Chapter 13:The Perils of Gung-ho Chapter 13:The Perils of Gung-ho International Financial CapitalismInternational Financial Capitalism

AGB 370

February 22, 2006

Presented by Lauren Jeter

Things you didn’t know about Things you didn’t know about BhagwatiBhagwati

Might be in line soon for the Nobel Peace prize in Economics

Comes from a illustrious family in India

Has seven brothers and sisters His Brother is a Chief Justice of

India’s Supreme Court Another is a world-renowned

neurosurgeon Another is a highly respected

metallurgist

BackgroundBackgroundJagdish Bhagwati, currently University Professor, Economics and Law, at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations, was born in 1934 and raised in India .  He attended Cambridge University where he graduated in 1956 with a first in Economics Tripos.  He then studied at MIT and Oxford, returning to India in 1961 as Professor of Economics at the Indian Statistical Institute, and then as Professor of International Trade at the Delhi School of Economics.  He returned to MIT in 1968, leaving it twelve years later as the Ford International Professor of Economics to join Columbia .  Until 2001, he used to be Arthur Lehman Professor of Economics and Professor of Political Science at Columbia .  Professor Bhagwati has also served as Economic Policy Advisor to Director-General, GATT (1991-1993), as Special Adviser to the UN on Globalization (2001) and as an External Adviser to the WTO. Currently, he is a member of UN Secretary General Kofi Annan's Advisory Group on the NEPAD process in Africa.

Book ReviewsBook Reviews

“This book will make history. It will also be a blockbuster, not only because of the depthof Bhagwati’s powerful argument backed by extensive research, but also because it isimmensely readable and surely the most humorous piece of economics ever written.”

Hernando de Soto, Author of The Other Path and The Mystery of Capital

Book ReviewsBook Reviews

“This is the book that everyone has been waiting for.”

George Akerlof, Nobel Laureate in Economics

“Jagdish Bhagwati has written a brilliant book… You may not always agree with him ---I don’t --- but In Defense of Globalization is bound to become a classic.”

Richard Sennett, Professor of Sociology, London School of Economics

Book ReviewsBook Reviews

Jagdish Bhagwati has written a brilliant book… You may not always agree with him ---I don’t --- but In Defense of Globalization is bound to become a classic.Richard Sennett, Professor of Sociology, London School of Economics

Book ReviewsBook Reviews“Professor Bhagwati delivers in this volume, both with erudition and wittiness, a preciserebuttal of the most common and pernicious fallacies about globalization.”

Ernesto Zedillo, Former President of Mexico

“The new century’s major economic issue is Globalization, Yes? or Globalization, No?Columbia University’s Bhagwati, long regarded as a master economist by all tradeexperts, has prepared for the intelligent public an even-handed analysis of the pros and cons. Read and ponder.”

Paul Samuelson, Nobel laureate in Economics

Where do we begin?Where do we begin?

Asian Financial Crisis 1997ThailandIndonesiaMalaysiaSouth Korea

What was the Problem?What was the Problem?

Huge amounts of Capital came into the country…then left in equal amounts

$85 Billion Investment in East Asia

Withdrawals of capital caused:– Currency Collapse– Stock Crashes– Per Capita Income to fall Drastically

Asian Financial CrisisAsian Financial Crisis

Compared to the Great Crash of 1929(which lead to competitive increase of tariffs)

Financial Liberalization:The Opening of Trade Gates and Barriers to promote freer trade among business commerce

Unwise/Rushed Financial Liberalization by foreign investors

What was the Outcome?What was the Outcome?

Companies wanted free flow in to the countries for a short time and did not consider the consequences post-investment

Foreign Investors blamed the local countries for the collapse

Why did they blame Asia?Why did they blame Asia?

“To continue to maintain ideological position in favor of a policy of free capital flows or to escape responsibility for playing a central role in pushing for what one might call Gung-ho International Financial Capitalism”

-Bhagwati

What was the “Wrong Explanation?What was the “Wrong Explanation?

Asian Miracle “ran out of steam”------------------------------------------------------- Highest Rate of productive investment in

history Increased Rates of accumulation of

Capital through foreign investment leads to slowed growth

The Real Reason…Diminishing Marginal Returns

Hey I learned that in 313!Hey I learned that in 313!

The "law" of diminishing marginal returns says that after a possible initial increase in marginal returns, the MPP of an input will fall as the total amount of the input rises (holding all other inputs constant)

More on DMRMore on DMR

In the case of Asian markets…

With the increase of capital in regards to labor, eventually efficiencies will decrease and give less output

Do Foreign Investors want to see Diminished Profits?

Is there a solution to Diminishing Is there a solution to Diminishing Returns?Returns?

YES!!!

Technology Increase

Did this happen in Asia?Did this happen in Asia?

No!!!

Although foreign technology was produced domestically there was little of no technology development domestically

So….back to the CrashSo….back to the Crash

In most cases, as capital accumulates, in regards to labor, future return on capital would decline slowly (DMR)

$$$ Profit goes back to foreign countries

Since there were withdrawals of investment, the Asian economies spiraled into Negative Growth Rates

How could this happen?How could this happen?

Corrupt Crony CapitalismExtreme Liberalization….extreme

crashPressure to open gatesFinancial Liberalization without

safeguards cause collaspe

But was it their fault?But was it their fault?

“A friend in the US, a crony in Asia”James Wolfensohn, President of

World BankWhy attack the victims?

“Morality is more easily thrown to those who borrow , then at those who lend.”

East Asia 1991-1996East Asia 1991-1996

Budget SurplusHigh Investment/Growth Rates-

1960’sInflation was lowTrade Deficits were small

Free Capital FlowFree Capital Flow

Panic Behavior“Flight due to Fright”

Balance of Payment CrisisBalance of Payment Crisis

Bhagwati blames the IMFFree Capital Mobility Regime

Where there other factors?Where there other factors?

Lack of Financial and Banking Regulations

Borrowed AbroadInvested Domestically with no

safeguards

The Wall Street-Treasury ComplexThe Wall Street-Treasury Complex

Capital account convertibility: the rush to abandon controls on International Capital Flows

External PressureIMF/Treasury ResponsiblePower EliteLemmings

What did Malaysia do right?What did Malaysia do right?

Malaysia was a Free Flow Country

They put on the brakes during mega-investments by imposing

“Selective Exchange Controls”

September 1998

Pr.Mn. Mahathir went against IMF advise and lost support

Selective Exchange controls are compared to import tariffs on goods

Segments Domestic Capital Market from the world, allowing lower interest rates which are more competitive then world rates

So what were the results of the So what were the results of the Asian Financial Crisis?Asian Financial Crisis?IMF dropped Position in Free Capital

MobilityMust exude caution in developing

global financial marketsDevelop stronger banking structuresTaxes on International Capital Flows

acceptable

I’d write these downI’d write these down

In most cases, as capital accumulates, in regards to labor, future return on capital would increase slowly. (T/F)

In Regards to Trade Liberalization, controls and taxes good for a country will many foreign investors (T/F)

Questions?Questions?