Re: FONDAD Conference

["ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

paul davidson wrote:

> At 02:08 PM 02/27/2000 -0500, Warrenwrote:
> >I happened to attend a conference last year on the 98 debt crisis
> >The following highlights contain examples of what I would call
> >a lack of fundamental, operational knowledge of senior officials.
> >Perhaps it this defficiency in general that is most responsible for
> >current policy around the world.
> >
> >This is from the copy of the transcript I recently received:
>
> Then Warren provided some cogent comments on others discussions.
>
> >Warren Mosler was critical of Mohammed Ariff?s statement that >Malaysia
> needs foreign capital and FDI. "Why do you need these >nominal transfers if
> you are a net exporter of a country, unless you >need real imports in order
> to make your country work? Perhaps >you have everything you need internally
> and it can be organised >internally through domestic policy, through local
> currency policy. >Perhaps the need for dollars really is not there. When you
> borrow >external currency, it doesn?t matter who the lender country is, you
> >are setting up a short position in that currency.
> >So when Malaysia borrows dollars, it is placing itself in a position >of
> risk because it is getting short of dollars. You have to be sure you have a
> good reason to do this."
>
> Very true.
>

But not universally true. It is true for large economies such as China and
Brazil, but not true for smaller economies that need commodities (oil, wheat),
goods and services (aircrafts, medicine, arms, consulting) that must be paid
for in dollars.

>
> >Mosler also criticised the idea that a country should export its way >out of
> a recession. "Recession means a reduction of growth. >Exporting your way out
> of a recession means all of your people >are creating products to give to
> somebody else, while getting >nothing in return in terms of the real standard
> of living. In the case >of Malaysia as an exporter of resources, it means
> that your own >resources are being transformed into a product that is sent to
> >foreigners for their material benefit. So when you export your way >out of a
> recession, you have decided to put your people to work >for someone else. In
> a sense, you have become the world?s
> >slaves and this is a serious condition."
>
> Of course Warren is correct in the sense that export-led growth is the
> orthodox prescription for stimulating aggregate demand to recover from
> recession or stagnation and  utilize excess capacity.
> And Warren is correct in that countries that persistently run export
> surpluses means "that your own resources are being transformed into a product
> that is sent to foreigners for their material benefit. So when you export
> your way out of a recession, you have decided to put your people to work for
> someone else."
>
> Why then do countries pursue such a foolish policy of  persistently
> depriving their own citizens of some of the production of goods and
> services that their resources provide (e.g., Japan, or the Asian tigers)?
>
> Unfortunately The foolishness implied in Warren's comment may not be as
> foolish as Warren makes it appear -- if we are operating in an
> entrepreneurial economy that organizes global production on a money contract
> basis and uses different currencies AND a flexible exchange rate system.
>
> I have provided a more complete analysis of this situation in a chapter
> entitled "The General Theory In An Open Economy Context" in A SECOND EDITION
> OF THE GENERAL THEORY, edited by G.C. Harcourt and P. Riach (Macmillan,
> London, 1997). In this chapter proofs (in terms of algebra and
> geometry) are presented for the comments that follow:
>
> In an open economy with flexible exchange rates, a nation that runs a
> persistent export surplus is likely to see its exchange rate rise over
> time. This will therefore permit the domestic population to buy more real
> foreign product per unit of domestic currency, therefore raising the standard
> of living of domestic residence -- even as the nation continues to send some
> surplus of current production abroad rather than keeping at home -- so that
> at each moment of time it looks like people are crazy in Warren Mosler's
> sense of working for foreigners -- but over time this may be the best way,
> given the rules of the free market exchange rate system, to increase domestic
> standards of living..  Moreover if the Marshall-Lerner condition does not
> apply the payments statistics will always show an export
> balance of payments surplus -- even as the real terms of trade turn in favor
> of the export-led growth economy.
>

Yet often this only reorganized the economy into two tiers - a prosperous
export tier and a depressed domestic tier - with problematic socio-political
consequencies.

> Moreover, if the country is an oil consuming nation -- and especially if its
> demand for barrels of oil is  positively and elastically related to its
> economic development, then the resulting appreciation of the domestic
> currency relative to the dollar, makes oil in the international market
> cheaper, the more export-led growth the domestic country pursues. Lower
> energy costs not only improve a developing nations standard of living very
> rapidly but it makes investment in manufacturing, etc cheaper and more
> profitable--- so maybe export-led growth, for each single nation, is not as
> stupid as Warren's " world?s slaves" analogy suggests.

When it come to oil and wheat, the appreciation of the purchaser currencies
earing from export of other goods, do not necessarily lower oil or wheat prices
unless supply is unlimited and can increase in a timely manner.  Often the
opposite occurs.  Purchaser currencies appreication causes more demand and
therefore prices to rise both as a result of increase purchasing power for a
given amount of money, and also the fundamentals behind a high exchange rate
translate into more demand.  Recessions come with deflation unless the economy
is in a state of stagflation.

> Of course the problem with many countries pursuing export led growth -- is
> that it cannot be pursued by ALL countries simultaneously. (Double entry
> booking prevents this!) Only if other nations run persistent deficits can
> some countries run persistent surpluses.  Of course, except for the United
> States, other countries can not run persistent trade deficits.  Instead they
> must "tighten their belts" under the rules of the game  and depress their own
> economy -- lowering the standard of living and thereby reducing
> imports which then depresses the economy of the country pursuing export led
> growth. The result is a global depression.  Only as long as the US
> persistently runs larger and larger trade deficits with benign neglect can
> the rest of the world improve !!

This is an insight that Greenspan/Rubin/Summers have never grasped.
Globalization requires a US trade deficit.  The US has no choice but be the
market of last resort.  This is the function of the leading component of the
global economy, just as it is the role of the central bank to be lender of last
resort. The US dual policy of a strong dollar being in its national interest
and its unrealistic quest for declining trade deficit in an expanding global
economy is self contradictory.

> {There are other advantages  -- under the rules of the current game-- e,g,
> keeping the labor movement and money wage demands quiescent.  See my chapter
> in the Harcoury and Riach book GTsquared.

This is changing.  Free trade will have to incorporate free labor movement to
work.  The current change is concentrated on skilled workers, but free movement
of non-skilled labor will have to come - we all need someone to do the vacuming
and run the washing machines and dishwashers.
A sign of this is the position of the AFL-CIO against the export of jobs is
being balance by its softening position on immigrant labor.

> >Mohamed Ariff disagreed and explained why it makes sense for >Malaysia to
> export its way out of the recession. "We need to do >this because there is an
> excess capacity of about 30 percent in the >manufacturing sector.
> >Most of the industries are producing at 70 percent of their >capacity.
> >The domestic economy cannot absorb this excess capacity in the >system
> without additional demand. In fact, in case of the domestic >sector, we found
> that all the sales have picked up in the first >quarter, but production is
> not rising, because they are simply >running down the inventories. We must
> use this excess capacity, >and we can do that with an increase in external
> demand."
> >John Williamson basically agreed with Warren Mosler?s critique of >the idea
> to export your way out of a recession and gave the >example of China.
> "Exporting your way out of a recession depends >on the strength of your
> foreign position. If sending all of your >resources abroad is not bringing
> the necessary liquidity to the >country, then it is better to expand at home.
> China still has a large >current account surplus, which does not seem to be
> eroding, and >its exports continue to expand. It has a high level of reserves
> >which yield a modest level of interest income, so why on earth >would they
> pile up more reserves in order to get out of
> >a recession when they appear to have policy instruments that >enable them to
> expand domestic demand?"

China continues to seek trade surplus to finance the coming arms race!

> >Zden_k Drábek, on the other hand, agreed with Mohamed Ariff >that export-led
> growth would be a sensible policy to follow for >both Malaysia and China.

Not China.  Not export-led growth. Export is important for China only as a
"take-off" phase development strategy. The global markets of last resort cannot
sustain the growth demand of 20% of the globe's population.  Everyone in the US
will have to buy 1,000 beany babies and wear out 100 pairs of sneakers a year.

> "John Williamson made me think about Warren Mosler?s earlier
> >comment that free trade is bad under certain circumstances. John, <you now
> seem to argue along with Warren that export-led growth >is not good.
> >In the context of Malaysia, it seems to me export-led growth is
> >sensible. I agree that since China is building up current account
> >surpluses, it might make more sense for them to stimulate domestic demand.
> But this is not a wise policy given the major agenda for economic policy
> reforms, particularly in the state-enterprise sector. I am not sure that
> inducing growth of domestic demand would be that helpful in China, and
> perhaps export-led growth remains a good strategy."

This is precisely the weakness of China's reform strategy.  The entire thrust
is to strengthen China's international competitiveness rather than domestic
well being.  The PLA saw the light.  It reduced its 3 million men army by half
and retsructure a 500,000 modernized force with modern high tech war-fighting
capability.  The economic planners have yet to understand the China only needs
an internationally competitive export sector that constitutes no more than 20%
of the its economy.  The rest of the Chinese economy can be more effectively
developed with some insulation the the rest of the globe.  This is why WTO is
not good for China.

Henry C.K. Liu