Download Introduction to TINA-the Washington consensus of development

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.
Origins of Wash Consensus
The Interwar Years, 1918-1939
• 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
• 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] ”
• To ensure economic stability and political peace, states agreed
to cooperate to regulate the international economic system. The
pillar of the U.S. vision of the postwar world was free trade. Free
trade involved lowering tariffs and among other things a balance
of trade favorable to the capitalist system.
The Bretton Woods System
and International Monetary Fund
• International Monetary Fund (IMF)
– In July 1944, 44 representing countries met in
Bretton Woods, New Hampshire to set up a
system of fixed exchange rates.
– All currencies had fixed exchange rates against the U.S.
dollar and an unvarying dollar price of gold ($35 an
ounce).
– It intended to provide lending to countries with
current account deficits.
– It called for currency convertibility.
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.
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
500
Private Flows
300
Workers’
Remittances
200
100
Bilateral Grants
0
Official Flows
2005
2004
2003
2002
2001
2000
1999
1998
-100
1997
Dollars (US billions)
400
Year
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
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•
•
•
•
Key element:
HUMAN CAPITAL-education, training, etc.
EX: Korea
1960: universal primary education, investment in higher ed
Investment in physical capital encouraged thru policie to increase
household savings and private investment.
• Savings 1/3 og GDP=highest
• 1960-1980s exports 10%GDP->40%GDP
• Egalitarian distrubution of income
“Wash. Consensus” reforms
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•
•
•
•
•
•
•
•
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* Fiscal policy discipline;
* Redirection of public spending toward education, health and infrastructure
investment;
* Tax reform – Flattening the tax curve: Lowering the income tax rates on
proportionally high tax brackets (typically above median income), and raising the
tax rates on the proportionally low tax brackets (typically below median income);
lowering the marginal tax rate;
* Interest rates that are market determined and positive (but moderate) in real
terms;
* Competitive exchange rates;
* Trade liberalization – replacement of quantitative restrictions with low and
uniform tariffs;
* Openness to foreign direct investment;
* Privatization of state enterprises;
* Deregulation – abolition of regulations that impede market entry or restrict
competition, except for those justified on safety, environmental and consumer
protection grounds, and prudent oversight of financial institutions; and,
* Legal security for property rights.
Figure 14.6 The Relation Between Average Annual Growth (1980-2000)
and Real GDP Per Capita, with Area Proportional to Population
Figure 14.4 The Unequal Distribution of the World’s Income, 2000