Re: Stiglitz on Soros

["Leigh Harkness" <Leigh@xxxxxxxxxxxxxxxxxxxx>]

Geoff

You wrote:

> This line of reasoning seems rather too clinical to describe real world
> economies. Countries do not have the implied level of independent control
> over their fortunes.

There are some areas of economics over which governments have a high level
of control, although they (and many economists) may not be aware of  it.

> Certainly some countries (like Australia) have deliberately put in place
> the policies (unilateral removal of restrictions on trade and foreign
> investment) that have been followed by massive current account deficits.

The unilateral removal of restrictions and foreign investment have not had
any direct effect on the current account deficit in Australia.  The current
account deficit in Australia has been equal to the growth of bank credit
since the Australian dollar was floated.

> But consider the following circumstances which can have the same result
> outside a country's deliberate control:
>
> * massive devaluation caused by speculative withdrawal of currency;

When the government choosed to use the exchange rate to make international
receipts and payments equal, you can expect specutlative withdrawls of
currency to devalue the currency.

I do not agree that the exchange rate should be used for that purpose.  I
would prefer that the market set the exchange rate d to ensure that the
price of the domestic products (relative to imports) were such that the
demand for these domestic products (both from exports and domestic sources)
was sufficent to provide full employment.

> * transfer pricing by corporations;

transfer pricing may enable a business to avoid some forms of tax (that
governments choose to apply) but it is not the cause of the current account
deficit.

> * IMF or World Bank conditions of financial support which force countries
> to shrink their infrastructure or open their markets to imports;

You have to be in trouble before you need to borrow from the IMF.  The only
influence of the IMF is when other lenders force IMF type reform policies on
your country as a condition of the loan.  To avoid this type of problem, a
country needs to carefully manage its IMF missions and not accept any
recommendations it its reports that the government considers unacceptable.

The World Bank on the other hand provides loans for projects.  The best way
to deal with them may be to call their bluff and not accept their
conditions.  They probably need to lend you the money (to justify their
existance) more than your country needs it.  If they insist on regressive
policies as a condition of a loan, a government can choose not to sign.

> * aggression by trading partners who demand that the subject country's
> markets be opened but protect their own.

Countries that believe that other countries are responsible for their
problems are deluding themselves.

> With a chorus of major international bodies proclaiming the current
> economic orthodoxy that "free trade" is the way to prosperity, and using
> their financial and political clout to force these policies onto the rest
> of the world, what hope do well-meaning politicians of the average smaller
> country have of running an independent macro policy?

A country that is open to free trade can prosper, provided it has the right
exchange rate.

Opening a country to free trade with the wrong exchange rate of a flawed
exchange rate system, could devastate it.  The market would be sending the
wrong signals into the economy, penalising sectors that should have been
rewarded and rewarding sectors that should be held back.  In such an
environment, manipulating the market by restricting trade to ensure domestic
resources are utilized could be better than opening the economy to free
trade that creates unemployment.

It is possible to have an independant macro policy if it is a sound and
stable macro policy.

If your country's macro policy is open to manipulation by foreign entities,
then that is a problem that your country has created.  It is possible to
develop a macro policy that is open to the world but is not open to
manipulation.


Leigh