Living in a Globalised World Lecture 3

1
Living in a Globalised WorldLecture 3

• Washington Consensus Economics
• George Irvin

2
Outline of Session

• What is Washington Consensus?
• Simple Theory the Savings Balances
• How good a record? (East Asia revisited)
• Is there a Brussels-Frankfurt-Washington
  Consensus?

3
IMF and WB

• Bretton Woods (1944) organisations
• WB funds Investment Projects Programmes
• IMF is CB lender of last resort
• conditional tranches
• why IMF loans needed
• standby agreement and letters of credit
• Regaining creditworthy status

4
IMF Basic Recipe

• 1. Fiscal discipline
• cut Govt expenditure to balance budget
• independent Central Bank controls inflation
•       
• 2. Liberalisation of prices and markets
• free capital markets
• make labour markets more flexible,
• 3. Trade liberalisation
• dismantle tariffs
• 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

• 1. Nat Y identity Y C I G (X-M)
•   2. Disposition of Y identity Y C Sp T
•   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 TltG, there must be an external deficit
• Govt Deficit (-100) gt Trade Deficit (-100)
• (T G) (X M)
• Main IMF argument Govt deficit causes trade
  deficit!

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More detailed

• ? (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 LDCs
  capital markets means potentially accessing a lot
  of investors money. Short-term Hot money is
  the chief problem
• Spectrum of K-Flows
• Short lt
  ?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) tequila crisis
• Argentina(1995) contagion
• Thailand (1997)
• Indonesia (1997)
• S Korea (1997) Asia induced by financial mkt
  liberalistion
• Malaysia (1997) refused IMF advice
• Philippines (1997)
• Russia (1998) bailout ER aid to save Chase
  Manhattan
• Brazil (1999, 2001)
• Ecuador (1999) too little too late
• Argentina (2001-2)
• Turkey (2002)

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IMF Reduce Growth
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Is there a Brussels Consensus?

• Euro is a good thing (protects against currency
  shocks), but
• Economic Architecture of EU?
• Central monetary authority (ECB) 2 inflation
  target
• Fiscal policy Stability Growth Pact constrains
  state-level 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
• 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-Frankfurt-Washington 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 worlds governments from indulging in
  irresponsible spending
• The Case For
• The Case Against