capital market is the hallmark of capitalism.
Ethiopia’s entire banking less than that of Bethesda Maryland population 55,000. IMF wanted Ethiopia to open its markets to giants like Citibank. To compete was impossible, they squelch national banks and offer loans to MNCs rather than to local business. Liberalize finance markets to allow interest rate to be determined by the market which Europe and US did not do till 1970s. US provided easy loans to agriculture. In Ethiopia the difference between lending and borrowing rate lower than in many LDCs.
Liberalization was an end in itself. Kenya followed IMF advice and saw 14 banking failures in 1993-94, interest rates went up and farmers could not borrow for seeds and fertilizers.
IMF is an opaque and fossilized international bureaucracy in for whom matters of substance are subsidiary to the process and casts itself as a monopoly supplier of sound advice. Special interests govern it (Banks frown on early payment of mortgage).
IMF –in the USA inflation up if unemployment down below 6% (fell actually to 4%, inflation did not go up), advise increase interest rate, the Fed ignored it. Other countries can not do so.
IMF has one size fits all approach. No mandate on development but comes down hard on the issues, such as LDCs have more problem market, not development or infra-structure.
IMF training faulty. Demand -supply, no unemployment. Unemployed do not want to work, it was due to greedy unions and governments interfering with markets for high wages, so wage should not be lowered.
3 Week trips can’t develop policies, foreigners should only advise, but IMF wants to dictate. It is market fundamentalism, increase interest rates may lead to starvation, but that is subsidiary to market efficiency. Allow markets to be unfettered, growth will eventually occur and all would be well-vision of paradise with wine, dance and women.
Alternatives to IMF fundamentalism:
Botswana independent since 1966, per capita income $100.00. it is agriculture based with water scarce, rudimentary infrastructure, had a growth rate of 7.5% between 1961-1997, helped by diamonds, used resources wisely unlike the Congo, Nigeria and Sierra Leone. Botswana developed political consensus and talked to a variety of advisers including ford foundation. They held open sessions, unlike IMF which talked only to finance ministers.
Keynes’s intent for IMF was deficit financing, which it does not follow, rather it does follow pre Keynes fiscal austerity and doles out funds with conditionalities which end in disaster.
Kenya rich land-rampant corruption plus IMF imposed high interest rate led to disaster.
Uganda-coffee. British kept the natives down. Only two African master sergeants, one was Idi Amin.
IMF does not listen to client states ideas on development strategy or fiscal austerity, behaves like a colonial ruler. IMF MD, Michael Camdessus (1998) humiliated Indonesian president into handing over economic sovereignty for a badly needed loan which was in fact used to bail out private sector foreign creditors. (Admiral Percy in Japan and opium wars in China, maharajahs of India and the British).
IMF extended its brief from macroeconomics to structural issues (privatization, labor markets, pension reform). IMF blackmails the desperate need of help.
1997 South Asian crisis. South Korea (3). IMF cut off own funds but also bully others to so- any signal that negotiation have broken off will result at best increased interest rate, at worst cut off funds. Only IMF way is the right way. Disagreement is off limits IMF given authority over debt relief, stifles discussion of alternatives. Terms of agreement indicate distrust. IMF monitors not only macroeconomic management but also intermediate variablities, money supply force country’s parliament to change laws with in one to three months.
(Religion empowered the establishment which eventually became the Mercantile class. They became colonialists, eventually graduated to capitalism to neo-colonialism and occupy Global abstract space)
These requirements are called conditions (4)-schedule of repayment. Sometimes over a hundred conditions on each item with its own rigid timetable they are collectively called conditionalities, are forceful and turn a loan into a policy tool. For example liberalize market and release loan in installments dependent upon conditionality, does not lead to improved economy, only has adverse political effect, might even reduce the likelihood of repayment of the loan leading to more control of IMF over the country.
Going way beyond its charter, it asked South Korea to make its central bank independent of political process (5) which often led to downturn like in Europe in 2001, did not allow lowering of interest rate needed to bring down unemployment (motive profit, not welfare). IMF pushed political agenda in South Korea to ask Korean Central Bank to focus on inflation which it did not have. IMF response we always focus on inflation. US federal works on employment, growth and inflation. IMF exercise of power in 1997 South forced to move up the date of open markets to certain Japanese goods which could not possibly help the crisis.
Conditionality does not ensure money well spent.
Fungiblity-money going in for one purpose frees up other money for other purpose with no impact on intended purpose.. money used for a commercial road frees funds for a road for the convenience of the elite. Conditionality did not work because I they were wrong, ii politically unacceptable lending policies driven by politics. Halted loan to Kenya to corruption, continued to Russia and Indonesia. Pushed privatization because government can’t stand political pressure, might reduce profit. Separation of economics from politics narrows perspective and is stupid.
IMF writes a draft report before visits a country and only fine tunes it during a visit. Boiler plate, whole paragraphs borrowed from one to another country. Apocryphal-name of the other country left behind on the report ( NDFC report for HPGH).
IMF has consultation with every country every year to ensure exchange rate convertibility for trade and actually grades the economy, not consultation actually. Big countries ignore it, US did in nineties and did not increase interest rate (Clinton and Fed). IMF should consult widely within the recipient country, because i they would I know more and ii participation matters. WB is more inclusive. WB and IMF agreed to participitatory methods in poverty assessment.
Freedom of Information Act 1966 in the USA. In the IMF citizens barred from discussion and also not told what was in the agreements, kept even from WB in joint missions-need to know basis, limited to a few in IMF and few in recipient countries.
LDCs have little voice in international economic institutions. US representatives in IMF/WB do not follow US government law and voted for fees in elementary schools for cost recovery.
IMF loans help countries which already have good economic policies, not due to conditionality.
Freedom to Chose: Chap 3
Washington consensus: fiscal austerity, privatization, liberalize-lower tariff and eliminate protection, huge deficits, inefficient government enterprise without competition, inefficient private firms protected politicians charged, loose monetary policies, developed for Latin America and made some sense, high prices, hyperinflation..
Most countries government offers public service and private sector enterprise of business. Policies became ends in themselves, but IMF pace and manner faulty.
Privatize-Competing private enterprise perform better than the government , but can not pursue too rapidly-IMF/WB- markets rise to meet all needs, but often governments have(Government supplied to step in as markets failed to provide. An NGO had instructed women to raise chicken, IMF stopped it in morocco-the project failed.
SS program in Europe/USA market for annuity did not exist. Even today annuity not hedged against inflation Federal National Mortgage Association (Fannie Mae) created as the market did not provide good mortgage to low and mid-level income groups.
In France a phone co privatized, given monopoly over cellular connections, raised the rates immediately. Students could not afford the internet. IMF philosophy, privatize first, face consequences later, vested interest created, competition squelched and impacts political process. IMF stand Privatization increases revenue to government. Macro-economics not effective, competitive or efficient. Private more efficient in exploiting monopoly. Privatization hurts customers and workers, there is insensitivity to social costs. There is minimal job protection, can fire workers at will and little cost. Unlike so called Greenfield investment new firm rather than private investors taking over existing firm which destroys jobs.
In LDCs there is no unemployment benefit, crime/violence go up, there is social and political unrest., anxiety, alienation all increase, the earning member are more stressed, schooling goes down. domestic firms less likely to fire workers than foreign ones.(SK).
Moving from low productivity to unemployment does not increase the country’s income. Privatization creation of jobs in tandem with job destruction entails lower interest rate. Privatization has come to be known as briberization. Sell government enterprise below market price (Pakistan Steel Mill) without appropriate legal structure and institutions. New owner strips assets (Russia).
Liberalize, less government interference, markets finance capital pushed, trade barriers lowered too far. IMF admitted 1990s global crisis disaster for small countries, but confession no use, harm already done and acceptance of guilt not in good faith, no restitution.
Liberalization supposed to increase income by moving resources from low productivity to higher productivity utilizing comparative advantage, jobs are lost.. Few economists believe in instantaneous job creation. LDCs did not have capital entrepreneurs due to lack of education. IMF austerity program have led to interest rates of 20-50 even 100%, cost of capital for growth too costly.
Successful LDCs in East Asia opened slowly and in an orderly fashion, lowered barriers cautiously and phased them in as jobs created. In China it took 20 years.
Even in the US with less than 4% unemployment, good unemployment benefits, Pat Buchanan found resonance in his job loss theme.
Liberalization often fails to deliver, simply raises unemployment. West liberalize for exports, not for imports like agriculture. Trade negotiators protect special interests in DCs
Uruguay round Market opened for services exported by advanced countries, finance, IT, not for maritime and construction services. Poorest of the poor, Sub-Saharan Africa, income went down by 2% as a result. Bolivia lowered barriers but the US kept it up for sugar.
19th Century AD the US grew rich on protection policies. In opium wars, the UK, France, Russia and the US ganged up on China. 1858 Teinstien treaty ensured China exported only what the West wanted., but to open itself to opium. Now markets opened through occupation of abstract space.. IMF insist on accelerating the pace of liberalization to offer loans. The US often sets itself up as prosecutor, judge and jury. Outside WTO used against LDCs.
1994 Uruguay had provided for longer adjustment period for LDCs. Mickey Kantor US trade representative wanted China to be treated as DC., had leverage, China wanted US support to enter WTO.(11, 2001). US wanted to be treated as LDC in Textiles (14 instead of 10 years).
China escaped 1990 crisis as it kept its pace slow. US demand based on special interest finance, capital markets. US insistence caused defeat for reformers in china, not much gain for the USA.
Financial Market Liberalization.
Savings loan scandal 200 billion loss, 1991 recession LDCs urged to do it quickly (Europe did not do it till 1940s) Crisis LDC poorly equipped to deal with higher interest rate.
Capital market liberalization entails stripping controls over in and out hot money short term loan/contract, no different than bets, can not be used for industry, adverse effect on growth, need to set aside reserves equivalent to loan.
Reserves kept in US bond with an yield of 4%. If a firm borrows at 18%, the country in effect borrowing at 18% and lending to US at 4%. With a 100 million loan US, the country has to keep equal amount in reserves in US bonds, in effect the country is giving the US 16 million a year. With liberalization, if a private co takes a loan, the country has to pay the difference by adding to reserves.
IMD dictum, without liberalization, FDI won’t come in.. but China got the largest FDI without IMF prescription. East Asia savings 30-40% of GDP, (USA 18%, Europe 17-30%) did not need FDI any way.
Liberalization would enhance stability, actually it resulted in 1997 crisis. Theory crisis would attract foreign capital. Banks, they should have known, prefer lending to those who do not need it. Cost of disability borne disproportionately by the poor.
FDI, key part of Globalization-Washington Consensus. Liberalize, privatize, and macro-stability-will attract FDI, and domestic finance, lead to growth. FDI will bring Techno and access to foreign markets, will increase jobs as in China, Malaysia and Singapore. But foreign firms quash locals- firms-coca Cola and Pepsi wiped out local sodas in India and Pakistan. (Ice creams too). Even in the USA Wal-Mart destroys local business. It is worse in LDCs.
After local firms destroyed price is hiked up. MNCs do little for LDCs.
Foreign banks can easily overrun local ones. National banking resisted till Clinton time who succumbed to Wall street. Before the collapse of 2001 Argentina banking dominated by foreigners who funded MNCs, starving locals. IMF decreed reduction in expenses, and raise in taxes. In 2001 a foreign bank predominant in Bolivia, pulled back on lending, that led to much worse economic downturn.
Domestic banks more sensitive to guidance by central banks to expand credit or restrict it as needed and can favor un-underserved groups, minorities and poor regions.
In the USA 1977 communit5y reinvestment act requires banks to invest in such areas. FDI LDC officials to grant them special favors like lowered tariff. US secretary of treasury routinely travels with businessmen.
Western governments especially the US push LDCs to live up to patently unfair agreements. 1994 Asia Pacific Economic Cooperation held in Jakarta, Clinton encouraged US businessmen to go to Indonesia. Contracts provided for government commitment to buy large quantities of electricity (take or pay clauses at high prices (also India and Pakistan). When Suharto and Nawaz removed, successor government still compelled to abide by contracts which had been fraudulently (bribes) obtained.
FDI often flourishes because of special privileges resulting in distortion of incentives. Bribes lead to undermining of democracy (oil, mines) Income does not transform society which is the real development, creates pockets of wealth-Dutch disease, inflow of capital, currency up valued, import cheap, export expensive (gas in the north sea gave the name).
Instead of development expenditure, the rulers appropriate income. IMF only advised FDI in colonialism in abstract space. (SK and Japan, little FDI). FDI abuses kept in check in China, Singapore, Malaysia, they were saved from ills, still got access to foreign markets.
Sequencing and pacing:
IMF blundered in pacing and sequencing, ignored broader social context, liberalized before safety net, regulatory framework could be put in place, jobs lost were not replaced.
Market Fundamentalists.
Adam Smith profit motive leads to efficient economy, has inherent restrictions(2) when information imperfect , it does not work. If information imperfect, little role left for finance markets. Washington consensus is neo-lib fundo, whenever information imperfect, markets incomplete, it does not work specially in the third world.
Post depression these policies were rejected.
Market system consists of clear property rights, country to enforce them, competition, perfect information, reform in one area may make things worse in another, hence importance of sequencing. Crisis represent blunders of sequencing.
Poor countries have marketing boards, purchase from farms, sell in country and outside is inefficient and corrupt, farmer gets little, but under IMF/WB pressure some countries dissolved them, replaced by local monopolies, got into mafia hands, peasants worse off. Some boards imposed the same price regardless of distance. Under the dual pressure some quit without good road system, and poorest worst off.
Fundamentalists do not understand development equals transformation of society. Development economics, universal primary education, including girls. Uganda removed school fees, fundos wanted them re-imposed (US/UK no school fees). In Uganda school enrollment including those of girls went up.
IMF set back development, hasty changes caused erosion of society, social instability. IMF removed food and kerosene oil subsidies and with incomes lowered and joblessness increased due to IMF decrees there were riots in Indonesia. If Jordan had followed the advice, King Husain could have been overthrown (would have been a good thing, that is why I favor fascist dictatorship and such tendencies as they expose capitalism and promote class conflict, instead of covering it up as democracy induced delusions do) with serious consequences for the US and Israel.
Social turmoil is hardly conducive to investment. Latin America and Africa excessive austerity lowers employment. Social contract between rulers and the ruled can not be broken unilaterally-the poor get share in prosperity and the rich share pain in adversity.
Trickle down.(3)
Called voodoo economics by Bush senior, when contesting for nomination against Reagan. 19th CCE England prospered as pauperism grew. Same in Reagan time US. Storm tides smash weaker vessels.
High savings do not require high inequality (East Asia). Government support led to social/political stability with higher growth. Washington consensus lowered growth in Latin America, increased poverty . Argentina, the star pupil collapsed in 2001. (Hakim Jullab story) Stringent policies brought poorer health and education. In Thailand it caused an increase in prostitution and AIDS. Irony is that major proponents of trickle down were in Clinton treasury department.
IMF Agenda:
Stabilization-on, jobs-off, Tax increase-on, Land reform-off, Bailout banks-on, health, education, help to unemployed-all off
Land reforms-Vast majority work as tenant farmers, share croppers without incentive. This is hidden tax on the poor and is OK with IMF, but not liked by rulers with whom IMF deals. When done properly, it has done good as in SK and in Taiwan.
Regulation. IMF ignored that inadequate financial regulation as a key factor in crisis. (plus bad fiscal and monetary policy). Only East Asia crisis taught IMF a lesson, after it had wrecked several economies. Inflation overemphasized, higher interest rate, higher exchange rate led to lower growth and unemployment. Poverty reduction requires resources that come only from growth. But can growth without poverty reduction. be -some policies promote growth but have little effect on policy, some promote growth and increase poverty, others promote growth and reduce poverty too. Land reforms, access to education Rapid trade lib policy increases poverty Capital market liberals lose all the way.
Nature of poverty:
The poor work harder and longer, suffer from lack of food which leads to poor health, to poor earnings to poorer health-no school, children worse off.
No fertilizers, poor crops. Strip trees in Nepal, BD and other poor countries for cooking and heat, erosion of soil, worse crops, floods
2000 -WB development report-interviewed a lot of poor people called the voice of the Poor, the poor voiceless, have no resources, insecure, circumstances beyond control, low wages, loss of jobs.
East Asian financial crisis, welfare measures dwindled, violence greater-gangs and police, no insurance or safety net, workers fought for job security, IMF for labor market flexibility which equates low wages and no job security.
Wash9inton consensus liberalization, accompanied by higher interest rate led to disaster. Financial markets, liberalization without regulation led to economic instability.
Privatization without competition, oversight to stop monopoly, no push for education, law or safety net.
Prices up, thoughtless fiscal austerity, loss of jobs, torn social fabric, rich richer, poor poorer, middle class weeded out. Argument unemployment remedy lower wages and weaker unions is absurd. Only employer and capitalists profit, the idea endorsed by IMF.
IMF, government bad, market good, the poor be d…ed. Washington consensus promoted-growth not sustainable, Latin America worse after than in the before WC protectionist period (1990s growth 2.9%, 1960s 5.4%), and the little benefit went to the upper 10%. Alternatives pace the changes and land reforms.
East Asian crisis 7/2/1997, Bhat collapsed 25% overnight to dollar, currency speculators (Soros made over a $ billion in a week), hit Malaysia, South Korea, Philippines and Indonesia, by the end of 1997 full blown crisis. IMF made it worse, were actually responsible for onset, pushed extreme finance and capital market liberalization. Before the crisis East Asia better, lower poverty than all countries LDCs and DCs, was widely described as East Asian miracle.
When it broke out IMF and US treasury secretary strongly condemned the countries, their rotten institutions and corrupt official. If all that was true, how did they do so well for so long. IMF and WB had not studied the region because it had been successful against their policies. A Japanese sponsored WB report had pointed to the role of governments. East Asia had saved a lot and invested well.(1). Before the crisis IMF and WB did not give credit of the miracle to the governments, after blamed it on them.
Changes over 3 decades:
-Rickshaws pulled for a pittance, now a tourist attraction
-standard of living raised, millions got educated, health care
-governments helped shape and direct markets against Washington C advice
-Trade gradually liberalized, new jobs created
-financial and capital markets also gradually liberalized.
-government created enterprises, not wholesale privatization
-close inc0me and techno gap-via education and investment.
When the crisis hit, the West did not realize its seriousness. East Asia finance men attributed it to hot money which came with liberalized capital market. Only Malaysia resisted IMF and its downturn was less severe and also shorter (3). South Korea post devastating war was poorer than India-with growth policies per capita income up 8 times, poverty reduced greatly, universal education, techno gap with DCs reduced, by 1994 had joined OECD, the DC club. Chips, Samsung, Daewoo, Hyundai. Under US pressure allowed firms to borrow abroad. In 1997 rumor can not roll over debt, and no reserves-trouble.
Thailand-
Speculators believed currency will devalue, change into dollars, which lowers value. Government buys currency against its reserves which run out, and curency goes into freefall, speculators move back and make windfall profits. 24 billion Bhat =1 billion $, speculators borrow 24 billion Bhat, which fell by 40%, borrow 600 million $, but 24 billion Bhat, return Bhat loan, make 400 million$.
IMF bail out 95 billion(4) to sustain exchange rate and used it to pay international banks who had lent to Thais, then bail out too. Rich people converted Bhat to $ at favorable rate and took it out of the country.
The same thing happened in Mexico in 1994-95. funds combined with conditionality-very high interest rate, lower expenses and raise taxes.
Structural reforms. To increase openness, better financial market regulation, abolition of clove monopoly in Indonesia. The countries gave up economic soverignty and undermine democracy.
The program failed. Market did not take notice of IMF rescue. It blamed the countries, (5), more investors fled. IMF was part of the problem. GDP went down, unemployment 4 times in SK, 10 times in Indonesia, 3 in Thailand, banks shut down, poor urban workers most hit, small business eroded. Global economic growth slowed down, commodity prices fell. LDCs emerging markets dependent on resources in bad shape.
Post cold war Emerging markets in East Asia, Latin America, Russia and India regarded as high return areas and private capital flow increased 7 fold while flow of public capital remained steady (6). IMF and US treasury felt that capital account liberalization would help E. Asia which did not need capital and that was the single most important reason for the crisis (7).. it changed investor sentiment, led to huge inflow and in turn huge outflow. Capital reversal in Thailand 7.9% of GDP in 1997, 12.3% in 1998, first half 1999 7% (equal to 765 billion/year getting out of the US). With no unemployment insurance (in the US self employed have little insurance). IMF pushed liberalization without any evidence that it helped and involved huge risks. It only serves naked self interest of financial markets (8). Capital flows out of the country in recession when it needs it most and flows in boom leading to inflation. Keynes (1935) called the swings in investor mood, animal spirits. Before crisis Thai bonds extremely safe, after risk premium went high.. IMF and its largest shareholder the UD treasury worked together. Capital market control reduces economic efficiency. Thai before liberalization extremely tight control of on banks to find speculative real estate, wanted to invest in manufacturing, lowered control source of instability, boom, burst over building, couldn't be rented and collapsed. Billions squandered in a country which needed it for infra-structure, education (9). SK developed 30 years without international finance. Singapore and Malaysia invited MNCs. SK created its own. Knew deregulation lead to savings loan crisis in 1980s. SK liberalization was not an issue of US national interest, only that of Wall St. council of Economic advisers under Clinton for a system of prioritization. Treasury opposed it and won. IMF and treasury made their worst mistake in the initial response.
Mistakes
Latin America profligate government spending, loose monetary policy- huge deficits, high inflation, decrease in demand was needed. East Asia, government surplus, low inflation, there was insufficient demand. Dampening demand would make it worse.
High indebtedness, raising interest rate amounts to a death warrant.
Downturns in Korea and Malaysia no worse than multiple recessions in 200 year history of capitalism. Vulnerability of East Asia was due to rapid capital and fiancé liberalization for which IMF was culpable.
Hooverite concretionary policies:
For severe downturn policy for 7 decades; stimulate demand, lower taxes, loosen monetary policy. IMF pushed the opposite.
At the time of the crisis was in rough macro-balance, with low inflation and budgets in balance or in surplus. Collapse of exchange rate and the stock market and bursting of real estate bubble would send it into recession which will lead it to collapsing tax receipts, and budget deficit.
No responsible economist has argued that focus should be on actual deficit rather than on structural deficit (deficit if economy had been operating on full employment). IMF did just that. They asked for balanced budget. Economy going into recession should not have a balanced budget. The treasury and council of economic advisers in the USA fought against the balanced budget amendment, as would restrict government in times of recession to cut back on spending or raise taxes and would hamper recovery and make the government abdicate the responsibility of maintaining full employment. Despite that IMF and treasury advocated balanced budget in East Asia, forcing economies to collapse to acquire assets on the cheap)
By advocating concretionary policy in one country IMF spread its bad effect on neighbors. These sort of policies spread depression in 1930s. Each country reduced imports and expenses , increased tariffs, devalued currency exports down, turned to neighbors. ?? IMF worse told the countries to build trade surplus at the cost of the people IMF no to tariff, devaluation against its own creed that market knew best, so the choice was increase exports which is not easy especially if economies of trading partners weak or reduce imports, cut income, deepen recession. That was the only option left in East Asia resulting in massive economic downturn cutting income reducing imports which led to surpluses to pay back foreign creditors. Which was the whole purpose of the exercise
Downturn spread into lower commodity prices and collapse of economy. IMF policies led to loss of confidence in the best emerging markets, focus on investors, not on people.
Clinton worried about interest raise of ¼ and ½ % by Alan Greenspan, that it will dampen economy lose jobs. In East Asia IMF forced raise of interest by 25% and asked to raise it even more. High corporate debt with high interest rates makes them over leveraged and leads to bankruptcy. And no repayment of loan (13)., capital driven out. IMF made small business men pay for real estate speculator’s sins.
Indonesia 75% business in debt, Thailand 50%, bank loans non-performing. 1997 Japan offered 100 billion to create Asia monetary fund. IMF and treasury fought it, did not want competition with itself., only among others (14) and loss of US leadership and control.
Media control was specially important, no one was supposed to use the word R-recession and D-depression, though Indonesia GDP likely to fall 10-15%. Japan offered 30 billion, was accepted by the treasury, but insisted it be used to bail out foreign creditors, and not for stimulating economy. Asian countries, three years after the crisis quietly began developing a modest version of the Asian monetary fund-the Chang Mai initiative after the city in Thailand where it was initiated.
Crisis deeper: banks shut, company takeover by creditors, real motive exposed. Financial system, the brain of the economy where to use for need, efficiency, Crisis becomes a vicious circle-Banks failing, lending steep decline, lower production lower income, banks failing. Collapse of even a single bank can be disastrous.
Its pile of information, creditworthiness of loan seekers is destroyed. Government creates regulations to prevent the vicious circle which IMF bridles at. When its advice is heeded-Chile 1982-83, GDF fell 13.7%. Reagan savings and Loan lost 200 billion. During S&L debacles banks were taken over rather than closed. Information capital was saved.
IMF macro models crude and micro ones are worse. East Asia was IMF shut down. Weak banks. Bribes rather than repayment of loans favorite method.
If the problem of bad banking ignored, eventual cost to tax payers too high (200 billion in S&L and 700 plus in 2008)
Capital adequacy ratio: Capital to outstanding loans/assets. IMF ignored the importance of keeping credit running, in stead insisted on all banks meeting the ratio immediately. If one bank has this problem, one can insist that it comply. If many or all banks have the problem, insistence is disastrous.
Two ways of increasing the ratio between of capital and loans-increase capital or reduce loans. It is hard to raise capital during a crisis. Reducing loan is difficult too, more and more banks call in loans, production is cut back and income lowered, the spiral is worsened along with the capital adequacy ratio of banks. The move backfired.
Depreciation of currency should have meant increased exports, but not enough production for export.
Nowhere is IMF stupidity exhibited as in closing Indonesian banks-16 closed down, others given notice, depositors left out, drain on deposits on the remaining banks, disastrous consequences, compounding mistakes of fiscal and monetary policy. SK ignored advice, recapitalized banks, recovered relatively more quickly.
Corporate sector in paralysis-75% Indonesians in distress and half the Thai businesses. On the verge of bankruptcy, who owns, owners or creditors. Owners strip assets. In DC trustees appointed. No such mechanism in East Asia. IMF conspired with special interests to dampen restructuring.. IMF confused financial restricting and who owns it with nuts and bolts, what should they produce, renegotiations dragged on, resulting in further uncertainty and loss as no body owned what and IMF insisting on selling assets (IMF enforcer of MNCs), selling chips in SK and bringing in foreign management. SK and Malaysian governments intervened and finished the job in 2 years Thai followed IMF and it went on forever.
Social/political turmoil resulting from severe concretionary policies. Billions for corporate welfare, not even millions for the poor. Food/fuel subsidy lowered in Indonesia, riots and businessmen and their families victims.. riots drove capital out. IMF should have known better. Its policies had caused riots elsewhere. Post riots subsidies restored. But such reversal does not restore social harmony, as lowering interest rates does not un-bankrupt a business bankrupted due to high interest rate.
Fluctuations are always part of the market economics (USA every 10 years), but institutions blamed in LDCs. East Asian crisis took longer to recover due to IMF mistakes. When job loss and real wages have bottomed out, crisis is not over as it is on Wall St once stock prices. No recovery till workers return to jobs and wages to pre-crisis level. Incomes remained 20% lower for a long time. In Mexico IMF declared crisis over as soon as foreign creditors started getting repaid. (mission accomplished). IMF focuses on financial variables, not on wages, jobs or GDP.
For most of the cases Keynesian expansionary fiscal and monetary policy is the best.
An economy which has had a deep recession never makes up the lost time. Economic policy should be directed at minimizing depth and duration of the recession.
Malaysia-China.
Malaysia reluctant to join IMF program, did not want dictation and had little confidence in IMF. Its strong regulatory stance prevented banks from foreign exchange volatility, though high 15% non-performing loans hit central banks, made banks keep provision to cover these. Its banking system was quite strong. IMF staffers found it difficult to support its MD’s assertion that its banks were weak.
9/98 Mahatir pegged currency to 3.8 ringgit to a $, lowered interest and ordered all off shore Ringgit back with in a month., limited transfer out of the capital, one year freeze on foreign portfolio capital ,. Investors allowed to take out profit 9/7/98.
Paul Krugman advised Mahatir to impose capital controls. Malaysia central bank governor and deputy resigned. IMF and US treasury predicted collapse.
In fact the reverse happened. WB worked with Malaysia to convert capital control to an exit tax. Large capital in and out flow-large externalities cause massive disturbance of economy.
Malaysia was able to remove the tax as promised in a year and in the period restructured Banks/corporations proving free capital marketers wrong (15). Foreign investment in Malaysia actually increased (16).Thai under IMF made much slower progress.
China (and India) escaped the vagaries of the global economic crisis. Both had capital controls. India grew 5%, china 8%. Other liberal markets declined.
China adopted expansionary policy and invested in infra-structure. It recognized links between economy and social-political stability and aware of links macro stability and its micro economy.
Thailand followed IMF and suffered.
South Korea took active role in restructuring corporations, ignored advice on micro chips and did well.
Future:
Despite hardships the East Asian crisis had a salutary effect, will develop better financial regulatory system and institutions. SK has checked some of the worst effects of crony capitalism, corruption has been reduced. Weak , unregulated financial institutions are bad, lead to poor resource allocation. IMF caused impairment of overall efficiency.
Little new money is raised by selling shares (new equity), only the UK, the USA and Japan with strong shareholder protection do it. Firms have to rely on loan which is risky., even more so if it is from IMF., so borrow less, and grow less, less efficient resouce allocation, especially capital allocation.
IMF admitted mistakes in Indonesia, by capital market liberalization, pushed back restructuring, underestimating interregional impacts, downfall of one economy led to that of neighbors, but not accepted mistakes of monetary policy or why its models failed to predict course of events.
Suffer from hubris, not likely to accept mistakes.
Asian conspiracy theories: Weaken Asia, grab assets, enhance Wall St income, interest up, contractionary policy, recession, open market, money in and out quickly, commodity price down, sell assets at basement bargain price to foreigners for their expertise, sales manged by the very people who had pulled money out (local mangers often former employees of MNCs like Shaukat Aziz), causing recession, make fat commissions as they had when directing money in. some did not do any restructuring, held it, bought it fire sale price and sold it when price high.
IMF working for Western financial interests.
Alternatives:
-Maintain full employment
-expansionary fiscal and monetory policy
-address the problem of weak banks, maintain flow of finance
-stand still on debt repayment
-Quick resolution of bankruptcy rather than liquidation as done in the USA
-strong government intervention
-quick reentry into the market
-eliminate srtipping
-increase exports due to lowered exchange rate
-quick restructuring
-large bail out bad
IMF legacy of private and public debt brought down living standards.
Russia: chap 5
: Berlin wall came down in 1989, marked the transition from communism to capitalism (1). For the majority in Russia, life under capitalism much worse than even what communist leaders had predicted, would be. Middle class has been devastated and crony mafia capitalism created. Under the so called democracy free media also being shut down. US treasury and IMF preached market fundamentalism in stead of communism. Some see oligarchs from Yeltsin time fall from grace. Others think only a few did. It will take years to repair damage of Yeltsin time. Poverty increased.
Some see burst of growth in 1998, with oil price going up and (devaluation in 1998 which IMF opposed and wanted to maintain overvalued currency with loans), as renaissance.
Transition will take a very long time, it was a transformation of of social and political structures and of the society as a whole.
Transition:
Russia 1990s. Seldom a country went from goverenment controlled economy to market economy..
China 1970s started transition but was still far from full market economy.
Taiwan, 100 miles offshore to china, was a Japanese colony since the end of 19CCE, was one of the most successful transitions, caused land reforms, partial privatization of industry and created a market economy.
1945, many countries transitted from war to peace economy, feaered recession, command tp private sector, reallocation of resources (Tanks to Cara) but production in the USA in 1947 was 9.6% higher than in 1944. At the time of the end of the war 37% GDP given to war, brought to 7.4% by 1947. the difference between the US and Russia was that in the US before the war market was in place.Russia required their creation.
Economists who advised Russia did not pay attention tp painless transition in china and Taiwan. Market fundos ignored the advice of Russian scholarship.
Russian banks did not decide who got loans or if they got repaid, enterprises were told what told what to produce, managers indulged in trades to fulfil quotas. This corruption increased with markets (3). Circumventing laws were part of life, led to massive corruption under markets without control. Prices set by governemnt for basic necessities like vodka and energy resources kept artificially low.
Economists-market economics-prices, private property, profit, competition, often ignore institutions
Institutions: legal and regulatory frame work to govern contract conflict resolution, bankruptcy procedures, competition, bank reserves to pay depositers, fair operation of markets and securities, so shareholders not cheated, developed in DCs over 150 years in response to bank failures and security frauds. Fundamentalists tried to create market economy with out creating institutions and what institutions there were, had no infra- structure, or effective banking system.
Soviet times: farmer given seeds and fertilizer, tractors and market had to be created. No unemployment under soviets, people worked in the same the entire life, given housing and pension. Post soviet labor could move but no housing any more. Safety net not needed, no market infrastructure, one price system, moved to market driven privatization, new type of market entrpreuners
Debate on speed of reform; 1 quick or communism will come back, but economic failure corruption (1) prevailed (IMF/US treasury) government monopoly rplaced by private monopoly worst exploiters. Gradualists proved right, they had only overestimated magnitude of disaster
Russia had high literacy, specially technologic, was first into space, centralized planning doomed it, no government agency could collect/process all the information. Incentive of profit lacking. Huge subsidies caused economic distortion. Privatization,/decentralization plus reduced military spending should have caused a burst of economic growth..
But the standard of living fell.
Mistakes:
1992 prices freed over night, led to inflation, savings wiped out, resulting in macro-instability. Raising interest rate to deflate followed. But the price of natural resources kept low for global corporations to rake billions in. Privatization followed. Russain savings wiped out. Global corporations won out. No new investment came, jobs were cut.
GDP down by 45%, greater than during WW II.(industrial product 1940-46 down 24%, 1990-98 down 42.9%, livestock down by half, investment in industry zero. Corporations took over. 7 oligarchs got away with hundreds of billions.
Liberalize, stabilize, privatize set the preconditions for decline. Loans, proceeds of privatization stolen, asset stripping led to offshore and US stocks. Privatization was giving away state property to friends and kick-backs. 1998 fall out of East Asian crisis hurt. No effective tax system either. Billions had to be borrowed. (IMF not stupid. If initial mistakes accepted, they would have learnt from them and not repeat them. The sabotage was deliberate).
1998 Russia Heavy debt, East Asian crisis had sent interest rates up, then oil prices went down by 40% in the first half of 1998, actually below the cost of extraction and transport.
Ruble was overvalued, drove exports down, unemployment was disguised by the number of people on the payroll, but no salary. Overvalued ruble a boon for the rich, had to spend fewer of them for luxuries. Outflow of money helped too, more dollars for rubles. IMF resisted devaluation and willing to pour billions in stead. With devaluation imminent, interest rate would went up and money fled .government had to pay 60% interest on its ruble loan in 6/1998 up to 150% a few weeks later. Dollar debt interest 50% (in US interest 5%) NY banks pushed loans on Russia in anticipation of IMF bail out (Userers in India) (4), and in 7/98 pushed Russia into borrowing more foreign currency. In the event of devaluation, it will be more difficult to repay.(5).
IMF 7/20/97 11.20 billion as part of 22.6 billion package, 4.8 billion used to prop up ruble and failed. Loans also delayed reforms like collection of taxes from oil companies. WB rated Russia as most corrupt and believed that loan will be directed to friends.(small fry like Kenya not given corruption rating. WB debate loan to maintain overvalued currency made no sense. Russia was a resourceful country. If it got its act together, if not no amount of loan will help. Clinton pushed WB to give 6 billion. Bank gave in 300 million instalments.
Rescue failed. 3/52 after loan of 8/17/98 Russia suspeneded payment, devalued. Ruble crashed by 1/99 down by 75% from 7/98 level.global crisis caused increase in interest rate increase in credit crunch. Brazil recession deepened, other Latin American countries driven to brink. US Fed bailed out largest hedge fund Long Term Capital Management.
Oligarchs bled money out of the countries in hours. IMF could have made life easier if it had simply sent money directly to Swiss and Cypriot banks.Wall street and investment bankers raked it in too. Cost of IMF blunders paid by Russians.
Gap between “expectations and reality” never wider , failed in all transitions (Russia 2000 GDP 2/3 if 1989, Moldovia less than 1/3, Ukraine 1/3 WB)
Russia from an industrial giant to oil exporter like Saudi Arabia. Sale of the century, Russia’s wild ride from communism to capitalism. (8)., poverty/inequality increased. 1989 only 2% in poverty, late 1998 23.8% (2$ a day), 40@ less than 4$, 50% children living in poor families.(10). A few very rich, mid class hit, savings and income gone down. health, education spending much lower, Bulgaria losr 10% of population, and a larger % of educated ones. Communism avoided extreme poverty, living standards relatively equal, free health and education, child care, now inequality comparable to Latin America(11).
Misguided policies. Russia knew that regardless of posturing money will keep coming, so reforms not undertaken as expected or planned. IMF emphasized privatization and short changed competition at the behest of corporate interests, monopoly cartels and Mafias.
Excessive suppression of inflation led to stagnation Czech republic very high interest rate, stripping , barter payment wages.
Privatization with out corporate governance harmful (12) stole assets-corporate theft. Yeltsin cronies became billionaires, poor did not even get $15 pension 1995 loan for shares. Governemnt turned to private banks, friends of government license to print money, government assets as collateral, default, banks took over (page 27).
Sham sales, oligarchs worked for Yeltsinreelection. US robber barons left the country richer. Russians stole the country poorer.
Social context-the glue that keeps socity together is social capital. Russia lost it, anarchic, theft by all from all. In Kazhakistan numerous greenhouses with out glass, so little confidence in the future, each took what they could and ran.
One got wealthy not by hard work but by using political connections. IMF impeded macro economic success by ignoring all that.
Problem of radical reform: French revolution 1789, Paris commune 1871, Bolshevic revolution 1917, Cultural revolution 1960-70s
US revolution was evolutionary and societal restructuring.
Russia tried market economy with party apparatic and KGB intact. With the oligarchic mafia stealing right and left-all creations of IMF. Demands for free media came from oligarchs so they could own and use them.
Unfair Trade laws chap 6
1998 bail out by IMF to keep satrap Yeltsin in place (1). Corruption deemed good for teaching Russians economy. Treasury, in spite of contrary advice by council od economic advisers stood by shock therapy, “in the interests of MNCs”. If communists took over again spigot would be shut off. Maldovia 2000 elections communists got 70% of the seats (2). IMF/Treasury treated them wih disdain. Valued their lackeys more. Most communists are like politicos in the west, opportunists, but they shared a belief in egalitarian societies. Clinton, on the surface, a social democrat allied himself with diciples of Milton Friedman-market fundos.
By 2000 clinton had started distancing himself from Yeltsin who was no more use.
Putin was the new boy. IMF/treasury were left to cover up for globalization by ignoring facts, denying reality, suppress discussion and shut the mouth of critics with money.
Russian growth. Unlike the US they debated issues, worried over high exchange rate and inflation. IMF/treasury scared of open discussion. US allied with corruption. Russia mafiaized. IMF/Treasury too dumb to eviscerate Russia? Wall street inflation reduced the value of loans, led to higher interest rate and bond price.
Creed-unemployment good, privatization sacred, competition not so good,
US treasury secretary Paul O Neill engineered Global Aluminium cartel and and brought down competition in steel as well, preferred independent (of Social pressure) central banks, Gordon brown of the UK did that,, US hypocritical, for free trade but not for poor country commodities. US fair trade laws called unfair trade outside, below cost sale called dumping increased tariff on foreign products, US business agri subsidized, not dumping. Aluminium price fell steeply in 1994, US accused Russia of dumping , it was selling only at international price. Paul O neill was thwen head of ALCOA global aluminium cartel, reduced output, increased price, threatened suit under anti-dumping laws. Russia’s cost of production low. US commerce uses best information available which is what corporations tell it supposedly comparable country “Poland, cost of production equal to that of Canada? Golf carts. Cartel better as just tariff would send Russian Aluminium elsewhere.
Cartel illegal in the USA, cartel would give quotas to countries. Cartel established, consumers US and others lost.
US and Russia made a deal to export deactivated uranium from nuclear warheads.
For use after de-enrichment for use in power plants. Russia accused of dumping uranium. Department of commerce and trade representative asked the congress to change anti-dumping laws. Congress lackeys of corporations turned it down.
By mid-1980s Margaret thtcher had privatized billions. Reagan had only 92 million Helium plant in Texas . Thatcher had a long way to go. United States enrichment corporation enriches Uranium for power plants. And bombs. It was privatized could sell enriched uranium to terrorist states. And asked for subsidies.
US motto trade good, imports bad, now changed or has it, but profit above all, whatever it takes.
Better Roads to Market chap 7
Poland and China did not toe IMF line and met with success.
Poland: inflation down quickly, privatized slowly, developed banks and other institutions, laws on bankruptcy (1) democratic process of reform, reduced unemployment, increased welfare spending and improved infra-structure.
China economy up 10%, Russia down 5.6% ,China saw the largest reduction in poverty in history, 358 million in 1990 to 208 million in 1997 to 30 million in 2005. Russia saw the largest increase in poverty.
China partial privitization of agri, enormous task,hundreds of millions o peasant to deal with in a few years, gradually in provinces, then competition, institutions, 2 tier system-what produced under quota old price, excess free market, avoided rampant inflation of Russia, running parallel elimination of old economy while new created.
Invite foreign firms for joint ventures, china the largest recepient of FDI in LDCs. (3).SEC, Bank regulation, , did not relax state controls, stability important for growth, reduce jobless.Safety nets, Restructure state enterprises. Create new jobs, , new enterprises, and competition before privatization and restructuring, never took inflation to extremes.
Liberalize gradually, there was accountability, gradualist countries obtained deeper reforms than shock ones.
Russia road to failure:
IMF/WB supporting a system which lacked political legitimacy. Stop pillage in future. Devaluation spurred import substiturion. Russia needed many years to catch up to where it was in 1990.
Stablization is hardly a growth strategy., contracts aggregate demand, reduces aggregate supply. Russain production capacity cut by 40%.
Huge inequality, poverty fertile ground for movements, nationalist, populist and communist.
Honest govt collects taxes, repays banks, accountiblity.
IMF other agenda Chap 8
IMF has failed in its mission., “what is good for financial community is good for global economy”.
Keynes recognized markets could not be left to their own devices, need global collective action.
-In a severe downturn some countries might not be able to borrow to compensate for tax cut to stimulate economy and Imf could put pressure on countries to maintain their at full employment and finance others to sustain global aggregate demand.
Markets function well, governments poorly.
Exchange rate:
In early seventies switch to flexible ratesm under the theory that like other prices, should be determined by market force. IMF interventions in billions of $ foreign exchange to Brazil and Russia, based on “markets exhibit excessive pessimism at times”. Exuberance bubbles hot money, real estate-Thialand followed by pessisim. IMF made it easier for hot money to go in and out. Speculators made money out of government supported by IMF, equal to what government loses.
Contgion:
Keynes downtirn, import down, hurt neighbors. IMF in East Asia crisis made contagious spread by tuightening belts, lowered income, lowered imports, hurt neighbors.
Trade Deficit:
Thailand govt fiscal surplus,, balance of payment deficit, private investment more than private savings.
Trade sum of all =sum of all surpluses
Large deficits country has to borrow year after year, if loan not coming Crisi- short term borrowing worst conditions.
Crisis Can’t adjust
Burst bubble. Market economics loaner bear consequences.-law of bankruptcy. IMF fund bail out. Foreign loaners (western) loaners have less incentive to make good loans promises. (whole idea Tax payer money-buy assets-bail out- pay corporations) Wall street Russia knew bail out would save them. Default a way of discharging debt. Russia defaulted 1998, was able to borrow by 2001.SK forced into restructuring of its laon, roll over or not get repaid.
Bail Out
IMF started asking the private sector to be on the bail out, tried first on little countries like Equador and Romania, IMF handed over its power of dealing with liquidity crisis caused by credit markets to individuals who had caused the problem in the first place. IMF/WB would not lend out without their approval, no one else would, private lenders had enormous leverage.
Romania. At one point $36 million short of private loan to qualify for 1 billion aid. Lenders demanded high interest rate and relaxation of the country’s regulations leading to riskier high profile loan status, and undermining the country’s banking system, negating the reasons for regulation. The government, desperate, yielded.
IMF as lender of last resort proposed to avert criticism, that it would act as central banker to the world. (1)., be the sole judge of credit worthiness of a country. IMF gets paid back first. Private lenders get the rest on demand, a higher premium risk.
IMF Agenda:
Seeming irrationality of IMF and inability to benefit from mistakes, point to the fact that it serves the finance community, changed mandate from global economic interest to global finance interest.
Many of its high officials come from the financial community and go back to it-revolving door, WB, USG, corporations.
Govt puts restraints on the doors. IMF no democracy or accountiblity.. IMF big wigs are for liberalization, privatization, stability fundamentalists. IMF bill collector for G7 lenders. (2) Default breaks the sanctity of contract, undermines capitalism. Did not believe in social contract-basic needs, jobs, welfare. Maintaining exchange rates via input of billions enriches the thieves and their backers at the cost of national economies which pay for private laibilities-debt nationalized. East Asian crisis great for western creditors, no money for food/fuel subsidy for the poor.
Massive contraction, reserves are up to pay lenders, not to increase growth. Thailand lost, reserves to fight speculators who could get in and out due to IMF coercion. Emphasis should have been on stand stills, capital control and exit taxes (used by Malyaysia). Lenders end up owning the country.
East Asian crisis IMF/US blamed the lack of transparency in the countries. (late 1980s and early 1990s Norway Sweden and Finland) Sin was premature capitalism and financial market liberalization. IMF imposed tactics to shift blame to weak banking regulation and Japan and the West encouraged unwise lending investment and other bankers absolved themselves the same way. ?
Risk factor SK high debt, Thailand trade deficit, real estate bubble, Indonesia Suharto thievery.-all known. If loan bad, it is lenders/borrowers fault. East Asian crisi cast doubt on Washington
For IMF liberalization is a received doctrine, negative benefits of low inflation too low(2). WB opposed imposition of more globalization as such, only one polcy right. US debates inside, stifles it outside., suppresses choice, circumstances of failure differ. East Asia high debt, Latin America low debt.
International public institutions for collective action, impose externalities, action of individuals affecting others for which they do not pay or compensated, overproduction of some, under of others, market can’t pay for defense, student loan or regulate which results in boom and bust.
Externalities-UN global security-political, IMF global stability-economic.
Environment Greenhouse effect-CO2, CFC, hole in Ozone.
CFC 1987 Montreal protocol worked well.
River blindedness and small pox gone-Aids, malaria and TB not
Knowledge, humanitarian aid, poverty, deforestation and soil erosion on back burner.
Governance
IMF-finance ministers cater to own lobbies? IMF affects lives of billions who have no voiceWTO Trade , no worry environment, though one vote one country, US, Europe and Japan dominate. China has added weight to LDCs.
IMF/WB need change in voting rights and not just trade/finance to be heard.
US unlikely to give up IMF veto-funds ultimately come from workers in LDCs, IMF always gets repaid.
IMF/WB 24 seats at the table. Africa least seats due to least economic power. Poor countries do not/can not afford staff to present point of view.
Transparency-IMF, WB, WTO leaders not directly elected , not accountable to public. WTO negotiations behind closed doors and violations decided by secret discussions. . Secrecy normal with central banks, before 9/11 US treasury defended off shore accounts secrecy and promoted tax evasion and money laundering.
IMF though not a bank has the same officials.
Openness would have exposed blunders to public scrutiny.IMF emphasized transparency in Asia.
Reform IMF
Mistakes made as it became a tool of special interests, believes in institutional infallibility as a creed. Don’t discuss alternative policies, patronize LDCs, they won’t understand..
But IMF not likely to learn or commit Hara Kiri. Broad consensus should limit itself to crises, not growth or transition.
It should consider growth and jobs in addition to inflation or preparing reports on countries.
IMF and US treasury dreamed of reforms of global financial architecture, but only enhanced its power.. money and obligation of countries to meet new standards. Discussions were a charade. IMD sense of complacency talk of transpreancy, poverty and participation to the extent of better web sites. Resistance came even for tepid reform of special interests.(8).
Needed awareness of:
Dangers of liberalization of capital markets and hot money.
Bankruptcy reform and stand still
Less reliance of bail outs
Better banking regulation
Improved risk management
Improved safety net
Improved crisis response
WB is more responsive to concerns of LDC(16-17). Successful countries pursued comprehensive approach.(18).
Assistance-remove conditionalities, and enhance debt forgiveness.
WTO-open LDC market, close DC market, intellectual property rights-AIDS
more balanced trade agenda
DC benefited from Asian, Russ8ian and Latin American crises.