Transcript Globalization and the Washington Consensus

Globalization and the
Washington Consensus
Globalization-Pro and con
* Economically, socially and ecologically positive: As
an engine of commerce; one which brings an
increased standard of living — prosperity to
developing countries and further wealth to First
World and Third World countries.
* Economically, socially, and ecologically negative: As
an engine of "corporate imperialism"; one which
tramples over the human rights of developing
societies, claims to bring prosperity, yet often
simply amounts to plundering and profiteering.
Negative effects include cultural assimilation via
cultural imperialism, the export of artificial wants,
and the destruction or inhibition of authentic local
and global community, ecology and cultures.
“Wash. Consensus” (TINA)
=GLOBALIZATION
* Specialize in products for export
* Trade liberalization – Eliminate subsidies and tarrifs
* Openness to foreign direct investment;
* Privatization of state enterprises;
* Deregulation – abolition of regulations that impede market
entry or restrict competition,
* Legal security for property rights.
Origins of Wash Consensus
The Interwar Years, 1918-1939
• International Economic Disintegration
– Many countries suffered during the Great Depression.
– Major economic harm was done by restrictions on
international trade and payments.
– These beggar-thy-neighbor policies provoked foreign
retaliation and led to the disintegration of the world
economy.
– All countries’ situations could have been bettered
through international cooperation
• Bretton Woods agreement
The Interwar Years, 1918-1939
• With the eruption of WWI in 1914, the gold
standard was suspended.
– The interwar years were marked by severe
economic instability.
– The reparation payments led to episodes of
hyperinflation in Europe.
• The German Hyperinflation
– Germany’s price index rose from a level of
262 in January 1919 to a level of
126,160,000,000,000 in December 1923 (a
factor of 481.5 billion).
Foreign Exchange controls
Foreign exchange controls undermined the
international payments system that was the
basis for world trade. The "beggar thy neighbor"
policies of 1930s governments—using currency
devaluations to increase the competitiveness of
a country's export products in order to reduce
balance of payments deficits—worsened
national deflationary spirals, which resulted in
plummeting national incomes, shrinking
demand, mass unemployment, and an overall
decline in world trade.
Cause of wars?
• Hull believed that the fundamental causes of the two world wars
lay in economic discrimination and trade warfare. Specifically,
he had in mind the trade and exchange controls (bilateral
arrangements) of Nazi Germany and the imperial preference
system practiced by Britain (by which members or former
members of the British Empire were accorded special trade
status). Hull argued
• “
[U]nhampered trade dovetailed with peace; high tariffs,
trade barriers, and unfair economic competition, with war…if we
could get a freer flow of trade…freer in the sense of fewer
discriminations and obstructions…so that one country would not
be deadly jealous of another and the living standards of all
countries might rise, thereby eliminating the economic
dissatisfaction that breeds war, we might have a reasonable
chance of lasting peace.[2]
Cause of wars?
•
New Dealer Harry Dexter White, the principal
architect of the Bretton Woods system, put it:
• “
the absence of a high degree of economic
collaboration among the leading nations
will…inevitably result in economic warfare that will be
but the prelude and instigator of military warfare on
an even vaster scale.[3] ”
FREE TRADE= PEACE?
Slide
9-1
International Monetary
System
• Currency exchange rates depend on the structure of
the international monetary system
• Generally they are not freely convertible and do not
float freely
– Only 51 were freely convertible in 1997
– Another 50 were pegged to the exchange rate of major
currencies such as the US Dollar and the French Franc or
to baskets of other currencies
– Another 45 currencies were allowed by their governments
to float within a range of another currency
– This is 146 of 188 UN member nations in 1999
Slide
9-2
Evolution of the International
Monetary System
• Gold Standard
– Currencies pegged to the value of gold; convertibility
guaranteed
– By 1880 most countries were on the gold standard
– Achieves balance of trade equilibrium for all countries
(value of exports equals value of imports); flow of gold
was used to make up differences
– Abandoned in 1914; attempt to resume after WWI failed
with Great Depression
• Bretton Woods (1944)
Slide
9-3
Bretton Woods (1944 - 1973)
• 44 countries met to design a new system in 1944
• Established International Monetary Fund (IMF) and
World Bank
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IMF maintained order in monetary system
World Bank promoted general economic development
Fixed exchange rates pegged to the US Dollar
US Dollar pegged to gold at $35 per ounce
Countries maintained their currencies ± 1% of the fixed rate;
government had to buy/sell their currency to maintain level
US hegemony
• Majority of investment capital, manufacturing
production and exports
• Produced half the world's coal, two-thirds of the
oil, and more than half of the electricity.
• Able to produce great quantities of machinery,
including ships, airplanes, vehicles, armaments,
machine tools, and chemicals.
• 80% of gold reserves and had not only a powerful
army but also the atomic bomb.
Slide
9-4
The Role of the IMF
per Bretton Woods
• Exchange rate discipline
– National governments had to manage inflation
through their money supply
• Exchange rate flexibility
– Provided loans to help members states with
temporary balance-of-payment deficit;
• Allowed time to bring down inflation
• Relieved pressures to devalue
– Excessive drawing from IMF funds came with IMF
supervision of monetary and fiscal policies
– Allowed up to 10% devaluations and more with
IMF approval
What is IMF Structural Adjustment?
* Cutting social expenditures, also known as austerity,
* Focusing econ output on direct export and resource extraction,
* Devaluation of overvalued currencies,
* Trade liberalization, or lifting import and export restrictions,
* Increasing the stability of investment (by supplementing foreign
direct investment with the opening of domestic stock markets, also
raise interest rates)
* Balancing budgets and not overspending,
* Removing price controls and state subsidies,
* Privatization, or divestiture of state-owned enterprises,
* Enhancing the rights of foreign investors vis-a-vis national laws,
* Improving governance and fighting corruption.
Slide
9-5
The Role of the World Bank
• World Bank (IBRD-International Bank for
Reconstruction and Development) role
– Refinance post-WWII reconstruction and development
– Provide low-interest long term loans to developing
economies
• The International Development Agency (IDA), an arm
of the bank created in 1960
– Raises funds from member states
– Loans only to poorest countries
– 50 year repayment at 1% per year interest
Slide
9-6
Collapse of Bretton Woods
• Devaluation pressures on US dollar after 20 years
– Lyndon Johnson policies
• Vietnam war financing
• Welfare program financing
– Nixon ended gold convertibility of US dollar in 1971
– US dollar was devalued and dealers started speculating
against it for further devaluation
– Bretton Woods fixed exchange rates abandoned in January
1972
Slide
9-7
Jamaica Agreement 1976
• Floating rates declared acceptable
• Gold abandoned as reserve asset;
– IMF returned its gold reserves to its members at current
prices
– Proceeds were placed in a trust fund to help poor nations
– IMF quotas – member country contributions – increased;
membership now 182 countries
– Less-develop, non-oil exporting countries given more access
to IMF
• IMF continued its role of helping countries cope with
macroeconomic and exchange rate problems
Slide
9-8
The Case for Floating Exchange Rates
– Monetary policy autonomy
– Trade balance adjustments helped
The Case for Fixed Exchange Rates
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–
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Monetary discipline
Speculation limited
Uncertainty reduced
Trade balance adjustment effects on inflation controlled
Who is right?
Slide
9-9
Recent Activities and the IMF
• Mexican crisis 1995
• Russian crisis1995
• Asian crisis 1997/1998
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–
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The investment boom
Excess capacity
The debt bomb
Expanding imports
The crisis
• How did the IMF do?
– Inappropriate
policies?
– Moral hazard
• Reckless behavior
• No consequences
– Lack of accountability
• Record mixed
Slide
9-11
Implications for Business
• Currency management
– The monetary system is not perfect
– Both speculative activity and government intervention affect
the system
– Companies must use risk management instruments
• Business strategy
– Minimize risk by placing assets in different parts of the world,
e.g., production
– Contract manufacturing
– Manage company-government relations
WTO
• The World Trade Organization (WTO) is an
international organization designed to
supervise and liberalize international trade.
The WTO came into being on 1 January
1995, and is the successor to the General
Agreement on Tariffs and Trade (GATT),
which was created in 1947, and continued to
operate for almost five decades as a de facto
international organization.
Growth factors
• Savings and Investment
• Manufacturing capital
• agriculture
• Human capital-science & technology
• Technological Innovation & Entrepreneurship
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•
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Buy technology
Training
Foreign business
Social organization/management
Govt policies
Growth Factors
• Macroeconomic Policy and Trade
• Find market-access to intl markets-export dependence
• Govt spending->debt->inflation BUT
• Strict budgets can lead to underinvestment
• Natural Resources
• Arable land, minerals, ports, climate BUT
• Hong Kong, Singapore, Japan, Nigeria
Growth Factors
• Foreign Capital
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•
•
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Bi-lateral assistance
Multi-lateral assistance
Mixed results-debt
Foreign Direct Investment
• Financial Legal Regulatory Institutions
• Property rights and contract enforcement
• Coporate and bank regulations
• Corrption internal conflice, instability
500
Private Flows
300
Workers’
Remittances
200
100
Bilateral Grants
0
Official Flows
2005
2004
2003
2002
2001
2000
1999
1998
-100
1997
Dollars (US billions)
400
Year
Figure 14.7 Net Capital Flows to Developing Countries, 1997-2005
Virtuous Cycles in development
• High savings, investment, productivity growth, economic expansion:
• Japan,
• Asian Tigers: Hong Kong, Taiwan, Korea, Singapore
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Key element:
HUMAN CAPITAL-education, training, etc.
EX: Korea
1960: universal primary education, investment in higher ed
Investment in physical capital encouraged thru policies to increase
household savings and private investment.
• Savings 1/3 of GDP=highest
• 1960-1980s exports 10%GDP->40%GDP
• Egalitarian distribution of income
Figure 15.1 The Relation Between Average Life Expectancy and GDP Per Capita,
with Area Proportional to Population
Figure 14.4 The Unequal Distribution of the World’s Income, 2000
DEVELOPMENT THEORIES
Modernization Theory
Modernization Theory is a theory of development which states that the development can be achieved
through following the processes of development that were used by the currently developed countries.
Dependency Theory
Informed by Marxist insights, they argued that development was a result of underdevelopment, and
underdevelopment was a result of development. Their conclusion was that for underdeveloped
nations to develop, they must break their ties with developed nations and pursue internal growth.
Such policies were crafted from this insight were Import substitution industrialization.
World Systems Theory
In response to some of the criticisms of Dependency Theory came World Systems Theory, which the
division of periphery and center was further divided into a trimodal system consisting of the core,
semi-periphery and periphery. In this system, the semi-periphery lies between the core and periphery
and is exploited by the core and exploits the periphery. This division aims to explain the
industrialization within lesser developed countries. Out of this theory stem anti-systemic movements
which attempt to reverse the terms of the system's inequality through social democratic and labor
movements.
State Theory
In response to the distrust of the state in World Systems Theory, is State Theory. State Theory is
based upon the view that the economy is intertwined with politics and therefore the take-off period in
development is unique to each country. State Theory emphasized the effects of class relations and
the strength and autonomy of the state on historical outcomes.
DEVELOPMENT THEORIES
Indigenous TheoryComparative advantage
Economic theory predicts all countries gain if they specialise and trade the goods in which they have a
comparative advantage. This is true even if one nation has an absolute advantage over another country.
Rostow
This is a linear theory of development. Economies can be divided into primary secondary and tertiary sectors.
The history of developed countries suggests a common pattern of structural change:
Harrod-Domar
The Harrod-Domar model developed in the l930s suggests savings provide the funds which are borrowed for
investment purposes.
Lewis
The Lewis model is structural change model that explains how labour transfers in a dual economy. For Lewis
growth of the industrial sector drives economic growth.
Balanced Growth Theory
Balanced growth (or the big push) theory argues that as a large number of industries develop simultaneously,
each generates a market for one another.
Unbalanced Growth Theory
Unbalanced growth theorists argue that sufficient resources cannot be mobilised by government to promote
widespread, coordinated investments in all industries