[A-List] Unbelievable US-IMF bullshit

["Michael Keaney" <michael011@xxxxxxxxxxx>]

Michael, is this what you intended to forward? It seems to fit your
choice of title...


The developing world should abandon parochial currencies
By Benn Steil 
Financial Times: Jan 17, 2006

Of all the objections that have been raised against globalisation -
including its alleged damage to income equality, workers' rights,
democracy and the environment - none is even remotely as compelling as
the devastating periodic havoc wreaked by currency crises in developing
countries.

Economists with the most impeccable pro-globalisation credentials, such
as the Financial Times' Martin Wolf and my colleague, Jagdish Bhagwati,
acknowledge capital flows as theAchilles heel of globalisation. Mr Wolf
has argued that, thus far, the gains of integrating emerging markets
into world capital markets "have been questionable, and the costs of
crises enormous". Mr Bhagwati has criticised "hasty and imprudent
financial liberalisation". I would like to say they are wrong, given
that any justification for capital controls can appear to be a
concession to otherwise misguided anti-globalisers. But they are right.

It is nonetheless critical to recognise that what we think of as
globalisation is not the same thing as classical economic liberalism
writ global, and that modern globalisation may be flawed without
liberalism as a framework being similarly flawed. The best evidence
comes from a much older era of globalisation, from the late 1870s until
1914. Not only was the world then comparably integrated on the basis of
trade metrics, but by a number of financial metrics much better
integrated. Purchasing power parity and real interest rate equalisation
held internationally to a degree not seen before or since. Mean current
account deficits and surpluses as a percentage of gross domestic product
were twice as large. And studies have shown that capital flows did a
better job of matching available capital to investment needs.

Perhaps most surprising is that short-term capital flows actually played
a highly stabilising role: trade deficits could be reliably financed
through short-term inflows stimulated by a modest rise in short-term
interest rates. Furthermore, although financial crises did occur,
recovery tended to be considerably more rapid. Why?

The monetary system that evolved during the globalisation of the late
19th and early 20th centuries was very different from today's. Known
widely as the gold standard, it comprised countries voluntarily backing
their money with gold at a fixed rate of exchange. The Bank of England
played a critical role, as its credible commitment to convertibility
gave investors confidence to move funds globally rather than scramble
for gold. Furthermore, countries facing financial crises found gold
flowing in rather than out. As domestic assets became cheaper after a
crisis, the expectation that exchange rates and asset prices would
eventually revert to pre-crisis levels because of governments'
commitment to the gold standard boosted gold imports.

The post-1971 international monetary "system" comprises nearly 200
currencies, all circulating in the form of irredeemable IOUs. During
gold-backed globalisation, commodity prices were aligned internationally
about as well as they were across regions within countries. Today, we
are so used to a world of autarkic national currencies that we consider
it normal not for commodity prices to align internationally, but for the
entire structure of prices in each country to shift up and down against
the entire structure of other countries' prices. Thus a fall in the
global (dollar) price of a commodity such as coffee tends not to produce
necessary diversification away from inefficient types of production, but
an engineered economy-wide inflation and devaluation in countries in
which coffee exporters are politically powerful. The central bank
distorts all other prices in the economy to prevent adaptation to
falling world coffee prices. This is at the root of development
stagnation for many poorer countries.

The textbook case for floating a national currency is founded on the
stabilising effects of using the exchange rate to protect domestic
interest rates from movements in foreign rates and the ability to lower
interest rates to counteract recessions. Yet the evidence is that the
opposite happens: under floating rate regimes, developing country
interest rates are more sensitive to foreign rates and, perversely, are
more likely to have to go up rather than down during a recession to
prevent capital flight.

Currency crises are now a big worry, particularly for countries with
fixed or pegged exchange-rate regimes. Over the past two decades, severe
crises have hit developing countries across Latin America and Asia, as
well as those just beyond the borders of western Europe - in particular
Russia and Turkey. The problem in each case emerged when they sought to
take advantage of the opportunities afforded by a dollar-dominated
international marketplace for capital. For developing countries that
carries a fatal risk: creditors precipitate crises when they fear
devaluation and in consequence default on dollar debts.

In short, developing countries do not actually see economic benefits
from operating an independent monetary policy. Their interest rates are
in effect tethered to US rates and their dollar capital imports expose
them to currency crises - crises that would have been obviated by the
gold backing that underpinned 19th-century globalisation and that
deliberately disallowed independent policy.

Today, the best option for developing countries intent on globalising
safely is simply to replace their currencies with internationally
accepted ones, namely the dollar or the euro. Latin America's star
economic performer in 2004 was politically volatile Ecuador, which grew
at 6.6 per cent with 2.7 per cent inflation, the lowest in 30 years.
Ecuador dollarised in 2000. If the European Union were wise, it would
change its policy on extending the euro entirely and offer to assist
Turkey and others in adopting it immediately.

Anti-globalisers will be aghast at such a blow to "monetary
sovereignty". But that concept is among the most damaging sovereignty
fetishes to have emerged in the 20th century. Spanish and later
higher-quality Mexican silver coins circulated freely throughout the US
until the late 19th century. Medieval popes actually condemned rulers
for debasing currencies, which is today's fatal state solution to every
economic toothache.

One need only look at Argentina, generating double-digit inflation once
again, to see the anti-globalisation backlash that inevitably emerges
from the wreckage of failed experiments with national monies that no one
wants to hold. Globalisation's earlier golden age has taught us that
capital flows need not be the Achilles heel of today's reincarnation.
The key is to refound globalisation on monies that people will hold
without compulsion.

The writer is director of international economics at the Council on
Foreign Relations and co-author of Financial Statecraft: The Role of
Financial Markets in American Foreign Policy


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