Re: on stiglitz

["Barkley Rosser" <rosserjb@xxxxxxx>]

    Minor corrrection: China ran a trade deficit as of the most
recent quarter.  Its imports have surged.  Of course those in
the U.S. beating up on China to float the yuan/renmimbi have
not noticed this as the PRC still has about a $100 billion bilateral
surplus with the U.S.  Most of those imports are from Asian
neighbors of China.
Barkley Rosser
----- 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
>
>