Brad De Long wrote:
> Re:
> >
> >`Liberalizing the movements of capital worldwide has proved a powerful
> >weapon against democracy and the social contract, much as was anticipated
> >by the framers of the (Bretton Woods) international economic order in the
> >1940s. Unregulated capital flow can be used very effectively to undermine
> >attempts by individual governments to introduce progressive measures. For
> >instance, any country trying to stimulate its economy or increase its
> >health spending is likely to find this deviant behavior instantly punished
> >by a flight of capital.
> >
>
> Ummm...
>
> Expansionary fiscal policy with unchanged monetary policy is much more
> likely to lead to upward pressure on the currency and an *inflow* of
> capital. Consider the U.S. from 1980-1986. What puts downward pressure on
> the currency--and generates the potential for capital flight--is when
> expansionary fiscal policy is combined with a loosening of monetary policy
> as well, and with expectations that the government's budget deficit is
> going to be financed by printing money.
>
> Moreover, downward pressure on your currency is not necessarily a bad
> thing. A depreciated currency (a) reduces the power of your elites to
> purchase foreign-made luxuries, and (b) improves the competitiveness and
> expands the markets of your export industries.
>
Downward pressure on the national currency reduces purchasing power. In the internationalized economy even peasants in Peru are dependant upon imports of potatoes. Lowering the currency is another means for lowering wages,( i.e. austerity) in the interests of keeping the popular classes in line and enhancing comparative advantage (lower wages). Since the popular classes have a higher marginal propensity to consume, I think taxing the hell out of the elites would be the way to discourage luxury consumption and to raise revenue.
>
> Downward pressure on your currency can be a very bad thing under three
> circumstances: (i) you are Brazil in 1998-9, and have relied on a fixed peg
> of the real against the dollar in order to lend credibility to your efforts
> to stamp out hyperinflation, (ii) you are Mexico in 1994-5 (or Southeast
> Asia in 1997-9) and have borrowed or allowed your private sector to borrow
> very large sums denominated in dollars, or (iii) you are Mitterand in
> 1981-3 and regard a weakening of the franc against the mark as a national
> humiliation.
>
> My view is that developing countries should...
>
> ...not regard a weakening of their currencies as national humiliation.
>
> ...not allow their private sectors to borrow abroad in harder currencies
> without heavy taxes and reserve requirements.
Given the low savings rates inLDC's, how is the private sector to raise capital if not off of the international capital market?
>
>
> ...not make pegs of their exchange rates key parts of their anti-inflation
> programs.
Difficult. Pegged x-rates have been risky but very successful in controlling inflation in Brazil and Argentina. Its the only reason Cardoso has been elected and re-elected.
>
>
> ...try to encourage inflows of foreign direct investment--for inflows of
> foreign direct investment are one of the best ways to transfer technology
> from the industrial core to the periphery, and the technology gap between
> the industrial core and the periphery is now wider than it has ever been
> before.
What is the causal mechanism for technology transfer? Seems to me that with TRIPS and the other provisions included in the Uruguay Round tech. transfer is becoming increasingly difficult if not impossible. One persons tech. transfer is another person's theft, right? The record of foreign investment in skills transfer is not great either. Foreign companies like to hire their own.
>
>
> ...try to encourage inflows of home currency-denominated portfolio
> investment in the context of a floating exchange rate, for access to
> foreign capital on cheap terms when New York is feeling bountiful allows
> one to cut perhaps a generation off the process of industrialization--or so
> the nineteenth-century U.S., Australia, and Canada found back when London
> was feeling bountiful.
I'm not sure I understand this reasoning. When is portfolio investment denominated in the national currency?
>
>
> I could be wrong: successfully managing an international economy of
> large-scale capital flows requires a greater willingness to adopt floating
> exchange rates and better-funded international institutions than we have
> seen in the 1990s. Benefits from access to the worldwide pool of savings to
> accelerate industrialization need to be weighed against the costs of
> potentially large international business cycles driven by currency crises.
>
International institutions, such as? Seems what you say in this post is at odds with what you said earlier about the East Asian experience and the development state. The successful S-E Asian economies has mechanisms that differed from what you recommend. Foreign investment controls were stringent, porfolio investment was limited.
Sam Pawlett.
>
> But why bother trying to think about the--complex--truth when you can
> propound a--simple--half-truth instead?
>
> Brad DeLong
>
> -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
> "Now 'in the long run' this [way of summarizing the quantity theory of
> money] is probably true.... But this
> long run is a misleading guide to current affairs. **In the long run** we
> are all dead. Economists set themselves too easy, too useless a task if in
> tempestuous seasons they can only tell us that when the storm is long past
> the ocean is flat again."
>
> --J.M. Keynes
> -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
> J. Bradford De Long; Professor of Economics, U.C. Berkeley;
> Co-Editor, Journal of Economic Perspectives.
> Dept. of Economics, U.C. Berkeley, #3880
> Berkeley, CA 94720-3880
> (510) 643-4027; (925) 283-2709 phones
> (510) 642-6615; (925) 283-3897 faxes
> http://econ161.berkeley.edu/
> <delong at econ.berkeley.edu>