Weekend antiglobalism

Brad de Long confesses to being a weekend antiglobalist.

I come down on the pro-mobility side on five days of the week (the other two I wake up in a cold sweat), but that is primarily because of my judgment that late-nineteenth century large-scale international capital mobility was profoundly helpful in spite of all its drawbacks, and I cannot see a difference between then and now that would lead to a different conclusion.

I guess, by the same token, that I’m a weekend globalist. My Golden Age is not the 19th century but the Long Boom from 1945 to the early 1970s, a period of unparalleled prosperity brought to a close by the pressures of capital mobility. Like Brad, but for the opposite reason, I wake up two days a week worrying that it was all an illusion and the capital mobility was the red pill that enabled us to see the truth.

But mostly, I think that the long boom failed because of avoidable mistakes, and that our best hope is a modernised and refurbished version of the Keynesian/social democratic policies that gave us that boom. In this context, the relevant issue is not so much capital mobility as the role of capital markets in general. I see capital markets as essential but dangerous, requiring tight regulation at all times. As Keynes said “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

Brad’s views are confirmed by the experience of the 1980s, when capital markets acted as the enforcer of fiscal discipline on wayward governments, notably in Latin America, and broke down the power of entrenched interest groups. These experiences gave rise to the famous ‘Washington consensus’.

Mine are confirmed by the experience of the late 1990s, when financial market panics produced a string of apparently unnecessary financial crises in Mexico, Thailand, Indonesia, Argentina and so on. In every case, the countries affected had been financial market darlings up to the day the panic struck.

Even more, I’m struck by the failure of the world’s most sophisticated financial markets in their basic task, that of allocating funds for investment. Governments have wasted a lot of money on silly projects, but the dissipation of a trillion dollars in the space of a couple of years on valueless dotcoms and redundant optical fibre is a record that is not going to be matched any time soon. And as far as rent-seeking goes, the amount creamed off in this process by people whose contribution was entirely negative gives the Mobutus and Saddams of this world a fair run for their money.

Update “Jane Galt” replies. However, her most specific counter-point, the observation that during the 1990s, “Japan spent over 100% of its GDP on redundant construction projects and similarly ineffective stimulus” seems to me to be singularly ill-chosen as a response to my observation about speculative bubbles. However ineffectual Japan’s policies of stimulus may have been (they have, after all, kept the economy afloat and unemployment around 5 per cent) they were only adopted in the first place as a response to a speculative bubble and bust in land and stocks comparable to that of the dotcoms/telecoms in the US a decade or so later.

10 thoughts on “Weekend antiglobalism

  1. A few points:

    My guess is that the IMF et al would say that the programme of opening up capital markets over the 90s also “failed because of avoidable mistakes.” Where there are well-regulated banks, transparent monetary policy regimes, all hopefully accompanied by transparent and accountable governments in general, then you would not see dysfunction in international capital markets.

    Likewise, arguably the boom then bust of developed countries’ markets in the 90s was a combination of dodgy accounting, inadequate regulation, distorted taxation regimes, and financial market innovation (let’s not forget that many of the whizz-bang derivatives that got people into trouble were relatively new on the scene).

    Of course, this all suggests that regulation is important – and I think most people agree that regulation is important.

    Do you honestly think governments could do a better job of allocating investment funds? – especially in a situation of new technology/products, such as the internet this time around, or railway stocks in the 19th century, or car companies in the early 20th century. I don’t see how governments would have any informational advantage in cases like this. It will always be a messy darwinian shake-down.

    So in general my take on the last decade of crises is, what with new products, financial innovation, inadequate regulation, and lack of transparency, basically a lot of people didn’t know what they were doing or getting into. I do think lessons have been learnt.

    But I am a callow youth, still full of optimism …

  2. Before you say it “failed” you need to define your target – do you mean that world GDP growth was slower as a result (it wasn’t), Australian growth was slower (it wasn’t) or poor countries growth was slower (mixed bag). Before you write a para at least go to the trouble of setting out an objective.

  3. BdeL and JQ could well both be wrong.

    I feel JQ has defined the way he could be wrong pretty well, and that his underlying problem comes from the unsustainability of Keynesian approaches. Human nature being what it is, eventually governments attach current activity by printing money. Sooner or later SOMETHING would have produced a crunch, and it didn’t have to be the World Bank/IMF stuff. As they themselves saw themselves, they were (then) mere instruments.

    But there’s more than that. BdeL is wrong too, from not noticing real differences between now andd the late 19th century, and real collateral damage then. In those days the capital maobility was on the back of hard money, with money supply increases matching gold and silver suppliers. This kept harmful stuff down to a level at which it was offset by sound investment decisions flowing from sound savings decisions in the developed world. See the introductory stuff in Keynes’ “the Economic Consequences of the Peace”, for instance. Also, the colonies needed direct investment far more than offering economic rents for capture in exchange for funds flows. So the English speaking world did much less harm that way than (say) the French and Dutch did. But now, we have a sizeable slice of non-US revenue streams being acquired on the back of US fiat currency as a catalysts, though with the gains going to “savers” elsewhere. These savers are often institutional, so there is no mechanism there for private judgment to get into investment decisions.

    So the ideal would be free real capital mobility, like in the 19th century. What today’s fashion wants is free nominal capital mobility, the same trick the French revolutionary armies used to “evacuate” assets from Northern Italy and the Netherlands in exchange for occupation currency – and that’s what BdeL doesn’t realise is going on. Anyway, I’ve beaten this drum before.

  4. Giles has some good points. And anyway it’s worth a hangover if the party is good enough – if instability really is the price of rapid growth then we’d best try and put up with it (we should get a decent social safety net in place in these countries as soon as they can afford it).

    I think arguments about capital mobility for DEVELOPING countries are the most interesting – both the risks and the potential gains are largest for them because of the issues of poorly developed institutions. The requirements of international capital, and (as Brad points out) the reduction in domestic rents give rich incentives for good governance, but at the same time the losses if this governance doesn’t happen will be larger.

    But when the models give conflicting answers, look to history – and I’d note Deepak Lal’s point that while plenty of countries have failed to take off after chasing foreign capital, none of those who have succeeded in taking off managed without it (well, the USSR might be an exception but that’s obviously a model with its own problems).

  5. Ken Rogoff, sometime Harvard prof, now chief boffin at the IMF, has been saying in recent times that the type of capital is what’s important. Instead of the hot money, the trick for developing countries is to attract capital in the form of equity (eg FDI). That way the lenders have much more of a commitment to their investment projects. (See for example this article.)

    Equity, however, is not always as politically attractive – which leaves room for rhetoric along the lines of “nasty western capitalists taking profits out of our country”.

    … Actually that sounds like some of the commentary in Australia. Anyone for a ‘temptin’ bikkie?

  6. I would agree with Pr Q on financialisation.
    The action of deregulated Global Financial markets is counter-productive. They fail, causing:
    financial instability: distributing their costs – local financial stability (hedging)purchased at global financial instability (contagion)
    income inequality: concentrating their benefits to facile calculators & manipulators
    industrial inefficiency: misallocating capital over (short-term) time & (high-profile) space

    There clearly needs to be a tax/regulatory impediment to financial “casino capitalising” or some sort of purge of the finance class.

    I dispute his characterisation of the causes of the end of the Long Boom:

    the Long Boom from 1945 to the early 1970s, a period of unparalleled prosperity brought to a close by the pressures of capital mobility.

    The long Boom ground to an end around the mid-seventies. The proximate-incidental cause of stagflation was the giant hike in oil prices caused by OPEC I.

    Destabilising “pressures of [global] capital mobility” could not have caused this as they did not really take off in the West until the early eighties, after technologisation and deregulation enabled hot money flows.
    The non-Japan Asian East has largely resumed it’s Long Boom of growth, after a bit of financial market re-regulation. Japan’s problems include financial dodginess but seem related to demographic stagnation.
    The Latin South did not have really have an idylic Long Boom, per Indonesia, growth in these quarters was largely phoney now they have had their kleptocracies exposed. But financialist nostrums, per Argentina & Mexico, have made things worse.

    The ultimate-fundamental causes of lower growth and higher inflation were:

    Technological: the end of a wave of gadget innovation & application that had started after WW II, which meant that the underlying rate of productivity growth slowed down.

    Demographic: structurally mal-adapted wave of baby boomers (incl females) swamped the labour market, which were unable to absorb all the extra labour and were in any case was initially rather more interested in love than money.

    Institutional: politico-economic institutions were rigid and perverse
    – labour markets were institutionally rigid (regulation, cartelisation)
    – political markets imposed punitive taxation and granted unconditional welfare which created perverse (dis-)incentives to invest and work.

    State responses to this, reflate the money supply, stimulated inflation, but not growth.

    The answer was to reform market institutions to make the people fit the neo-classical model.

    Now extra credit flows, not into more competitive goods and labour markets, but straight into overheating capital (financial asset) markets causing asset price inflation (bubbles).

  7. I’d agree with Jack, except that the Long Boom was ended by the inflationary pressures of the Vietnam war and Johnson’s Great Society, leading to the US abandoning convertibility of the $ to gold and devaluing the $, exporting its inflation to the rest of the world, followed by a boom in commodity prices (not only, though most notably, oil).

    The slower rate of productivity gain since financial deregulation is due to the massive diversion of capital from productive investment to speculation, and the huge increase of unproductive debt, including that most unproductive use of capital of all, asset price increase of the family home, a sink for excess money.

    Since we switched to a system of virtually unlimited debt, the world has become awash with excess money. As Friedman pointed out, inflation is always and only a monetary phenomenon. If it doesn’t flow into consumer prices, it flows into asset prices, and that’s what we’ve seen since the neoliberals took over, massive inflation manifesting in asset prices. But not to worry, the correction always follows the boom. We haven’t had the corection yet, though the world economy is obviously on the verge of it. When it comes the fundamentals will be restored, and we can crawl out of the wreckage and try some new economic system.

  8. Globalization
    GLOBALIZATION….In an interesting post about globalization and capital mobility — in which I guess I come out as a 4-day-a-week globalist — John Quiggin says this:Even more, I’m struck by the failure of the world’s most sophisticated financial markets…

  9. Swallow the Red Pill
    John Quiggan confesses that he is a weekday antiglobalist, and that he fears and distrusts capital markets (as a Keynesian, it is probably because they’re filled with ‘Animal Spirits’ and other chaotic shades such as speculators and entrepreneurs). In …

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