Tuesday, April 20, 2004
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The Copenhagen Consensus and financial instability
Back in March, the Economist, along with Denmark's Environmental Assessment Institute (which is run by environmentalist bete noire Bjorn Lomborg), announced the Copenhagen Consensus project. As their March story phrased it:
You can go to the Copenhagen Consensus' main site by clicking here.
This week, the magazine reports on the report prepared by Barry Eichengreen on the costs of financial instability in the developing world. The costs are significant:
Bring on the capital controls!! Oh, wait, it's a bit more complicated:
[So you're saying we should just shrug off the $107 billion as the cost of doing business in a global economy?--ed. Absolutely not. More importantly, Eichengreen doesn't shrug it off either, and he's a real economist with some intriguing proposals up his sleeve -- though I'm not completely convinced they would work.]
You can download Eichengreen's paper here.posted by Dan on 04.20.04 at 12:45 AM
Lotta meat here.
Well, let's start: what does "opening up capital markets" mean in practice?
The financial crises of the 1990s pointed to significant issues related to volatility. Foreign investment is great, but investment without risk -- that is, without the danger that investors can lose some or all of their investment if the local currency weakens or the local economy slumps -- is an illusion. This risk is simply transferred to the people of countries who come to rely on foreign investment that may suddenly dry up.
So, what is the appropriate policy response to this? Drop all capital controls and just accept the transfer of risk? Or, as some developing countries led by Malaysia have done, retain some capital controls as an option? Or something else?
It is worth keeping in mind, incidentally, that opening up more economies like India's to investment will have some effect on the attractiveness of US government securities to foreign individuals and central banks. Now that we are back to running gigantic government deficits, ought this not to add some ambiguity to our thinking on pressing for open capital markets elsewhere? I'm not pressing this point, only raising it.posted by: Zathras on 04.20.04 at 12:45 AM [permalink]
What is needed for a 2nd,or 3rd world country to advance?
Four things, Stable government, Good economics, The Right Education, and Adaquite Medical.
The countries that have suffered the most during the economical crashes, have been the countries with the biggest government DEBT. What is the point? Don't allow the government to borrow money. They only use it to BUY votes and sent to their Swise bank accounts.
Great Brittan is a 1st world good example of no/low government DEBT. The UK was the country least affected by the economical crashes starting in 1997. Buy the end of the Majors priministership, the UK had payed off about 60 billion Pounds of DEBT, from about 64 billion pounds. For the other side of the coin look at Argentena or Indonisia. Countries with low government DEBT had their curencies devalue the least amount, which, hopefuly lead to minimal local inflation, thus minimal drop in the standard of living of the local people.
The 2 cheepest sectors or the economiy to first promote are Agriculture and Tourism. Comparitably small capital investment. This can then be followed up with the Added Value industries, canning and processing plants.
Hongkong was a great example of a Free Trade country. They also had a Minimal Government Policy.posted by: Jim Coomes on 04.20.04 at 12:45 AM [permalink]
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