On 19 Dec 99, at 14:38, Brad De Long wrote:
> >Patrick:
> >First, it seems to me that the moral hazard problem is not just a
> >matter of neoclassical theory, but as Robert Rubin himself
> >conceded a couple of years ago, a material phenomenon. So,
> >without an IMF bailout fund, there would be less risk-free
> >NY/London/Tokyo/Frankfurt portfolio capital flowing into the
> >emerging markets (we call this hot money in South Africa, as it's
> >come in very fast three times -- 3-12/95 after exchange controls
> >were dramatically relaxed, 1-6/98 and 3-11/99 -- but twice left even
> >faster, over periods of a few weeks on largely spurious grounds,
> >like a rumour Mandela was ill in 2/96, causing enormous real-
> >sector dislocations due to 30% currency collapses, rapid depletion
> >of forex reserves, massive interest rate increases, stock market
> >crashes, etc). So, if the portfolio-K inflow doesn't arrive because the
> >IMF isn't there to do bailouts, then we don't get the disastrous
> >outflow episodes.
> Brad:
> Ummm... Yes we do. Back before World War II, back before there was an
> IMF, there were *lots* of disastrous outflow episodes.
Sorry, I overstated my case and you're right, the moral hazard argument is ahistorical. What I should have emphasised was that this is not, at the end of the day, about institutions, but rather about a cyclical phenomenon (global banking panics and crashes during the 1820s, 1870s, 1930s and in recent/current years, each following an overaccumulation buildup). Institutionally, JP Morgan was the IMF and Fed rolled into one for a long time, early on this century, but even he couldn't hold the line from 1929-33. So it's not the institution that can or can't prevent the disastrous outflow episodes, it's in the nature of the accumulation process. Perhaps we'd agree to agree on this.
What the IMF does so very well (and differently) today, however, is police the outflows so that nearly all of it actually flows out, instead of during the earlier periods when a good chunk of it got caught in sovereign debt defaults (1/3 of all countries refused to pay, during those periods).
> Brad:
> The absence of
> a moral hazard-creating IMF did not keep there from being a
> disastrous outflow episode in the U.S. in 1873, in the U.S. in 1893,
> in the U.S. in 1907, in Argentina in 1890, in Austria in 1931, in
> Germany in 1931, in Britain in 1931, and in a bunch of other places.
> To claim that financial markets will be "rational" and not
> overspeculate in the absence of a lender of last resort is just
> naive. Only those who have vast confidence in the rationality of
> financial markets make such confident assertions.
Right, agreed, so that's not my claim at the end of the day. What I'm more interested in is the defense of certain spaces (including nation-states) against a particularly parasitical process of surplus extraction. (This is described by David Harvey in his very recently reissued book Limits to Capital [Verso edition] as the basis, in the accumulation process, for alliances that form or erode around the question of which class forces bear the brunt of devalorisation of overaccumulated capital, and it leads us to a whole theory of geopolitics.)
The left argument now, indeed, is that if financial markets are iin an rrational (disequilibrating?) mode, and if the IMF is their cop (not just Believing in fin mkt rationality but forcing all others to Believe by liberalising capital controls), a crucial first step to disempowering the financial markets in relation to other economic processes is to remove their quasi-state backing, so as to alter the global balance of forces. That still seems reasonable, given how consistently the IMF has come down on the side of speculators and against poor/working people. (I'm really not hearing anyone vaguely left -- save technocrats like Eatwell-Taylor and the nice folk at the Financial Markets Center -- wholeheartedly arguing for a nicer cop on the beat, are you?)
> The live questions are: (a) How much in the way of additional capital
> flows are generated by confidence that there will be an international
> lender of last resort?
But again to question artificial parameters, two absolutely "live" (and death) questions in emerging markets remain, why do we need "additional capital flows" given what they entail, and what degree of whoring is sufficient to generate confidence by portfolio managers and the IMF cop?
> (b) How much smaller are the financial panics
> that do come made because of the existence of an international lender
> of last resort? The Asian financial crisis was, a year before it
> happened, seen as roughly a 1% probability event (and the Mexican
> financial crisis was, a year before it happened, seen as roughly a
> 10% probability event). So I have to think that in the most recent
> financial crisis factor (a) was small: few who invested in East Asia
> in 1996 were thinking at all about the potential benefits of an IMF
> bailout in 1998. Claims about how long the East Asian depression
> would have lasted in the absence of the IMF are inherently
> speculative, but my use of analogies from the 1870s and 1890s (which
> are, I admit, extremely weak evidence) suggests that a lot of good
> was done by keeping East Asian banking systems liquid.
Wait a minute. As I understand it, the IMF directly ordered massive East Asian banking system contraction (and hence foreclosures on plenty of going concerns), massive monetary tightening and credit crunching, and massive interest rate increases. "Keeping East Asian banking systems liquid" was really just lending $130 bn or so over 18 months, beyond existing commitments, so that NY/London/Tokyo/Frankfurt financiers wouldn't have to write down their loan books.
Was this the only option? No, the subsequent decision of Malaysia to replace IMF lines with capital controls, provides a nice real-life policy option -- one regrettably not taken by other countries due to weaker and different power relations and domestic political considerations.
> >Second, the IMF should be shut down because their lead
> >bureaucrats retain enormous power, and are opposed to capital
> >controls which would halt the capital flight you worry about.
> Say, rather, that they're scared that capital controls lead to
> large-scale corruption.
Me too. Afrikaner financiers milked the SA Reserve Bank from 1985-95 due to roundtripping the dual currency (Peter, no ethnic offense intended, it was just that Church St was a key Broederbond outpost you know). One branch manager of the SA Reserve Bank tried to steal $1 bn, but was caught. So that simply means more democracy and civil service accountability (including systematic watchdogging processes)... along with more control over capital (which together are not, in the least, inconsistent themes).
> And that they are attracted (as am I) by the
> idea that open capital markets (if they can be properly managed)
> allow for large-scale capital flows from Japan and Europe to the
> periphery that promise to cut as much as a decade off the time it
> takes to go through an industrial revolution.
And where has that happened? In particular, what rates of return are portfolio investors demanding? (Last time I talked to a group from the IFC pushing "public-private-partnership" infrastructure privatisation in Southern Africa, they were demanding -- in writing -- 30% p.a. in US dollars, which in project practice means unaffordable water for poor people, and absurdly high costs of funds for industrial/economic infrastructure.)
> Look: I like taxes on short-term capital inflows. I like the idea
> that developing countries should twist their relative price
> structures to make it extremely *expensive* to import
> foreign-luxuries and extremely *cheap* to import machine tools.
Brad, isn't that last point just neo-classical ideology? Haven't economists from Albert Hirschman to Ben Fine demonstrated the importance of internal (domestic) industrial linkages so as to avoid the maquila problem? Aren't such backward-forward linkages crucial to avoid terms-of-trade and vulnerability to currency volatility associated with export dependency? Isn't mopping up massive unemployment through labour-intensive production processes a Stiglitz-certified example of getting the prices wrong so that you correct a larger market failure? Why be so blunt about the alleged benefits of capital-intensive imports when all over the place, it is violated to the benefit of society as a whole?
> But I
> am also fearful: the rhetoric behind India's anti-developmental-state
> policies of the past fifty years is very close to the rhetoric behind
> Korea's policies of state-led development. I don't think that the
> U.S. state has the power and competence to successfully use tariffs
> and capital controls as part of an industrial policy--and the U.S.
> state is, in broad perspective, one of the most autonomous in the
> world.
Well maybe the US financial industry is just too fast, powerful, unregulated and corrupting to worry about clods like Phil Gramm. But if Mahathir can do it, others can. That guy was in Southern Africa a few weeks ago and invites Southern Africans out to KL to teach them how. (I think he's teaching the wrong crowd, and hopefully he isn't teaching them venal politics, but there you go. You think Summers might learn a thing or two? He probably lost some bets about Mahathir's economic lifespan in September 1998, eh.)
> So I think that the neoliberal bet is the best one open. And I am
> pretty damn sure that getting rid of the IMF--without putting
> anything else in its place--moves us from a world in which developing
> countries have bad options when first-world (and third-world)
> investors pull the plug on their economies to a world in which
> developing countries have no options at all...
Yes, under prevailing circumstances, I can see how you would arrive at this conclusion. That's why we must be more realistic, and get well away, very quickly, from a status quo predicated upon financial speculation, periodic bouts of system-threatening volatility, a massive South-North transfer of resources (in various ways) and the comprador politics that go with all of these, run largely through Washington, Wall Street/City and their financial agency cops.
Luckily the social forces that have precisely this post-post- Washington agenda are mobilising with more courage and vision than anyone had any right to expect!
Patrick Bond (Wits University Graduate School of Public and Development Management) home: 51 Somerset Road, Kensington 2094, Johannesburg office: 22 Gordon Building, Wits University Parktown Campus mailing address: PO Box 601 WITS 2050 phones: (h) (2711) 614-8088; (o) 488-5917; fax 484-2729 emails: (h) pbond at wn.apc.org; (o) bondp at zeus.mgmt.wits.ac.za