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

• 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

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?

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 9-1

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 9-2

Bretton Woods (1944 - 1973)• 44 countries met to design a new system in 1944• Established International Monetary Fund (IMF) and

World Bank– 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

Slide 9-3

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.

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

Slide 9-4

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.

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 9-5

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 9-6

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 9-7

The Case for Floating Exchange Rates– Monetary policy autonomy– Trade balance adjustments helped

The Case for Fixed Exchange Rates– Monetary discipline– Speculation limited– Uncertainty reduced– Trade balance adjustment effects on inflation controlled

Who is right?

Slide 9-8

Recent Activities and the IMF• Mexican crisis 1995• Russian crisis1995• Asian crisis 1997/1998

– The investment boom– Excess capacity– The debt bomb– Expanding imports– The crisis

Slide 9-9

• How did the IMF do?– Inappropriate

policies?– Moral hazard

• Reckless behavior• No consequences

– Lack of accountability

• Record mixed

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

Slide 9-11

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• 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• 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

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Bilateral Grants

Workers’ Remittances

Official Flows

Private Flows

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

• 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

Modernization TheoryModernization 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 TheoryInformed 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 TheoryIn 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 TheoryIn 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 Theory-

Comparative advantageEconomic 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.

RostowThis 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-DomarThe Harrod-Domar model developed in the l930s suggests savings provide the funds which are borrowed for investment purposes.

LewisThe 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 TheoryBalanced 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 TheoryUnbalanced growth theorists argue that sufficient resources cannot be mobilised by government to promote widespread, coordinated investments in all industries

DEVELOPMENT THEORIES