Posts tagged with: International Monetary Fund

Blog author: jsunde
posted by on Wednesday, March 5, 2014

In an excerpt from the splendid PovertyCure series, Michael Fairbanks offers a helpful bit on why our attitudes about competition matter for economic development:

I can predict the future of a developing nation better than any IMF team of economists by asking one question: “Do you believe in competition?” When I go to Venezuela and I say, “do you believe in competition?,” they say “competition means the rich get richer and the poor get poorer.” They say “competition is the unnecessary duplication of effort because you have two firms doing the same thing.” They say “competition is a quaint North American concept that doesn’t apply here.”

But when I go to Silicon Valley and I say,“What do you think about the word competition?,” they say, “Well, I love competition, because even when I lose, I learn something. And my success is due to the fact that I speeded up my failures, and the only way to fail was to compete, and figure out where I wasn’t good enough.”

As Hayek put it, competition is a discovery procedure. If we neglect, distort, or downplay that process, we can expect the outcomes of discovery — the fruits of our sacrifice and service — to digress accordingly.

PovertyCure DVD Series

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It’s no secret that the economy of the European Union is, ahem, struggling. But Vikas Bajaj says the global economy is worse than anyone seems to want to acknowledge:global-economic-growth

In a new report released on Tuesday, the International Monetary Fund says that China, India, Brazil, Mexico and other developing countries are growing more slowly than previously thought. That weakness, combined with Europe’s enduring recession and middling growth in the United States, means the global economy will grow at 3.1 percent this year, about the same as last year and down from the I.M.F.’s April forecast of 3.3 percent.

Developing economies are struggling for a variety of reasons. Some, like Brazil and Russia, are hurting because there is less demand for their exports in the United States, Europe and elsewhere. China is trying to reduce its reliance on exports and investments while increasing the importance of domestic consumer spending. Some countries are also under pressure as foreign investors start moving money out of emerging markets to invest it in the United States, where interest rates have risen in recent days.

Bajaj points out that economist have been talking about this for months, but the response has been “a collective shrug” from policy makers. The International Monetary Fund calls for nations’ policymakers to create more robust attempts to stimulate economies, but Bajaj worries: “Is anybody listening?”

National Public Radio did a roundup of views on what to expect from Pope Francis on economic issues. Reporter Jim Zarroli interviewed Acton Research Director Samuel Gregg and several commentators on the Catholic left. NPR host Audie Cornish introduced Zarroli’s report by observing that the new pope “comes from Argentina, where poverty and debt have long posed serious challenges. In the past, when thrust into debates about the country’s economic future, Francis had made strident comments about wealth, inequality and the markets. Now, some Catholics are hoping their new pope will play a similar role, giving voice to the poor and exerting influence on a global scale.” But Cornish cautioned that if “some say the idea that Pope Francis is some kind of economic liberal is to misread him and the church.”

Here’s the exchange between Gregg and Zarroli that wrapped up the report.

ZARROLI: But anyone who expects Francis to take an active role as a critic of capitalism is sure to be disappointed, says Samuel Gregg, research director of the Acton Institute. Gregg says even as the new pope was criticizing the IMF, he was also taking a stand against liberation theology, the leftist movement that swept some parts of the church in the 1970s and ’80s. Gregg says Francis saw the movement as tainted by Marxist ideas that were at odds with church teaching and he didn’t want the church in Argentina to become politicized.

SAMUEL GREGG: Liberation theology, at least certain strands of liberation theology, insisted that the church had to become involved in more or less revolutionary movements for justice. And his response was no, that is not the responsibility of priests. Priests are supposed to be pastors. They’re supposed to be guides. They’re supposed to offer the sacraments. They’re not politicians. They’re not revolutionaries. (more…)

photo courtesy of Foreign Policy

“We don’t just want the money to come to Haiti. Stop sending money. Let’s fix it. Let’s fix it,” declared Republic of Haiti President Michel Martelly three years after the 2010 earthquake. Martelly was referring to foreign aid, $9 billion of which has been pledged to the country since the disaster. But financial aid has of course not been the only item sent to Haiti; the country has experienced a vast influx of goods, including clothing, shoes, food, and in particular, rice. Haiti imports approximately 80% of its rice, making it the country’s most significant food import.

Considering Haiti was self-sufficient in rice production in the 1970s, this should come as an alarming statistic. Along with rice, production of goods in around 200 companies enabled Haiti, at one time, to be a recognized exporter and experience moderate levels of prosperity. In her Foreign Policy article, “Subsidizing Starvation,” Maura R. O’Connor cites U.S. Ambassador to Haiti from 1981 to 1983, Ernest Preeg:

“Haiti was just as far along as anyone else,” said Preeg. “People came to Port-au-Prince to get jobs because it was a burgeoning export economy.” Preeg wrote an article in 1984 in which he echoed the view of many others that Haiti could be the “Taiwan of the Caribbean.”

But starting in the early 90s, these industries crumbled, as international trade embargos — prompted by a military coup against President Jean-Bertrand Aristide — were implemented and foreign imports began to flood the Haitian market. (more…)

Last summer, Acton’s PovertyCure team traveled to Ghana to meet with its economists and entrepreneurs — the men and women who are helping the country develop. It just so happens that they also met briefly with Peter Cardinal Turkson, president of the Vatican’s Pontifical Council for Peace and Justice and co-author of the note released yesterday that has stirred up a global controversy.

Cardinal Turkson, a native of Ghana, calls for the establishment of a central world bank in his note to the G-20, published in anticipation of next month’s summit in Cannes. Drawing from the first world’s obligation in solidarity to the developing world, he says:

Specific attention should be paid to the reform of the international monetary system and, in particular, the commitment to create some form of global monetary management, something that is already implicit in the Statues of the International Monetary Fund. It is obvious that to some extent this is equivalent to putting the existing exchange systems up for discussion in order to find effective means of coordination and supervision. This process must also involve the emerging and developing countries in defining the stages of a gradual adaptation of the existing instruments.

On that trip to Ghana, PovertyCure sat down for an interview with entrepreneur Herman Chinery-Hesse, a Ghanaian software developer who writes programs that can handle frequent power outages and primitive technology. (“Everybody builds Rolls Royces, but we’re in Africa; we build Land Rovers,” he explains.) His experience with a heavily nationalized economy that is dependent on foreign aid has taught him much:

I have never heard of a country that developed on aid. If you have heard of one, let me know! I know about countries that developed on trade, and innovation, and business. I don’t know of any country that got so much aid that it suddenly became a first world country. I have never heard of such a country.

Chinery-Hesse has plenty of experience with engines of economic progress created by well-meaning Western nations:

You cannot imagine how petty the political parties could get [in Ghana]… and they can do this because they are not depending on tax revenue. They are more interested in a smile on the World Bank country director’s face than the success of my business.

A truly human program of development must take into account the fallen nature of developing countries’ rulers — they’re human too, after all. The World Bank is disruptive enough as it is: ask Herman Chinery-Hesse whether Ghana would improve if we merged it into a behemoth financial overlord.

This morning the Pontifical Council for Justice and Peace issued a bold statement advising how to bring order to the global financial crisis. I was in attendance at the much anticipated press conference that was organized to debrief reporters on the statement’s content.

The statement came in the form of a “Nota” (“Note” in Vatican terms): Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority.

The President and Secretary of the Council, together with a University of Rome economics professor summarized the points and context of the Note. They were met with tough questions from 60 feisty Vatican-beat journalists representing international newspaper, television and radio outlets.

To say the least, the Council’s Note was controversial and not something you normally see released from a Vatican Council. Normally, concerning specific economic policy and governance, Vatican authorities speak much more boldly on moral and theological matters and much less so on practical prescriptions.

Before getting started with the debriefing, there were a few waivers and clarifications to make about the Note’s official extent of authority and relevance.

Both the council’s President, Cardinal Peter Turkson, and Vatican Press Secretary, Fr. Federico Lombardi, made it very clear that the statement was “not in any way the opinion of the pope”, but solely that of the Pontifical Council of Justice and Peace and those that composed it.

One of the journalists present asked if the Holy Father himself had read the document, to which the Council’s Secretary, Bishop Mario Toso, said the document had only been reviewed by the Secretariat of State and was released to stimulate the practical and moral thinking of world economic leaders attending the G-20 summit this November 3-4 in Cannes, France and to “invite a process of discernment among all peoples of the world” as Cardinal Turkson later added.

Most of the heated questions at the Vatican press conference concentrated on the potential utopian vision of a single world government authority a la United Nations and IMF to promote financial and monetary security as well as greater equality among the rich and poor in teetering markets and destitute nations. Professor Leonardo Becchetti told journalists from the panel that “the world has changed…a globalized economy now calls for a global government”.

Bishop Toso was quick to point out that the statement’s opinions on a global financial authority took inspiration from Pope Benedict’s 2009 encylcical letter, Caritas in Veritate, where he said the Holy Father underscored that some form of world authority was necessary to bring order to the global economic chaos in full force. Therefore, as the Council’s officials argued, some legitimacy to their argument for a world economic authority stemmed from the Church’s official social teachings.

The reference to Caritas in Veritate had today’s journalists on edge with further demanding questions about the natural tendencies and historical proofs that corruption, self-interests and sin almost always destroy the good intentions and original human ideals of large-scale governance and any political authority wielding massive power.

Here are some extended clips from the first and third parts of the Council’s statement, where the issues of economic development, inequality and global financial authority are addressed.

The English translation is still in a process of final revision and should be released soon along with expert articulation and commentary from the Acton staff. Stay tuned for more!


1. Economic Development and Inequalities

The grave economic and financial crisis which the world is going through today springs from multiple causes. Opinions on the number and significance of these causes vary widely. Some commentators emphasize first and foremost certain errors inherent in the economic and financial policies; others stress the structural weaknesses of political, economic and financial institutions; still others say that the causes are ethical breakdowns occurring at all levels of a world economy that is increasingly dominated by utilitarianism and materialism. At every stage of the crisis, one might discover particular technical errors intertwined with certain ethical orientations.

In material goods markets, natural factors and productive capacity as well as labour in all of its many forms set quantitative limits by determining relationships of costs and prices which, under certain conditions, permit an efficient allocation of available resources.

In monetary and financial markets, however, the dynamics are quite different. In recent decades, it was the banks that extended credit, which generated money, which in turn sought a further expansion of credit. In this way, the economic system was driven towards an inflationary spiral that inevitably encountered a limit in the risk that credit institutions could accept. They faced the ultimate danger of bankruptcy, with negative consequences for the entire economic and financial system

After World War II, national economies made progress, albeit with enormous sacrifices for millions, indeed billions of people who, as producers and entrepreneurs on the one hand and as savers and consumers on the other, had put their confidence in a regular and progressive expansion of money supply and investment in line with opportunities for real growth of the economy.

Since the 1990s, we have seen that money and credit instruments worldwide have grown more rapidly than revenue, even adjusting for current prices. From this came the formation of pockets of excessive liquidity and speculative bubbles which later turned into a series of solvency and confidence crises that have spread and followed one another over the years…

A liberalist approach, unsympathetic towards public intervention in the markets, chose to allow an important international financial institution to fall into bankruptcy, on the assumption that this would contain the crisis and its effects. Unfortunately, this spawned a widespread lack of confidence and a sudden change in attitudes. Various public interventions of enormous scope (more than 20% of gross national product) were urgently requested in order to stem the negative effects that could have overwhelmed the entire international financial system.

The consequences for the real economy, what with grave difficulties in some sectors – first of all, construction – and wide distribution of unfavourable forecasts, have generated a negative trend in production and international trade with very serious repercussions for employment as well as other effects that have probably not yet had their full impact. The costs are extremely onerous for millions in the developed countries, but also and above all for billions in the developing ones…

Global economic well-being, traditionally measured by national income and also by levels of capacities, grew during the second half of the twentieth century, to an extent and with a speed never experienced in the history of humankind…

First and foremost, an economic liberalism that spurns rules and controls. Economic liberalism is a theoretical system of thought, a form of “economic apriorism” that purports to derive laws for how markets function from theory, these being laws of capitalistic development, while exaggerating certain aspects of markets. An economic system of thought that sets down a priori the laws of market functioning and economic development, without measuring them against reality, runs the risk of becoming an instrument subordinated to the interests of the countries that effectively enjoy a position of economic and financial advantage.

Regulations and controls, imperfect though they may be, already often exist at the national and regional levels; whereas on the international level, it is hard to apply and consolidate such controls and rules.

The inequalities and distortions of capitalist development are often an expression not only of economic liberalism but also of utilitarian thinking: that is, theoretical and practical approaches according to which what is useful for the individual leads to the good of the community. This saying has a core of truth, but it cannot be ignored that individual utility – even where it is legitimate – does not always favour the common good. In many cases a spirit of solidarity is called for that transcends personal utility for the good of the community….

One devastating effect of these ideologies, especially in the last decades of the past century and the first years of the current one, has been the outbreak of the crisis in which the world is still immersed.

In his social encyclical, Benedict XVI precisely identified the roots of a crisis that is not only economic and financial but above all moral in nature. In fact, as the Pontiff notes, to function correctly the economy needs ethics; and not just of any kind but one that is people-centred. He goes on to denounce the role played by utilitarianism and individualism and the responsibilities of those who have adopted and promoted them as the parameters for the optimal behaviour of all economic and political agents who operate and interact in the social context. But Benedict XVI also identifies and denounces a new ideology, that of “technocracy”.

3. An Authority over Globalization

On the way to building a more fraternal and just human family and, even before that, a new humanism open to transcendence, Blessed John XXIII’s teaching seems especially timely. In the prophetic Encyclical Pacem in Terris of 1963, he observed that the world was heading towards ever greater unification. He then acknowledged the fact that a correspondence was lacking in the human community between the political organization “on a world level and the objective needs of the universal common good”. He also expressed the hope that one day “a true world political authority” would be created.

In view of the unification of the world engendered by the complex phenomenon of globalization, and of the importance of guaranteeing, in addition to other collective goods, the good of a free, stable world economic and financial system at the service of the real economy, today the teaching of Pacem in Terris appears to be even more vital and worthy of urgent implementation.

In the same spirit of Pacem in Terris, Benedict XVI himself expressed the need to create a world political authority. This seems obvious if we consider the fact that the agenda of questions to be dealt with globally is becoming ever longer. Think, for example, of peace and security; disarmament and arms control; promotion and protection of fundamental human rights; management of the economy and development policies; management of the migratory flows and food security, and protection of the environment. In all these areas, the growing interdependence between States and regions of the world becomes more and more obvious as well as the need for answers that are not just sectorial and isolated, but systematic and integrated, rich in solidarity and subsidiarity and geared to the universal common good.

As the Pope reminds us, if this road is not followed, “despite the great progress accomplished in various sectors, international law would risk being conditioned by the balance of power among the strongest nations.”

The purpose of the public authority, as John XXIII recalled in Pacem in Terris, is first and foremost to serve the common good. Therefore, it should be endowed with structures and adequate, effective mechanisms equal to its mission and the expectations placed in it. This is especially true in a globalized world which makes individuals and peoples increasingly interconnected and interdependent, but which also reveals the existence of monetary and financial markets of a predominantly speculative sort that are harmful for the real economy, especially of the weaker countries.

This is a complex and delicate process. A supranational Authority of this kind should have a realistic structure and be set up gradually. It should be favourable to the existence of efficient and effective monetary and financial systems; that is, free and stable markets overseen by a suitable legal framework, well-functioning in support of sustainable development and social progress of all, and inspired by the values of charity and truth. It is a matter of an Authority with a global reach that cannot be imposed by force, coercion or violence, but should be the outcome of a free and shared agreement and a reflection of the permanent and historic needs of the world common good. It ought to arise from a process of progressive maturation of consciences and freedoms as well as the awareness of growing responsibilities. Consequently, reciprocal trust, autonomy and participation cannot be overlooked as if they were superfluous elements. The consent should involve an ever greater number of countries that adhere with conviction, through a sincere dialogue that values the minority opinions rather than marginalizing them. So the world Authority should consistently involve all peoples in a collaboration in which they are called to contribute, bringing to it the heritage of their virtues and their civilizations.

The establishment of a world political Authority should be preceded by a preliminary phase of consultation from which a legitimated institution will emerge that is in a position to be an effective guide and, at the same time, can allow each country to express and pursue its own particular good. The exercise of this Authority at the service of the good of each and every one will necessarily be super partes (impartial): that is, above any partial vision or particular good, in view of achieving the common good. Its decisions should not be the result of the more developed countries’ excessive power over the weaker countries. Instead, they should be made in the interest of all, not only to the advantage of some groups, whether they are formed by private lobbies or national governments.

A supranational Institution, the expression of a “community of nations”, will not last long, however, if the countries’ diversities from the standpoint of cultures, material and immaterial resources and historic and geographic conditions, are not recognized and fully respected. The lack of a convinced consensus, nourished by an unceasing moral communion on the part of the world community, would also reduce the effectiveness of such an Authority.

What is valid on the national level is also valid on the global level. A person is not made to serve authority unconditionally. Rather, it is the task of authority to be at the service of the person, consistent with the pre-eminent value of human dignity. Likewise, governments should not serve the world Authority unconditionally. Instead, it is the world Authority that should put itself at the service of the various member countries, according to the principle of subsidiarity. Among the ways it should do this is by creating the socio-economic, political and legal conditions essential for the existence of markets that are efficient and efficacious because they are not over-protected by paternalistic national policies and not weakened by systematic deficits in public finances and of the gross national products – indeed, such policies and deficits actually hamper the markets themselves in operating in a world context as open and competitive institutions.

In the tradition of the Church’s Magisterium which Benedict XVI has vigorously embraced, the principle of subsidiarity should regulate relations between the State and local communities and between public and private institutions, not excluding the monetary and financial institutions. So, on a higher level, it ought to govern the relations between a possible future global public Authority and regional and national institutions. This principle guarantees both democratic legitimacy and the efficacy of the decisions of those called to make them. It allows respect for the freedom of people, individually and in communities, and at the same time, allows them to take responsibility for the objectives and duties that pertain to them.
According to the logic of subsidiarity, the higher Authority offers its subsidium, that is, its aid, only when individual, social or financial actors are intrinsically deficient in capacity, or cannot manage by themselves to do what is required of them. Thanks to the principle of solidarity, a lasting and fruitful relation is built up between global civil society and a world public Authority as States, intermediate bodies, various institutions – including economic and financial ones – and citizens make their decisions with a view to the global common good, which transcends national goods.
As we read in Caritas in Veritate, “The governance of globalization must be marked by subsidiarity, articulated into several layers and involving different levels that can work together.” Only in this way can the danger of a central Authority’s bureaucratic isolation be avoided, which would otherwise risk being delegitimized by an excessive distance from the realities on which it is based and easily fall prey to paternalistic, technocratic or hegemonic temptations.
However, a long road still needs to be travelled before arriving at the creation of a public Authority with universal jurisdiction. It would seem logical for the reform process to proceed with the United Nations as its reference because of the worldwide scope of its responsibilities, its ability to bring together the nations of the world, and the diversity of its tasks and those of its specialized Agencies. The fruit of such reforms ought to be a greater ability to adopt policies and choices that are binding because they are aimed at achieving the common good on the local, regional and world levels. Among the policies, those regarding global social justice seem most urgent: financial and monetary policies that will not damage the weakest countries; and policies aimed at achieving free and stable markets and a fair distribution of world wealth, which may also derive from unprecedented forms of global fiscal solidarity, which will be dealt with later.
On the way to creating a world political Authority, questions of governance (that is, a system of merely horizontal coordination without an authority super partes cannot be separated from those of a shared government (that is, a system which in addition to horizontal coordination establishes an authority super partes) which is functional and proportionate to the gradual development of a global political society. The establishment of a global political Authority cannot be achieved without an already functioning multilateralism, not only on a diplomatic level, but also and above all in relation to programs for sustainable development and peace. It is not possible to arrive at global Government without giving political expression to pre-existing forms of interdependence and cooperation.