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Lecture II
Questions from last lecture
Revisions to syllabus: will be shortened
Review of data: discuss some characteristic facts before continuing discussion.
Monterrey Statement – Discussion of the main points that it hits and how it relates to course and syllabus
Stiglitz papers on capital market liberalization
International Capital: Important But Not DependableAll : GDP/Cap Flows
0
1
2
3
4
5
6
7
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
-$50
$0
$50
$100
$150
$200
$250GDP
Cap Flows, $billions
Compares GDP of emerging market and developing countries including selected advanced economies and capital flows of Emerging market and developing countries including selected advanced economies.
International Capital: Important But Not Dependable
Africa: GDP/Cap Flows
-2
-1
0
1
2
3
4
5
6
7
-$2
$0
$2
$4
$6
$8
$10
$12
$14GDP
Cap Flows, $billions
International Capital: Important But Not Dependable
Latin America: GDP/Cap Flows
-3
-2
-1
0
1
2
3
4
5
6
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
-$20
$0
$20
$40
$60
$80
$100GDP
Cap Flows, $billions
International Capital: Important But Not Dependable
Asia: GDP/Cap Flows
0
1
2
3
4
5
6
7
8
9
10
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
-$60
-$40
-$20
$0
$20
$40
$60
$80
$100
$120
$140
GDP
Cap Flows, $billions
Developing Asia for capital flows defined to also include Hong Kong SAR, Korea, Singapore, and Taiwan Province of China
Some types of flows are more volatile than others
Latin America was chosen because of incomplete data for other areas.
International Capital Flow s: Latin Am
-$40
-$30
-$20
-$10
$0
$10
$20
$30
$40
$50
$60
$70
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
FDI
Portfolio
Other private
Official
Flows to some areas are more volatile than others
Net private portfolio flows include the purchase of private equity shares (amounting to less than 10% of firm) and debt securities debt (e.g. bonds). Measured in US$ billions.
Private Portfolio Inflows
-$60
-$50
-$40
-$30
-$20
-$10
$0
$10
$20
$30
$40
$50
$60
$70
$80
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
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94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Africa Cen Eur Lam Asia
Some types of flows are too persistent
Total foreign indebtedness in billions of US$
Foreign Debt
$0
$100
$200
$300
$400
$500
$600
$700
$800
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
Africa Cen Eur
L Am Asia
Persistent debt and its legacy
Principle and interest payments on total foreign indebtedness in billions of US$
Foreign Debt Service Payments
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Africa Cen Eur
L Am Asia
Capital flows are concentrated
Private Capital Flows10 Year Average, $billion
$49$38
$24$8
Lam
Asia
Cen Eur
Africa
Even FDI is concentratedForeign Direct Investment
10 Year Average, $billion
$9$16
$54 $48
Africa
Cen Eur
Asia
Lam
Monterrey StatementFocus on Sections C, E and F: Trade, Debt and Systemic Issues
Goals – to end poverty, sustainable growth and development, and equitable global economic system
National efforts need t be supported by enabling international economic conditions
Peace and development are mutually reinforcing
Appropriate regulatory framework at national level
Redefines macroeconomic policy – growth and full employment first
Invest in social infrastructure and basic services
Lecture II
Monterrey Statement -- continued
Orderly development of local capital markets, i.e. “sequencing”, with sound banking systems
Support microfinance and national development banks, and lower transactions costs of remittances
Lecture II
Monterrey StatementB. Private Capital Flows
The challenge is to promote FDI even to small, remote developing countries
• Public-private partnerships• Structured finance• Measures to reduce short-term volatility in capital flows• Sequencing regulatory measures• Voluntary standards and codes
C. TradeRecognize managed trade measures as a means to developmentRecognize the role of regional development banksNeed multilateral assistance to helped depressed export revenueNeed to insurance against risk (see C. 37)
Lecture II
Stiglitz papers on capital market liberalizationRogoff study comes in wake of policy failures. Intended to evaluate effects of policy and indicate some opening towards change in those policies
IMF tried in 1993 to change its charter to require all member states to pursue policy of capital market liberalization. This effort was abandoned following the financial crises in the developing world.
Stiglitz claims IMF policy based on hard-headed ideology – and in the interest of private financial markets – and not on economic science (economic theory based on facts).
Lecture II
Stiglitz papers on capital market liberalization
• EMPIRICAL PROBLEMS
Empirical studies of the role of trade liberalization and capital market liberalization on growth rates is difficult because of model specification and simultaneity. That is, many factors are not or cannot be included, some factors that are associated with liberalization are highly correlated with other factors that are deemed ‘positive’ for growth, and there is the problem that higher growth rates might lead to liberalization (such as the recent experience with the developed world).
Even faulty measures of liberalization and the IMF’s own data failed to demonstrate the economic benefits of liberalization by the end of the 1990s.
The counterfactual remains that the two big success stories, China and India, both experienced rapid growth without liberalization. In contrast the Russian experience with it had ended in a great disaster.
Lecture II
Stiglitz papers on capital market liberalization
THEORETICAL PROBLEMS• Liberalization can lead to capital flight, not inflow (e.g. Russia)• Speculative flows does not necessarily create new or expand
existing enterprises• Inflow leads to higher exchange rate and Dutch Disease type
problems• Short-term inflows can also lead to speculative pressure on asset
prices• Accumulation of foreign reserves as self-insurance
Lecture II
Stiglitz papers on capital market liberalizationRISK
Liberalization has NOT led to better regulation1. due to external pressure from IMF or the US
2. pressure precisely to deregulate financial markets
3. few trained and experienced people in financial market regulation (and those that exists are bought at higher salary by private sector)
Crises occurred despite good fundamental• East Asian countries had good fundamentals such as fiscal policy
• Largest source of instability was recent inflows themselves
• IMF responses exacerbated risks – private markets feared consequences of IMF policy (contractionary macro policies to respond to crisis)
• IMF opposed bankruptcy that would have cleared books
Lecture II
Stiglitz papers on capital market liberalization
Externalities and Capital ControlsExternalities impose costs on many who do not share in upside
Government intervention is one remedy – though it might raise costs of funds it might just be more efficient so that costs match benefits on a social level.
Lecture II
Economics of Growth and Development1. Low incomes lead to lower savings
2. Shortage of savings constrains investment that is needed for capital formation as well as investment in labor and public infrastructure
3. Lower or slower investment rates result in slower growth and development
4. Foreign investment can serve to augment domestic savings so that a rate of investment can lead to higher rates of growth and development
5. At the same time foreign investment can expose country to disruptions originating abroad or leave country more vulnerable to disturbances from within
6. Volatility reduces the incentives for investment and hampers the improvement in living standards
Lecture II
Monterrey StatementFocus on Sections B, C, E and F: Trade, Debt and Systemic Issues
Goals – to end poverty, sustainable growth and development, and equitable global economic system
National efforts need to be supported by enabling international economic conditions
Peace and development are mutually reinforcing
Appropriate regulatory framework at national level
Redefines macroeconomic policy – growth and full employment first
Invest in social infrastructure and basic services
Lecture II
Monterrey Statement -- continued
Orderly development of local capital markets, i.e. “sequencing”, with sound banking systems
Support microfinance and national development banks, and lower transactions costs of remittances
Lecture II
Monterrey StatementB. Mobilizing Private Capital Flows
The challenge is to promote FDI even to small, remote developing countries
• Public-private partnerships• Structured finance• Measures to reduce short-term volatility in capital flows• Sequencing regulatory measures• Voluntary standards and codes
C. TradeRecognize managed trade measures as a means to developmentRecognize the role of regional development banksNeed multilateral assistance to helped depressed export revenueNeed to insurance against risk (see C. 37)
Lecture II
Stiglitz papers on capital market liberalizationRogoff study comes in wake of policy failures. Intended to evaluate effects of policy and indicate some opening towards change in those policies
IMF tried in 1993 to change its charter to require all member states to pursue policy of capital market liberalization. This effort was abandoned following the financial crises in the developing world.
Stiglitz claims IMF policy based on hard-headed ideology – and in the interest of private financial markets – and not on economic science (economic theory based on facts).
Lecture II
Stiglitz papers on capital market liberalization
• EMPIRICAL PROBLEMS
Empirical studies of the role of trade liberalization and capital market liberalization on growth rates is difficult because of model specification and simultaneity. That is, many factors are not or cannot be included, some factors that are associated with liberalization are highly correlated with other factors that are deemed ‘positive’ for growth, and there is the problem that higher growth rates might lead to liberalization (such as the recent experience with the developed world).
Even faulty measures of liberalization and the IMF’s own data failed to demonstrate the economic benefits of liberalization by the end of the 1990s.
The counterfactual remains that the two big success stories, China and India, both experienced rapid growth without liberalization. In contrast the Russian experience with it had ended in a great disaster.
Lecture II
Stiglitz papers on capital market liberalization
THEORETICAL PROBLEMS• Liberalization can lead to capital flight, not inflow (e.g. Russia)• Speculative flows does not necessarily create new or expand
existing enterprises• Inflow leads to higher exchange rate and Dutch Disease type
problems• Short-term inflows can also lead to speculative pressure on asset
prices• Accumulation of foreign reserves as self-insurance
Lecture II
Stiglitz papers on capital market liberalizationRISK
Liberalization has NOT led to better regulation1. due to external pressure from IMF or the US
2. pressure precisely to deregulate financial markets
3. few trained and experienced people in financial market regulation (and those that exists are bought at higher salary by private sector)
Crises occurred despite good fundamental• East Asian countries had good fundamentals such as fiscal policy
• Largest source of instability was recent inflows themselves
• IMF responses exacerbated risks – private markets feared consequences of IMF policy (contractionary macro policies to respond to crisis)
• IMF opposed bankruptcy that would have cleared books
Lecture II
Stiglitz papers on capital market liberalization
Externalities and Capital ControlsExternalities impose costs on many who do not share in upside
Government intervention is one remedy – though it might raise costs of funds it might just be more efficient so that costs match benefits on a social level.
Lecture II
