Transcript Onset of the East Asia Crisis Radelet and Sachs

Discussions of the King/King Reader
MBA 628
The Doha Development Agenda
Anne McGuirk
Reading 6
After the Seattle debacle in 1999, a new
trade round in Doha was scheduled. It
promised to show greater concern for the
needs and interests of the developing
countries.
 What was the Uruguay Round?

The Doha Development Agenda
Anne McGuirk
Reading 6

Launched 15 years ago it resulted in tariff
cuts covering a greater share of world
trade than under any previous round, and
it launched the WTO from GATT.
The Doha Development Agenda
Anne McGuirk
Reading 6

But the world trade system still faces
major challenges. What are they?
High tariffs and trade-distorting subsidies
in agriculture
 Other trade obstacles, e.g., industrial
subsidies and intellectual property rights

The Doha Development Agenda
Anne McGuirk
Reading 6

Many poorer countries feel they are
bearing the burdens of earlier agreements
(customs valuation, intellectual property
rights) without enjoyed the benefits of
better market access and without
adequate technical and financial
assistance.
The Doha Development Agenda
Anne McGuirk
Reading 6

The Doha Development Agenda, adopted
in Nov., 2001, called for a more coherent
approach to trade and development. Hard
bargaining established the scope of the
agenda. See the table on p. 70.
The Doha Development Agenda
Anne McGuirk
Reading 6

Where is the Doha Round at today?
Has any progress been made?
The Doha Development Agenda
Anne McGuirk
Reading 6
The WTO met in 2003 for only a very
short time. The developing countries
presented only modest concessions to
begin the negotiations. The developing
countries said they wouldn’t do.
 And the meetings were over!
Back to the drawing board.

“Bridging The Trade-Environment
Divide,” Daniel C. Esty
Reading 7
Environmental view:
 Increased trade
increased
manufacturing and economic growth
environmental degradation.
 Policy prescriptions:
 Stop trade and growth?
 Not formally. Impose trade sanctions!

“Bridging The Trade-Environment
Divide,” Daniel C. Esty

Economic views:

Increased trade
increased growth
economic well-being
“Bridging The Trade-Environment
Divide,” Daniel C. Esty
Slow Kuznets curve (environment
improves about $5,000 – 8,000 per capita
GDP
environmental decline
Increased trade
increased growth
economic well-being
greater environmental
concern and resources to respond to it.
Economic Policy Prescriptions
Policy Prescriptions:
 1. Find balance. Starving people couldn’t care
less about the environment. Note the
deforestation of parts of the world where the
forests are used to heat huts for the winter.
 2. Some prefer letting trade people take care of
trade. Take your environmental complaints to
other specialists.

Esty’s View




Who is Esty?
Environmentalist. Lawyer. Yale Professor.
Whom is he addressing in this article?
A functioning Global Environmental
Organization, operating in parallel with the
trading system, might be a “first-best” policy
option in response to these challenges. But no
such regime exists. Thus, the WTO along with
regional trade agreements cannot avoid some
shared responsibility.
“Bridging The Trade-Environment
Divide,” Daniel C. Esty
Esty argues that “transboundary
externalities” are a key issue in
upcoming trade talks.
 What are “transboundary
externalities”?
 See p. 75.

“Bridging The Trade-Environment
Divide,” Daniel C. Esty
Give examples.
 Why do they matter?
 What institutions do you believe are
necessary to deal with transboundary
externalities?
 Have you all heard of the “economics”
solution. Describe it? Will it work?

“Bridging The Trade-Environment
Divide,” Daniel C. Esty
Why is NAFTA referred to as a “green”
trade pact?
 How did that work? (p. 76)
 Why are trade advocates and
environmentalists allies?
 How are they enemies?

“Bridging The Trade-Environment
Divide,” Daniel C. Esty
Most environmentalists argue that,
absent restrictions, free trade will lead
to a “race to the bottom.”
 What do they mean by that? Give an
example.
 Does Esty agree with this assessment?
 Does he see other issues in
coordinating policies?

“Labor Standards” Drusilla K. Brown
Reading 8
What are the key labor issues that need to be
addressed in trade talks?
 Universally accepted rights regarding working
conditions.
 Protect labor interests by incorporating labor
rights into international trade law.
 Opponents say that regulation of labor markets
is a matter of national sovereignty and should be
domestic policy.
“Labor Standards” Drusilla K. Brown
Of these which does Brown think are the most
important?
 To analyze the arguments for coordinating labor
standards internationally.
 Do labor policies for developing countries have
adverse consequences for workers in
industrialized countries?
 Should labor standards by introduced formally
into the negotiations of the WTO?

Labor Standards Justice
Is it just to attempt to establish standards
in all of these areas without regard for the
level of economic development and
cultural norms?
 Child labor practices depend on the level
of development. For many families the
income earned by their children is a
matter of the family’s survival. (p. 90)

ILO Or WTO?
Does Esty’s non-existent “first-best”
organization exist in the field of labor
rights?
 See p. 90.
 Why then must the task of labor-rights
enforcement fall to the WTO?

The Two Faces of Labor Unions
What are they?
 See p. 95.

1998 ILO Declaration on
Fundamental Principles
Freedom of Association/ Right to
collective bargaining.
 Elimination of forced or compulsory
labor Poor workers must offer their
own labor as collateral to obtain a
loan.
 Abolition of child labor (Put the child to
work if you can’t borrow against the
educated child’s future income.)
 Elimination of discrimination of
employment and occupation.

Trade and Wages
(Stolper/Samuelson)
To what extent is the decline in the return
to unskilled labor in the US in the last few
decades the result of international trade
with low-wage countries?
 To what extent is that trade the
consequence of low labor standards?

Trade and Wages
(Stolper/Samuelson)

“There is little evidence that the relative
price of labor-intensive goods fell during
the 1980s, as one would expect if imports
from low-income countries were
undercutting less-skilled US labor.” (p. 96)
Trade and Wages
(Stolper/Samuelson)

The debate continues, but to this point the
evidence supports the argument that skillbiased technological change is more
important than trade as an explanation of
wage inequality in the US, although rising
levels of trade with low-income countries
may have played a secondary role. (p. 97)
Trade and Wages
(Stolper/Samuelson)
Empirical studies find the link from low
labor standards in low-income countries to
the wage of unskilled workers in industrial
countries not especially strong.
 Labor standards are at most a secondary
determinant of wages in low-income
countries.

Labor Standards “Race to the Bottom”
Prisoner’s dilemma:
 Alone a country faces an incentive to
adopt low standards. But all such
countries together would benefit from a
coordinated choice of higher labor
standards.
 How does that work?
 (p. 98)
Effect of Tightening World Labor
Standards?
Dong so will constrict the world supply of
labor (fewer labor slaves, higher age of
entry and less child labor, etc.)
 Wages worldwide rise, pushing up the
price of labor-intensive goods exported by
developing countries.

The WTO and Labor Standards
The WTO does not have an enforcement
mechanism for low labor standards.
 Opponents of a “social clause” argue that
negotiating trade and domestic policy
simultaneously will create a morass.

“Labor Standards” Drusilla K. Brown
Should we use trade sanctions to force
countries with low labor standards to
comply with higher standards?
 Trade sanctions in the face of low labor
standards are as likely or even more likely
to harm workers as they are to improve
working conditions.

“Labor Standards” Drusilla K. Brown
Why does brown argue that child labor
laws might encourage economic
growth?
 Maybe in the long term.
 What about a tax on products made by
child labor?

“Labor Standards” Drusilla K. Brown

What about a tax on products made by
child labor?
 Good
if it means fewer children working
and more getting educated
 Not so good if the newly unemployed
children live with lower incomes, less
nutrition, and otherwise diminished
alternatives. The imposition of the tax will
cause children who continue to work to
receive a lower after-tax wage.
“Labor Standards” Drusilla K. Brown

Brown Concludes:
“If trade sanctions are actually
employed in pursuit of higher labor
standards, the effect will often be to
hurt precisely those who are the focus
of humanitarian concerns.”
“Labor Standards” Drusilla K. Brown
Labor rights activists still favor some link
between the ILO and the WTO on labor issues to
provide the ILO with enforcement power.
 Such a link could slow the process of trade
liberalization. But would the gains from
improving the relatively inadequate labor
standards be larger than the losses from raising
the already close-to-optimal tariff levels?

Labor Standards Fini
Borders Beyond Control
Reading 9
Jagdish Bhagwati

Why does Bhagwati believe that
immigration cannot be stopped?

Would it be desirable to stem the flow of
immigration?
Borders Beyond Control
Jagdish Bhagwati

If the US tried to stem the flow, what do
you think would happen?

Are the developed countries against an
inflow of skilled workers?
Borders Beyond Control
Jagdish Bhagwati

How and why do most skilled workers
come to this country?

Are most immigrants to this country from
Mexico and Latin American “walk-ons”?
Borders Beyond Control
Jagdish Bhagwati

What is Bhagwati’s solution to the
problem?
WTO and Intellectual Property Rights
Philip G. King
What are TRIPS?
Trade Related Aspects of Intellectual
Property Rights
 How do IPRs differ from other types of
property?

 Intangible
 Non-rival
in consumption
The WTO and Property Rights
The TRIPS agreements specify how basic
property rights principles should be
applied, how protection of IPRs should be
given and how the laws should be
enforced.
 Explain the concern of developing
countries about the lack of protection for
traditional creativity as opposed to
specific, new creative works. (p. 115)

The WTO and Property Rights

What is the issue with pharmaceuticals
and property rights?
Drugs are granted patents and protected.
What does that do for AIDS in Africa?
 What about drugs for diseases like
malaria?
 Are such drugs in some sense “public
goods”?


The World Bank estimates the revenue
implications of the current TRIPS
agreements. How do they look?
They will increase revenues to the US by
about $19 billion.
 The developing countries cost will be
$7.5 billion.

King: “Pharmaceutical companies
widely practice differential pricing…”

What are the implications?
Global Governance of Trade
Reading 12
Dani Rodrik

Rodrik is a very independent thinker and a
good economist. He is Rafiq Hariri
Professor of International Political
Economy at the John F. Kennedy School of
Government, Harvard University. He is
affiliated with the NBER.
Global Governance of Trade
Reading 12
Dani Rodrik

He is a deep thinker
and surprises the
reader by taking
positions that seem
untenable at first
glance. But he then
very persuasively
defends those
positions.
Global Governance of Trade
Reading 12
Dani Rodrik
This article is too full of material to make a
complete discussion of the issues he
addresses possible. So I will just refer to a
few concepts he addresses for discussion.
 He starts by quoting a WTO statement:
“The surest way to do more to help the
poor is to continue to open markets.” He
notes that this view is backed up by a
voluminous empirical literature.

Global Governance of Trade
Reading 12
Dani Rodrik
What does he find wrong with this?
 It confuses ends and means. “Trade
becomes the lens through which
development is perceived rather than the
other way around.” (p. 126)

Global Governance of Trade
Reading 12
Dani Rodrik

This paper presents a different view of
development. What’s the view?
Global Governance of Trade
Reading 12
Dani Rodrik

It questions the centrality of trade and
trade policy, emphasizing instead the
critical role of domestic institutional
innovations that often depart from political
orthodoxy.
Global Governance of Trade
Reading 12
Dani Rodrik

When isn’t trade much of a factor in
economic development?
Global Governance of Trade
Reading 12
Dani Rodrik

Opening up the economy is hardly ever a
key factor at the outset. The initiating
reforms instead tend to be a combination
of unconventional institutional
innovations… requiring local knowledge
and experimentation for successful
implementation.
Global Governance of Trade
Reading 12
Dani Rodrik
“There is no convincing evidence that
trade liberalization is predictably
associated with subsequent economic
growth.”
 “The problem is not trade liberalization per
se, but the diversion of financial resources
and political capital from more urgent and
deserving developmental priorities.”

(P. 128)
Global Governance of Trade
Reading 12
Dani Rodrik

“First, the trade regime must accept,
rather than seek to eliminate, institutional
diversity along with the right of countries
to ‘protect’ their institutional
arrangements.” (p. 128)
Global Governance of Trade
Reading 12
Dani Rodrik
Does Rodrik condemn ISI?
 See p. 132.

Trade Liberalization vs. Development

See the (p. 136) Viet Nam/Haiti
comparison. What was the conclusion?
Trade Liberalization vs. Development
The literature is replete with cross-national
studies concluding that growth and
economic dynamism are strongly linked to
more liberal trade policies, but those
studies are flawed, says Rodrik.
 How are they flawed?

Trade Liberalization vs. Development

He and Rodriguez found a major gap
between the policy conclusions typically
drawn and what the research has actually
shown…
Trade Liberalization vs. Development
A common problem has been the
misattribution of macro phenomena (e.g.,
overvalued currencies or macro instability)
or geographical location (e.g., in the
tropical zone) to trade policies.
 Once these problems are corrected, any
meaningful relationship across countries
between the level of trade barriers and
economic growth evaporates.
(p. 137)

Outward-Oriented Industrialization
This involves governmental policies
supporting the direction of investment
funds, etc., as in Korea.
 The techniques involved are now largely
barred by WTO rules. Why?

Then What’s the Key to
Development?
The Key to Successful Development
Innovative development policy (that can’t
turn it’s back on trade and foreign
investment contributions) focuses on
promoting investment, growth and poverty
alleviation.
 It achieves trade and global integration as a
by-product. Trade liberalization alone is not
necessarily productive of development.

General Principles of an International
Trade Regime That Puts Development
First
Trade is a means to an end, not an end in
itself
 Trade rules have to allow for diversity in
national institutions and standards.
 Non-democratic countries cannot count on
the same trade privileges as democratic
ones.

General Principles of an International
Trade Regime That Puts Development
First
Countries have the right to protect their
own institutions and development
priorities.
 But countries do not have the right to
impose their institutional preferences on
others.
(See pp. 142-145)

What are Development-friendly
Measures?
Greatly restrict the use of anti-dumping
measures in advanced industrial countries
when exports originate from developing
countries.
 Allow greater mobility of workers across
international boundaries.

Development-friendly Measures

Require that all existing and future WTO
agreements be fully costed out…condition
the phasing in of these agreements…on
the provision of commensurate financial
assistance.
Development-friendly Measures
Strengthen the rewards to the successful
dispute settlement claims of developing
countries.
 Provide legal assistance for WTO dispute
settlement to developing countries.

“Economic Developments during NAFTA’s
First Decade,” Joanna Moss
Reading 14
What led to the NAFTA?

After President Madrid’s decade-long
economic reforms, Mexico joined GATT in
1986 then wanted to join the 1989
Canadian-U.S. Free Trade Agreement.
Pres. Salinas proposed a “North American
Free Trade Area in 1990, which went into
effect January 1, 1994.
The main provisions were that goods and
services eventually be exchanged without
tariffs or non-tariff barriers.
 Free trade in ag to be phased in over a
15-year period.
 Cross-border investment liberalized.

What were the NAFTA side agreements?
See p, 156
 Environmental Protocol
 Labor Protocol
 Snap-back Provision

How important is the US market to
Canada and Mexico?

See Table 2, p. 160
Has NAFTA been a success?
Advocates believe it has been a
tremendous success as NAFTA has
boosted Mexican exports and foreign
investment in Mexico.
 Critics find fault.
 What does Moss add to the discussion?

It’s hard to separate NAFTA effects
from other developments

What were these developments?
 Mexico’s
trade liberalization policies already in
effect when they joined NAFTA
 The more open Mexican economy beginning
in the 1980’s.
 The maquiladora program. What was that?
 The Peso crisis of 1994-95.
 What
caused it?
 Did the bailout work?
What happened to trade with NAFTA?
U.S. export growth to Mexico is c. 16.3%
higher per year under NAFTA.
 U.S. imports from Mexico grew on average
about 16.2% higher per year.
 Canadian trade did not appear to be
significantly affected by the NAFTA
agreement.

And Perot’s “giant sucking sound”?

“Predictions of widespread displacement
of workers in the United States were not
entirely untrue, the number of people
affected was nowhere near the predicted
numbers and most of those individuals
received adjustment training so that they
could get other jobs.” (Moss, pp. 167-68)
Trade affects unemployment far less
than do cyclical effects in the U.S.

The reality is that the effect of NAFTA is small
when compared to even the normal turnover of
the U.S. labor market. In a boom year like 1999,
with unemployment at a 30-year low, the US
economy displaced 2.5 million workers. This
means that these workers were laid off due to
closure or substantial restructuring of a plant.
Suppose that the most pessimistic estimate is
correct – an adverse NAFTA impact of 110,000
jobs lost annually, the figure comes to less than
5 percent of total annual displacement in the
labor force and much less than annual gross job
creation.” (p. 171)
What else needs to be said about
NAFTA?
What Drives Large Current Account Deficits?
Coughlin & Pollard
Reading 19
The U.S. currently has a huge current
account deficit.
 Why do we have it?


Is it sustainable?
The current account balance is the
difference between domestic saving and
domestic investment. If domestic saving
falls, the US must borrow from abroad to
finance domestic investment…
 US foreign indebtedness is not necessarily
bad if foreign funds are used towards
investment. (p. 231)


Repayment of the debt is potentially a
problem if foreign funds are used to
purchase consumption goods since future
generations will bear the burden of debt.
Poole presents evidence that the rising
current account deficit is associated with
rising domestic investment, and a
significant share of foreign investment in
the US is equity investment which does
not have to be repaid. He concludes that
the US does not have a current account
disorder.” (p. 231)
Poole reminds us that a “capital and
financial account surplus is identical to a
“current account deficit” because their
dollar values are identical by the rules of
accounting. (p. 236)
If a foreign firm builds a production facility
in the US, the capital and financial account
surplus increases, which, in turn, means
that the U.S. current account deficit would
increase. (p. 236)
 The rising current account deficit in recent
years has been accompanied by a rising
rate of U.S. domestic investment. (p. 237)

“EMU at 1,” Mark A. Wynne
Reading 28
Introduction
 What were the Maastricht rules?
 Control inflation, reduce national debts,
reduce budget deficits.
 Accomplish this for several years before
being permitted to receive the Euro.

Krugman says, “Is this like hazing?”
 Countries are asked to become good at
managing monetary policy before giving it
up?
 They were also asked to learn fiscal
responsibility. They were asked to become
accustomed to give up monetary
sovereignty (living by EU rules instead).


For what purposes do countries hold
foreign exchange?
i. to finance imports
ii. to finance foreign debt
iii. to intervene in foreign currency markets
Is the Euro in demand for that purpose?
 For what purposes is the dollar in demand
outside the United States?

What are some of the criticisms of the
European Central Bank (ECB)?
Are they valid? Why or why not?
“European Labor Markets and EMU
Challenges Ahead”
Soltwedel, Dohse, and Krieter-Boden
Reading 30

Benefits of a currency union?
 Reduction
of exchange rate uncertainty
 Reduction of transaction costs (foreign
exchange and hedging)
 Stimulation of trade, investment, growth
and employment
Costs of a currency union?

A currency union member must relinquish:
 Independent
monetary policy, and
 Currency devluation
What are asymmetric shocks?
Macro-economic shocks (business cycle
effects, or shocks like 9/11 was on the US
economy). They affect some countries or
regions in a currency union, but not
others.
 They can put pressure on national labor
markets and may increase unemployment.

What are asymmetric shocks?
Which countries are affected most by
asymmetric shocks in the EU?
 See p. 345. Finland, Greece, Ireland, Italy,
Portugal, Spain, Sweden, and the United
Kingdom.
 Not so bad in Austria, Denmark, France,
Germany and the Benelux Countries.

Why are asymmetric shocks a problem for
EMU countries?
Belgium, Denmark, France and Germany
would probably see greater structural
unemployment in response to shocks.
Why are flexible labor markets
important for the success of the EMU?
Onset of the East Asia Crisis
Radelet and Sachs
Reading 33
Who are the crisis culprits according to
these authors?
 Corrupt and mismanaged banking systems
 Lack of transparency in governance
 Shortcomings of state-managed
capitalism. Yes, but also…
 The International Financial System
What did the collapses of Mexico (‘95) and
Korea (‘97) have in common?
 Collapse followed a prolonged period of
market euphoria and an inflow of capital
that could not be sustained

Banks and moral hazard. What do Akerlof
and Romer argue about “the economics of
looting?”
 See top right, p. 371

What is the correct response to panic
(where viable economic activities are
destroyed by a sudden and essentially
unnecessary withdrawal of credits)?
 Protect the economy through lender-oflast-resort activities.
 But see the bottom of p. 371 on the end
of bubbles.
 Mexico, 1995, is the case (R&S) of a panic
requiring a lender of last resort (p.373,
bottom left).

What were the IMF programs to the end
of 1997 for the panic.
 (p. 377) Immediate bank closures,
restoration of minimum capital-adequacy
standards (to recapitalize strapped banks),
tight domestic credit, high interest rates
on central bank discount facilities, fiscal
contraction, and non-financial sector
structural changes.
 These probably heightened the panic.


The crisis gave little warning:
 Domestic
savings and investment rates were
high across the region
 Current account deficits were large, but
capital inflows were even larger, so foreign
exchange reserves were growing
 The US economy, the export target for Asia,
was booming, but
 There was a rapid expansion of commercial
bank credit and growing short-term foreign
debt.

The crisis gave little warning:
 Asian
prices were increasing, so there was
depreciation of Asian currencies against the
dollar.

What were the banking problems?
 See
p. 388. Borrowing to finance domestic
investments in real-estate and other nontradable activities.
 Borrowing in foreign exchange and lending in
local currencies (exposure to risk of foreign
exchange losses from a depreciation).
 Banks borrowed offshore in short-term
maturities and lent onshore with longer
payback periods (exposure to the risk of a
run).

What were the causes of capital flight?
 Bank
and finance company failures in
Thailand
 Corporate failure in Korea
 Political uncertainty with potential for a
change in government
 Contagion. Sudden loss of government
credibility throughout the region

What were the causes of capital flight?
 International
interventions. The IMF, on this
occasion, sent a signal to creditors of
impending crisis, leading to accelerated
outflow of foreign funds.
 The IMF recommended immediate
suspensions or closures of financial
institutions, which increased the panic.
 The withdrawal of funds set off a liquidity
squeeze and a sharp rise in interest rates.
Even profitable firms couldn’t obtain working
capital.

What were the IMF programs?
 Funds
were granted to the stricken countries
in order to:
 Prevent
default on foreign obligations
 Limit currency depreciation
 Limit inflationary pressure
 Rebuild foreign exchange reserves
 Restructure the banking sector
 Reform the domestic non-financial economy
 Preserve confidence and creditworthiness
 Limit the decline of output

What were the IMF programs?
 Fiscal
contraction was the “heart” of the
program. Tight monetary and fiscal policies
were to be maintained to defend the
exchange rate. Funds were provided to inject
into the financial system. Effect?
 See
p. 402.
 Bank
closures. In Thailand, 58 of 91 finance
companies were immediately suspended. In
Korea, 14 of 30 merchant banks were
suspended. Effect?
 Loss
of confidence. With no deposit insurance, a
run on the banks was assured.

What were the IMF programs?
 Full
payment of foreign debt obligations
through “bailout funds” of the IMF.
 Non-financial structural change. Reduce
tariffs, open sectors for foreign investment,
reduce monopoly powers. While this
happened the crisis continued.

An important R&S conclusion;
“We do not believe that such a vicious crisis
was necessary, nor that its depth should be
interpreted as an indication of the extent of
the underlying economic problems in the
region. Instead, we believe that a much more
moderate adjustment would have been
possible had appropriate steps been taken in
the early stages of the crisis.” (p. 403)