chapter  3
22 Pages

Global imbalances, financial crisis and globalization

ByRUDIGER VON ARNIM

Since the bursting of the bubbles in Asia, East Asian countries have refocused on what got them where they are. Exports of increasingly sophisticated and

competitive high value added products hold the largest growth potential by fostering economy-wide productivity growth. Stabilization of the rate of exchange at a reasonably competitive level has been an important component of policy for many countries in the area. The “new mercantilist” development strategy centers on the manipulation of the exchange rate to (1) provide broad support for export-oriented activities with increasing returns to scale, and to (2) bolster a national insurance fund against balance of payments crises, capital flight, and exchange volatility. It is often to the detriment of “thy neighbor,” and appears to have been perfected by China, whose dollar reserve accumulation has become a matter of national security concern in the US. The entrance of China into global markets, her tremendous success and sheer size have indeed sent ripples all throughout the world. The triple whammy of reserve accumulation, commodity price rises, and increased South-South lending enabled the global South to forego budgetary support from the Bretton Woods institutions. Most importantly, the cord was cut on IMF and World Bank loans burdened with conditionalities. Indeed, the IMF appears to have been rocked by a series of events that severely undermine its legitimacy and effectiveness. Compared to the debt and balance of payments crises-ridden 1980s and 1990s, lending has virtually ceased. Remaining borrowers are African countries, Colombia and Turkey, whose Stand-by agreement expired summer 2008. The resulting lack of revenue from lending operations forced the managing director to offer buy-outs to employees, to announce country office closures, and prepare to sell Gold holdings. Moreover, internal evaluations find remaining lending still tied to “fundamentalist” conditionalities, neither supported by economic theory and evidence, nor part of the IMF ’s mandate. The IMF (2008b: 1), in reference to (IMF 2008a), notes that

during the evaluation period, 1995-2004, conditions became more focused on areas within the Fund’s core mandate but one third [of structural conditionalities] still remained in areas where the Fund had little or no expertise. Also, conditions remained too numerous and many were not tied to key program goals.