Countries that are classified as having floating exchange rate systems (or very wide bands) show strikingly different patterns of behavior. They hold very different levels of international reserves and allow very different volatilities in the movements of the exchange rate relative to the volatility that they tolerate either on the level of reserves or in interest rates. We document these differences and present a model that explains them as the optimal response of a Central Bank that attempts to minimize a standard loss function, in an environment in which firms are credit–constrained and incomplete markets limit their ability to avoid currency mismatches. This model suggests that the difference in the way countries float could be related to their differing levels of exchange rate pass–through and differences in their ability to avoid currency mismatches. We test these implications and find a very strong and robust relationship between the pattern of floating and the ability of a country to borrow internationally in its own currency. We find weaker and less robust evidence on the importance of pass–through to account for differences across countries with respect to their exchange rate/monetary management.
What difference does it make, and for whom, whether the nonperforming debts of emerging market borrowers are restructured? This paper begins by positing a set of counterfactual conditions under which restructuring would not matter, and then shows how several ways in which the actual world of international lending departs from these conditions give both lenders and borrowers ample reason to care whether nonperforming debts are restructured. One implication of the way in which debt restructuring matters is that restructuring should not be too' easy. Further, with a greater frequency of defaults, some credit flows to emerging market countries would not be extended in the first place. An important element driving this line of argument is moral hazard, but (unlike in much of the recent literature of emerging market debt problems) what is central here is not the availability of credit from the IMF or other official lenders but the more fundamental moral hazard inherent in all uncollateralized borrower–lender relationships.
The most convincing theory of comparative economic development asserts that it is institutions – the way societies are organized – that are the fundamental cause of countries? development of underdevelopment. To attain prosperity, a country needs to accumulate physical and human capital and create and adopt technology. Whether or not it does so is determined by the incentives that stem from the institutional environment.
Economic and Monetary Union (EMU) in Europe will have important effects on international monetary affairs. This is true on both economic and policy–making dimensions. As for the first, the euro is a major new currency whose use in international transactions will affect global monetary and financial relations in and of itself. The euro might rival the dollar as the principal international currency, which would fundamentally alter the character of other countries' exchange rate policies. Or the euro might prove a feeble currency, of little import to countries not directly tied to it. In this sense, the euro's international economic role is of interest and importance.
This paper asks whether the composition of capital flows is at all related to the likelihood of crises. The dominant view is quite straightforward. FDI involves a long–term commitment to a country and is "bolted down" in such a way that it cannot leave at the first sign of trouble. Hence, it is unlikely to be associated with crises for two reasons: first, because there must be something right about the country if capital is coming in as FDI; second, because even if there were problems, FDI does not have the explosive characteristics of other flows. As expressed by the World Bank (1999) "FDI also is less subject to capital reversals and contagion that affect other flows, since the presence of large, fixed, illiquid assets makes rapid disinvestment more difficult than the withdrawal of short–term bank lending or the sale of stock holdings."
This paper studies the proposition that capital inflows tend to take the form of FDI (i.e. the share of FDI in total liabilities tends to be higher) in countries that are safer, more promising and with better institutions and policies. It finds that this view is patently wrong since it stands the historical record on its head. It then uses alternative theories to make sense of the facts. It begins by studying the determinants of the size and composition of the flows of private capital across countries. It finds that while capital flows tend to go to countries that are safer and have better institutions and financial markets, the share of FDI in total flows is not an indication of good health. On the contrary, countries that are riskier, less financially developed and have weaker institutions tend to attract less capital but more of it in the form of FDI. Hence, interpreting the rising share of FDI, as a sign of good health is unwarranted.
Global inequities in access to pharmaceutical products exist between rich and poor countries because of market and government failures as well as huge income differences. Multiple policies are required to address this global drug gap for three categories of pharmaceutical products: essential drugs, new drugs, and yet–to–be–developed drugs. Policies should combine "push" approaches of financial subsidies to support targeted drug development, "pull" approaches of finnancial incentives such as market guarantees, and "process" approaches aimed at improved institutional capacity. Constructive solutions are needed that can both protect the incentives for research and development and reduce the inequities of access.
This article seeks to contribute to our understanding of international law compliance by focusing on a particular area – the public international law of money. This is a critical terrain for examining compliance with international commitments, for money has traditionally been one of the key aspects of national sovereignty. The creation, valuation, and convertibility of a state's national currency has long been considered a national legal prerogative, as well as a potent symbol of national autonomy. Yet, after World War II, governments established for the first time in history a public international law of money, which required adherents to maintain par values for their currencies, maintain a unified exchange rate regime, keep their current accounts free from restrictions, and consult on a regular basis regarding these matters. The development of these rules allows us to ask and attempt to answer questions that go to the very purposes of international law itself: Why do sovereign governments commit themselves to international rules that will bind their future behavior? Once committed, what conditions are associated with compliance? Do governments that make specific behavioral commitments behave any differently than similarly situated countries who do not commit? The argument developed here suggests that an international legal commitment is a signaling device that governments use to convince private market actors as well as other governments of a serious intent to eschew the proscribed behavior...
The documents concerning the Cuban missile crisis, declassified by the Office of the Historian of the U.S. Department of State, reveal quite effectively a key theme in the conduct of U.S. foreign policy in 1962–63: Cuba's bizarre role within the context of U.S. government decision making. This role had somewhat contradictory dimensions.Cuba seemed to be both an afterthought and an obsession for U.S. decision makers. Its exclusion from the diplomatic negotiations over the missile crisis was an instance of negligence, though it came about in part from a deliberate decision. Such Cuban exclusion reduced the likelihood that the United States could accomplish all of its goals in the missile crisis settlement. Moreover, information included in these documents only to some degree (or not at all) calls attention to Cuba's much greater substantive importance before and during the missile crisis than U.S. officials thought at the time. This documentary record, therefore, reminds us that the outcome of the missile crisis was so positive for the United States, to a significant degree, thanks to Soviet statesmanship in managing and controlling its unhappy Cuban ally.
As with any president, it is easy to think up ways that Clinton's record might be improved. But on the whole, he does not deserve the chorus of criticism he has received. Clinton's critics fail to appreciate how changes in the international position of the United States have complicated the making of its foreign policy. The next president will fact similar pressures.
In this paper, we investigate a neglected aspect of financial systems of many countries around the world: government ownership of banks. We assemble data which establish four findings. First, government ownership of banks is large and pervasive around the world. Second, such ownership is greater in countries with low levels of per capita income, backward financial systems, interventionist and inefficient governments, and poor protection of property rights. Third, higher government ownership of banks in 1970 is associated with slower subsequent financial development. Finally, higher government ownership of banks in 1970 is associated with lower subsequent growth of per capita income, and in particular with lower growth of productivity rather than slower factor accumulation. This evidence is inconsistent with the optimistic "development" theories of government ownership of banks common in the 1960s, but supports the more recent "political" theories of the effects of government ownership of firms.
This paper examines the effect of reduced transaction costs in the international trading of assets on the ability of governments to issue debt. We examine a model in which governments care about the welfare of their citizens, and thus are more inclined to default if a large proportion of their debt is held by foreigners. Reductions in transaction costs make it easier for domestic citizens to share risk by selling debt to foreigners. This may increase tendencies for governments to default, and thus raise their cost of credit and reduce welfare. We find that even in the absence of transaction costs, home bias in placement of government debt may persist, because in the presence of default risk the return on government debt is correlated with the tax burden required to pay the debt. Asset inequality may reduce this home bias, and by increasing foreign ownership, increase incentives for default. Finally, if foreign creditors are less risk averse than domestic creditors, there may be one equilibrium in which domestic creditors hold the asset and default risk is low, and another in which foreign creditors hold the asset and default risk is high.
American Economic Review, 91, 1369–1401We exploit differences in European mortality rates to estimate the effect of institutions on economic performance. Europeans adopted very different colonization policies in different colonies, with different associated institutions. In places where Europeans faced high mortality rates, they could not settle and were more likely to set up extractive institutions. These institutions persisted to the present. Exploiting differences in European mortality rates as an instrument for current institutions, we estimate large effects of institutions on income per capital. Once the effect of institutions is controlled, for countries in Africa or those closer to the equator do not have lower incomes.
Global health problems require global solutions, and public–private partnerships are increasingly called on to provide these solutions. But although such partnerships may be able to produce the desired outcome, they also bring their own problems. A first–of–its kind workshop in April, hosted by the Harvard School of Public Health and the Global Health Council, examined the organizational and ethical challenges of partnerships, and ways to address them.
This paper focuses on two issue–areas that are characterized by relatively high levels of conflict between economic and social pressures, tourism and foreign direct investment (FDI). Tourism has been little studied by political scientists, but as an international economic activity it has tremendous importance for many states, and is often highly politicized. There is also a substantial secondary literature on tourism, mostly written by sociologists, and abundant (if at times unreliable) data. It thus is a good issue to study in this context, asking about the level at which tourism policy is made, and why. FDI has been taken more seriously by political scientists, although there has been surprisingly little written on this topic in the last decade or two. The literature on FDI from the 1970s leaves little doubt that economic and social pressures are often conflictual. We have also seen numerous attempts to shift the level of governance for FDI, and dramatic policy shifts. FDI therefore also promises to provide insights into how governments resolve tension between social and economic pressures for particular patterns of governance.
This paper investigates the design of an exchange rate policy for an economy where the domestic capital market is segmented from the global financial market, producers rely on credit to finance working capital needs, and the labor market is characterized by nominal contracts. We show that the choice of an exchange rate regime is intertwined with the financial structure — greater reliance on working capital to finance input needs, and greater segmentation of the domestic capital market increase the desirable exchange rate stability. This result follows from the observation that greater exchange rate stability is likely to reduce the real interest rate facing the producer, thereby increasing output. Hence, greater reliance on working capital increases the welfare gain attached to the lower interest rate associated with lower flexibility of the exchange rate, thereby increasing the desirability of a fixed exchange rate. Similarly, greater integration with the global capital market reduces the real interest rate benefits from exchange rate stability, increasing thereby the optimal flexibility of the exchange rate, and reducing the demand for international reserves.
In history, a new rising power usually experiences great trouble in the existing world order. With the renaissance of Europe and emergence of China, will the world avoid a repetitive painful experience of the old days and register the twenty–first Century as a peaceful century in human history? The answer will very much depend on how these countries manage their foreign affairs.
In a now–familiar scene, General H. Norman Schwarzkopf, imposing in his desert "battle dress uniform," stood before the press and pointed to the TV on his left. On the screen, a set of bombing crosshairs overlaid a roadbed. Transfixed by the cockpit imagery, the reporters chuckled nervously when someone the general called "the luckiest man in Iraq" drove through the crosshairs. With perfect comic timing, he quipped, "And now, in his rear–view mirror?" as a U.S. precision–guided munition (PGM) detonated, obliterating the road where the driver had just been. According to the Gulf War Air Power Survey, "Few scenes were as vivid on television as the picture of a guided bomb going through a ventilation shaft in an Iraqi office building." A central post–war question was whether such images in fact presaged a new style of combat based on advanced technology: Were we watching the birth of a U.S.–led revolution in military affairs (RMA), or simply slicker packaging of business as usual?
Sovereign control over money is one of the most closely guarded national prerogatives. Creating, valuating, and controlling the distribution of national legal tender is viewed as an inherent right of a nation–state in the modern period.Yet over the course of the twentieth century, international rules of good monetary conduct have become "legalized" in the sense developed in this volume. This historic shift took place after World War II in an effort to bolster the confidence that had been shattered by the interwar monetary experience. If the interwar years taught monetary policymakers anything, it was that economic prosperity required credible exchange–rate commitments, open markets, and nondiscriminatory economic arrangements. International legalization of monetary affairs was a way to inspire private actors to once again trade and invest across national borders.