Development Economics
Posted: Fri Jun 22, 2018 7:33 am
Development Economics
Harry Marks has provided an insightful response to criticism of the international financial institutions (IFIs) in the thread titled Should Donald Trump be awarded the Nobel Peace Prize? Since this question of the role of the International Monetary Fund and World Bank is such an important global topic, but is not central to the Nobel deliberations, I want to respond, and am therefore quoting Harry’s comments in this new thread.
I have been highly interested in development economics for a long time, and felt Harry’s insights shed a great deal of light on what many people find a confusing topic, as seen in the range of conspiratorial claims that Harry refutes. I read Confessions of an Economic Hit Man by John Perkins, which may be the leading insider account of such conspiracy theories, but while it did expose some abuses it did not seem balanced or convincing overall.
Harry Marks has provided an insightful response to criticism of the international financial institutions (IFIs) in the thread titled Should Donald Trump be awarded the Nobel Peace Prize? Since this question of the role of the International Monetary Fund and World Bank is such an important global topic, but is not central to the Nobel deliberations, I want to respond, and am therefore quoting Harry’s comments in this new thread.
I have been highly interested in development economics for a long time, and felt Harry’s insights shed a great deal of light on what many people find a confusing topic, as seen in the range of conspiratorial claims that Harry refutes. I read Confessions of an Economic Hit Man by John Perkins, which may be the leading insider account of such conspiracy theories, but while it did expose some abuses it did not seem balanced or convincing overall.
The central role of private banks in creating debt is largely ignored and misunderstood among critics of the IFIs.Harry Marks wrote:Countries don't normally approach the IMF unless they have already gotten themselves in debt, usually to private banks.KindaSkolarly wrote: The IMF and World Bank are the financial hammers of the U.N. They claim that they're helping to alleviate poverty and so on, but that's not true.
Whether a strong or weak currency is good or bad is confusing for non-economists, and seems to be disputed among economists as well. So often with such topics people take a small part of this complex puzzle and treat it as the main point. Central banking is such an arcane gnomic pursuit that currency stability is a difficult topic to explain to the broader electorate, except in situations of collapse like Zimbabwe or Venezuela, and even there, the thickness of many people is quite extreme.Harry Marks wrote: The other main case is currency stabilization, against the hot money that Stiglitz discussed. Currency stabilization was the purpose for which the IMF was established, but its expertise in international finance, and its experience negotiating with governments, meant it was the only organization available to be the broker in the debt reductions of the 80s debt crisis.
One of my favourite papers on this broad topic of poverty reduction is by Dollar and Kraay, Growth is Good for the Poor. They show that economic growth increases the incomes of the poor in a proportional way, and that good economic policy is the best way to alleviate poverty. Unfortunately, that whole rational framework gets disparaged as “trickle down economics” with the result that the false socialist idea gets believed that stealing from the rich can reduce poverty. The World Bank like the IMF combines policy advice with concessional loans. I have often suspected that the advice is more important than the loans in terms of achieving durable results. The other World Bank Group program that I particularly admire is the Doing Business ratings managed by IFC, which has been based on the argument that improved regulation is the most cost-effective development aid.Harry Marks wrote: The World Bank does alleviate poverty. By borrowing at favorable rates from the capital markets, due to its diversified portfolio and managed lending, it makes loans available to developing countries at concessional rates (although right now the rates to a typical emerging market are low enough that the World Bank can't offer them much of a benefit). A one or two percent reduction in the borrowing cost for a port or a power station, over 30 years, can make a substantial difference in the cost of the final service.
It is not so simple to just blame commercial banks, since no one is forced to borrow money, and there is a responsibility of buyer beware in entering into unserviceable loans. Of course there is a lot of swindling by banks like in the US subprime loans, and governments can be corrupted by bribery, but writing off debt is hardly in the interest of banks. The IMF certainly copped a lot of criticism for its policy advice after the 1997 Asian Financial Crisis. Here is an example.Harry Marks wrote:There are no cases I am aware of in which IMF intervention was followed by an increase in indebtedness, and not many for the World Bank. The stories of high indebtedness are not due to lending by those two, but by the banks of the rich world.KindaSkolarly wrote: The countries they "help" are left in debt, with the IMF at the head of the line demanding repayment.