>
>So if Bhagwati took you out of context, what is your position on capital
>flows?
My position is massively confused and inconsistent...
I like the idea that the industrializing periphery can borrow on a large scale from the industrial core in order to cut perhaps a generation off of the time needed to go through the industrial revolution (and--perhaps more important in the very long run--the demographic transition).
I'm not very scared that the (successfully) industrializing parts of the periphery will wind up enserfed in a form of global debt peonage. Leland Stanford and Jay Gould did a wonderful job at making sure that British investors who loaned to American railroads wound up owning not high dividend-paying enterprises but instead overcapitalized shells on the point of bankruptcy. I think that this process will be repeated...
I am scared that (unsuccessfully) industrializing parts of the periphery may get into bad trouble as kleptocrats skim off the foreign loans to live on the Riviera and leave the country's taxpayers to repay. When Erich Honecker wanted to redistribute wealth to himself from the East German people, all he could get was a big house, a few imports, and a deer park. By contrast modern capital financial markets allow Suharto and family to skim off 3 billion? 10 billion? 20 billion? Enough to be worried about.
I do believe that *if* we are going to go the global-capital-mobility route, we need a kinder, gentler IMF: one that makes bigger loans at lower interest rates for longer periods requiring less conditionality when we have an episode like Europe '92, Mexico '94, or East Asia '97 when industrial core investors panic and flee. Thus I am depressed at seeing my options for change reduced to either Lauch Faircloth (who thinks that 30 million people in East Asia need to be thrown out of work because East Asian borrowers who overborrowed *must* be punished)or Ralph Nader (who thinks that 30 million people in East Asia need to be thrown out of work because New York lenders who "overlent" *must* be punished). There's a depressing symmetry here.
Here's a first-draft response to Bhagwati, by the way:
800 words...
I open my May/June _Foreign Affairs_ to discover myself pilloried in an
article by Jagdish Bhagwati between Paul Krugman and Roger C.
Altman (excellent company to be in, by the way: much better than I am
used to) as a banner-waving proponent of international capital mobility,
guilty of "assum[ing] that free capital mobility is enormously beneficial
while simultaneously failing to evaluate its crisis-prone downside."
I rub my eyes in surprise. I had not thought of myself as a
banner-waving proponent of international capital mobility. I wish that
Jagdish Bhagwati's research assistants had shown him the sentence from
my January 28 Los Angeles Times op-ed after the two he quotes (it
reads: "But the free flow of financial capital is also giving us one major
international financial crisis every two years"); or shown him my
evaluation of the causes of the crisis a paragraph but one above where he
quotes (it reads: "the sudden change in [market] opinion [toward East
Asia] reflects not a cool judgment of changing fundamentals [of East
Asian growth] but instead a sudden psychological victory of fear over
greed").
If I am the the point man waving the banner, all I can say is that the ranks
of the army of international capital mobility must be thin indeed.
But since I have apparently been elected, let me pick up the banner and
wave it around a few times, for on this issue I am what Jagdish Bhagwati
calls a "liberal"-- someone who believes that we should neither encourage
governments to choke off international flows of saving and investment
(as Bhagwati thinks), nor look with schadenfreude on and discourse on
the long-run salutory effects of the great depressions caused by
international financial panics; but instead try to have our cake and eat it
too: to reap the benefits of international capital mobility, and to minimize
the human costs of recurrent crises through appropriate and well-funded
international central banking institutions and practices.
We should try to have our cake because the benefits of international
capital mobility truly are mammoth. Between 1994 and 1996 some $200
billion of international capital flowed into Malaysia, the Philippines,
South Korea, and Thailand. In all of these countries the private return on
investment is high--higher than in the industrial core. In all of these
countries the social return on investment is higher still: if the economic
history of the past two centuries teaches us anything, it teaches us that
investments in modern machine technologies are a very good if not the
best way to upgrade the skills of the labor force and gain the
organizational expertise necessary for high total factor productivity.
This inflow of capital to these four countries was worth at least $15
billion a year and perhaps as much as $40 billion a year in higher GDP to
the receiving countries even after taking account of the interest,
dividends, and capital gains owed to investors from abroad. Just as the
flow of finance from the British core to the periphery in the late
nineteenth century played an important role in producing the Australian
and North American economies that have had the world's highest
standard of living in the twentieth century, so the flow of finance from
today's industrial core to the NIC periphery has every prospect of cutting
a generation or so off of the time needed for East Asian workers and
consumers to achieve industrial core levels of productivity and economic
welfare.
Calculations of the effect of international capital mobility on economic
welfare are considerably more complicated and uncertain than
calculations of the effect on growth, but they carry the same message:
the ability to attract international capital to boost development or cushion
the costs of macroeconomic policy mistakes can be very, very valuable.
We should try to eat our cake too because the costs of unmanaged
international financial crises are horrific. Because of the Latin Amerfican
debt crisis of 1982 the decade of the 1980s was lost to Latin American
development--leaving the typical Latin American country between five
and ten percent poorer at the beginning of the 1990s than it would have
been in a counterfactual world in which borrowing from abroad had not
financed oil imports and elite consumption in the late 1970s. The
financial crisis of 1873 saw the share of the U.S. non-agricultural labor
force employed in building railroads fall from perhaps eight to perhaps
two percent. And international financial crises turned the global recession
of 1929-1931 into the Great Depression, generating not only a decade of
relative poverty but the rise of the Nazi regime and the fifty million dead
from World War II in Europe.
If there were no reasonable prospect of successfully managing
international financial crises, then I would agree with Professor
Bhagwati: the risks of an 1873 or a 1982 or--worst of all--a 1933 would
then significantly outweigh the benefits of capital mobility. But there is
every reasonable prospect of successfully managing international
financial crises. The much-larger-than-anyone-anticipated Mexican crisis
of 1994-1995--successfully handled--saw Mexican economic growth
resume after a single year of recession. The East Asian crisis of 1997
may not even generate an absolute recession: as of this writing it looks as
though East Asian GDPs will not decline, but instead that growth will
pause in 1998 and resume in 1999.
But successful handling of international financial crises requires political
and economic skill. It requires rejecting the arguments of the Wall Street
Journal's editorial page that East Asia "needs" a deep, prolonged
recession with mass unemployment to punish entrepreneurs and banks in
NICs who overborrowed. It requires rejecting the arguments of Ralph
Nader that East Asia "needs" a deep, prolonged recession with mass
unemployment to punish New York financiers who overlent. And it
requires rejecting the arguments of Jagdish Bhagwati that international
capital mobility--good enough to finance the industrialization of the NICs
of Australia, Canada, and the U.S. a century ago--is too risky for the
NICs of today.