Re: ``globalization'' and poverty

["Canova, Timothy" <CANOVA@xxxxxxxxxxxxx>]

Colin,
thank you for your response.

(1) i agree that firms should be able to raise money, but permitting
speculation in currency futures is a rather extravagent and dangerous way to
do that.

(2) even if, as you say, "Mexican banks have not been especially wonderful",
opening up the country's bond markets to foreign exchange risk is not an
appropriate response.

(3)  it's my recollection that Fidelity and Merrill were both very exposed
to the tesobono crash.
Mexico may not have missed a payment, but at what price and to whom?

(4)  yes, BIS does give out seals of approval.  it's called the Basle
Accord.  when home mortgages require substantial capital reserves, but
Mexican government debt requires none, that certainly seems like a stamp of
approval.

(5)  yes, neoliberals always blame the "internal conditions" for currency
collapse and hardly ever identify the external factors.  for instance, the
U.S. runs an enormous trade deficit, one so large as a percentage of GDP
that it would lead to a falling dollar in any other country.  but the dollar
is the reserve currency of the world, so it just won't fall (yet).  it's
just as accurate to say that Mexico's peso problems in 1954, 1984 and 1994
were all related to the way that the International Monetary Fund places all
of the burdens of adjustment on deficit countries and none on surplus
countries.

i would hestitate before calling capital account liberalization a red
herring.  while the peso may have collapsed time and again, many many other
countries experienced currency contagion for the first time only after
opening their capital accounts.

yes, pegs are difficult to maintain, but more control over speculative
capital flows is a prerequisite.  Most Western European countries did not
get to currency convertibility until the late 1950's, and many did not
liberalize their capital accounts until the early 1990's.  this, of course,
was followed soon after by Western Europe's own currency contagion -- the
currency crises of the early to mid-1990's.

West European reconstruction was not based on floating exchange rates or
speculative capital flows.  Companies were still able to finance their
operations, but much of the working capital came from Marshall Plan
assistance ($13 billion in U.S. grants from 1947-1951 alone).  That's an
example of a major surplus country (the U.S. at that time) accepting its
share of the adjustment burden by transfering much of its reserves at
no-interest and in outright grants.  what a contrast to today's world where
surplus countries sit on mountains of unused foreign monetary reserves.

Tim



-----Original Message-----
From: Colin Danby [mailto:danbyc@xxxxxxx]
Sent: Friday, May 04, 2001 11:47 AM
To: pkt
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