Economic Policies, Governance and the New Economics

Economic Policies, Governance and the New Economics

International Papers in Political Economy Series Series Editors: Philip Arestis and Malcolm Sawyer This is the seventh volume of the new series of International Papers in Political Economy (IPPE). The new series will consist of an annual volume with four to five papers on a single theme. The objective of the IPPE will continue to be the publication of papers dealing with important topics within the broad framework of Political Economy. The original series of International Papers in Political Economy started in 1993 and has been published in the form of three issues a year with each issue containing a single extensive paper. Information on the old series and back copies can be obtained from Professor Malcolm Sawyer at the University of Leeds (e-mail: mcs@lubs.leeds.ac.uk) Titles include: Philip Arestis and Malcolm Sawyer (editors) THE EURO CRISIS NEW ECONOMICS AS MAINSTREAM ECONOMICS 21st CENTURY KEYNESIAN ECONOMICS PATH DEPENDENCY AND MACROECONOMICS CRITICAL ESSAYS ON THE PRIVATISATION EXPERIENCE POLITICAL ECONOMY OF LATIN AMERICA Recent Economic Performance ALTERNATIVE PERSPECTIVES ON ECONOMIC POLICIES IN THE EUROPEAN UNION FINANCIAL LIBERALIZATION Beyond Orthodox Concerns International Papers in Political Economy Series Standing Order ISBN 978 1 403 99936 8 You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of diff iculty, write to us at the address below with your name and address, the title of the series and one of the ISBNs quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England

Economic Policies, Governance and the New Economics Edited by Philip Arestis Director, Department of Land Economy, University of Cambridge and Malcolm Sawyer Professor of Economics, University of Leeds, UK

Selection and editorial matter Philip Arestis and Malcolm Sawyer 2013 Individual chapters Contributors 2013 Softcover reprint of the hardcover 1st edition 2013 978-1-137-02350-6 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6 10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2013 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978-1-349-43824-2 DOI 10.1057/9781137023513 ISBN 978-1-137-02351-3 (ebook) This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. Typeset by MPS Limited, Chennai, India.

Contents List of Figures List of Tables Preface Notes on the Contributors vi ix xi xii 1 The Great Recession, Capital Market Failure and International Financial Regulation 1 Valpy Fitzgerald 2 A Progressive International Monetary System: Growth-Enhancing, Speculation-Reducing and Cross-Country Equity 40 John Weeks 3 The Potential of Financial Transactions Taxes 87 Philip Arestis and Malcolm Sawyer 4 Global Imbalances as Constraints to the Economic Activity in the World Economy 122 Jesús Ferreiro, Patricia Peinado and Felipe Serrano 5 Africa and the Perversities of International Capital Flows 165 Howard Stein 6 Capital Flows, International Imbalances and Economic Policies in Latin America 209 Luiz Fernando de Paula, Fernando Ferrari-Filho and Aline M. Gomes Index 249 v

List of Figures 1.1 US gross capital flows, 1995 2010 5 1.2 Emerging Asia gross capital flows, 1997 2010 6 1.3 Credit rationing in the global debt market 7 1.4 Consumption and investment in developed and developing economies, 2007 11 14 1.5 Debt and saving in developed and developing countries, 1980 2010 15 1.6 Global risk appetite, 1995 2004 27 2.1a GDP growth rates by decade, high-income countries, 1961 2010 44 2.1b Export growth rates by decade, high-income countries, 1961 2010 44 2.2 Net portfolio flows, 12 European Union countries, 1980 2011 45 2.3a Net portfolio capital flows, four developing regions, 1980 2011 46 2.3b Net portfolio capital flows, four developing regions, 1980 2011 47 2.4 Forex reserves in months of imports, four Latin American countries, 1981 2010 49 2.5 Forex reserves in months of imports, four Asian countries, 1981 2010 50 2.6 Forex reserves in months of imports, four African countries, 1981 2010 51 2.7 Forex reserves in months of imports, four high-income countries, 1981 2010 52 2.8 Standard deviation across the trade balances of 25 countries, 1970 2010 53 2.9 Standard deviation across the current accounts of 25 countries, 1980 2010 54 2.10 GDP growth in Germany, 1992 2011 63 vi

List of Figures vii 2.11 Percentage change in real export growth and GDP growth in Germany, 1992 2011 64 2.12 Percentage change in real export growth and nominal unit labour cost in Germany, 1992 2011 64 2.13 Percentage change in nominal unit labour cost and nominal wages in Germany, 1992 2011 65 2.14 Balance on trade in goods and services, Germany and the other euro countries, 2000 2011 (US$ billion) 66 2.15 Goods and services balances of the PIGS, 2000 2011, (US$ billion) 66 2.16 GDP growth and the public debt as percentage of GDP, Greece, 1996 2011 68 4.1 Current account balances in the period 1980 2011 (US$ billion) 135 4.2 Current account balances in the period 1980 2011 as percentage of world gross domestic product 136 4.3 Current account imbalances, 1980 2011 (US$ billion) 140 4.4 Three highest current account imbalances as a percentage of total current account imbalances (%) 140 4.5 Current account imbalances as a percentage of the GDP: developed economies 142 4.6 Current account imbalances as a percentage of the GDP: developing economies 143 4.7 Number of countries with high current account imbalances 144 4.8 Countries with high current account imbalances as percentage of the total number of countries (%) 145 4.9 Foreign direct investment flows and stocks and current account imbalances (percentage of world GDP) 147 4.10 Inward foreign direct investment flows (US$ billion) 149 4.11 Inward foreign direct investment stocks (US$ billion) 150 6.1 Financial account of Latin American countries (net balance in US$ billion) 226 6.2 Financial account of the main Latin American countries (net balance in US$ million) 227 6.3 Commodity price index (2005 = 100) 228

viii List of Figures 6.4 Foreign reserves (US$ billion) 229 6.5 Current account to GDP ratio (%) 231 6.6 Public external debt (% of GDP) 232 6.7 GDP growth rate (%) 233 6.8 Overall fiscal balance (% of GDP) 234 6.9 Real effective exchange rate (2005 = 100) 238

List of Tables 2.1 Forex reserves in months of imports and trend, 1981 2010 48 4.1 Concentration by countries of world current account imbalances 138 4.2 Number of years with surplus or deficit in the current account 146 4.3 Ranking of the countries by the size of the inward foreign direct investment flows 151 4.4 Ranking of the countries by the size of the inward foreign direct investment stocks 152 5.1 Controls on debt, equity and FDI in a selection of African countries 177 5.2 Examples of capital account liberalization 180 5.3 FDI inflows to SSA, 1980 2010 (millions of US dollars except for last two rows which are in percentages) 182 5.4 Exports by Standard International Trade Classification (SITC), 1995 2010 (thousands of US$) SSA excluding South Africa 184 5.5 Structure of economy, SSA and SEA, 1970 2008 (% value added) 184 5.6 Development indicators 185 5.7 Foreign ownership trends by share of total banking assets in selected SSA countries 186 5.8 Banking asset structures in crises and non-crises countries in SSA 186 5.9 SSA reserves, ratios and excesses (US$ billion except for ratio) 187 5.10 Net long-term private non-fdi capital flows to Sub-Saharan Africa, 1980 2009 (US$ billion) 189 5.11 External debt of Sub-Saharan Africa, 1980 2009 (millions of US nominal dollars except for ratios) 190 ix

x List of Tables 5.12 African capital flight 2008, including list of the top ten 193 6.1 Main features of the monetary and exchange rate policies of the main Latin American countries 222

Preface This is the ninth volume of the series of International Papers in Political Economy (IPPE ). The series consists of an annual volume with five to seven papers on a single theme. The objective of the IPPE is the publication of papers dealing with important topics within the broad framework of Political Economy. The original series of International Papers in Political Economy started in 1993 until the new series began in 2005 and was published in the form of three issues a year with each issue containing a single extensive paper. Information on the old series and back copies can be obtained from the editors: Philip Arestis (e-mail: pa267@cam.ac.uk) and Malcolm Sawyer (e-mail: mcs@lubs.leeds.ac.uk). The theme of this ninth volume of six papers is Economic Policies, Governance and the New Economics. The papers in this volume were initially presented at a one-day conference in Cambridge, UK, 12 April 2012. The conference was organized by the Department of Land Economy under the aegis of the Cambridge Trust for New Thinking in Economics, entitled Economic Policies, Governance and the New Economics. The Cambridge Trust for New Thinking in Economics fully supported and financed the conference. The papers were subsequently presented at the 9th International Conference, entitled Developments in Economic Theory and Policy, held at Universidad del Pais Vasco, Bilbao, Spain, 28 9 June 2012, which fully supported and funded the special session to which the papers included in this volume were presented. We are grateful to the organisers of the Bilbao conference and to the Cambridge Trust for all the help and funding provided. xi

Notes on the Contributors Philip Arestis is Director of Research, Cambridge Centre for Economics and Public Policy, Department of Land Economy, University of Cambridge, UK; Professor of Economics, Department of Applied Economics V, University of the Basque Country, Spain; Distinguished Adjunct Professor of Economics, Department of Economics, University of Utah, USA; Senior Scholar, Levy Economics Institute, New York, USA; Visiting Professor, Leeds University Business School, University of Leeds, UK; Professorial Research Associate, Department of Finance and Management Studies, School of Oriental and African Studies (SOAS), University of London, UK; and holder of the British Hispanic Foundation Queen Victoria Eugenia British Hispanic Chair of Doctoral Studies. He is Chief Academic Adviser to the UK Government Economic Service (GES) on Professional Developments in Economics. He has published as sole author or editor, as well as co-author and co-editor, a number of books, contributed in the form of invited chapters to numerous books, produced research reports for research institutes, and has published widely in academic journals. Luiz Fernando de Paula is Professor of Economics at the University of the State of Rio de Janeiro and Fellow Research in Economics at CNPq, Brazil. His research interests are in the areas of macroeconomics, Post-Keynesian theory, international financial flows, banking and monetary economics. He has published as sole author or editor, as well as co-author and co-editor, a number of books and in a lot of refereed journals such as the Brazilian Journal of Political Economy, the Cambridge Journal of Economics, ECLAC Review, Investigación Económica, and the Journal of Post Keynesian Economics. Fernando Ferrari-Filho is Professor of Economics at the Federal University of Rio Grande do Sul and Fellow Research in Economics at CNPq, Brazil. His research interests are in the areas of macroeconomics, Post-Keynesian theory, financial and currency crises and the international monetary system. He has published as sole author or editor, as well as co-author and co-editor, a number of books and papers in the following journals: the Journal of Post Keynesian Economics, the Journal of Economic Issues, Investigación Económica, and the Review of Political Economy, among others. xii

Notes on the Contributors xiii Jesus Ferreiro is Associate Professor in Economics at the University of the Basque Country, in Bilbao, Spain, and an Associate Member of the Centre for Economic and Public Policy, University of Cambridge. His research interests are in the areas of macroeconomic policy, labour markets and international financial flows. He has published a number of articles on those topics in edited books and in refereed journals such as the American Journal of Economics and Sociology, Economic and Industrial Democracy, Économie Appliquée, Ekonomia, European Planning Studies, the International Journal of Political Economy, the International Labour Review, the International Review of Applied Economics, the Journal of Economic Issues, the Journal of Post Keynesian Economics, and Transnational Corporations. V alpy Fitzgerald is Professor and Head of the Department of International Development at the University of Oxford. He is also Professorial Fellow of St Antony s College Oxford and Visiting Professor of International Finance at the Universidad Complutense, Madrid. He has in recent years conducted advisory work for international agencies on: international investment regulation (Organisation for Economic Co-operation and Development, OECD); debt sustainability (United Nations Conference on Trade and Development, UNCTAD); macroeconomic policy and children (United Nations Children s Fund, UNICEF); and financial development (United Nations-Department of Economic and Social Affairs, UN/ DESA). His areas of expertise are: financial and trade linkages between industrial and developing countries; macroeconomics of Latin America; conflict and reconstruction; history of economic thought. He was educated at Oxford (PPE, BA 1968) and Cambridge (Economics, PhD 1972). Aline Gomes is Assistant Researcher at the Faculty of Economics, University of the State of Rio de Janeiro, Brazil. She was CNPq fellowship junior researcher in 2009 2010, and worked as Assistant Researcher in the Division of Research and Economic Analysis of the Brazilian Development Bank (BNDES) in 2010 12. Her research interests are in the areas of macroeconomics, banking, financial markets and Brazilian economy. Patricia Peinado is Assistant Professor of Macroeconomics and Microeconomics at the University of the Basque Country. She was awarded both her BA and PhD in Economics by the University of the Basque Country. Her research interests are in the areas of social security, welfare state, public policy, ageing economics, gender economics, applied econometrics and finance. She has published in journals such as Feminist Economics, Panoeconomicus and the Journal of Pension Economics and Finance.

xiv Notes on the Contributors Malcolm Sawyer is Professor of Economics, Leeds University Business School, University of Leeds, UK. He was until recently Pro-Dean for Learning and Teaching for the Faculty of Business, University of Leeds, UK. He is managing editor of the International Review of Applied Economics, on the editorial board of a range of journals and editor of the series New Directions in Modern Economics. He has published widely in the areas of Post-Keynesian and Kaleckian economics, industrial economics and the UK and European economies. He has authored 11 books and edited 18, has published over 70 papers in refereed journals and has contributed chapters to over 100 books. Felipe Serrano is Professor of Economics at the University of the Basque Country, in Bilbao, Spain. He is the Head of the Department of Applied Economics V at the University of the Basque Country. His research interests are in the areas of social security, the welfare state, labour market, innovation and economic policy. He is the author of a number of articles on those topics in edited books and in refereed journals such as Economies et Sociétés, Ekonomia, European Planning Studies, the Industrial and Labor Relations Review, the International Labour Review, the International Review of Applied Economics, the Journal of Economic Issues, the Journal of Pension Economics and Finance, and the Journal of Post Keynesian Economics. Howard Stein is a professor in the Department of Afroamerican and African Studies at the University of Michigan and a Fellow of the African Studies Center Community at the University of Leiden. He has held academic posts in Africa, Asia and a number of European countries. He is the editor or author of more than a dozen books and collections and has published widely in scholarly journals. His research has focused on foreign aid, finance and development, neoliberalism, health and development, industrial policy and rural property right transformation. His most recent books include Beyond the World Bank Agenda: An Institutional Approach to Development (2008), Good Growth and Governance in Africa: Rethinking Development Strategies (2012), co-edited with Akbar Noman, Joseph Stiglitz and Kwesi Botchway; and Gendered Insecurities, Health, and Development in Africa (2012), co-edited with Amal Fadlalla. John Weeks is Professor Emeritus of the University of London (School of Oriental and African Studies). His two most recent books are Capital, Exploitation and Economic Crisis (2011) and The Irreconcilable Inconsistencies of Neoclassical Macroeconomics (2012). In an importance recent theoretical contribution he demonstrated flawed logic in the Mundell Fleming macro model (Review of Political Economy, forth coming). He is Visiting

Notes on the Contributors xv Professor at Kadir Has University in Istanbul and Senior Research Fellow at Institute for African Economic Studies, Addis Ababa University. In recent years he has written an economic recovery programme for Sierra Leone while being advisor to the Minister of Finance and Economic Development (2009), and contributed to the construction of a short-run forecasting for the Central Bank of Kenya (2010 11). Under the auspices of the United Nations Development Programme he led macroeconomic diagnostic missions to Moldova (2005), Vietnam (2004) and Zambia (two, 2006 and 2007). His commentary on current economic events can be found at http://jweeks.org.