Transcript Consulta Regional Preparatoria de la Conferencia

Seminario sobre
“Estructura productiva y dinámica de precios: efectos macro-micro y respuestas de
política”
Escuela de Verano de Economías Latinoamericanas
6 y 7 de agosto de 2008
CEPAL - Sala Furtado
Santiago, Chile
The Impact of Changes in International
Financial Flows on Trade and Production
in Developing Countries
Prof Jan Kregel
Director, Programa sobre Política Monetaria y Estructura Financiera
Levy Economics Institute del Bard College
Are we in a Financial Market Driven
Washington Consensus?
• Original WWC (Williamson WC) Objective:
• Increase Economic Efficiency
– Eliminate Inflation Distortion on Decision making
• Reduce Excess Demand – Monetary and Fiscal Policy
– Reduce Public Distortion of Market Prices
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Privatise Public Enterprises (also reduces deficit)
Eliminate price controls and subsidies
Reduce Financial Market regulations
Reduce Internal and External Debt
– Reduce External Distortion of Market Prices
• Open domestic goods and capital markets
• Eliminate quotas and subsidies
WWC Did Not:
• Increase Real Incomes
• Increased Inequality
• Increase Value Added in Exports
• Increased volume of exports
• Improve Degree of Domestic Market Competition
• Privatisation created Oligopoly (cf World Bank)
• Increase Domestic Investment
• Increased Foreign Direct Investment and M&A
• Increase Domestic Research/Innovation
• Shifted R&D to Parent of TNC
• Increase Financial Market Efficiency/ Stability
• Endemic Financial Instability
• Internal and External Debt Increased
Good Macro Policy, Bad Micro Policy?
• The good macroeconomic fundamentals –
– low inflation,
– primary budget surpluses and
– control of the money supply,
• Overlooked more traditional macro economic
fundamentals
– high levels of aggregate demand,
– low real interest rates
– competitive real exchange rates.
• As a result they created an overall macroeconomic
environment that impeded the required structural
changes at the micro level.
Bad Micro Policy
Five areas can be identified in which the
structural adjustment policies undermined the
stability of the macroeconomic fundamentals
and the adjustment of the production
structure.
– overvaluation of the exchange rate,
– the high level of real interest rates,
– composition of the fiscal budget,
– the composition of the external account
– the failure of adjustment of the industrial
production structure to reduce the dependence of
increased investment and increased export
capacity on imported inputs.
What Caused the Recent Improvement?
• Global Imbalances
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US Fiscal Deficit – US Recovery
Low US Policy Rates - post-9/11 Recovery, Sub Prime Crisis
Developing Country Surpluses are US Deficits
Recycling of Developing Country Surpluses to US
Reinforce Low US Interest Rates – Rising Global Liquidity
• Improved Terms of Trade
• Financial Speculation in Commodities
• Continued Industrialisation in China & India
• Environmental Issues – BioEnergy
• Capital Inflows
• Interest Rate Differentials --Positive Carry Currencies
• Foreign Investment in Alternative Energy/Commodity Supply
The Varying Fashions in the Terms of Trade
• Original Argument of Improving Terms of Trade
• Ricardo – Diminishing Returns in PC Production
• Malthus – Geometry v. Arithmetic
• New Prebisch-Singer-Myrdal Argument of Declining ToT
– Global Distribution of Effective Demand
• Technical Progress increases productivity increases Real
Wages Increases per capita Income
• PC trade in Global Competitive Markets, Manufactures in
Administered Price Markets
• Markets Compete Away Increase in Productivity in PC
• Increased Productivity Goes to Real Wages in Manufactures
• Purchasing Power and Real Wages increased in Manufactures
and Constant in Primary Production
The Return of Improving Terms of Trade?
• Increased Supply of Manufactured Goods
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US Expansion
Developing Country Industrialisation
Capital Mobility – FDI
Labour Competes in Global Competitive Markets lowering Costs
• TP lowers prices and increases TNC Profits
• Increased Demand for Primary Commodities
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FDI -- Industrialisation of Developing Countries
Financial Market Real Wealth Protection -- Index Funds
Hedge Fund Speculation
Rise in Price of Energy -- BioFuels
Environment – BioFuels
• Raises Supply and Commodity Prices
Different Impact on Effective Demand
• Monopsony in Commodity Markets
• Horizontal Integration by TNCs
• No Increase in Real Wages in Producing Countries
• Oligopoly in Retail Markets
• Vertical Integration by TNC
• No Increase in Real Wages in Developed County Mkts
• Protection of Developed Country Producers
• Gatt Excludes Agriculture
• US Protection –European CAP
• Tariff Escalation Limits Processed Exports
• Privatisation of Developing Country Production Sources
• TP goes to Developed TNCs Profits not Real Wages
• Increases Prices – Reduces Global Demand
Did Conditions Improve in the New
Millennium?
• Rejection of WWC
• Some Never Adopted – India, China; Some Rejected -Argentina
• Improved External Balances
• Improved Commodity Prices Improve Terms of Trade
• Build up of External Reserves
• Trade & CA Surpluses
• Absence of Financial Crisis
• Return of Capital Flows
• Rejection of Doha Proposals
• Defence of Development Round
Influence of Finance on Trade
• Improved Trade Balance -- Improved Commodity Prices
• Due to Commodities Becoming an Asset Class
• Commodity Index Funds
• Financial Demand dominates Commercial Demand
• Low Interest Rates to Sub Prime Crisis
• International Imbalances – weak $
• Environmental Policy --Subsidies to Bio Fuels
• Spreads to Commodities in General
• Subsidies to Energy Consumption in Developing Countries
• E.g. In China gasoline and diesel prices have been kept steady since
11/2007 and electricity prices since 6/2006
• Improved Capital Balance – Foreign Direct Investment
• Natural Resources
• Bio Fuel Sources
Impact of New Terms of Trade
• Exchange Rate Overvaluation – loss of Industrial Competitiveness
• Restores Comparative Advantage Primary Commodity Dependence
• Differential Impact on SIDs, LLDCs, LDCs
– Increased transport costs impact tourism -- cf. 9/11
– Increased transport costs impact geographic dispersion of
production – special export zones
– Increases Volatility of Export Prices and Earnings
• Shift from Final Products (food) to Intermediate Inputs
– Negative Impact on Food Security
– Increases Poverty
• Use of Monetary and Fiscal Policy to Fight Inflation
– Reduces Global Demand
Does this look Like WWC?
• Higher Prices
– Developing Country Industrialisation
• Higher Oil Prices – Cost of Production of Manufactures and Primary Commodities
– Bio Fuels – Higher Prices of All Soft Agricultural Commodities
– Finance – Higher Futures Prices of Commodities
• Attract Higher Foreign Direct Investment Flows
• Response to US Financial Crisis --Interest rate differential
– Attracts arbitrage financial flows
• Leads to Real & Nominal Appreciation of Exchange Rate
• Response to Inflation
– Tighter Monetary Policy - Higher Interest Rates – Capital Inflows - Appreciation
– Tighter Fiscal Policy – Lowers Demand – Reduces Wages
• What Has Been Happening
in Commodity Markets?
–Financial Demand
–Environmental Demand
Shift From Backwardation to Contango
• Hedging of Commodities Produces “Natural
Backwardation” Future Price is Below Cash Price
– Producers of Commodities Seeking to Hedge by Selling
Futures Exceeds Demand for Future Delivery
• When Financial Institutions wish to Hold
Commodities to Profit from Rising Prices Demand
for Futures Exceed Supply from Producers
• A Speculative Market had Future Price Above Cash:
A CONTANGO
• Increased Financial Institution Demand Has Brought
Contango to most Commodity Markets
Size of NYMEX Non-Commercial
Positions
• Speculators held 48% of the open interest in
NYMEX crude oil futures and options July 15
• One trader held 327,000 long and 330,000
short NYMEX crude oil futures and options
positions
• Total NYMEX Open Interest is around
1,600,000 contracts
NYMEX Sweet Light crude
But, Substitution Drives Up Other Prices
• More Corn Planted Means Less Wheat,
Soybeans, Rice
• And excess demand shifts to all substitutes
• Reinforces Financial Investment which further
increases excess demand
• Brings shift in other crop allocations
– Increased Soy Acreage in Argentina and Brazil
– Shift to Grain Fed Beef and Lack of Beef
– Clearing of Land in Amazon – increases Carbon
emissions
Are Improvments In Latin America …….
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Due to Financial Commodity Speculation?
Due to Speculation in Oil?
Due to Response to Climate Change?
Due to return to Monocommodity or Primary
Commodity Dependence?
• Are Over valued Exchange Rates and Capital
Inflows Simply a Reflection of a Commodity
Bubble?
• What is the Impact on Industrialisation?