Transcript Standard Approach to Economics

Development Policy in an
UnEqual World:
Financing for Development and
Growth
IDEA’s Workshop “Development Experiences and Policy Options
for a Changing World
Tsinghua University, Beijing, 5 June 2007
Jan Kregel
Senior Scholar, Levy Economics Institute of Bard College
Distinguished Professor, Center for Full Employment and Price
Stability,
University of MIssiouri, Kansas City
Post War Approach to
Development
• Constraints:
– Deficient Domestic Savings
– Scarcity of Domestic Resources
– Deficient Capacity to Produce Capital Goods
• How to Overcome constraints:
– Increase Domestic Savings
– External Financing for Development
• Official development assistance -- ODA
• Private aid and investment flows --FDI
Application in the United Nations
• First United Nations Development Decade-1960
– One per cent of developed country GDP to be
transferred to developing countries to achieve Five
per cent growth of GDP
– 0.3 per cent private flows, 0.7 per cent ODA
• Growth Rate Target Achieved
• Official Aid Target Was Not
Theoretical Support for External
Financing for Development
“The
basic argument for international investment of
capital is that under normal conditions it results in
the movement of capital from countries in which its
marginal value productivity is low to countries in
which its marginal value productivity is high and
that it thus tends toward an equalization of marginal
value productivity of capital throughout the world
and consequently toward a maximum contribution
of the world’s capital resources to world production
and income.”
Jacob Viner, “International Finance in the postwar World,” Journal of Political Economy,
55, April, 1947, p. 98.
Implicit Assumption: scarcity of
capital in developing countries
• Negative relation between capital intensity
and rate of return
• You can measure capital scarcity/intensity
• Foreign capital inflows finance investment
• There is a high elasticity of substitution
between financial assets and real assets
• Fixed Exchange Rates or insurable exchange
rate risk
Few of these Assumptions can be
theoretically verified
• No monotonic negative relation between capital
intensity and rate of return
• No unambiguous measure of capital intensity
• No empirical evidence that foreign capital inflows
increase domestic investment
• However, in Latin America they do increase
consumption
• There is negligible elasticity of substitution between
financial assets and real assets
Nor are they verified in practice
• Negative net transfers have been the rule
– 1960s,
– Latin American lost decade of the 1980s,
– financial crises of the 1990s
– Reserve accumulations of the 2000s
• Private Flows have become dominant
– Resource flows not subject to development
needs, but to private incentives
Transfers in First Development
Decade under Alliance for Progress
Former Chilean finance minister Gabriel Valdes to President
Nixon, June 12, 1969
“It is generally believed that our continent receives real
financial aid. The data show the opposite. We can affirm
that Latin America is making a contribution to financing
the development of the United States and of other
industrialized countries. Private investment has meant and
does mean for Latin America that the sums taken out of
our continent are several times higher than those that are
invested. ... In one word, we know that Latin America gives
more than it receives.”
Modern Experience of Net Transfers of Resources
200
-200
Developing economies
-300
Africa
-400
-500
-600
Eastern and Southern Asia
Latin America
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
-100
1981
$ Billions
0
1980
100
Modern Explanation
• Real Growth Theory
– Increasing returns to investment in
• Human capital
• Market institutions
– Investment in Developed countries may thus
have higher returns than investment in
Developing countries
– Global Financial Markets may thus may be
efficient in producing negative net resource flows
• Rediscovery of position of Nicholas Kaldor
and Ragnar Nurkse
Modern Policy Proposal: Build Financial
Institutions
“The case for capital account liberalization is a case
for
capital
seeking
the
highest
productivity
investments. We have seen in recent months in Asia -as at many points in the past in other countries -- the
danger of opening up the capital account when
incentives are distorted and domestic regulation and
supervision is inadequate. … The right response to
these experiences is much less to slow the pace of
capital account liberalization than to accelerate the
pace of creating an environment in which capital will
flow to its highest return use. And one of the best
ways to accelerate the process of developing such a
system is to open up to foreign financial service
providers, and all the competition, capital and
expertise which they bring with them.”
Summers, Lawrence (1998) US Government Press Release, 2286, March 9, 1998: “Deputy Secretary Summers
Remarks Before The International Monetary Fund.”
What do Foreign Financial
Institutions Contribute?
• Foreign Banks were the first to exit Argentina in
2000
• Before the Corralito was imposed
• Before the Suspension of debt service
• Did not act to create stable domestic environment
• In Brazil foreign banks are less efficient than
domestic banks
• Foreign acquisitions of Latin American banks have
been of the best domestic performers
See Mario Tonveronachi, “The Role of Foreign Banks in Emerging Countries – The Case of
Argentina, 1993-2000, investigación económica, vol LXV, No. 255, enero-marzo, 2006 and
Jon and Fatima Williams ‘Does ownership explain bank mergers and acquisitions? The case
of domestic banks and foreign banks in Brazil’, Oxford Centre for Brazilian Studies and
Luiz Fernando Rodrigues de Paula, The Recent Wave of European Banks in Brazil ”,
Oxford: Centre for Brazilian Studies.
No Fifth Development Decade:
Millennium Declaration
• Reduced emphasis on resource transfers
• A “directed” aid strategy
• To meet “time-bound”, “measurable” Social
Development Goals
• But, these Goals are really symptoms of
underdevelopment
• Eliminating them still requires external resources:
– $100 billion per year to 2015
• What happens after 2015?
2002 Financing for Development:
Global Development Partnership
Developing countries responsible for their own
development
Primary source of development finance is
Mobilising Domestic Resources
Developed countries to provide additional
resources required to support sound national
development strategies
Return to Traditional Development
Theory
 What are the available domestic resources?
 Most developing countries have abundant natural
resources
 But all have unemployed, underemployed or
underqualified domestic labour
 Increasing employment presents the greatest
unexploited potential for mobilising domestic resources
 Employment increases Income and thus Savings
 Nurkse: “All Capital is Made at Home”
 Requires policy to ensure incomes is saved and used to
increase capital
Investment in What?
 Traditional Development Theory – Eric Reinert
 From Antonio Serra (1612) to US Today
 Investment in Building Domestic Industry
 Because industry presents increasing returns
 Restrict Access to Luxury Consumption Goods
 Synergy Between Agriculture and Industry
 Build Export Platform
 to Fie ance the needed imports for domestic industry
 Prebisch at UNCTAD I criticising Import Substitution
 Amsden on Asia as a successful example
Get Prices Wrong to Create Comparative Advantage
 Prebisch, Nurkse, Kaldor -- Limit Imports of Luxury
Consumption Goods
 Manage Terms of Trade
 Domestically
 Internationally
Traditional Approach undermines
Domestic Mobilisation
External resource transfers fill resource gap
 Private flows and Official Aid create debt
service obligations
 Earnings of foreign currency needed to meet
debt service
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External surplus = negative net resource transfer
BWI Structural Adjustment Program
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Reduce domestic level of activity to free resources to
meet debt service
External surplus produced via fiscal surplus
Reduces domestic absorption and resource utilisation
Creates unemployment
Absence of Social Safety Net creates social
marginalisation
2005 Summit Outcome emphasised
Traditional Approach
Employment
47. We strongly support fair globalization
and resolve to make the goals of full and
productive employment and decent work
for all, including for women and young
people, a central objective of our relevant
national and international policies as well
as our national development strategies,
including poverty reduction strategies, as
part of our efforts to achieve the
Millennium Development Goals.
Employment joins MDGs
• High-level segment of the 2006 substantive
session of the Economic and Social Council
Ministerial Declaration reinforced the 2005
World Summit position
• Make full and productive employment and
decent work for all, including for women and
young people, a central objective of relevant
national and international policies and
national development strategies and to be
part of efforts to achieve the internationally
agreed development goals, including the
Millennium Development Goals.
Full and Productive Employment
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New Development Goal
–
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Full mobilization of domestic labour resources
Requires
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suitable employment opportunities
provision of adequate basic education
vocational and occupational training to improve skills and
productivity
unemployment benefit scheme that avoids moral hazard
and fraud
migration policy - remittances
Domestic Policy Space requires
Fiscal Sovereignty
• Is fiscal surplus sound resource mobilsation policy?
– Government spending creates private sector assets in the
banking system
– Taxation creates private sector debts to the government
that must be financed with those assets
– If taxes exceed government spending the private sector is in
net deficit, i.e. insolvent
– If the private sector holds assets for other convenience
purposes financial stability requires a government deficit
over time equal to the private sector’s demand for money
balances
Domestic Policy Space requires
Monetary Sovereignty
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Government spending increases unborrowed bank reserves
Excess reserves drive interbank rates to zero
To keep interest rates positive the government must borrow
As borrower of last resort it can fix the interest rate
Interest rates are thus not constrained by private sector willingness to
buy government debt or the size of the deficit
• The government does not have to borrow or issue debt in order to
deficit spend
• It follows that the government can always set the short term policy
interest rate independently of the size of the deficit -- viz. Japan
How to use policy space to
support mobilisation of domestic
labour resources?
• If private sector development is
insufficient to provide full employment
• Government takes responsibility to
provide employment to all those willing
and able to work at or marginally below
the prevailing informal sector wage
• What does “work” mean?
What does “work” mean?
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Different according to level of development
Primary goals:
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Maintain and improve skill level of the labour force –
basic educational skills
Provide social safety net – income maintenance
Provide social inclusion for the
unemployed/unemployable – social services
Meet the needs of female heads of households to
combine work with family responsibilities
Improve the well-being of society – useful public
works
Can it be done?
• Argentina experience – Jefes programme
– Education at all levels an integral part of
the programme – primary to occupational
– Interministerial cooperation – Labour,
Eduction and Social Development
ministries cooperated in providing
educational programme
– Promotes work practice and experience
– Provides vocational skills
– Improves marginal communities
Is Jefes a relevant example?
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Verified examples of success
Verified examples of fraud and corruption
Depends heavily on local government for
implementation
Depends heavily on individuals
Depends on Federal government for financing
Constrained by government budget goals– but
need not be given monetary and fiscal
sovereignty that Argentina currently possesses
Jefes is not ELR
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The Jefes programme was close to the ELR proposal
but was an emergency response to the crisis
A suitably designed ELR can build on the success of
Jefes
It can be designed to integrate the MDGs as well as
the other Internationally Agreed Development Goals
to be included in the National Development
Strategies mandated at the 2005 Global Summit
ELR as an MDG programme
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A suitably designed ELR programme to provide
employment can also be designed to satisfy:
MDG Goal 1: Eradicate Extreme Hunger and Poverty
MDG Goal2: Universal Primary Education
MDG Goal 3: Promote Gender Equality and Empower
Women
MDG 4 and 5 Reduce Child Mortality and Improve
Maternal Health
New/Old View:
How to Lift the Development
Constraints?
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Savings generated internally by increasing incomes
through full employment -- ELR
Financing is assured by limiting reliance on external
financial resources – Monetary Sovereignty
Policy to Build Domestic Industry
Policy to Earn Necessary Imports through export
promotion
Policy to reduce leakages into imported consumption
goods and use of capital to produce domestic luxury
goods