Apologies for cross-posting. Please repost to any list.
It is clear that current IMF policies create the opposite of their
intentions. Elementary management theory suggests that good managers learn
to change tactics when results differ from objectives; yet, Michele
Camdessus stated recently that the IMF will continue the same policies until
things get better.
Obviously, Mr. Camdessus is a poor manager and must be replaced immediately.
But, what should policies should his successor follow? Now is a good time to
begin that discussion.
I want to begin such a discussion by focusing on capital flows. Currency
instability caused by speculative capital and capital movement
liberalization have contributed to the current debacle. Years ago, the
Bretton Woods agreement was created to stabilize currency exchange rates
while allowing for managed change and the result was many years of
prosperity and economic growth. Recently the rules have changed to allow for
free, instantaneous capital mobility. It is time to redress that change.
Unfortunately, until very recently some economists held that moving capital
from one currency to another had no effect on the underlying economy since
any capital inflow or outflow was automatically adjusted for by
international borrowings or currency devaluation. Recent events, better
theory (Dominick Salvatore, INTERNATIONAL ECONOMICS, 5th ED., Prentice-Hall,
New Jersey, 1995, Chapters 15 and 16) and some recent academic work [see THE
EFFECTIVENESS OF CAPITAL CONTROLS: THEORY AND EVIDENCE FROM CHILE, Salvador
Valdes-Prieto and Marcelo Soto, EMPIRICA, 25, No. 2 (1998) Economic Policy
Forum: Capital Flows to Eastern Europe - Lessons from Latin America and
Asia, Kluwer Academic Press, [email: [log in to unmask]]] have proven
this out-moded theory wrong and it is now time to acknowledge that capital
moving into or out of a currency increases or decreases the underlying
economy's money supply, aggregate demand and GDP.
Since this is obviously the case, what can the IMF do about it? First it
must abandon its insistence on capital liberalization as a condition for
assistance. Countries must be allowed to protect their populations from the
deletorious effect of currency speculators.
Second, it can require that the central bank of a country receiving
assistance adhere to minimal banking standards of transparency [published
credit standards and published results of lending practices], accountability
[letting speculators lose their money] and control [administrative control
of currency and foreign exchange]. The IMF can insist on approval of
appointees or policies to facilitate this process.
Third, and most important, borrowing countries must be held to strict
foreign exchange standards so that the total current account does not show
more than a five or ten percent deficit each year. In strict free floating
exchange rate regimes, this will mean a five or ten percent controlled
devaluation and little or no need for the IMF; in managed exchange rate
regimes, this will require some IMF intervention. I believe that history
shows that most governments prefer some sort of control over exchange rates
and do not choose free floating rates when given a choice. Capital accounts
can be managed with a variety of restrictions, see Prieto and Soto.
This single criterion will result in much pain and will keep the IMF's
reputation intact, but it will also result in positive long term change. The
current policies create immediate pain but do not create any long term
change. Long term improvement will result when capital is prevented from
fleeing the country - capital seeks safety and returns and will create both
sound structures and employment inside a country when it cannot leave the
country.
Finally, what should the USA do as the creator of the world's reserve
currency? Perhaps it should continue slightly differently than recent
history, that is, the FED should allow modest inflation in the USA to
encourage growth in the US and elsewhere.
Thank you for your interest. This is an important debate and I hope that
many of you will contribute your thoughts to these cursory remarks.
Mike P. McKeever
Founder: NETIGENCE, a service of
The McKEEVER INSTITUTE OF ECONOMIC POLICY ANALYSIS (MIEPA)
1511 Woolsey Street, Berkeley, CA 94703 USA
Telephone 510-486-0275
email: [log in to unmask]
URL: http://www.mkeever.com/ (Note: there is no 'c' in mkeever.
This is a free site)
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