Transcript Lecture II - Financial Policy Forum

Lecture II
Questions from last lecture
Revisions to syllabus: will be shortened
Review of data: discuss some characteristic facts before
continuing discussion.
Monterrey Statement – Discussion of the main points that it
hits and how it relates to course and syllabus
Stiglitz papers on capital market liberalization
International Capital: Important But Not Dependable
All : GDP/Cap Flows
GDP
7
$250
Cap Flows, $billions
6
$200
5
$150
4
$100
3
$50
2
$0
1
0
-$50
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
Compares GDP of emerging market and developing countries including
selected advanced economies and capital flows of Emerging market and
developing countries including selected advanced economies.
International Capital: Important But Not Dependable
Africa: GDP/Cap Flows
7
6
GDP
Cap Flows, $billions
5
$14
$12
$10
4
$8
3
$6
2
$4
1
$2
19
81
19
8
19 2
8
19 3
84
19
8
19 5
86
19
8
19 7
8
19 8
89
19
9
19 0
91
19
9
19 2
9
19 3
94
19
9
19 5
9
19 6
97
19
9
19 8
99
20
0
20 0
0
20 1
02
20
03
0
-1
$0
-2
-$2
International Capital: Important But Not Dependable
Latin America: GDP/Cap Flows
GDP
6
$100
Cap Flows, $billions
5
$80
4
3
$60
2
$40
1
0
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
-1
$20
$0
-2
-3
-$20
International Capital: Important But Not Dependable
Asia: GDP/Cap Flows
10
$140
9
$120
8
$100
7
$80
6
$60
5
$40
4
$20
3
$0
2
-$20
GDP
Cap Flows, $billions
1
-$40
0
-$60
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
Developing Asia for capital flows defined to also include Hong Kong SAR, Korea, Singapore, and
Taiwan Province of China
Some types of flows are more volatile than
others
$70
International Capital Flows: Latin Am
FDI
$60
Portfolio
$50
Other private
Official
$40
$30
$20
$10
$0
-$10
-$20
-$30
-$40
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Latin America was chosen because of incomplete data for other areas.
Flows to some areas are more volatile than others
Private Portfolio Inflows
$80
$70
$60
$50
$40
$30
$20
$10
$0
-$20
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
-$10
-$30
-$40
Africa
Cen Eur
Lam
Asia
-$50
-$60
Net private portfolio flows include the purchase of private equity shares (amounting to less
than 10% of firm) and debt securities debt (e.g. bonds). Measured in US$ billions.
Some types of flows are too persistent
Foreign Debt
$800
$700
$600
Africa
Cen Eur
L Am
Asia
$500
$400
$300
$200
$100
Total foreign indebtedness in billions of US$
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
$0
Persistent debt and its legacy
Foreign Debt Service Payments
$180
$160
$140
$120
$100
Africa
Cen Eur
L Am
Asia
$80
$60
$40
$20
$0
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Principle and interest payments on total foreign indebtedness in billions of US$
Capital flows are concentrated
Private Capital Flows
10 Year Average, $billion
Lam
Asia
Cen Eur
$38
$49
$8
$24
Africa
Even FDI is concentrated
Foreign Direct Investment
10 Year Average, $billion
Africa
Cen Eur
Asia
Lam
$54
$48
$9
$16
Lecture II
Monterrey Statement
Focus on Sections C, E and F: Trade, Debt and Systemic
Issues
Goals – to end poverty, sustainable growth and
development, and equitable global economic system
National efforts need t be supported by enabling
international economic conditions
Peace and development are mutually reinforcing
Appropriate regulatory framework at national level
Redefines macroeconomic policy – growth and full
employment first
Invest in social infrastructure and basic services
Lecture II
Monterrey Statement -- continued
Orderly development of local capital markets, i.e.
“sequencing”, with sound banking systems
Support microfinance and national development banks, and
lower transactions costs of remittances
Lecture II
Monterrey Statement
B. Private Capital Flows
The challenge is to promote FDI even to small, remote developing
countries
•
•
•
•
•
Public-private partnerships
Structured finance
Measures to reduce short-term volatility in capital flows
Sequencing regulatory measures
Voluntary standards and codes
C. Trade
Recognize managed trade measures as a means to development
Recognize the role of regional development banks
Need multilateral assistance to helped depressed export revenue
Need to insurance against risk (see C. 37)
Lecture II
Stiglitz papers on capital market liberalization
Rogoff study comes in wake of policy failures. Intended to
evaluate effects of policy and indicate some opening
towards change in those policies
IMF tried in 1993 to change its charter to require all member
states to pursue policy of capital market liberalization. This
effort was abandoned following the financial crises in the
developing world.
Stiglitz claims IMF policy based on hard-headed ideology –
and in the interest of private financial markets – and not on
economic science (economic theory based on facts).
Lecture II
Stiglitz papers on capital market liberalization
• EMPIRICAL PROBLEMS
Empirical studies of the role of trade liberalization and capital market
liberalization on growth rates is difficult because of model specification
and simultaneity. That is, many factors are not or cannot be included,
some factors that are associated with liberalization are highly correlated
with other factors that are deemed ‘positive’ for growth, and there is the
problem that higher growth rates might lead to liberalization (such as the
recent experience with the developed world).
Even faulty measures of liberalization and the IMF’s own data failed to
demonstrate the economic benefits of liberalization by the end of the
1990s.
The counterfactual remains that the two big success stories, China and
India, both experienced rapid growth without liberalization. In contrast
the Russian experience with it had ended in a great disaster.
Lecture II
Stiglitz papers on capital market liberalization
THEORETICAL PROBLEMS
• Liberalization can lead to capital flight, not inflow (e.g. Russia)
• Speculative flows does not necessarily create new or expand
existing enterprises
• Inflow leads to higher exchange rate and Dutch Disease type
problems
• Short-term inflows can also lead to speculative pressure on asset
prices
• Accumulation of foreign reserves as self-insurance
Lecture II
Stiglitz papers on capital market liberalization
RISK
Liberalization has NOT led to better regulation
1.
2.
3.
due to external pressure from IMF or the US
pressure precisely to deregulate financial markets
few trained and experienced people in financial market regulation
(and those that exists are bought at higher salary by private sector)
Crises occurred despite good fundamental
•
•
•
•
East Asian countries had good fundamentals such as fiscal policy
Largest source of instability was recent inflows themselves
IMF responses exacerbated risks – private markets feared consequences
of IMF policy (contractionary macro policies to respond to crisis)
IMF opposed bankruptcy that would have cleared books
Lecture II
Stiglitz papers on capital market liberalization
Externalities and Capital Controls
Externalities impose costs on many who do not share in upside
Government intervention is one remedy – though it might raise costs
of funds it might just be more efficient so that costs match benefits
on a social level.
Lecture II
Economics of Growth and Development
1.
2.
3.
4.
5.
6.
Low incomes lead to lower savings
Shortage of savings constrains investment that is needed for capital formation as
well as investment in labor and public infrastructure
Lower or slower investment rates result in slower growth and development
Foreign investment can serve to augment domestic savings so that a rate of
investment can lead to higher rates of growth and development
At the same time foreign investment can expose country to disruptions originating
abroad or leave country more vulnerable to disturbances from within
Volatility reduces the incentives for investment and hampers the improvement in
living standards
Lecture II
Monterrey Statement
Focus on Sections B, C, E and F: Trade, Debt and Systemic
Issues
Goals – to end poverty, sustainable growth and
development, and equitable global economic system
National efforts need to be supported by enabling
international economic conditions
Peace and development are mutually reinforcing
Appropriate regulatory framework at national level
Redefines macroeconomic policy – growth and full
employment first
Invest in social infrastructure and basic services
Lecture II
Monterrey Statement -- continued
Orderly development of local capital markets, i.e.
“sequencing”, with sound banking systems
Support microfinance and national development banks, and
lower transactions costs of remittances
Lecture II
Monterrey Statement
B. Mobilizing Private Capital Flows
The challenge is to promote FDI even to small, remote developing
countries
•
•
•
•
•
Public-private partnerships
Structured finance
Measures to reduce short-term volatility in capital flows
Sequencing regulatory measures
Voluntary standards and codes
C. Trade
Recognize managed trade measures as a means to development
Recognize the role of regional development banks
Need multilateral assistance to helped depressed export revenue
Need to insurance against risk (see C. 37)
Lecture II
Stiglitz papers on capital market liberalization
Rogoff study comes in wake of policy failures. Intended to
evaluate effects of policy and indicate some opening
towards change in those policies
IMF tried in 1993 to change its charter to require all member
states to pursue policy of capital market liberalization. This
effort was abandoned following the financial crises in the
developing world.
Stiglitz claims IMF policy based on hard-headed ideology –
and in the interest of private financial markets – and not on
economic science (economic theory based on facts).
Lecture II
Stiglitz papers on capital market liberalization
• EMPIRICAL PROBLEMS
Empirical studies of the role of trade liberalization and capital market
liberalization on growth rates is difficult because of model specification
and simultaneity. That is, many factors are not or cannot be included,
some factors that are associated with liberalization are highly correlated
with other factors that are deemed ‘positive’ for growth, and there is the
problem that higher growth rates might lead to liberalization (such as the
recent experience with the developed world).
Even faulty measures of liberalization and the IMF’s own data failed to
demonstrate the economic benefits of liberalization by the end of the
1990s.
The counterfactual remains that the two big success stories, China and
India, both experienced rapid growth without liberalization. In contrast
the Russian experience with it had ended in a great disaster.
Lecture II
Stiglitz papers on capital market liberalization
THEORETICAL PROBLEMS
• Liberalization can lead to capital flight, not inflow (e.g. Russia)
• Speculative flows does not necessarily create new or expand
existing enterprises
• Inflow leads to higher exchange rate and Dutch Disease type
problems
• Short-term inflows can also lead to speculative pressure on asset
prices
• Accumulation of foreign reserves as self-insurance
Lecture II
Stiglitz papers on capital market liberalization
RISK
Liberalization has NOT led to better regulation
1.
2.
3.
due to external pressure from IMF or the US
pressure precisely to deregulate financial markets
few trained and experienced people in financial market regulation
(and those that exists are bought at higher salary by private sector)
Crises occurred despite good fundamental
•
•
•
•
East Asian countries had good fundamentals such as fiscal policy
Largest source of instability was recent inflows themselves
IMF responses exacerbated risks – private markets feared consequences
of IMF policy (contractionary macro policies to respond to crisis)
IMF opposed bankruptcy that would have cleared books
Lecture II
Stiglitz papers on capital market liberalization
Externalities and Capital Controls
Externalities impose costs on many who do not share in upside
Government intervention is one remedy – though it might raise costs
of funds it might just be more efficient so that costs match benefits
on a social level.