Globalization and the Washington Consensus

1. Globalization and the Washington Consensus

2. Globalization-Pro and con * Economically, socially and ecologically positive: As an engine of commerce; one which brings an increased standard of living — prosperity to developing countries and further wealth to First World and Third World countries. * Economically, socially, and ecologically negative: As an engine of "corporate imperialism"; one which tramples over the human rights of developing societies, claims to bring prosperity, yet often simply amounts to plundering and profiteering. Negative effects include cultural assimilation via cultural imperialism, the export of artificial wants, and the destruction or inhibition of authentic local and global community, ecology and cultures.

3. Origins of Wash Consensus

4. The Interwar Years, 1918-1939 • International Economic Disintegration • Many countries suffered during the Great Depression. • Major economic harm was done by restrictions on international trade and payments. • These beggar-thy-neighbor policies provoked foreign retaliation and led to the disintegration of the world economy. • All countries’ situations could have been bettered through international cooperation • Bretton Woods agreement

5. The Interwar Years, 1918-1939 • With the eruption of WWI in 1914, the gold standard was suspended. • The interwar years were marked by severe economic instability. • The reparation payments led to episodes of hyperinflation in Europe. • The German Hyperinflation • Germany’s price index rose from a level of 262 in January 1919 to a level of 126,160,000,000,000 in December 1923 (a factor of 481.5 billion).

6. Foreign Exchange controls foreign exchange controls undermined the international payments system that was the basis for world trade. The "beggar thy neighbor" policies of 1930s governments—using currency devaluations to increase the competitiveness of a country's export products in order to reduce balance of payments deficits—worsened national deflationary spirals, which resulted in plummeting national incomes, shrinking demand, mass unemployment, and an overall decline in world trade.

7. Cause of wars? • Hull believed that the fundamental causes of the two world wars lay in economic discrimination and trade warfare. Specifically, he had in mind the trade and exchange controls (bilateral arrangements) of Nazi Germany and the imperial preference system practiced by Britain (by which members or former members of the British Empire were accorded special trade status). Hull argued • “ [U]nhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war…if we could get a freer flow of trade…freer in the sense of fewer discriminations and obstructions…so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace.[2]

8. Cause of wars? • New Dealer Harry Dexter White, the principal architect of the Bretton Woods system, put it: • “ the absence of a high degree of economic collaboration among the leading nations will…inevitably result in economic warfare that will be but the prelude and instigator of military warfare on an even vaster scale.[3] ” • To ensure economic stability and political peace, states agreed to cooperate to regulate the international economic system. The pillar of the U.S. vision of the postwar world was free trade. Free trade involved lowering tariffs and among other things a balance of trade favorable to the capitalist system.

9. The Bretton Woods System and International Monetary Fund • International Monetary Fund (IMF) • In July 1944, 44 representing countries met in Bretton Woods, New Hampshire to set up a system of fixed exchange rates. • All currencies had fixed exchange rates against the U.S. dollar and an unvarying dollar price of gold ($35 an ounce). • It intended to provide lending to countries with current account deficits. • It called for currency convertibility.

10. US hegemony • Majority of investment capital, manufacturing production and exports • Produced half the world's coal, two-thirds of the oil, and more than half of the electricity. • Able to produce great quantities of machinery, including ships, airplanes, vehicles, armaments, machine tools, and chemicals. • 80% of gold reserves and had not only a powerful army but also the atomic bomb.

11. Growth factors • Savings and Investment • Manufacturing capital • agriculture • Human capital-science & technology • Technological Innovation & Entrepreneurship • Buy technology • Training • Foreign business • Social organization/management • Govt policies

12. Growth Factors • Macroeconomic Policy and Trade • Find market-access to intl markets-export dependence • Govt spending->debt->inflation BUT • Strict budgets can lead to underinvestment • Natural Resources • Arable land, minerals, ports, climate BUT • Hong Kong, Singapore, Japan, Nigeria

13. Growth Factors • Foreign Capital • Bi-lateral assistance • Multi-lateral assistance • Mixed results-debt • Foreign Direct Investment • Financial Legal Regulatory Institutions • Property rights and contract enforcement • Coporate and bank regulations • Corrption internal conflice, instability

14. Figure 14.7 Net Capital Flows to Developing Countries, 1997-2005

15. Virtuous Cycles in development • High savings, investment, productivity growth, economic expansion: • Japan, • Asian Tigers: Hong Kong, Taiwan, Korea, Singapore • Key element: • HUMAN CAPITAL-education, training, etc. • EX: Korea • 1960: universal primary education, investment in higher ed • Investment in physical capital encouraged thru policie to increase household savings and private investment. • Savings 1/3 og GDP=highest • 1960-1980s exports 10%GDP->40%GDP • Egalitarian distrubution of income

16. “Wash. Consensus” reforms • * Fiscal policy discipline; • * Redirection of public spending toward education, health and infrastructure investment; • * Tax reform – Flattening the tax curve: Lowering the income tax rates on proportionally high tax brackets (typically above median income), and raising the tax rates on the proportionally low tax brackets (typically below median income); lowering the marginal tax rate; • * Interest rates that are market determined and positive (but moderate) in real terms; • * Competitive exchange rates; • * Trade liberalization – replacement of quantitative restrictions with low and uniform tariffs; • * Openness to foreign direct investment; • * Privatization of state enterprises; • * Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions; and, • * Legal security for property rights.

17. Figure 14.6 The Relation Between Average Annual Growth (1980-2000) and Real GDP Per Capita, with Area Proportional to Population

18. Figure 14.4 The Unequal Distribution of the World’s Income, 2000