End of the ‘American Century’
The postwar era has ended. The institutional structures that the United States
sponsored are less relevant or less accepted now, and the US is unable to solve
its major domestic problems. In 1944–46, the US led the world toward new
international arrangements that promoted freer markets, freer trade and financial
stability. That system was very successful, but despite its success, it has lost
public support. Also, the US has been unable for thirty or forty years to reach
internal agreement about how to reduce oil imports, provide effective health care
and produce quality education. In this paper, the author argues that countries
which cannot solve main domestic problems are unlikely to lead others.
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Bringing Balance to the IMF Reform DebateThis paper summarises the outcome of formal discussions among scholars,
former policymakers and senior officials of International Monetary Fund (IMF)
member countries that took place in 2007–08 regarding the future of the
IMF and how its responsiveness to member countries might be improved. It
relates member countries’ concerns about ownership and conditionality in IMF
programmes; emphasizes the usefulness of IMF surveillance and considers its
limitations; highlights opportunities for the IMF to better interact with regional
financial organisations; and investigates how the IMF might address problems of
representation and accountability. The concluding section summarises the policy
recommendations arising from the consultations.
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The Effectiveness of IMF SurveillanceIMF surveillance of the international monetary and financial system is a global
public good. Its effectiveness depends critically on the dynamics that underpin
the mechanisms governing the IMF and global finance. These dynamics, in turn,
reflect the interests and power of influence of countries (especially the largest),
their cooperative attitude and international relations. Assessing the effectiveness
of IMF surveillance, therefore, demands a clear understanding of the IMF and global financial governance: improving the former requires strengthening the
latter. This study considers how the governance of the IMF and global finance
can be reformed to increase the effectiveness of surveillance and to strengthen
international financial cooperation. The study proposes a configuration of
governance with a clearer allocation of responsibilities and stronger mechanisms
of power checks and balances. It identifies new roles for the IMFC and the
Executive Board, and calls for strengthening management accountability, in
particular by decoupling the dual capacity of the Managing Director as chair of
the Executive Board and Chief Executive Officer.
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Why do Governments Delay Devaluation?In the sequence of currency crises in emerging economies in the 1990s, there
was an observed reluctance to devalue the exchange rate. Although ultimately
adopted, the decision to devalue was usually delayed, often until it could no
longer be avoided. While economic explanations of delay are available, they need
to be combined with an evaluation of the political implications in order to secure
a better understanding of exchange rate inertia. This article presents a political
economy interpretation of delayed devaluation. It introduces and discusses the
determining factors drawing on available empirical evidence and briefly applies
these ideas to a range of specific examples. It also examines why there may
be even more impediments in the way of timely revaluation. Since delayed
exchange rate adjustment carries economic costs, the article also considers ways
in which delay may be minimised.
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The West and the Rest in the World Economy: 1000–2030This paper analyses the forces determining per capita income levels of nations
over the past millennium and the prospects to 2030. In the year 1000 AD,
Asian countries were in the lead. By 1820, per capita GDP in Western Europe
and the US was twice the Asian average. The divergence had grown much
bigger by 1950, but by the 1970s, several Asian countries – Japan, South Korea,
Taiwan, Hong Kong and Singapore – had achieved considerable catch up. Since
then, there has been a major surge in China and the beginning of a similar
phenomenon in India. As a result, the Asian share of world income has risen
steadily and, by 2030, will be fairly close to what it was in 1820. Maddison
concludes by comparing his analysis with the Malthusian interpretation of
Oded Galor.
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Missing Out on Industrial RevolutionExplanations of industrialisation stress England’s nineteenth-century abrupt
departure from a common Eurasian pattern. This paper examines the preceding
de-industrialisation of Southern England and limited development of Tokugawa
Japan (the shogunate that ruled Japan from 1600–1868), which throw clearer light
on the processes involved. English industrialisation was regional, resulting from
competition within a market unified by seventeenth- and eighteenth-century
improvements in communications. The old industries of Southern England
were eliminated before the application of steam to manufacturing in the North.
Underpinning regional competition were transportation investments encouraged
by the ‘elite settlement’ of 1688, and by market ideology. The paper shows
that Japan independently followed a parallel path between 1600 and 1700. Its
elite settlement was weaker than England’s but both countries were already
constructing the ‘open access orders’ characteristic of modern economies.
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How can Korea Raise its Future Potential Growth Rate?Korea has achieved tremendous economic progress over the last three and a half
decades, but in recent years growth has slowed down, and looking forward, most
forecasters expect potential growth to decline substantially. The authors’ analysis
of the key factors determining potential growth in Korea suggests that only if
Korea implements swift reforms to address the low productivity of its service
sector and prevent the decline in its labour supply, can the Korean economy
achieve a doubling of its per capita income level by 2020. Without a rapid
response this goal will be unachievable and the expected growth slowdown will
be unavoidable. Reforms intended to boost productivity in services and labour
force participation could help Korea sustain growth at double its expected real
growth rate in the business-as-usual scenario in the period 2020–40.
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Perspectives on Inclusive DevelopmentThe pursuit of inclusive development raises numerous questions and challenges
for academics, practitioners and policymakers. To demystify the subject and
move towards addressing the challenges, this paper first highlights the concept
of inclusive development. Next, the key approaches as advanced by various
proponents of inclusive development are presented. This is followed by a
discussion of the neo-liberal ideology’s demise and its likely impact on inclusive
development. The findings suggest that inclusive development should be shaped
by various factors, such as; the functional definition of inclusive development,
interventions that enhance governance and promote effective institutions, sound
economic policies, and cultural and socio-economic considerations in policymaking
and implementation. Furthermore, inclusive development requires – as
with the generic Asian approach to capitalism – that planning and interventions
are state-led, with indispensable but ancillary engagement by the private sector
and other stakeholders. In lieu of the failed neo-liberal model of governance and
the free-market system, the generic Asian approach to development is suggested
to be one realistic option to pursuing inclusive development goals in developing
countries.
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The World is not FlatThis paper reviews different proposals for the measurement of globalisation,
arguing that available composite indicators, although going beyond a purely
economic definition of international integration, fail to perform their task
adequately for a variety of conceptual and methodological reasons. The most
important problem is that globalisation indicators often do not take the spatial
aspects of international interactions adequately into account. The scope of
international integration is not necessarily global, as cross-border interactions
among human societies are often limited in their geographical reach. The
author explores a number of ways through which space and distance affect the
construction of globalisation indicators.
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Are Economic Sanctions Useful in Discouraging the Proliferation of Weapons of Mass Destruction?against countries that have been implicated in the development of weapons
of mass destruction and the use of terrorism. These sanctions have included
limitations on customary trade and/or financial relations with a target country.
Are sanctions effective in discouraging the proliferation of weapons of mass
destruction? This paper investigates the nature and effects of sanctions applied
to North Korea, Iran and Iraq. The paper concludes that although sanctions may
help slow down the development of weapons of mass destruction, it is unlikely
that they will be able to prevent determined and well financed countries from
becoming members of the nuclear club. In the absence of military conflict,
policymakers should reinforce the effectiveness of sanctions by being ready to
negotiate and offer positive incentives as a method of encouraging cooperation
with target nations.
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An Expanded Concept of Capital in Development EconomicsRead Full Paper >
Domenico Lombardi and Maria Fabiana Viola on Barry Eichengreen, Global Imbalances and the Lessons of Bretton Woods: the Cairoli Lectures Author: , December 2008
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Endangering the War on Terror by the War on DrugsThe century-old US War on Drugs based on supply control measures is endangering its War on Terror in Afghanistan. With opium poppy cultivation the most profitable crop available to Afghan farmers, the Taliban has been able to use the illegal profits from the trade to buy arms and recruit farmers by offering protection from US led aerial spraying of the crops. These supply control measures are not warranted by welfare economics, classical liberal social ethics, or the actual outcomes of the US War on Drugs. The best policy to deal with US drug addiction would be to legalize drugs, concentrating on enforced treatment of chronic drug users. A successful War on Terror requires an end to aerial spraying, the buying up of Afghan opium and its conversion into morphine, for which there is excess demand in the Third World.
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Risk-Pricing and the Sub-Prime CrisisAs the sub-prime crisis celebrates its first birthday, what lessons have been learnt? The crisis was rooted in a misperception problem among end-investors, facilitated by financial engineers selling “tail risk” products. Contrary to the precrisis rhetoric, this tail risk was often transferred to those least able to manage and price it. Once crisis struck, bank balance sheets needed to be repaired. The article argues that the authorities have a key coordinating role to play in ensuring individual bank balance sheet adjustments strengthen, rather than weaken, the financial system as a whole. A credit crunch-an uncoordinated credit contraction—is an example of what policy should be seeking to avoid. Finally, the article considers two medium-term prophylactic policy measures-countercyclical regulatory policy and central trading, clearing and settlement of systemically-important financial instruments. On both theoretical and practical grounds, there are good reasons for believing their time may have come.
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Credit Crisis 101Subprime mortgage loans were the catalyst, not the cause, of the crisis. Policy errors in both the public and private sectors stretch back nearly 40 years. Inflation, monetary policy and lax regulation all played a role in allowing individual greed and irrational risk-taking to flourish. The paper provides background to the mania that generated an alphabet-soup of derivative “obligations” with uncertain—possibly unknowable-values. The growth of derivatives and the failure of Fannie Mae and Freddie Mac are linked to the tenfold growth of median house prices in the United States, which ballooned from $11,900 in 1960 to $120,000 in 2000. Residential properties became trading inventory for speculators rather than fixed assets for homeowners. Turmoil, the author suggests, will continue as long as financial instruments are manufactured and sold through “fantastically complex” statistical models and mathematical strategies that bear little relationship to fair market values of real assets.
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The Sovereign Wealth Funds of SingaporeThis paper examines the origin, evolution and recent operations of Singapore’s two sovereign wealth funds, Temasek Holdings (TSK) and the Government Investment Corporation (GIC). Singapore is a unique case in that it has two of the oldest and largest sovereign wealth funds. Both funds reflect a long history of sound macroeconomic fundamentals and strong fiscal discipline on the part of the Singapore government. The two funds have significantly different operating features and governance structures. TSK operates like an equity investment firm with significant independence in its day-to-day operations from the government and a relatively high degree of transparency; by contrast, GIC operates like an asset management company, under tight control by the government and with a relatively low degree of transparency. The paper concludes with some lessons from Singapore’s experience with its sovereign wealth funds for the on-going debate about the role of such funds in the international financial system.
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Singapore’s Sovereign Wealth FundsThis paper examines Singapore’s two sovereign wealth funds (SWFs)-the Government Investment Corporation of Singapore (GIC) and Temasek Holdings (Temasek)—and the political risks which they are exposed to in their overseas investments. Wu argues that Temasek has hitherto exposed itself to a greater level of political risk than GIC, but is in turn rewarded with a higher rate of returns on its investments. At the same time, he finds that political risk is an inevitable challenge for SWFs in general. In fact, as worldwide opinion has turned towards demanding greater transparency and accountability from SWFs, the political risks faced by SWFs have correspondingly risen. The paper seeks to throw some light on this issue by undertaking a case study of Singapore’s two SWFs, which are consistently ranked among the global top 10 SWFs by assets, and have attracted much worldwide attention in recent times as a result of some of their politically controversial overseas investments.
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The Wealth and Poverty of Nations Author: An interview with introduction by Brian Snowdon, September 2008
François Bourguignon was Chief Economist and Senior Vice President, Development Economics, at the World Bank before taking up his current position as Director of the Paris School of Economics. He is one of the world’s leading economists in the field of economic growth and development, in particular the relationship between growth, poverty and income distribution. To set the interview in context, Brian Snowdon first provides a brief discussion of several contemporary issues in economic development, including the recently published Commission on Growth and Development Report. In the interview that follows, discussion ranges over several subjects and key issues including Latin America; the fall and rise of development economics; changing conventional wisdom on the role of government; World Bank development research; measuring development; poverty, inequality and development; the Millennium Development Goals; convergence and divergence clubs; growth and inequality; democracy and development; geography v. institutions; globalisation; migration and development; foreign aid and development; improving the business and investment climate; the ‘Stern Report’ and climate change; culture, religion and development; and the IMF, World Bank and WTO.
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International Comparisons of GDPThe recent publication by the World Bank of PPP-GDP estimates for 2005, referred to 146 countries, seems a good occasion to reopen the long-standing debate on the use of Purchasing Power Parities. While theoretical speculations on the subject have continued, no estimates were supplied for more than a decade. The author’s alternative method for GDP estimation is based on inflationadjusted long-term exchange rates, where real GDP estimates are obtained through simultaneous equations. He describes the method in the light of his experience and compares its results for 100 countries with both ICP estimates and GDPs at exchange rates.
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Unwinding Global Economic ImbalancesRead Full Paper >
Climate Change IssuesRead Full Paper >
Global Imbalances and the Lessons of Bretton WoodsRead Full Paper >
Andrew Haldane on Tim Congdon, Keynes, the Keynesians and Monetarism Author: , September 2008
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Economic ForecastsWill the US and other economies slip into recessions this year? Which economies will decouple from a global slowdown? The authors suggest that the excessive caution shown by private sector forecasters limits the usefulness of their forecasts in answering these questions. Using growth forecasts for 14 major economies from 1990 onwards, they demonstrate that revisions made to forecast are extremely smooth. An implication of this smoothness is that forecasters do not call a recession until fairly late in the year in which the recession occurs. They are also slow to absorb news about developments outside their own economies, limiting the ability of the growth forecasts to predict the extent of decoupling.
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Measuring China’s Economic PerformanceChina is the world’s fastest growing economy and is also the second largest. However, the official estimates of the Chinese National Bureau of Statistics exaggerate GDP growth and need adjustment to conform to international norms as set out in the 1993 System of National Accounts (SNA). This paper presents and discusses the necessary adjustments. The two major contributions are new volume indices for the industrial sector and for "non-material" services. Finally, in order to measure the level of Chinese GDP in internationally comparable terms, the authors use a measure of purchasing power parity (PPP) instead of the exchange rate.
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The Rise of China Investment CorporationThe sovereign wealth club acquired a new member with the official launch of the China Investment Corporation (CIC) on 29 September 2007. The arrival of CIC has further heated up the debate on sovereign wealth funds (SWFs) and their potential implications for global financial markets. This is because, in carrying out its investments, CIC can tap into China’s huge official foreign exchange reserves, which by April 2008 had surged to US$1.76 trillion. CIC’s initial working capital of US$200 billion makes it the fifth largest SWF in the world today. This article seeks to analyze the background of the emergence of CIC, its hitherto investment strategy as well as the potential economic and political implications of its offshore investments, and finally the challenges it is likely to face in the near term.
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A Wave of Protectionism?In light of the US current account deficit, pressure is high on Asian countries to revalue their currencies. The calls from some US policymakers for tariffs on imports from China have sparked fears of a world-wide surge in protectionism. This study evaluates the risk of protectionism, considering two dimensions: first, the economic effects; second, the incentives for policymakers to adopt tariffs. The study distinguishes between ‘benevolent’ policymakers-who care about long-term GDP-and ‘myopic’ policymakers, for whom short-term considerations are important. An analysis of the economic effects using the Bank of Canada’s Global Economy Model shows that the gains from import tariffs are small: import tariffs raise the price of imports and shift consumption toward domesticallyproduced goods; but they also lead to a real appreciation. This improves the terms of trade, but falling export volumes lead to a reduction in GDP in the long run. The conclusion therefore is that a ‘benevolent’ policymaker would not adopt tariffs, because of negative long-term consequences, but ‘myopic’ policymakers might be tempted to exploit short-term political gains. Given the potentially high costs of protectionist trade policies, protectionism is therefore rightly viewed as an important risk.
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Towards a Unified Theory of Economic Growth Author: An interview with introduction by Brian Snowdon, June 2008
Oded Galor, Professor of Economics at Brown University, is one of the world’s leading and most imaginative growth theorists. Throughout his career, his numerous publications have focussed on growth-related issues such as labour migration, international trade, income distribution, demography, human capital accumulation, and discrete dynamical systems. Recently his work has emphasised the need for a unified theory of growth that incorporates an evolutionary perspective and can account for the transition from ‘Malthusian stagnation’ to the modern growth regime. Brian Snowdon provides, as background, a brief survey of the new and exciting literature in this area and in the interview that follows, discusses with Professor Galor his innovative approach to explaining some of the most profound and difficult questions in human history, and the progress that is being made in building a coherent unified theory of long-run growth.
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GlobalizationThe rapid globalization of the world economy is causing fundamental changes in patterns of trade and finance. Some economists have argued that globalization has arrived and that the world is “flat”. While the geographic scope of markets has increased, the author argues that new patterns of trade and finance are a result of the discrepancies between “old” countries and “new”. As the differences are gradually wiped out, particularly if knowledge and technology spread worldwide, the traditional theoretical Heckscher and Ohlin comparative advantage basis for trade will fade. Trading relationships in the "new" economy will be based on the locational theories of the new economic geography.
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Trends and Challenges in Islamic FinanceThe paper first discusses the current trends in Islamic finance, which has become mainstream with currently more than US$800 billion of assets worldwide and a buoyant market for sukuk bonds. However, this exorbitant growth raises many challenges, particularly in the areas of banking, capital markets and regulation. Thus, the paper then considers these challenges, notably the economic and legal bottlenecks of sukuk, banking-specific issues, such as liquidity risk management and business models, as well as disharmonized financial regulation. Despite the challenges, the paper concludes that the Islamic finance industry has a bright future.
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Over-Presumption and MyopiaRead Full Paper >
Miranda Xafa on Frederic S. Mishkin, The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich Author: , June 2008
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Joe Perkins on Paul J. Zak (editor), Moral Markets: The Critical Role of Values in the Economy Author: , June 2008
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Brian Snowdon on John S. Lyons, Louis P. Cain & Samuel H. Williamson (eds), Reflections on the Cliometrics Revolution: Conversations with Economic Historians Author: , June 2008
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Challenging Times for UK Monetary PolicyGlobal economic developments have recently thrown up two major challenges for the setting of UK monetary policy. The recent global financial turmoil threatens to reinforce the slowdown in the UK and globally. But rising energy and commodity prices will push up inflation in the short term, and pose an upside risk to inflation expectations. In this article, Andrew Sentance-an external member of the Monetary Policy Committee (MPC)-argues that two issues will be critical to the future course of UK monetary policy: the course of the economic slowdown at home and abroad; and whether inflation expectations remain stable and well anchored. He argues that UK monetary policy has flexibility to adapt to changing circumstances and the data flow from the real economy will be very important in shaping future interest rate decisions. However, the MPC remains focused on its remit of keeping inflation on course to meet the 2% target for CPI inflation.
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The Future of Financial RegulationIn light of the recent turmoil in global financial markets and criticisms of the performance of the regulatory system, Sir Howard Davies-who prior to his current appointment as Director of the London School of Economics was Chairman of the Financial Services Authority, the UK’s single financial regulator-gives a preliminary assessment of where there is a case for change in the rather complex global regulatory system. He identifies seven interesting and difficult questions for central banks and regulators concerning the financial markets upheaval: Did the Fed cause the problem? Is this a broader crisis of Anglo-Saxon capital markets? Is there a fundamental problem in the subprime mortgage market in the United States? Is there a fundamental problem with the credit ratings agencies? Do we need a new approach to liquidity? Is the UK’s regulatory system fundamentally flawed? Does the crisis reveal flaws in the international regulatory system? His answer to the latter question is a qualified yes. Improvements can be made, but the recent events have provided a vivid demonstration of the importance of a robust regulatory framework surrounding capital markets.
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Alternative Strategies for Fighting UnemploymentDuring more than three decades of protracted high unemployment, European countries have developed a variety of approaches in order to tackle the problem. These strategies differ in their philosophy, scopes and successes. A number of them can be understood in terms of shying away from full-fledged liberalization in order to preserve the "European Social Model". In this paper the author discusses their relative merits. He focuses on strategies that may reasonably be expected to reduce unemployment, and ignores sheer blunders based on a false view of how the economics works (such as working time reduction), as well as measures that may improve the welfare of the unemployed but are nevertheless harmful to the labour market (such as generous unemployment benefits). The general message is that some of the strategies that “preserve the European Social Model” have merits, but are unlikely to lead to an efficient labour market where finding a job or hiring a worker are no longer considered as a painful challenge.
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Growth Strategies and DynamicsThe paper examines the challenges that developing countries face in accelerating and sustaining growth. The cases of China and India are examined to illustrate a more general phenomenon which might be called model uncertainty. As a developing economy grows, its market and regulatory institutions change and their capabilities increase. As a result, growth strategies and policies and the role of government shift. Further, as the models of economies in these transitional states are incomplete and because models used to predict policy impacts in advanced economies may not provide accurate predictions in the developing economy case, growth strategies and policies need to be responsive and to evolve as the economy matures. This has led governments in countries that have sustained high growth to be somewhat pragmatic, to treat the policy directions that emerge from the advanced economy model with circumspection, to be somewhat experimental in seeking to accelerate export diversification, to be sensitive to risks and as a result to proceed gradually in areas such as the timing and sequencing of opening up on the current and capital account. The last is an area in which existing theory provides relatively little specific guidance, but in which there are relatively high risks that decline over time as the market matures.
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Three Cheers for the 'Progressive State' Author: An interview with introduction by Brian Snowdon, March 2008
Ben Friedman is widely recognised as one of the world’s leading macroeconomists. His research and publications have focused on monetary and fiscal policy, and the key role that financial markets play in influencing how macroeconomic policies impact on aggregate economic activity. Professor Friedman’s recent book, The Moral Consequences of Economic Growth, has received considerable critical acclaim. Friedman argues that America is at an ‘economic crossroads’ and in this election year in the US, the important issues he highlights are especially poignant. Before discussing with Professor Friedman subjects addressed in this influential volume and his critical views on monetary policy strategies based on inflation targeting, Brian Snowdon examines several issues relating to economic growth and to the issue of rising inequality in the United States. Among questions explored in the interview that follows are ones relating to happiness and the ‘Easterlin paradox’; democracy and economic growth; culture, religion and economics; growth and the environment; growth, poverty, and inequality; market failure, public policy, and growth; and inflation targeting and the ‘dual mandate’.
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Two Concepts of the Output GapTwo alternative concepts of the output gap, Keynesian and monetarist, can be distinguished. When they use the phrase, economists should make clear which concept is under discussion. The first concept, developed by Okun in the early 1960s, defines the output gap relative to a full employment notion of output. It was a standard part of the Keynesian policy toolkit in the 1960s and 1970s, and was associated with the active use of fiscal policy to promote full employment. As stated by Okun, the gap takes only positive values and these values rise with unemployment. The second concept, which is derived from Friedman’s 1967 accelerationist hypothesis, defines the output gap relative to the natural-rate-of-unemployment level of output. It takes both positive and negative values, and, following the lead of the international research organizations (the OECD and the IMF), an above-trend level of output is said to define a ‘positive output gap’ and a beneath-trend level a ‘negative output gap’.
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Islamic Economics and FinanceThis article provides an introduction to key concepts and methods involved in an Islamic approach to business, investment, risk taking and insurance. The prohibition of riba (interest or usury) profoundly influences the way business transactions and investments are made and financial contracts must comply with Islamic law or shariah. Underlying all economic and financial transactions from an Islamic perspective is a moral dimension, with the authoritative source of guidance being the Holy Quran, the revealed word of Allah, and the Hadith, the sayings and practices of the Prophet Muhammad and his companions, referred to as the Sunnah. Notably there is a concern about the justice of outcomes for individuals. A valuable contribution of the Islamic finance industry-with over one trillion dollars’ worth of assets designated as shariah compliant-is the issues it raises about morality and social accountability in financial dealings and the challenge it poses to conventional assumptions.
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Poverty Reduction in Developing CountriesRead Full Paper >