Transcript Document

INT’L FINANCIAL SYSTEM
JOINT CLASS SEVEN
POLITICS & ECONOMICS
WITHIN THE WORLD BANK
LEGAL FRAMEWORK
Prof. David K. Linnan
Univ. of South Carolina
School of Law
UI-UGM-USC-UNDIP-USU
Joint Videoconferenced Class
September 26, 2002
CLASS LISTSERV ALSO FOR
INDONESIAN STUDENTS
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2)
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CLASS LISTSERV ADMIN
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Listserv
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Further information on listservs otherwise at
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Class projects admin
Shared project work to begin by next class (turn around required at
both ends)
•
Mock negotiation during the second half of the course, carried out
mostly via internet between US and Indonesian student groups
representing IFI and a specified country
•
Negotiation of a privatization undertaking as part of an IFI country
agreement (conditionality & economic opinions in action).
•
Differential information distributed to different sides initially (as
privatisation in practice represents different economic views),
after two weeks distribution of interim negotiating transcript
•
Two rounds, namely two weeks to position memos, two weeks to
finished agreement provision
•
Grading will be organized locally at each participating university.
FRAMEWORK AS MIRROR
POLITICIAL & ECON. ELEMENTS
STRUCTURES
MIRRORED IN LAW
IFIs largely creatures of treaties, and treaties have changed
over time
To what extent do “external” elements like politics &
economic views control over legal structures & vice-versa
(public to private investment focus shift; conditionality &
governance as examples)
Note that political & economic views have changed
drastically since WW II & probably will over next 20+ years
(roughly a generation in IFI terms, so IFI structures
presumably change)
FRAMEWORK AS MIRROR
IFIs AS TREATY CREATION
Parallel to IMF exercise of last week, World Bank Articles of
Agreement: Art. I Purposes:
1. [reconstruct war-ravaged economies, post WW II genesis]
2. To promote private foreign investment by means of guarantees
or participations in loans and other investments made by private
investors; and when private capital is not available on reasonable
terms [to do finance itself, what does it mean to say private capital
is unavailable on reasonable terms]
3.
To promote the long-range balanced growth of international
trade and the maintenance of equilibrium in balances of payments
by encouraging international investment for the development of
the productive resources of members, thereby assisting in raising
productivity, the standard of living and conditions of labor in their
territories [almost same as IMF provision, note intergrated
beginning]
FRAMEWORK AS MIRROR
IFIs AS TREATY CREATION (CONT’D)
4. [provision giving priority to more important
projects]
5. To conduct its operations with due regard to
the effect of international investment on busines
conditions in the territories of members and, in
the immediate postwar years, to assist in bringing
about a smooth transition from a wartime to a
peacetime economy [still post-WW II framework,
but what investment picture]
FRAMEWORK AS MIRROR
REVISITING HISTORY
19th Century first & still greater age of internationalisation of world
economy, mostly debt finance to emerging markets (eg, Latin
American countries as original LDCs)
1930s economic collapse included defaults on sovereign issues &
equity collapse, blue sky & legality of investment laws in US
resulted to exclude from many institutional portfolios (eg,
insurance)
Portfolio investment (capital markets) blew up
Post WW II newly independent African & Asian LDCs suspicious
of capitalism as colonial artifact, so state instead as leader of
development/dirigiste economy
Dirigiste leanings meant public sector emphasis, incluidng
state owned enterprises, infant industry protection on
manufacturing side, marketing boards & price controls on
agricultural side
FRAMEWORK AS MIRROR
REVISITING HISTORY (CONT’D)
Financial sector, being services as banking, insurance, and
capital markets, hardly on radar screen before 1970s
Liberalization even in industrialized
countries
only
then favoring consumers
Eg, in US money market funds above bank deposit
interest rates to create de facto competition for
money
Idea in IFI advice was deepening of financial
systems
via deregulation would lead to more savings being
available for investment, so more growth w/ allocative
efficiency
But what happens if deregulate, for example,
banking without maintaining prudential supervision?
Competing idea of exploiting poorly compensated
consumers w/ low interest rates to create cheap capital
(mostly bank loans) steered to particular industries
under administrative guidance
Who is better at allocating capital, the minister or the
market?
FRAMEWORK AS MIRROR
REVISITING HISTORY (CONT’D)
1960s already, African economies started economic downward
spiral
Statist & kleptocracies in government, heart of failed
state arguments currently
In Asia difference between large & small economies ex Japan led
to several consciously electing open economy & export
orientation (especially South Korea, Hong Kong, Singapore &
Taiwan)
Original East Asian Miracle economies through mid1990s showing extraordinary growth from same or
lower income levels as in Africa immediately post-WW
II
Human resources, high savings & investment
rates
Success stories until 1997, now questions
FRAMEWORK AS MIRROR
REVISITING HISTORY (CONT’D)
By late 1970s, push to replace state with market w/ parallel
neoclassical pressures on macroeconomic side (for example, in
US Paul Volcker wringing out inflation)
1970s oil price shock created serious quandary for non-oil
exporting LDCs w/o export general orientation (eg, not small, open
economy Asian countries, more Africa & Latin America)
Famous recycling of petrodollars whose LDC borrowers could not
repay led initially to Latin American debt crisis
Creation of structural adjustment concept, idea of IFI lending to
enable structural changes in economy w/o too much politically
unbearable pain, including Washington consensus as policy
advice plus first signs of conditionality
FRAMEWORK AS MIRROR
REVISITING HISTORY (CONT’D)
1990s transition economies (former Soviet
block), attempts to get to market system
1990s opening up East Asia in particular
in financial sector too (APEC), but 1997
crash and issues re structural reform,
including financial sector, still playing out
with IFIs
FRAMEWORK AS MIRROR
WORLD BANK DIVISIONS (AKA BANK GROUP) AS EXAMPLE OF
PHENOMENON
World Bank (1945 lending
w/ developing country gov.
guarantee, usually public or quasi public sector uses, to foster
long-term economic growth & development)
International Development Association
(1960 IDA, highly
concessional finance for developing country public sector,
currently 0% interest, 35-40 year maturity, 10 year payment
holiday-- 3rd vs 4th world)
International Finance Corporation (1956 IFC, private sector
equity & debt direct investments in developing country w/o
host gov. guarantee, 1956)
Multilateral Investment Guaranty Agency (1988 MIGA, political
insurance & ADR for private sector direct investment projects
in developing countries)
FRAMEWORK AS MIRROR
WORLD BANK DIVISIONS (AKA BANK GROUP) AS
EXAMPLE OF PHENOMENON (CONT’D)
Prior list fits nicely into WB purposes re article I, at
least if “guarantee” extends to insurance
What is missing from the preceding list in terms of
economic activity, and are there alternative ways of
covering activity?
List includes lending to governments (public sector),
lending to (4th vs 3rd world, aka HI, still public sector)
governments at concessional rates, co-investing in
foreign direct investment (FDI) projects, political
insurance for FDI projects?
FRAMEWORK AS MIRROR
WORLD BANK DIVISIONS (AKA BANK GROUP) AS
EXAMPLE OF PHENOMENON (CONT’D)
Chief missing element is portfolio investment, which
coincidentally implicates capital account and financial
sector liberalization, but note that it was prominent in
international arena 19th century to 1930s
Why distinguish
investment here?
between
portfolio
and
direct
What is financial sector liberalization and why is it
special (monetary sovereignty views, or what)?
FRAMEWORK AS MIRROR
ALTERNATIVE SOURCES, PUBLIC OR PRIVATE
List includes lending to governments (public sector)
What is function for “creditworthy” countries that could borrow
privately from banks or in bond market
Lending to (dividing LDCs into 4th vs 3rd world, aka highly indebted
countries normally, still public sector) governments at concessional rates
What is function for countries of doubtful creditworthiness, but
what undertakings might be required from a country if private sector
refuses to touch (or would require high interest rates for high risk)
Co-investing in foreign direct investment (FDI) projects
Market failure arguments that foreigners will no invest w/o initial
public sector involvement, but is argument quasi-guarantee
(Manulife case)
Political insurance/ADR for FDI projects
National insurance agencies (OPIC, Hermes, etc)
plus ICC and other ADR venues plus forum clauses (neutral
country courts)
FRAMEWORK AS MIRROR
CONDITIONALITY
Argument whether conditionality is a performance measure
for loans, etc, or whether it is a precondition for access to
finance at all
Is there a difference in imposing “conditions” on a
sovereign borrower as opposed to an ordinary borrower in
private sector
What are the limits of influence on social & defensepolicy,
using the example in US of huge current account deficit,
notwithstanding which US apparently contemplates going
to war with Iraq for national security purposes and also is
looking to expand social programs like free drugs for
senior citizens (both costing hundreds of billions of U$
potentially, with deficit problems that the IMF would not
tolerate in a normal country)
FRAMEWORK AS MIRROR
GOVERNANCE
Idea originally created as a negative definition to explain why
“development” did not occur in Africa in the 1970s despite
formal preconditions being present
What is governance?
Plain English versus IFI managerial view
Is this accurate transposing private sector “managerial”
view against public sector ideas
Parallel argument as w/ conditionality whether governance is a
precondition or a performance measurement
So how does governance now work for IFIs & bilateral
development lending
FRAMEWORK AS MIRROR
DO CONDITIONALITY & GOVERNANCE LOOK
THE SAME FOR ALL LENDING PATTERNS
Back to question of market vs minister allocating
capital
How does conditionality work itself out in private sector
vs public sector emphasis
Idea of creating market framework (technically
transaction cost economics view, Coase)
How can you have market framework w/o enforceable
contracts
FRAMEWORK AS MIRROR
IS THE MARKET FRAMEWORK A
POLITICAL OR AN ECONOMIC
QUESTION?
Starting with privatisation exercise
next week, but can Indonesians
explain Article 33 from UUD 1945
for class