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INT’L FINANCIAL SYSTEM JOINT CLASS SEVEN
POLITICS & ECONOMICS WITHIN THE WORLD BANK
LEGAL FRAMEWORK
Prof. David K. Linnan UI-UGM-USC-UNDIP-USU Univ. of South Carolina Joint Videoconferenced ClassSchool of Law September 26, 2002
CLASS LISTSERV ALSO FOR INDONESIAN STUDENTS
Joining class LISTSERV1) Send e-mail to
2) In message body
Subscribe laws-817 [first name] [last name]
3) Course listserv to send messages will be
CLASS LISTSERV ADMIN
Upon subscribing from e-mail address where you want to receive listserv messages, you will receive information message on using listserv
Listserv purposes are for direct student discussions and for faculty to distribute materials (like class powerpoint presentations)
Further information on listservs otherwise at
http://www.sc.edu/ars/handouts/listserv.html
Class projects adminShared project work to begin by next class (turn around required at
both ends)
• Mock negotiation during the second half of the course, carried out mostly via internet between US and Indonesian student groups representing IFI and a specified country
• Negotiation of a privatization undertaking as part of an IFI country agreement (conditionality & economic opinions in action).
• Differential information distributed to different sides initially (as privatisation in practice represents different economic views), after two weeks distribution of interim negotiating transcript
• Two rounds, namely two weeks to position memos, two weeks to finished agreement provision
• Grading will be organized locally at each participating university.
FRAMEWORK AS MIRRORPOLITICIAL & ECON. ELEMENTS MIRRORED IN LAW
STRUCTURES
IFIs largely creatures of treaties, and treaties have changed over time
To what extent do “external” elements like politics & economic views control over legal structures & vice-versa (public to private investment focus shift; conditionality & governance as examples)
Note that political & economic views have changed drastically since WW II & probably will over next 20+ years (roughly a generation in IFI terms, so IFI structures presumably change)
FRAMEWORK AS MIRRORIFIs AS TREATY CREATION
Parallel to IMF exercise of last week, World Bank Articles of Agreement: Art. I Purposes:
1. [reconstruct war-ravaged economies, post WW II genesis]
2. To promote private foreign investment by means of guarantees or participations in loans and other investments made by private investors; and when private capital is not available on reasonable terms [to do finance itself, what does it mean to say private capital is unavailable on reasonable terms]
3. To promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living and conditions of labor in their territories [almost same as IMF provision, note intergrated beginning]
FRAMEWORK AS MIRRORIFIs AS TREATY CREATION (CONT’D)
4. [provision giving priority to more important projects]
5. To conduct its operations with due regard to the effect of international investment on busines conditions in the territories of members and, in the immediate postwar years, to assist in bringing about a smooth transition from a wartime to a peacetime economy [still post-WW II framework, but what investment picture]
FRAMEWORK AS MIRRORREVISITING HISTORY
19th Century first & still greater age of internationalisation of world economy, mostly debt finance to emerging markets (eg, Latin American countries as original LDCs)
1930s economic collapse included defaults on sovereign issues & equity collapse, blue sky & legality of investment laws in US resulted to exclude from many institutional portfolios (eg, insurance)
Portfolio investment (capital markets) blew up
Post WW II newly independent African & Asian LDCs suspicious of capitalism as colonial artifact, so state instead as leader of development/dirigiste economy
Dirigiste leanings meant public sector emphasis, incluidng state owned enterprises, infant industry protection on manufacturing side, marketing boards & price controls on agricultural side
FRAMEWORK AS MIRRORREVISITING HISTORY (CONT’D)
Financial sector, being services as banking, insurance, and capital markets, hardly on radar screen before 1970s
Liberalization even in industrialized countries only then favoring consumers
Eg, in US money market funds above bank deposit interest rates to create de facto competition for money
Idea in IFI advice was deepening of financial systems via deregulation would lead to more savings being
available for investment, so more growth w/ allocative efficiencyBut what happens if deregulate, for example, banking without maintaining prudential supervision?
Competing idea of exploiting poorly compensated consumers w/ low interest rates to create cheap capital (mostly bank loans) steered to particular industries under administrative guidance
Who is better at allocating capital, the minister or the market?
FRAMEWORK AS MIRRORREVISITING HISTORY (CONT’D)
1960s already, African economies started economic downward spiral
Statist & kleptocracies in government, heart of failed state arguments currently
In Asia difference between large & small economies ex Japan led to several consciously electing open economy & export orientation (especially South Korea, Hong Kong, Singapore & Taiwan)
Original East Asian Miracle economies through mid-1990s showing extraordinary growth from same or lower income levels as in Africa immediately post-WW II
Human resources, high savings & investment rates
Success stories until 1997, now questions
FRAMEWORK AS MIRRORREVISITING HISTORY (CONT’D)
By late 1970s, push to replace state with market w/ parallel neoclassical pressures on macroeconomic side (for example, in US Paul Volcker wringing out inflation)
1970s oil price shock created serious quandary for non-oil exporting LDCs w/o export general orientation (eg, not small, open economy Asian countries, more Africa & Latin America)
Famous recycling of petrodollars whose LDC borrowers could not repay led initially to Latin American debt crisis
Creation of structural adjustment concept, idea of IFI lending to enable structural changes in economy w/o too much politically unbearable pain, including Washington consensus as policy advice plus first signs of conditionality
FRAMEWORK AS MIRRORREVISITING HISTORY (CONT’D)
1990s transition economies (former Soviet block), attempts to get to market system
1990s opening up East Asia in particular in financial sector too (APEC), but 1997 crash and issues re structural reform, including financial sector, still playing out with IFIs
FRAMEWORK AS MIRRORWORLD BANK DIVISIONS (AKA BANK GROUP) AS EXAMPLE OF
PHENOMENON
World Bank (1945 lending w/ developing country gov. guarantee, usually public or quasi public sector uses, to foster long-term economic growth & development)
International Development Association (1960 IDA, highly concessional finance for developing country public sector, currently 0% interest, 35-40 year maturity, 10 year payment holiday-- 3rd vs 4th world)
International Finance Corporation (1956 IFC, private sector equity & debt direct investments in developing country w/o host gov. guarantee, 1956)
Multilateral Investment Guaranty Agency (1988 MIGA, political insurance & ADR for private sector direct investment projects in developing countries)
FRAMEWORK AS MIRRORWORLD BANK DIVISIONS (AKA BANK GROUP) AS
EXAMPLE OF PHENOMENON (CONT’D)
Prior list fits nicely into WB purposes re article I, at least if “guarantee” extends to insurance
What is missing from the preceding list in terms of economic activity, and are there alternative ways of covering activity?
List includes lending to governments (public sector), lending to (4th vs 3rd world, aka HI, still public sector) governments at concessional rates, co-investing in foreign direct investment (FDI) projects, political insurance for FDI projects?
FRAMEWORK AS MIRRORWORLD BANK DIVISIONS (AKA BANK GROUP) AS
EXAMPLE OF PHENOMENON (CONT’D)
Chief missing element is portfolio investment, which coincidentally implicates capital account and financial sector liberalization, but note that it was prominent in international arena 19th century to 1930s
Why distinguish between portfolio and direct investment here?
What is financial sector liberalization and why is it special (monetary sovereignty views, or what)?
FRAMEWORK AS MIRRORALTERNATIVE SOURCES, PUBLIC OR PRIVATE
List includes lending to governments (public sector)What is function for “creditworthy” countries that could borrow privately from banks or in bond market
Lending to (dividing LDCs into 4th vs 3rd world, aka highly indebted countries normally, still public sector) governments at concessional rates
What is function for countries of doubtful creditworthiness, but what undertakings might be required from a country if private
sector refuses to touch (or would require high interest rates for high risk)
Co-investing in foreign direct investment (FDI) projectsMarket failure arguments that foreigners will no invest w/o initial public sector involvement, but is argument quasi-guarantee (Manulife case)
Political insurance/ADR for FDI projectsNational insurance agencies (OPIC, Hermes, etc) plus ICC and other ADR venues plus forum clauses (neutral country courts)
FRAMEWORK AS MIRRORCONDITIONALITY
Argument whether conditionality is a performance measure for loans, etc, or whether it is a precondition for access to finance at all
Is there a difference in imposing “conditions” on a sovereign borrower as opposed to an ordinary borrower in private sector
What are the limits of influence on social & defensepolicy, using the example in US of huge current account deficit, notwithstanding which US apparently contemplates going to war with Iraq for national security purposes and also is looking to expand social programs like free drugs for senior citizens (both costing hundreds of billions of U$ potentially, with deficit problems that the IMF would not tolerate in a normal country)
FRAMEWORK AS MIRRORGOVERNANCE
Idea originally created as a negative definition to explain why “development” did not occur in Africa in the 1970s despite formal preconditions being present
What is governance?
Plain English versus IFI managerial view
Is this accurate transposing private sector “managerial” view against public sector ideas
Parallel argument as w/ conditionality whether governance is a precondition or a performance measurement
So how does governance now work for IFIs & bilateral development lending
FRAMEWORK AS MIRRORDO CONDITIONALITY & GOVERNANCE LOOK
THE SAME FOR ALL LENDING PATTERNS
Back to question of market vs minister allocating capital
How does conditionality work itself out in private sector vs public sector emphasis
Idea of creating market framework (technically transaction cost economics view, Coase)
How can you have market framework w/o enforceable contracts
FRAMEWORK AS MIRROR
IS THE MARKET FRAMEWORK A POLITICAL OR AN ECONOMIC QUESTION?
Starting with privatisation exercise next week, but can Indonesians explain Article 33 from UUD 1945 for class
