International Finance and the Developing Economies

Frontmatter

1. Conducting Macroeconomic Policy in Developing Countries: Piece of Cake or Mission Impossible?

Abstract

Recent economic crises in East Asia and Latin America have once again raised serious questions about the conduct of macroeconomic policy in developing countries. In the early 1980s the Latin America debt crisis was attributed by some observers to domestic economic mismanagement in the indebted countries. Similarly, Africa’s poor economic performance has often been put down to overexpansionary monetary and fiscal policy and currency overvaluation.

Graham Bird

2. External Financing and Balance of Payments Adjustment in Developing Countries: Getting a Better Policy Mix

Abstract

There are a number of alternative strategies for dealing with current account balance of payments deficits. One is to ignore them altogether on the grounds that they do not matter. Here the argument is that in the long term the imbalance between domestic investment and savings, which the deficit reflects, will be automatically corrected and that, mindful of this, private external finance will be available to cover excess expenditure in the short term; net capital inflows will finance short-term net inward transfers of real resources. If, in long-run equilibrium, there is a close positive correlation between investment and saving across countries, net external financing will be merely a cyclical deviation from this.

Graham Bird

3. Where do we Stand on Choosing Exchange Rate Regimes in Developing and Emerging Economies?

Abstract

The question of what is the best exchange rate regime for a country to adopt has been an important part of the macroeconomic policy debate for as long as here has been a debate about macroeconomic policy. It has indeed sometimes been the dominant issue. An historical review could easily go back to the nineteenth century and the debate over the gold standard and the bimetallic standard, or could go back to the interwar period and the debate over the return to gold and the abandonment of the gold standard in favour of exchange rate flexibility. Or it could focus on the exchange rate arrangements incorporated into the Bretton Woods system devised in 1944 and the final collapse of those arrangements in favour of generalised flexible exchange rates in 1973.

Graham Bird

4. Is Dollarisation a Viable Option for Latin America?

Abstract

In January 2000 Ecuador announced that it was replacing its own currency (the sucre) with the US dollar; a process known as ‘dollarisation’. Although in parts of Latin America the dollar has been used unofficially as a medium of exchange for many years and frequently has been preferred by some nationals to their domestic currency, this was the first time that a country that had previously had its own currency had opted to abandon it and to replace it officially with the US dollar. Panama, which also uses the dollar as legal tender, has never had its own currency. Argentina, with a currency board arrangement in place since 1991 (effectively tying the quantity of pesos to foreign exchange reserves), has seriously contemplated going to the next stage in the form of dollarisation but has yet to make the move.

Graham Bird

5. What Happened to the Washington Consensus?

Abstract

The phrase, ‘The Washington Consensus’ was, so the story goes, coined by John Williamson at a conference in response to the suggestion that, during the 1980s, countries in Latin America were being confronted with conflicting, and therefore confusing, advice from the International Monetary Fund and the World Bank. Williamson’s response was that there was, in fact, a strong consensus about policy across the Washington-based institutions around the need for macroeconomic stability, microeconomic liberalisation and openness. Their advice was therefore not conflicting but reinforcing.

Graham Bird

6. Miracle to Meltdown: A Pathology of the East Asian Financial Crisis

Abstract

For most of the 1980s and the first half of the 1990s the newly industrialising countries of East Asia were held up as the world’s most dramatic economic success story. They were characterised by exceptionally rapid rates of economic growth and human development, by relatively low inflation and by an absence of balance of payments difficulties. During the 1980s, when Latin America was experiencing severe debt crises, East Asia managed to avoid them. The size of capital inflows to the region in the first half of the 1990s suggested that capital markets expected the East Asian success story to continue.

Graham Bird, Alistair Milne

7. The International Monetary Fund and Developing Countries: A Review of the Evidence and Policy Options

Abstract

As its systemic role evaporated with the collapse of the Bretton Woods system, so the International Monetary Fund (IMF) became drawn into a much more specific role in the context of the balance-of-payments (BOP) problems that developing countries were encountering. At its inception, the IMF had been seen as having no specific role in developing countries, but now it became exclusively these countries that formed its clientele. While during the 1970s the IMF had continued to make a few relatively large loans to a limited number of industrial countries (Italy and the United Kingdom), beyond the mid-1970s industrial countries ceased to draw any resources from it.

Graham Bird

8. Remodeling the Multilateral Financial Institutions

Abstract

Since the International Monetary Fund (IMF) and the World Bank were first established in 1946, the world economy has changed in a number of important ways.¹ Not only have the volume, composition, and pattern of world trade changed, but capital flows have come to dominate the global balance of payments, as has been underlined by the financial crises of the 1990s (Europe in 1992–93, Mexico in 1994–95, and East Asia in 1997–98).

Graham Bird, Joseph P. Joyce

9. How Important is Sound Domestic Macroeconomics in Attracting Capital Inflows to Developing Countries?

Abstract

Developing countries tend to run current account balance of payments deficits on their trade in goods and services. Decumulating international reserves as a means of financing such deficits is not a long-term option, and may not even be a short-term option where reserves are already meagre. Inflows of capital in the form of either foreign aid or private capital offer a potential alternative. Failing to attract capital inflows implies that national income and domestic living standards will have to decline. An imbalance where domestic saving falls short of domestic investment either calls for foreign financing or for corrective domestic action which reduces consumption or investment. Given the related adjustment costs, developing countries will be anxious to make themselves attractive to foreign creditors. But how can they do this?

Graham Bird

10. Convertibility and Volatility: The Pros and Cons of Liberalising the Capital Account

Abstract

The late 1990s have seen an interesting juxtaposition between international financial crises in Latin America and East Asia involving a high degree of capital volatility, on the one hand, and the pursuit of capital account liberalisation by the International Monetary Fund on the other. A natural question is whether it makes sense to encourage capital account liberalisation at a time when capital movements seem either to have created or at least to have contributed to financial crises. The logic behind free capital convertibility in such circumstances is not immediately obvious; indeed intuition points in the opposite direction.

Graham Bird

11. Coping with, and Cashing in on, International Capital Volatility

Abstract

The volatility of international capital flows and the incidence of international financial crises have led to calls for the existing international financial architecture to be reformed. But how? One idea that has been around since the 1970s is that a tax should be levied on international currency transactions. Would such a tax reduce capital volatility and help avoid currency crises, or would it prove ineffective and infeasible? The political economy of currency taxation suggests that the idea will receive more support if it can be shown to make a significant contribution to offsetting the perceived inefficiencies of private international capital markets.

Graham Bird, Ramkishen S. Rajan

12. The Catalytic Effect of Lending by the International Financial Institutions

Abstract

For many less developed countries (LDCs) and countries in transition (CITs) external financing is frequently an effective constraint on economic growth and development. Capital inflows may be used to overcome shortages of domestic saving, thereby permitting higher levels of investment, as well as shortages of foreign exchange, thereby permitting larger quantities of imports.

Graham Bird, Dane Rowlands

13. The Political Economy of Foreign Aid: Fatigue or Regeneration?

Abstract

Since the early 1990s there has been a pronounced fall in the real amount of foreign aid provided by donors for developing countries. Over the same period, while progress has been made in some parts of the developing world, Africa, a region which has relied heavily on aid flows, has witnessed little if any reduction in poverty. Indeed, the number of people living in poverty world-wide is likely to rise in the remaining years of the twentieth century. On the face of it aid is being withdrawn when it is still desperately needed.

Graham Bird

14. Economic Assistance to Low-Income Countries: Should the Link be Resurrected?

Abstract

The Special Drawing Right (SDR) was established at the beginning of the 1970s for the purpose of acquiring greater control over the amount of international liquidity in the international monetary system. It was believed that there was an optimum quantity of international reserves. If this quantity were exceeded, there would be global inflation; if it were not reached, there would be recession and unemployment. The late 1960s had been perceived as a period during which international liquidity was inadequate. Moreover, the way in which international reserves were created under the Bretton Woods system relied heavily on the state of the U.S. balance of payments, and this was generally perceived to be unsatisfactory. SDRs seemed to offer a more centralized and controllable mechanism. It was intended that the SDR would eventually take over as the principal reserve asset in the international monetary system.

Graham Bird

15. Debt Relief for Low-Income Countries: Is it Effective and Efficient?

Abstract

In recent years religious bodies, campaigning groups, and parts of the media have made a strong moral case for debt relief, accusing creditors of imposing an excessive burden of debt on low-income countries and thereby forcing them to cut back in other areas of government expenditure such as education and health, with deleterious effects on poverty reduction and economic growth. The case for debt relief is also made from the other side of the political spectrum, most notably in the recent report of the International Financial Institution Advisory Commission sponsored by the US Congress (the ‘Meltzer’ report) which amongst other measures called for complete debt cancellation by the IMF and other IFIs.

Graham Bird, Alistair Milne

Backmatter