Re: on stiglitz

[Gunnar Tómasson <gunnar.tomasson@xxxxxxxxxxx>]

Paul:

Re. the following:

> Citing John Maynard Keynes as the inspiration for his prescription,
Stiglitz
> suggests creating "global greenbacks" (known as special drawing rights
[SDR])
> to be issued as handouts to developing countries and other countries in
times
> of international financial difficulties. These SDRs can be converted into
hard
> currencies to service debts, buy imports, or supplement foreign reserves.
> Unfortunately, such handouts are merely palliatives and not the solution
to
> the problem. Moreover, some countries will become SDR addicts, and when
the
> handouts end, the economic withdrawal symptoms will be even more deadly.

Comment:

In his article, Stiglitz did not address the technical "details" of how his
proposal might be put into action.

He did make clear, however, that he had in mind something akin to the
post-World War II Marshall Aid Plan.

In that earlier case, none of the recipients of U.S. "handouts" became aid
"addicts".

In the present case, much would depend on the technical "details".

It is not a given that these would entail end results different from those
of the Marshall Plan.

Gunnar




----- Original Message -----
From: "pdavidso" <pdavidso@xxxxxxx>
To: "Ric Holt" <rholt@xxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Monday, September 01, 2003 10:34 PM
Subject: Re: on stiglitz


> In the Spring 2003 issue of Harvard Relations Council International
Review,
> Nobel Prize winner Joseph Stiglitz indicates that  the international
financial
> system is suffering from a virulent malady that has left developing
nations,
> e.g., Korea, Indonesia, Thailand, Mexico, Argentina, Brazil, ecoonmically
> devestated.
>
> Stiglitz notes that international capital flows are a primary cause of
this
> disease as every prudent nation (except the United States) strives to
maintain
> a surplus of exports over imports to be added to the nation's foreign
> reserves. Since the global economy is in essence on a dollar standard,
foreign
> reserves are held primarily in the form of US Treasuries.
>
>
> Some countries, e.g.,  Japan and China, successfully run persistent export
> earning surpluses. Stiglitz correctly notes that one country's surplus
must be
> some other nation(s)'s deficit as the saved foreign reserves are not used
to
> buy the products of the nation's trading partners. In essence, when any
nation
> runs trade surpluses, it is as if this nation is playing a game of Old
> Maid and passing the Black Queen of unemployment and indebtedness to its
> trading  partners.
>
>
> Countries stuck with the Old Maid must use a combination of  international
> loans and previously saved foreign reserves to pay for their excess of
imports
> and to service their international debts. Ultimately, as its foreign
reserves
> dwindle and its international indebtedness increases, the deficit
> nation is unable to service its outstanding  international debt
obligations.
> To prevent default, The IMF can make new loans to the indebted nation. The
IMF
> loans require deficit nations adopt "Washington Consensus" reforms where
(1)
> all domestic financial, labor and product markets must be freed of
government
> control, and (2) the nation must tighten its belt, i.e., run fiscal
surpluses
> and tight monetary (high interest) policies. These belt tightening
policies
> depress the nation's economy, in the  hope that the resulting
impoverished
> population will drastically reduce their purchases of all goods and
services
> including imports.
>
>
> Even as  the deficit nation tightens its belt, however,  its increased
> international indebtedness  (as the IMF loans are added to the existing
loans)
> enlarged the annual international debt service payments. Adding to this
burden
> is any decline in the nation's exchange rate as domestic residents and
foreign
> investors attempt to move their funds to a safe haven in another country.
> Almost inevitably, the indebted nation can not free itself from the
increasing
> weight of its hard currency international debts  except by default. The
result
> is a moribund economy e.g., Argentina in 2002.
>
> Citing John Maynard Keynes as the inspiration for his prescription,
Stiglitz
> suggests creating "global greenbacks" (known as special drawing rights
[SDR])
> to be issued as handouts to developing countries and other countries in
times
> of international financial difficulties. These SDRs can be converted into
hard
> currencies to service debts, buy imports, or supplement foreign reserves.
> Unfortunately, such handouts are merely palliatives and not the solution
to
> the problem. Moreover, some countries will become SDR addicts, and when
the
> handouts end, the economic withdrawal symptoms will be even more deadly.
>
> The cure lies in creating new international financial architecture as
> President Clinton called for after the 1998 Russian debt default
Unfortunately
> Clinton's clarion call went against the Washington Consensus and therefore
was
> never seriously studied by political decision makers. Stiglitz fails to
> provide a new architecture because he ignores some guidelines that Keynes
> indicated were essential to avoid international financial problems and
> recessionary forces in the post World War II era. Keynes indicated that
the
> surplus nation(s) must be required to bear a large responsibility for
> eliminating persistent trade imbalances. Keynes other suggestions
> included: "We need a quantum of international currency... [which] is
governed
> by the actual current [liquidity] requirements of world commerce, and is
> capable of deliberate expansion.... We need a method by which the surplus
> credit balances arising from international trade, which the recipient does
not
> wish to employ can be set to work... without detriment to the liquidity of
> these balances" .
>
> Accordingly in my book, Financial Markets, Money and the Real World, I
have
> embedded Keyness essential suggestions in a proposal for a new
international
> financial architecture that is designed [1] to prevent a lack of global
> effective demand due to any nation(s) either holding excessive idle
reserves
> or draining reserves from the system, [2] to provide an automatic
mechanism
> for placing a major burden of payments adjustments on the surplus nations,
[3]
> to prevent financial crises while providing each nation with the ability
to
> monitor and, if desired, to control movements of flight capital,  [4] to
> expand the liquidity of the international financial system as global
capacity
> warrants, and [5] to induce the debtor nations to work their way out of
debt
> rather than await handouts.
>
> The health of the global economic system will not permit us to muddle
through
> with the present arrangements much longer. Before an international
financial
> calamity occurs, it is time to look at blue prints for a New Financial
> Architecture that will prevent recurrent financial crises and the economic
> stagnation that the global economy appears to have become mired in.
>
> Paul Davidson
>
> Paul Davidson
> Editor, Journal of Post Keynesian Economics
> University of Tennessee
> SMC 503
> Knoxville, Tennessee 37996-0550
> office phone #;(865)974-4221; office fax# (865)974-1686 or (865)974-4601
> home phone and fax # (865)692-0802
> email pdavidson@xxxxxxx
> http://econ.bus.utk.edu/davidsonextra/Davidson.html
>