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This book examines the role of financial globalization in economic
growth and derives corresponding implications for economic policy.
Although economists have debated the importance of openness to
international trade, they generally agree that in the market for
goods, international openness is more favorable to growth than a
largely closed economy. In contrast, whether external financial
openness boosts or curbs growth has long been a controversial
issue, and it has become even more so with the outbreak of the
global financial crisis of 2007-09.The East Asian financial crisis
of the late 1990s raised doubts on this issue, and helped spur a
wave of empirical research on it. Supporters of financial
globalization-such as Stanley Fischer and Lawrence
Summers-maintained that, with the right policies, open capital
markets continued to be a powerful means for enhancing growth.
Critics, including Jagdish Bhagwati and Joseph Stiglitz, argued
that the crisis demonstrated that, unlike free trade in goods, free
mobility for capital is counterproductive for growth. In the past
decade a large empirical literature has emerged examining this
question. Overall it has tended to find that financial
globalization has "positive marginal effects on growth." The US-led
financial crisis of 2007-09 swept most of the developed and
emerging-market economies into its vortex. The global crisis has
set the stage for an intensification of the debate on financial
openness. Some analysts and policymakers will be inclined to
escalate calls for restrictions on capital flows. In the acute
phase of the crisis that began in September 2008, major stock
markets around the world plunged along with the US equity market,
and many currencies fell sharply against the dollar (excluding the
yen, which proved, like the dollar, to be a safe-haven currency).
If countries had maintained closed capital markets, some may argue,
they would not have been vulnerable to these shocks. Cline asserts
that financial globalization represents a significant factor in
economic growth of emerging-market economies. Further, he argues
that a significant portion of current-day GDP can be attributed to
the cumulative influence of financial openness, especially in
industrial countries.This study surveys the extensive literature on
this issue to arrive at a broad sense of the state of the evidence
for and against the growth benefits of financial openness. The
survey is critical in the sense that it seeks to evaluate strengths
and weaknesses of the various studies in addition to summarizing
their results. It then applies leading quantitative models from the
literature to arrive at synthesis estimates of the contribution of
financial openness to growth for major industrial and
emerging-market economies over the past four decades. Finally, the
book considers the preliminary evidence on whether the 2007-09
financial crisis constitutes grounds for a major change in the
policy verdict on financial openness. As part of that
reconsideration, the analysis reviews the causes of the global
crisis, as well as its principal events and policy interventions.
The stakes of the poor in trade policy are large: Free trade can
help 500 million people escape poverty and inject $200 billion
annually into the economies of developing countries, according to
author William R. Cline. This book provides a comprehensive
analysis of the potential for trade liberalization to spur growth
and reduce poverty in developing countries. It quantifies the
impact on global poverty of industrial-country liberalization, as
well as liberalization by the developing countries. Half or more of
the annual gains from trade would come from the removal of
industrial-country protection against developing-country exports.
By removing their trade barriers, industrial countries could convey
economic benefits to developing countries worth about twice the
amount of their annual development assistance. By helping
developing countries grow through trade, moreover, industrial
countries could lower costs to consumers for imports and realize
other economic efficiencies. The study estimates that free trade
could reduce the number of people earning less than $2 per day by
about 500 million over 15 years. This would cut the world poverty
level by 25 percent. Cline judges that the developing countries
were right to risk collapse of the Doha Round at the Cancun
ministerial meeting in September 2003 by insisting on much deeper
liberalization of agriculture than the industrial countries were
then willing to offer. The study calls for a two-track strategy:
first, deep multilateral liberalization involving phased but
complete elimination of industrial-county protection and deep
reduction of protection by at least the middle-income developing
countries, albeit on a more gradual schedule; and second, immediate
free entry for imports from "high risk" low-income countries
(heavily indebted poor countries, least developed countries, and
sub-Saharan Africa), coupled with a 10-year tax holiday for direct
investment in these countries.
The international debt crisis that erupted in 1982 threatened the
world financial system and turned the 1980s into a lost decade for
Latin America. But the crisis jolted governments throughout the
region into adopting sweeping economic reforms. By the early 1990s
inflation was lower, growth was reviving, the major debtors had
reached "Brady Plan" workout agreements reducing bank debt in
exchange for collateral, and capital was entering the region in
unprecedented magnitudes.This study tries to make sense of this
historic financial episode and to derive lessons for future policy.
Cline first returns to his 1983 projection models that figured
importantly in the debate at that time, and reruns them with the
benefit of hindsight to see what went wrong (e.g., capital flight)
and what went right (e.g., revival of industrial country growth).
He provides a critical survey of the voluminous economics
literature that emerged from the debt crisis. The study evaluates
performance of the evolving international debt strategy, which
eventually succeeded brilliantly in preserving international
financial stability and restoring debtor access to credit markets
but failed to achieve debtor country growth in the 1980s.The study
reviews policy reform and Brady plan results for major Latin
American countries; provides new analysis of today's debt problems
in Russia and Africa; and analyzes the degree of vulnerability of
Latin Americas capital market renaissance to such factors as
overvalued exchange rates and a resurgence of US interest rates. It
concludes with suggestions for institutional change and policy
guidelines to help avoid future crises.
First came the financial and debt crisis in Greece, then government
financing difficulties and rescue programs in Ireland in 2010 and
Portugal in 2011. Before long, Italy and Spain were engulfed by
financial contagion as well. Finally in 2012, the European Central
Bank pledged to do "whatever it takes" to preserve the euro area
with purchases of government bonds, a step that achieved impressive
results, according to William R. Cline in this important new
book.One of the world's leading experts on fiscal and debt issues,
Cline mobilizes meticulously researched and forceful arguments to
trace the history of the euro area debt crisis and makes
projections of future debt sustainability. He argues that euro area
leaders made the right decision to keep the euro from breaking
apart but warns against complacency about the future. Cline
contends that troubled European economies should continue their
fiscal consolidation but that further debt restructurings for most
countries are not called for. Greece is a special case and may need
some further debt relief contingent on continued progress on fiscal
and structural reform, however. In this landmark study, Cline
offers a detailed analysis of the mistakes, successes, and options
for Europe as it struggles to overcome its worst economic disaster
since World War II.
This study examines the costs and benefits of an aggressive program
of global action to limit greenhouse warming. An initial chapter
summarizes the scientific issues from the standpoint of an
economist. The analysis places heavy emphasis on efforts over a
long run of 200 to 300 years, with much greater warming and damages
than associated with the conventional benchmark (a doubling of
carbon dioxide in the atmosphere). Estimates are presented for
economic damages, ranging from agricultural losses and sea-level
rise to loss of forests, water scarcity, electricity requirements
for air conditioning, and several other major effects. A survey of
existing model estimates provides the basis for calculation of
costs of limiting emissions of greenhouse gases. After a review of
the theory of term discounting in the context of very-long-term
environmental issues, the study concludes with a cost-benefit
estimate for international action and a discussion of policy
measures to mobilize the global response.
The United States has once again entered into a period of large
external imbalances. This time the current account deficit, at
nearly 6 percent of GDP in 2004, is much larger than in the last
episode, when the deficit peaked at about 3.5 percent of GDP in
1987. Moreover, the deficit is on track to become substantially
larger over the next several years. This study examines whether the
large and growing current account deficit is a problem, and if so,
how the problem can be solved. A central policy conclusion of this
study is that it is increasingly important that the United States
reduce its external current account deficit. This deficit is no
longer benign as it arguably was in the late 1990s when it was
financing high investment instead of high consumption and large
government dissaving.
What began as a relatively localized crisis in Greece in early 2010
soon escalated to envelop Ireland and Portugal. By the second half
of 2011, the contagion had spread to the far larger economies of
Italy and Spain. In mid-September the Peterson Institute and
Bruegel hosted a conference designed to contribute to the
formulation of policies that could help resolve the euro area debt
crisis. This volume presents the conference papers; several are
updated through end-2011. European experts examine the political
context in Greece (Loukas Tsoukalis), Ireland (Alan Ahearne),
Portugal (Pedro Lourtie), Spain (Guillermo de la Dehesa), Italy
(Riccardo Perissich), Germany (Daniela Schwarzer), and France (Zaki
Laidi). Lessons from past debt restructurings are then examined by
Jeromin Zettelmeyer (economic) and Lee Buchheit (legal). The two
editors separately consider the main current policy issues: debt
sustainability by country, private sector involvement and
contagion, alternative restructuring approaches, how to assemble a
large emergency financing capacity, whether the European Central
Bank (ECB) should be a lender of last resort, whether
joint-liability "eurobonds" would be feasible and desirable, and
the implications of a possible break-up of the euro area. The
luncheon address by George Soros and a description (by Steven R.
Weisman with Silvia B. Merler) of the policy simulation game played
on the second day of the conference complete the volume. Involving
market participants and experts representing the roles of euro area
governments, the ECB, IMF, G-7, and credit rating agencies, the
game led to a proposal for leveraging the capacity of the European
Financial Stability Facility through arrangements with the ECB.
This study provides alternative estimates of the costs of
greenhouse gas abatement through 2050 that would be necessary to
limit CO2 atmospheric concentrations to approximately 450 parts per
million and limiting warming to 2 DegreesC. Specific estimates are
provided for 25 major economies (with the European Union as a
single economy). Business as usual baselines are first developed,
based on US Department of Energy projections through 2030 and on
maintenance of country-specific trends in GDP growth, energy
efficiency growth, and carbon-efficiency of energy growth
thereafter. The central policy simulation then involves a
"Copenhagen Convergence" path, in which major economies meet their
Copenhagen (December 2009) pledges for 2020, and thereafter
emissions per capita decline along a path that by 2050 results in
equal per capita emissions in all countries.Three abatement cost
functions are used for calculating the resulting abatement costs: a
model based on McKinsey & Co. estimates for 2030; the Nordhaus
RICE model cost functions; and a set of summary cost regressions
calculated from the Stanford Energy Modeling Forum (EMF-22) survey
of abatement models. It is found that abatement costs should be
moderate, reaching about one-fourth to two-thirds of one percent of
GDP by 2030 and 1 to 2 percent of GDP by 2050. Costs can be reduced
by international trading, but by less than generally perceived. A
more ambitious early start on abatement than pledged at Copenhagen
could reduce full-period costs. The study calculates corresponding
magnitudes of investment for abatement as well as adaptation costs
for developing countries, and identifies a benchmark of about $80
billion annually (excluding China) by 2020, lending support to the
$100 billion target pledged for industrial country financial
support by that year.
For more than a decade, there have been two important trends in the
American economy. The first trend has been toward increasing
openness of the economy to the international flows of goods, money,
people, and ideas. The second has been very slow or even negative
growth in real wages and a widening disparity in the distribution
of income, particularly between relatively skilled and unskilled
workers. Many observers suspect that these two trends are
connected: increasing competition from foreign producers,
particularly in low-wage developing countries, may have contributed
to stagnation in US real wages and a worsening income distribution.
These concerns have led to proposals to slow or reverse the
internationalization of the American economy in order to bolster
real wages, preserve jobs, and prevent a worsening income
distribution. The issue is hotly debated among analysts and
policymakers. This study will provide a fresh and comprehensive
analysis of theory and empirical evidence on the relationships
among trade, employment and wages, and income distribution. It will
explore the full range of options available to policymakers,
including slowing the pace of trade liberalization, providing
adjustment assistance to trade-impacted workers, and encouraging
investment in human and physical capital.
How will global warming affect developing countries, which rely
heavily on agriculture as a source of economic growth? William
Cline asserts that developing countries have more at risk, such as
their production capacity, than industrial countries as global
warming worsens. Using general circulation models, Cline boldly
examines 2071-99 to forecast the effects of global warming and its
economic impact into the next decade. This detailed study outlines
existing studies on climate change; Cline finds the Stern Report
for the UK government's estimates most reliable; estimates
projected changes in temperature, precipitation, and agricultural
capacity; and concludes with policy recommendations. Cline finds
that agricultural production in developing countries may fall an
average of 16 percent, and if global warming progresses at its
current rate, India's agricultural capacity could fall as much as
40 percent. Thus, policymakers should address this phenomenon now
before the world's developing countries are adversely and
irreversibly affected.
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