Transcript Washington consensus

Living in a Globalised World
Lecture 3
Washington Consensus Economics
George Irvin
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Outline of Session
1. What is Washington Consensus?
2. Simple Theory: the Savings Balances
3. How good a record? (East Asia revisited)
4. Is there a Brussels-Frankfurt-Washington
Consensus?
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IMF and WB
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‘Bretton Woods’ (1944) organisations
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WB funds Investment Projects & Programmes
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IMF is CB ‘lender of last resort’
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‘conditional’ tranches
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why IMF loans needed
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‘standby’ agreement and ‘letters of credit’
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Regaining ‘creditworthy’ status
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IMF Basic Recipe
1. Fiscal discipline:
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cut Govt expenditure to balance budget;
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independent Central Bank controls inflation
2. Liberalisation of prices and markets:
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‘free’ capital markets
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make labour markets ‘more flexible’,
3. Trade liberalisation:
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dismantle tariffs;
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exchange rate liberalisation
4. Shrink the State, mainly by privatising everything that can be
privatised; PPPs and PFIs
In summary: Fiscal austerity, Liberalisation, Privatisation,
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Simple Economic Logic
Y = C + I + G + (X-M)
2. Disposition of Y identity: Y = C + Sp + T
1. Nat Y identity:
gives: C + Sp + T = C + I + G + (X-M);
rearranging:
3. Savings balance: (Sp – I) + (T – G) = (X – M)
where:
 (Sp – I) is private savings and investment;
 (T – G) is the Govt current surplus or deficit;
 (X – M) is a simplification of the CA balance
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Key Point
Savings balance: (Sp – I) + (T – G) = (X – M)
Assume Sp = I;
then if T<G, there must be an external deficit:
Govt Deficit (-100) =>
(T – G)
=
Trade Deficit (-100)
(X – M)
Main IMF argument: Govt deficit causes trade deficit!
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More detailed:
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(Sp – I) + (T – G) = (X – M)
Sp: improve financial sector intermediation (end
‘McKinnon-Shaw financial repression) thus enabling Sp to
rise;
G: too much G finances subsidies to ‘inefficient’ PS
enterprises; these should be privatised;
i: also, reducing G takes pressure off Government
financial borrowing requirement (PBR), enabling i-rts to fall
and reducing ‘crowding out’ of private Investment
 (X- M): end import protection, thus enabling switch of
resources exports.
In some cases, devalue---although IMF tends to believe in
‘exchange rate anchor’ as a bulwark against inflation---so
‘expenditure cutting’ must be used instead.
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Liberalising K-Mkt
Private capital flows: (world K-markets turnover = $1.6 trillion
daily!). Liberalising an LDC’s capital markets means potentially
accessing a lot of investor’s money. Short-term ‘Hot money’ is
the chief problem:
Spectrum of K-Flows
Short <= ============================================long
Money Mkt & Portfolio I ...
DFI
Long-term DFI: Direct Foreign Investment (typically in bricks &
mortar); can be wholly owned subsidiary, joint venture,
management contract, etc.
Short-term: called ‘hot money’: it can flow out as quickly as it flows in
- Portfolio: stocks & bonds of host country;
- Money market: short-term private or public paper, or simply
placing money on deposit account drawing high i-rate..
- China has exchange controls: greatly reduces volatility!
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IMF Crises
IMF-Crises: 12 crises in 10 years
Mexico (1994-95);
Argentina(1995);
Thailand (1997)
Indonesia (1997)
S Korea (1997)
Malaysia (1997)*
Philippines (1997)
‘tequila crisis’
‘contagion’
Russia (1998)
‘bailout’: ER aid to save Chase Manhattan
Brazil (1999, 2001)
Ecuador (1999)
Argentina (2001-2)
too little too late
Asia: induced by ‘financial mkt liberalistion’;
* refused IMF advice
Turkey (2002)
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IMF = Reduce Growth
East Asia:
•IMF-style policies led to falls in 1998 GDP of 14% in Indonesia, 10% in
Thailand and 6% in S Korea; unemployment rose and real wages fell (-6%
Korea; -7% Thailand; -38% Indonesia).
•In all cases the IMF prescription was the same; higher interest rates and
rigid budgetary austerity.
•Thailand had a large external deficit and Thai banks had borrowed in dollars
and lent in baht; when foreign investment dried up, the baht was forced to
float---but the budget deficit was not large, and demanding a budget surplus
plunged the economy into recession.
•In Korea, the internal and external balances were perfectly sound; IMF
forced budget-surplus induced contraction which caused serious bankruptcy
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Is there a Brussels Consensus?
Euro is a good thing (protects against currency shocks), but
……
Economic Architecture of EU?
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Central monetary authority (ECB): 2% inflation target
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Fiscal policy: Stability & Growth Pact constrains statelevel fiscal policy to 3% deficit and automatic stabilisers
Long term budget balance: reduces PBR to zero, thus
‘shrinking’ the State
Core Eurozone unemployment remains 9%
Key point: low growth means high unemployment, cuts in
social provision
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Suggested References:
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Stiglitz, Joseph (2002) ‘Globalisation and its discontents’
London: Penguin Books
Williamson, J. ed (1990) Latin American Adjustment: how
much has happened? Washington DC: Institute for
International Economics
Chang Ha-Joon (2002) ‘Kicking away the ladder: development
strategy in historical perspective’ London: Anthem Books.
Fitoussi, J-P and F Saraceno (2004) ‘The Brussels-FrankfurtWashington Consensus Old and New Tradeoffs in Economics’
Paris: (OFCE) Observatoire Français des Conjonctures
Economiques N° 2004-02, February
Irvin, G (2005) ‘The Implosion of the Brussels Consensus’
Torino: ICER, May. www.icer.it
Standing, G (2004) ‘Evolution of the Washington Consensus:
Economic Insecurity as Discontent’ Geneva: International
Labour Office
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Debate:
Resolved: ‘The IMF is a much maligned
organisation; it serves the crucial purpose of
keeping the world’s governments from indulging in
irresponsible spending’
The Case For
The Case Against
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