Re: ``globalization'' and poverty

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

      With regard to what happened in the peso crash,
a not-much mentioned factor was deregulation and
privatization of the banking sector that had happened
prior to the adoption of NAFTA under the Salinas
regime.  These banks had encouraged a major
consumer debt boom in Mexico.
       A careful reading of accounts of what happened
during the crisis, e.g. as in Nora Lustig's second edition
of her definitive, _Mexico: The Remaking of an Economy_,
1998, Brookings Institution, makes it clear that the crisis
went in several stages.  The first stage, roughly in December
of 1994 and into early January of 1995, involved the
tesobono government securities that were denominated
in dollars, and which the unwillingness of foreign investors
to roll over in the face of private Mexican money flowing out
into dollars caused to trigger the crisis.
      The second and more serious stage came later in
January and into February as problems erupted because
of the internal banking situation in Mexico.  This triggered
the continued inability to refinance the tesobonos and
was what led to the US-organized bailout.
Barkley Rosser
----- Original Message -----
From: "Colin Danby" <danbyc@xxxxxxx>
To: "pkt" <pkt@xxxxxxxxxxxxxxxx>
Sent: Friday, May 04, 2001 1:46 PM
Subject: Re: ``globalization'' and poverty


> Hello Tim,
>
> Just to be neoliberal for a minute...
>
> > ... the kind of free trade that we get with NAFTA and
> > the FTAA is one which emphasizes free capital mobility (particularly hot
> > money, portfolio capital).
>
> This is logical if you think freer trade is going to open up new
> opportunities for enterprise.  Firms should be able to raise money.
>
> > For instance, NAFTA Article 1109 requires that each Member country
"permit
> > all transfers relating to an investment."   Article 1139 defines
> investment
> > as including equity securities and certain marketable debt securities.
In
> > addition, Chapter 14 of NAFTA provides for a gradual tolerance for, and
> > liberalization of, foreign ownership of financial institutions and
> services.
> > By mid-1998, at least seventeen subsidiaries of foreign banks were
> operating
> > a brisk business in Mexico (a result of Annex VII(B) of NAFTA).
>
> Is this a bad thing?  It's not like Mexican-owned banks have been
especially
> wonderful.
>
> I would certainly agree, though, that NAFTA is basically an investment
pact
> rather than a trade pact.  Much of the trade liberalization occurred in
1985
> when Mexico joined the GATT.
>
> > NAFTA also coincided with Mexico's membership in the Organization for
> > Economic Co-operation and Development (OECD).
> >  The Bank for International
> > Settlement's (BIS) risk-based capital requirements, known as the Basle
> > Accord, put a zero weighting on credit risk for the central government
> debt
> > of all OECD countries (which by mid-1994 included Mexico).  Therefore,
at
> > the time of the Mexican peso crash, banks from around the globe could
hold
> > Mexican government debt securities without providing any capital
reserves
> > for credit risk.
>
> Did foreign banks really hold much of these?  I thought most of them were
in
> individual portfolios.  In any case Mexico never missed a payment.
>
> > The OECD-BIS stamp of approval was certainly a premature
>
> Was BIS giving out seals of approval?
>
> > inducement to free flows of in a particularly volatile form of portfolio
> > capital.  All this combined with the restructuring of Mexico's debt from
> > bank loans to "Brady bonds" contributed to the peso crisis of 1995 by
> > increasing the short-term nature of Mexico's exposure -- in this way a
> > qualitatively and quantitatively more dangerous environment than had
> existed
> > pre-NAFTA.
>
> But you can see much the same thing in 1981-82 in terms of overborrowing
and
> short-term exposure.  The Mexican gov't can borrow because everyone
> understands it will get bailed out by Washington.  I doubt NAFTA or OECD
> made much difference.  The Brady bonds were mainly important as a signal
of
> continued U.S. commitment to ensure that Mexican debt got paid.
>
> Most importantly the combination of macro policies in the Salinas sexenio
> made the peg unsustainable under any conditions.
>
> > My point is that capital account liberalization is a central feature of
> > today's trade liberalization regime -- in fact, it's been a central
aspect
> > of trade liberalization for the past two decades.  Such free trade in
> > currency and capital has fueled the enormous expansion of hot money
flows
> > and made the peso collapse all but inevitable.  (David Felix and many
> others
> > have documented the enormous increase in such speculative capital
flows).
>
> We've talked about this before.  In brief I suggest that internal
conditions
> are to blame for collapsing pegs.  This "enormous expansion" of
> "speculative" flows is a red herring.  The peso collapsed just as readily
in
> 1954 as it did in 1994.
>
> I would want analytically to separate the questions of free trade and
pegged
> currencies.  You can have either without the other.  Understanding the
> currency peg in Mexico requires seeing it as part of a larger system of
> price controls over the 1989-94 period.
>
> >...
> >
> > The Salinas policy of cutting agricultural protection in the 1980's must
> > also be seen as part and parcel of the IMF model which was imposed on
> Mexico
> > through repeated IMF Letters of Intent throughout the 1980's.
>
> The de la Madrid and Salinas administrations enthusiastically adopted
> neoliberal policies of reducing protection and privatizing.  It's true
that
> Lopez Portillo and Echeverria were frequently at odds with the IMF, and
you
> could argue that the existence of the IMF is one reason their project
> foundered.  But there really was a shift in *Mexican* policy, like it or
> not, after JLP left office.
>
> >...
> >
> > Only two months ago Turkey started to permit unlimited trading of its
lira
> > in international currency and capital markets.  Two weeks ago, the lira
> came
> > crashing down -- a victim of the same dynamic forces of currency
contagion
> > that have crushed currencies throughout Asia, Latin America, South
Africa,
> > and Russia.
>
> Again, this is a focus on the proximate cause and does not ask what was
> going on in Turkey.  It probably was not a good idea to be propping up the
> lira's fx value at the same time that there was a lot of suspect lending
in
> liras going on.
>
> > Turkey, hat in hand, came to the IMF for emergency assistance,
> > which is coming only after Turkey took action to actually implement 15
> major
> > changes to its financial and economic system, including a plan to make
the
> > central bank more unaccountable, allow the lira to float freely on
> > international markets, reduce government spending, and privatize
> state-owned
> > companies -- the entire menu of IMF bad medicine.
>
> Not all of these reforms are necessarily bad ideas.  But I'm not
interested
> in defending the IMF's overall package or the fact of its ability to
impose
> remedies.  I *would* like to have more alternatives than bad state policy
> and bad neoliberal policy.
>
> >
> > There's free trade in goods, but there's also free trade in capital,
> > currency, and financial services.  The latter kind of free trade is akin
> to
> > throwing lots of fuel onto an already simmering brush fire.  You are
> > certainly right to warn of the hypocrisies and dangers of US and
northern
> > trade positions.  But we should not ignore the way that FTAA could
quickly
> > increase the dangers to every Latin American member in an exponential
way.
>
> There are three separate questions here:
>
> 1. freer trade in goods
> 2. freer capital flows, especially portfolio flows
> 3. pegs
>
> In general (1) is probably a good thing; certainly better access to the US
> market would help a lot of people in Latin America.  I would like to see a
> lot more labor mobility too.  We already have a lot of (2); as noted above
I
> think the argument against it mistakenly focuses on proximate causes not
> underlying ones.  (3) can be a real problem depending on the underlying
> political economy that motivates the peg, other price controls in place,
and
> what your domestic financial system does.
>
> Best, Colin
>
>
>
>
>
>