For some time now, the large flow of capital from the developing to the industrialized world has been the principal irony of the international financial system. In 2007, this flow will total well over half a trillion dollars, a figure that will be exceeded by the build-up in reserves and sovereign wealth funds (SWFs) in developing countries. Inevitably, countries possessed of publicly held foreign assets far in excess of anything needed to respond to financial contingencies feel pressure to deploy them strategically or at least to earn higher returns than in US treasury bills or their foreign equivalents. SWFs are now growing at a faster pace than the global rate of new issuance of traditional reserve assets.
Are investment firms buying out poor countries’ debt at a discount, hoping to sue, harass or shame debtors into paying, simply rapacious and predatory? Or, like the birds of prey, do they play an important part in maintaining the health of the international financial system?
Elliott Associates—a hedge fund specializing in government debt— claims it provides a “check on the ‘moral hazard’ of debt default”.
Debt relief advocates should recognize that beneficiaries of debt relief are often corrupt or incompetent regimes that squander their nations’ assets and then cry poverty to avoid legitimate debts. This cycle must be broken for countries to achieve economic development.
Does import substitution deserve a bad reputation?
Does import substitution deserve its unsavoury reputation?
It’s hard to see why it does, in view of the numbers. They reveal that import substituting industrialization (ISI) has a more than respectable productivity record.
But there are two other objections that often surface in relation to ISI. One is that ISI has an easy early stage, and then gets bogged down in its difficult later stage. The other is that the debt crises that Latin American and other countries succumbed to in the 1980s were the consequence of ISI.
The first argument may be right, but is largely irrelevant. The second is almost surely wrong.
The “easy ISI” hypothesis has never been precisely formulated. I think I know that it can be done, but I strongly suspect that it would be a highly contingent argument rather than a general one.
The typical formulations in terms of the ease of producing the first generation of light manufactures versus the difficulty of more sophisticated products is not very satisfactory, when one bears in mind the learning that takes place along the way.
But the more telling point is that countries such as Brazil and Colombia were already pulling out of inward-looking regimes by the 1970s. Countries did not necessarily get bogged down in some easy early stage.
With regard to the debt crisis, the argument that gives ISI a causal role mixes up microeconomics with macroeconomics. ISI is about “distorting” relative prices and the sectoral allocation of production and investment.
The debt crises were about mismanaging the relationship between aggregate expenditures and incomes. You can have as distorted a structure of relative prices as you want, but still run balanced budgets and zero current account deficits. Conversely, you can be extremely outward-oriented and have free-trade regimes, but still face currency and debt crises if your macro and exchange-rate policies encourage overspending.
Latin American countries ran into the debt crisis because they had expansionary fiscal policies and/or overvalued currencies, not because they had high trade barriers or directed credit. Incidentally, the country with the most overvalued currency was Pinochet’s free trading Chile. And Chile experienced the deepest collapse in the entire region in 1982-83 when capital inflows stopped. Its liberal economy and low trade barriers did not protect it. But some myths die hard.