Los Bancos Centrales frente a la Volatilidad Financiera Internacional: Impacto Macroeconómico y Desafíos Estructurales Session I: los países emergentes y la arquitectura financiera internacional Is it Time for a Radical Reform of the International Financial System? Jan Kregel, Levy Economics Institute of Bard College, International Financial Architecture: We Never Really Had One • Post War Architecture: The Stool with Three Pillars – IMF: Exchange Rate Stability to support Free Trade • Delayed implementation, $ gold parity breached in 1959 • DM float May 1971 • Run on Gold, US suspends convertibility Aug 1971 – IBRD: European Reconstruction • Slow Implementation, supplanted by Marshall Aid – ITO: Commercial Policy, Employment Policy, • GATT approved before Havana • Never ratified because of full employment objective and developing country exemptions • 1979 Enabling Clause: Special and Differential Treatment developing countries • Replaced by WTO in 1995 • Plus UN Development Decades – 0.7% GDP to Developing Countries: Never Achieved – Prebisch UNCTAD: Terms of Trade Losses more than offset financial flows – A new International Trading Order was needed as well as an International Financial System to support developing countries The BW “System” contained a Contradiction for Developing Countries • Objective was stable exchange rates in support of freeing multilateral trade in the post-war world • Stability required Current Account Equilibrium – Exchange Rates only be stable if CA is in balance over time – Since Current Accounts don’t self adjust requires policy intervention – Imbalances limited by Forex Reserves and IMF programme lending • But MFIs Urged Flows of Finance for Development from Developed to Developing Countries – Sustained Current Account Deficits and Debt accumulation in Developing Countries to meet scarcity of financial resources – But produced Persistent BoP imbalance and Exchange Rate Tensions – Which threatened growth and led to an IMF programme – With Conditionality designed to reduce growth and produce Current Account Surplus – Development strategy continually interrupted by crisis: STOP-GO The Post-Smithsonian “Non” System was Even More Incoherent for Emerging Market Economies • • • • • • • • • 1971 $ devaluation produced 1973 Oil Crisis produced 1975 Petrodollar Recyling produced 1982 Latin American debt crisis Reserves and Fixed Rates were no longer a constraint on External Imbalances Foreign Borrowing made an IMF programme redundant The STOP was a financial crisis rather than IMF conditionality GREENSPAN: New Millennium Capital Account not BoP Crisis But: IMF does not have statutory authority nor the resources to deal with Capital account crises Either System Is Unstable • What is a Minsky “Hedge” profile for a developing country? – Current account credits greater than current account debits by a sufficient “cushion of safety” • What is a “Speculative” financing profile? – Occasional shortfall of credits over debts – Use of Forex reserves or foreign borrowing or exchange rate adjustment – This is BW and creates the Foreign Constraint with Debtor Adjustment • Domar: a country could have a “hedge” profile if there was a lending country which would increase its stock of foreign lending at a rate equal or greater than the interest rate it charged on the loans • But, this is lending to the country to allow it to meet debt service: • A “hedge” profile is a PONZI scheme!! • Keynes knew this too: “It is obvious that no country can go on forever covering by new lending a chronic surplus on current account without eventually forcing a default from the other parties”. What Reform the International Financial System? • Reform proposals after the Great Recession – National Re-regulation, Macroprudential regulation – Cooperation for cross-border resolution regimes – Cross Border Regulatory and Supervisory Cooperation and Coordination • Little Discussion of International Financial Architecture Reform • Emerging Markets in the International Financial Architecture – – – – Currency Wars Exchange rate volatility (persistent overvaluation) Commodity price volatility Deindustrialisation • Proposed Remedies – – – – Better Global Coordination (Rajan) Better representation in MFI’s Governance: Adjust quotas Increased resources for MFI’s: Increase quotas Regional Emerging Market Financial Institutions • Banco Sur, BRICs Bank, Chinese Infrastructure Banks – Replace the US$ as International Reserve Currency • SDRs Radical Reform: Combine Stable Exchange Rates and Policy Space • Fixed Exchange Rates constrain domestic policy space • Flexible rates are not the answer – Volatility, deindustrialization, food security • What is the source of the problem? • Triffin: Use of a national currency to finance current account imbalances • Keynes: Asymmetric international Adjustment from international currency • The 1940’s Had a Radical Solution: – Get rid of national currencies as the means of payment for international trade and payments Keynes on the Faults of the Pre-war International System • “It is characteristic of a freely convertible international standard that it throws the main burden of adjustment on the country which is in the debtor position on the international balance of payments” • “it has been an inherent characteristic of the automatic international metallic currency … to force adjustments in the direction most disruptive to social order, and to throw the burden on the countries least able to support it, making the poor poorer.” • “a successful international system … must … require the chief initiative from the creditor countries, whilst maintaining enough discipline in the debtor countries.” Loss of Policy Space under an International Standard • “The main effect of … any international standard) is to secure uniformity of movements in different countries – everyone must conform to the average behaviour of everyone else. … The disadvantage is that it hampers each central bank in tackling its own national problems, interferes with pioneer improvements of policy the wisdom of which is ahead of average wisdom, and does nothing to secure either the short-period or long-period optimum if the average behaviour is governed by blind forces such as the total quantity of gold, or is haphazard and without any concerted or deliberate policy behind it on the part of the central banks as a body”. • “In my view the whole management of the domestic economy depends upon being free to have the appropriate rate of interest without reference to the rates prevailing elsewhere in the world. Capital control is a corollary to this.” Can we Combine Stable rates and Policy Space? • • • • • • • Premise of 1940s Reforms: Restrict Private Capital Flows Keynes – “Nothing is more certain than that the movement of capital funds must be regulated; --which in itself will involve far reaching departures from laissez-faire arrangements” “In my view the whole management of the domestic economy depends upon being free to have the appropriate rate of interest without reference to the rates prevailing elsewhere in the world. Capital control is a corollary to this.” Premise of 1940s Reforms: Managed Trade Settlement “The virtue of free trade depends on [it]… being carried on by means of what is, in effect, barter. After the last war laissez-faire in foreign exchange led to chaos.” Schacht had “the germs of a good technical idea. This idea was to … discard the use of currency having international validity and substitute for it what amounted to barter, not indeed between individuals, but between different economic units. In this way he was able to return to the essential character and the original purpose of trade whilst discarding the apparatus which had been supposed to facilitate, but was in fact strangling, it.” But this “does not mean that there would be direct barter of goods against goods, but that the one trading transaction must necessarily find its counterpart in another trading transaction sooner or later.” Keynes’s Radical Solution • National currency not used to pay for imports or receive payment for exports • No market for “foreign” currency required • No impact of exchange rate on relative prices of international goods or tradeable and non-tradeable goods • International settlement through a Clearing that deals in clearing house credits and debits denominated in a common union of account • Clearing house credits (CHC’s) in notional unit of account have fixed conversion rate to national currencies • The CHC’s can only be used to offset debits by buying imports • If not used will be extinguished • No Global Reserve Currency, Symmetric Adjustment, Policy Autonomy Lord Sempill’s Radical Solution • “it is necessary to establish a system of international trade under which the problem will be fairly and squarely placed on the shoulders of each nation, as to how it proposes to take payment for its exports: if it does not take payment in the form of imports, it will merely have made a present of its exports. The matter will then be one for settlement, not as between nations, but within each nation as between the exporting industries, which will wish to continue to export, and the new industries, which will be faced by the dilemma of seeing their best customers, the export industries, ruined, or allowing imports in to pay for those exports” • “The United States has already shown the way to the new system in the “Lend-Lease Act. She has there accepted the principle that nations can only pay for goods and services with goods and services.” • From “A Twentieth Century Economic System” published anonymously 1941 A Central “International Exchange” Clearing Bank • US exporter draws exchange bill on UK importer in sterling and discounts the bill for $ at local bank who discounts the bill with US Exchange Control. Proof of discount require to ship goods. • UK importer honours the bill paying in sterling at his local bank which sets a credit to the UK Exchange Control for disposition of the US Exchange Control. • The credit could only be activated when a US importer buys goods from the UK for payment to the UK exporter. • All transactions are in domestic currency: “International trade would … be done by a system of contra account” • “The importing country would be entitled to cancel the credit, under a Statute of Limitations, if it were not used within seven years” • The system becomes multilateral when National Exchange Controls hold accounts in and International Exchange Clearing Bank where credits may be transferred at notional exchange rates What about International Capital Flows? • Foreign investment limited by CA position, not domestic monetary creation in the reserve country. • No Currency wars, no wall of money, not interest rate arbitrage: • “International capital movements would be restricted so that they would only be allowed in the event of the country from which capital was moving having a favourable balance with the country to which they were being remitted.” • Capital flows would extinguish foreign credits in the same way as imports and thus would only be “allowed when they were feasible without upsetting the existing equilibrium“ on external account. • Keynes: “I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel--these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.” Stable Exchange Rates and Monetary Sovereignty • In either the Clearing Union or the International Exchange Bank there is no need for an International Reserve Currency • There is no market exchange rate or volatility • There is no parity to be defended – But the notional rates can be adjusted to support development policy • There is no need to restrict domestic activity to meet foreign claims • There is no need for an International lender or Bank • Adjustment occurs by creating an incentive for export surplus countries to find outlet to spend their credits • The system thus supports global demand • All payments and debts are in National currency • Independent National actions and policy space preserved Doubts and Reflections • • • • Would such a system be compatible with globally disaggregated production systems? – Yes, but most foreign investment would be financed domestically and thus under closer domestic policy control With export-led growth systems? Does it make sense to penalise China for its rapid growth by taxing or forfeiting its surplus? – It could never have existed had it not been for the large US deficit which under this system could not have been created. – It would make it easier for China to rebalance its growth strategy With Exchange rate policy? – Notional values for CHCs or units of account are negotiated across countries – this is the real area of coordination – It would be possible to have multiple values for different transactions or tariffs and subsidies? Support for Developing countries? – Surplus credits from developed countries could be given as grants in aid – Special extensions on developed country credits could be given to counter longer term development debits Thank You www.levyinstitute.org