House of Paine

global tranfers

this pop apalogia is most revealing

read and consider 

Managing the World Economy
 By Kenneth Rogoff
 Director of the Research Department
International Monetary Fund

---------------------------
SOMETIMES
 I spend my nights re-reading 
how Englishman John Maynard Keynes
 and American Harry Dexter White
 calmly traded ideas
 for reshaping 
the international financial system
 even as the second world war 
exploded around them



 That puts today's challenges
 into perspective 
 useful for those of us 
who sit  as I now do
 at the International Monetary Fund
 attempting to implement
 Keynes's and White's vision
 as it has evolved
 over the past 60-some years
 Taking a pause to look ahead
 here are six issues
 that seem to me 
particularly salient over the coming decades

----------------------------------------------
1. Current-account imbalances 

We at the IMF 
have not been 
a cheerleader for burgeoning 
current-account imbalances
 especially when they start
 to look unsustainable
 Are we wrong
 to worry so much about this?
 Rapid current-account reversals
 are often accompanied 
by sharp and potentially disruptive
 adjustments in exchange rates
 or worse  patterns of growth
 But at the same time
 if we begin to think ahead
 it becomes obvious
 that the real challenge
 is not to reduce 
current-account imbalances 
but to find ways
 to sustain bigger ones
 albeit properly directed. 
Isolationists in industrialised countries
 should stop and look 
at their populations'
 advancing age structure
 As the dependency ratio explodes
 later this century
 who is going
 to provide goods and services
 for all the retirees?
 There are many elements
 to a solution
 not least allowing
 expanded immigration
 from the developing world
 with its much younger population
 Regardless, one desirable element
 has to be 
for the industrialised countries
 to save abroad
 by running large current-account surpluses
 vis-à-vis the developing world
 These cumulated surpluses
 while facilitating
 much-needed investment
 in poorer countries right now
 could later be drawn down 
as the baby-boomers stop working. 
As discussed 
in our World Economic Outlook of May 2001
 the resulting pattern
 of current-account balances
 could see industrialised countries
 accumulating overseas wealth 
amounting to 50% of their GDP 
by 2030
 Then the process would reverse,
with the industrialised countries
 drawing down 
their wealth
 by running sustained current-account deficits
 of 3-4% of GDP
 Right now
 the system cannot easily tolerate
 such giant debt accumulation
 We have to make it work better
 Expanding trade
 would help support deeper
 capital-market integration
 Better procedures
 to govern international
 lending contracts are also essential. 
----------------------------------------------

2. Government debt 
Unfortunately
 though globalisation
 raises the benefits
 of re-channelling global savings
 it also sets constraints
 on governments' capacity
 to raise the revenues 
needed to manage 
exceptionally large
 debt-to-GDP ratios. 

As factors of production
 become more mobile
 they become more difficult to tax. 
Companies can ever more readily
 move production to countries
 where tax rates are lower
 As global investment options expand
 taxing wealth-holders
 has become harder too
 Even labour 
cannot be relied on
 to remain at home
 Indeed
 countries that fail
 to achieve offsetting efficiencies
 (for example
 by keeping after-tax rates
 of return
 competitive 
through above-average 
productivity growth) 
may find it
 increasingly difficult
 to borrow as the 21st century rolls on
 Otherwise
 if a government allows 
its debts to rise too far
 there will be
 an exodus of capital and labour
 that strains the ability to repay
 of the investors and workers who remain
 Exacerbating this
 will be the diminished ability
 of governments to borrow
 even at home
 without indexing debt 
to major currencies
 Indexation also pushes down
 levels of sustainable debt
 as it increases vulnerability
 to exchange-rate adjustments
that might otherwise be desirable. 
Fortunately
 in addition 
to productivity gains
 governments still have many ways
 to make their commitment
 to future debt repayments more credible
 Improving the efficiency
 of national tax systems is one
 Until we have better answers
 some governments
 may be well-advised 
to be more prudent
 at the very least
 running surpluses 
during times of economic booms
 so as to have
 some borrowing capacity left
 when it is most needed
 Certainly
 this should be 
one of the lessons from Argentina
 whose government 
ran deficits
 during the boom years of the 1990s. 

-------------------------------
3. Exchange rates 
Perhaps economic historians
 will look back on today's patchwork
 global exchange-rate 
arrangements
 as a latter-day Tower of Babel
 But what other system is there?
 With freely flowing capital
 a fixed exchange rate
 has the life expectancy 
of a Hollywood marriage
 And
 the historical experience
 of countries that try 
to sustain rigidly fixed rates indefinitely
 via capital controls is not a pretty one
 Unless monetary and fiscal policy
 are slavishly consistent
 with the requirements of fixity
 a parallel market soon flourishes
 with a floating rate
 Typically
 the parallel premium grows
 the capital controls break down
 and the official rate itself has to move. 
During post-war history
 a great many 
so-called fixed exchange-rate regimes
 have in reality been
 "back-door" floats
 via dual and parallel markets
 Then again
 many countries nominally float 
but for various reasons
 often due to some form of liability dollarisation
 intervene
 so as to keep the exchange rate
 within relatively narrow margins
("fear of floating".) 

Movements 
in those few exchange rates
 that do float 
(for instance, the dollar-yen and the euro-dollar) 
are frustratingly difficult to explain
 much less predict
 policymakers must be
 conscious of this fact
  no structural model 
can reliably explain
 major-currency exchange-rate movements
 after the fact
 much less predict them. 

 managing macroeconomic policy
 with less exchange-rate flexibility
 is one of the major political 
and economic challenges 
of the next era of globalisation. 
------------------------------------------
4. Capital controls 
Admittedly
 in its routine surveillance missions
 prior to the Asian crisis
 the IMF may have sometimes tilted 
too far towards benign neglect
 as countries prematurely 
liberalised markets
 for short-term capital movements
 before the internal regulatory structure
 was in place to handle them
 Now, the IMF's advice 
is more nuanced 
 this is a tough balance to strike
 and for many reasons. 
First
 as economies develop
 more sophisticated financial sectors
 capital controls become 
more and more difficult to enforce
 Second
 in countries with serious governance problems
 capital controls
 can be a particularly
 pernicious source of corruption
 Third
 to some degree
 capital-account and trade liberalisation 
go hand in hand
 With unfettered trade
 under-and over-invoicing
 can be used 
to circumvent capital controls
 If capital controls are too heavy
 the need to comply
 with complex regulations 
hampers trade
 It is particularly important
 for developing countries
 to remain open
 to direct foreign investment
 which is the least volatile
 form of capital flows
 and in recent years
 by far the most important quantitatively
 amounting to $170 billion in 2001
 That said
 the role of limited and temporary capital controls
 especially for economies
 at intermediate levels
 of financial development
 needs further study. 
-----------------------------------------
5. Macroeconomic stability
  some measure of price stability
 is surely an essential ingredient
 of economic growth
 Many countries rely heavily
 on exports
 of a small number 
of primary commodities
 (for example, cotton, coffee, cocoa,
 soyabeans, metals )
 All are subject
 to extraordinary price volatility
 in world markets
 Add to that
 the extreme unpredictability
 of international aid flows
 and one can see
 that macroeconomic stabilisation
 would be difficult to achieve
 under any circumstances. 
It is harder still 
in countries
 where institutional development 
is incomplete
 Policymakers face a natural temptation
 to try to shield
 the economy 
from volatility with extensive
 price and exchange controls
 Unfortunately
 completely blocking price signals
 impedes adjustment 
to what are often long-lived shocks
 not to mention the inefficiency and corruption
 that controls typically spawn
 Many developing countries 
 have made great progress
 in lowering inflation
 liberalising markets and resuming growth
  Still
 the challenges ahead are formidable
 and require further rethinking
 of standard macroeconomic prescriptions. 

----------------------------------------------

6. Moral hazard and IMF lending 
It would be hard to overstate 
the influence
 of the popular perception
 that IMF crisis loans 
are thinly disguised bail-outs
 with the tab paid 
mainly by ordinary taxpayers
 in the industrialised world
 The presumed need 
to limit such bail-outs
 and their adverse 
long-term incentive effects
 is a central element
 of virtually every important plan out there
 to improve the way the IMF does business. 
The challenge posed by the bail-out view 
is not simply lack of transparency 
  IMF loans are really
 outright transfers
 and should be called such
 however 
 the deeper and more troubling implication
 is the "IMF moral hazard" theory
 Simply put
 if lenders are confident
 they will ultimately be bailed out 
by heavily subsidised IMF loans
 they will extend too much credit
 to emerging-market debtors 
at rates that do not reflect
 the true underlying risk
 The result?
 Bigger and more frequent crises
 than if the IMF did not exist
 Giving the IMF more resources
 it is argued
exacerbates the crises it was designed to alleviate. 
Yes
 it is an elegant theory
but is it true ?
fact 
 IMF loans have almost invariably
 been repaid 
and with interest
 To maintain 
that rich-country taxpayers
 are footing a big part of the bill
 one has to believe 
that the IMF protects its books
 by continually relending principal and interest
 a giant Ponzi scheme
 that must someday unravel
it is true
 that IMF programmes 
have often ended up 
rescuing both lenders and debtors
 though not always
But
 if there is a  subsidy element involved
 perhaps 
such "bail-outs" should
 just be interpreted 
as the IMF doing its job
 making the international financial system
 work better 
 Certainly
 to keep bail-out concerns
 on the back burner
 the IMF needs
 to ensure that its programmes 
continue to be well designed 
and based on sound fundamentals
 Politics in both donor and borrower countries
 will always come into play
 but it cannot be allowed casually
 to override clear-headed judgments
 about sustainability.