Showing papers on "Foreign-exchange reserves published in 1987"

The political economy of economic liberalization

Abstract: Two of the major policy problems facing governments of developing countries in the 1 980s have been unsustainable external and internal disequilibria, and implementation of politically feasible stabilization cum liberalization programs which become necessary to correct these imbalances. This article discusses these "crises" and subsequent policy reform. The analysis suggests that balance of payments and fiscal deficits are frequently the result of use of an incorrect accounting system in a fixed exchange rate economy, and of public sector expansion beyond its economically feasible size; that governments usually seek to liberalize their economies during a crisis to regain control when the growth of the "transfer State" has led to generalized tax resistance, avoidance, or evasion; that reduction of the government role will be required to alleviate these crises; that sharp departures from past policies rather than gradual reform may be politically necessary; and that, contrary to the current technocratic opinion on this matter, the sequencing of a consistent and credible package of reforms which will most effectively reduce the costs of adjustment is initial liberalization of domestic capital markets simultaneous with cuts in the fiscal deficit, followed by floating the exchange rate and then commodity market liberalization. With the growing importance of Internal Monetary Fund (IMF) stabilization and World Bank structural adjustment programs, there has been concern about the proper sequencing of the standard stabilization cum liberalization measures contained in these packages. In particular, there is grave concern at the very mixed and in some cases disastrous effects of liberalization attempts on incomes and employment in the Southern Cone of Latin America in the late 1970s and early 1 980s. Much of the existing discussion of the order of liberalization is conducted within the traditional technocratic framework,' which seeks to determine the welfare-cost-minimizing deployment of policies in the standard stabilization and 1. This assumes a benevolent and well informed government maximizing a social welfare function

Lessons from the Southern Cone Policy Reforms

Abstract: The article assesses the design of stabilization and liberalization programs in the Southern Cone countries of Argentina, Chile and Uruguay. With the exception of Chile, the reforms were not as widespread as some believed. Little trade liberalization took place in Argentina and Uruguay, although some of the antiexport bias was reduced by eliminating taxes on traditional exports. The main causes of the collapse of the three economies in the early 1980s were poorly designed programs and poor implementation. These errors included restrictive wage legislation (Chile) or political instability combined with a preoccupation with keeping unemployment as low as possible (Argentina). Monetary policy to deal with growing fiscal deficits was inconsistent with the accompanying exchange rate policy. Financial deregulation was not matched by appropriate supervision of the financial institutions. The article finds that reductions in distortions produced efficiency gains in Chile and Uruguay. Second, it shows that policy inconsistencies undermined the credibility of the later stages of reform in all three countries, eventually producing a crisis. Third, it presents data that questions the use of exchange rate-based stabilization. Forth, it stresses the need for caution in financial deregulation.

An Analysis of the Management of the Currency Composition of Reserve Assets and External Liabilities of Developing Countries

Abstract: Analyses of developing countries’ financial positions have generally focused on the growth and currency composition of their reserve assets. The theory of portfolio selection, however, is clearly relevant to net positions rather than to assets alone. For this reason it is inappropriate to interpret changes in developing countries’ net currency positions as having resulted from independent decisions concerning the currency composition of foreign exchange reserves and external debt. Such a decision-making process would be suboptimal, and we see no reason to ascribe such behavior to the countries studied.

Foreign and Domestic Capital in Indonesian Industrialization

Abstract: The unsettled political conditions of the 1950s and first half of the 1960s were not favorable to economic development 10 general and industrial development 10 particular. With the Indonesian economy steadily deteriorating during the first half of the sixties, the small manufacturing sector was burdened with under-utilized capacity, as the flow of imported raw materials and parts and components slowly dwindled to a trickle as a result of steadily declining foreign exchange reserves. With the advent of a new government * In May 1986. we conducted a number of interviews with Japanese businessmen in Jakarta. Although we cannot name them individually, we would like to record our appreciation to those who gave us their valuable time. We would like also to express our appreciation to JETRO for letting us use their Indonesian collection. Also at lETRO, Mr. Sori Harahap often provided us with information on Indonesian businesses, for which we are very grateful. Lastly, we would like to thank Dr. Dorodjatun Kuntjorojakti of Universitas Indonesia for letting us use liberally his files on Indonesian businesses and industries. Without this help, this study would have been impossible. ** Economic and Development Studies Center, LIP!, Indonesia *** s}jj{?\C::::R:, The Center for Southeast Asian Studies, Kyoto University in 1966 which, unlike the previous government, was strongly committed to economic development, industrial development started in earnest for the first time since independence. In the period 1966-1968 the average annual growth rate of the manufacturing sector reached 6. 02 percent, and accelerated to 12.44 percent during the following three years. We can divide industrial growth since the late 1960s into three phases: a) the phase of 'easy' import substitution (19681975), b) the phase of 'moving upstream' (1975-1982), and c) the phase of slowdown (1982-present) . a) The first phase (1968-1975) : 'easy' import substitution. During this period a wide range of locally made consumer goods (including light consumer goods and consumer durables) gradually replaced imported goods. The firms which produced these consumer products were set up by domestic (i. e., national) and foreign investors who were spurred by highly protective import substitution policies as well as by the Foreign Investment Law of 1967 and the Domestic Investment Law of 1968 [Thee 1983 : 2J. This pattern of investment is quite similar to that of other Southeast Asian countries. such as the Philippines, Thailand, and Malaysia, which experienced

Monetary policy in Taiwan, China

Abstract: This paper examines how Taiwan, China, has used monetary policy to deal with the impact of the two oil shocks since 1973, as well as with the recent problem of a very large rise in foreign exchange holdings. In dealing with the inflationary pressures brought on by the two oil shocks, the central bank relied primarily on changes in its rediscount rate to reduce inflationary pressures. However, the changes were initially too small and too late to prevent a large rise in consumer prices in 1974 and 1980. Since 1985, the large gains in foreign exchange reserves, due to a rising trade surplus and capital inflows have sharply expanded the money supply. The burden of containing this inflationary threat has fallen on monetary policy, and the government has not been able to offset the build-up in reserves by prepayment of external debt since the amount of outstanding debt is relatively small. In addition, use by the central bank of its rediscount policy or changes in reserve requirements has not been appropriate as domestic credit expansion has been low and not a basic cause of the large rise in liquidity. Instead, the central bank has relied almost exclusively on open market operations. It has engaged in a massive sterilization operation, selling primarily central bank certificates of deposit to neutralize the potentially inflationary impact from the large rise in the money supply. So far the central bank has been successful in holding the inflation rate to a low level, but it is not yet clear whether the present strategy will continue to be successful. Some suggestions of new basic measures for restoring a sustainable equilibrium between the external and domestic sectors are discussed.

Countertrade and foreign exchange shortages: A preliminary assessment

Abstract: is often alleged that countertrade is a response to shortages of foreign exchange reserves. "Eastern European and some developing countries make demands for countertrade arrangements for a number of reasons: 1. They wish to minimize their outlay of scarce "hard" currency" [Minister of Supply and Services Canada, 1981, p. 1]. In the past few years, such statements have been made by practitioners, government officials and even academics1. It is surprising that this common allegation has not been subjected to much systematic analysis2. We are not aware of any rigorous analysis which reveals how countertrade alleviates foreign reserve shortages, nor can we find any critical test of the validity of the allegation. In this paper, we attempt to explore the relationship between countertrade and foreign exchange reserves in the hope of providing an answer to the question of whether countertrade is a means to deal with foreign reserve shortages.

Money and South-South Cooperation

Abstract: Monetary arrangements may sound technical and of subsidiary significance. The production and distribution of goods and services are what matter for the pattern of development. From this perspective it would appear that the important international arrangements are those that regulate flows of goods and services and of investment, technology and labour: trade agreements, and rules or codes of conduct concerning investment, technology and labour would appear to take precedence over monetary arrangements. The experience and achievements of South-South agreements seem to exemplify this view: there have been more, and more effective, agreements on trade and investment than on money, and where monetary arrangements have been undertaken they have, typically, been introduced as a supplement to trade arrangements.

Currency substitution, u.s. money demand, and international interdependence

Abstract: A number of writers have argued in recent years that massive international currency substitution has been a major cause of exchange rate volatility and monetary instability in the United States and other major countries. Such analysis is frequently coupled with recommendations for a return to pegged exchange rates. This paper critically examines the evidence presented for this currency substitution view. It argues that the weight of latest research suggests that direct international currency substitution has not been of major quantitative importance for the U.S. However, empirical evidence supports traditional views that international capital mobility can generate substantial short-run monetary interdependence even under flexible exchange rates. Thus, even though international currency substitution is of little importance to U.S. monetary conditions, a broader range of international considerations may be of considerable importance for the U.S. economy.

China in 1986: A Year of Consolidation

Abstract: The achievements and shortcomings of the reform movement in China in 1985 to a large extent influenced the country's political agenda in 1986. The promotion of a new generation of leaders-the so-called third echelon-to leading positions on the Politburo and the Central Secretariat, and the decisive demonstration of civilian control over a conservative military establishment were major victories for the reform program in 1985.1 Personnel issues, therefore, were largely absent from the 1986 agenda. Economically and ideologically, a series of problems which had arisen in 1985 threatened to make the reform program vulnerable. Among the difficulties were a far too rapid industrial growth rate of 18%, an inflation rate of 9%-triple the 1984 rate-a 7% drop in grain output, a sharp worsening in the balance of trade, a 40% decline in foreign exchange reserves, and a large number of widely publicized corruption cases.2 Largely on the defensive, Chinese reformers had made it clear early in the year that no key economic reforms would be implemented. The first year of the Seventh Five-Year Plan (1986-90) was devoted to gaining more control over the economy and to solving some of the problems left over from 1985. If 1986 was not a year for implementing major new policies, the reformers did provide tantalizing indications of the political and economic direction in which they want to move, and they were successful in bringing some of their programs onto the political agenda. For example, China

Market-based debt-reduction schemes in Chile : a macroeconomic perspective

Abstract: Chile's oversized external liabilities and the impossibility of generating a more sizeable trade surplus without imposing intolerable social costs have led to a search for alternative ways to reduce the debtservice burden. Within a strategy of negotiation with foreign cre-ditors, Chile has developed debt-reduction mechanisms to take advantage of the discount that the market has placed on the country's foreign liabilities. These schemes offer an interesting potential, although they cannot be expected to solve the debt problem quickly. The purpose of this paper is to describe the present mechLnisms, what has been achieved, and some of their macroeconomic effects. In one year and a half of existence, these operations have reduced Chilean foreign debt by around US$1.2 billion, or 6% of the country's external liabilities. The advantages associated with the use of these schemes are: (1) A smaller debt means less interest payments in the future and thus less need for further adjustment policies, which get translated into a lower social cost and enhanced political stability. (2) Foreign debt certificates are purchased at a discount with the assets of Chileans abroad. Since the international reserves of the country are not used for this purpose, it is a vehicle for capital repatriation. (3) The transforfiation of debt into capital has advantages related to the business cycle. During depressions interest rates increase while profits go down, worsening considerably the position of a debtor country. A swap of debt to equity, by tilting the payment of financial services towards more profit repatriation and less interest payments, will tend to stabilize the external position of the country. (4) These mechanisms provide an incentive for foreign investment which can help, even if only marginally, in the necessary investment effort that Chile needs. (5) The auctioning of quotas for the use of these schemes has had a beneficial side effect on public finances, as the Central Bank has already collected over US$40 million in fees on the allocation of quotas. The reason for imposing limits or quotas on the maximum (yearly) amount of debt to be recovered through these schemes is to avoid some undesirable effects on the parallel exchange rate premium, monetary. expansion and the real interest rate (see Table 1): (1) Because no access to international reserves is allowed, these schemes put pressure on the exchange rate gap when they add a net demand for foreign exchange in the parallel market. A higher gap produces a number of undesired effects on the economy (over-invoicing of imports, under-invoicing of exports, smuggling, etc.). Nonetheless, the Chilean experience shows that the exchange rate gap currently around 7% can be kept under control. One important way in which the authority can influence the gap is through the quotas which are periodically auctioned. (2) Potential effects on monetary emission occur when the foreign liability brought into the country under one of these schemes belongs to the Central Bank. However, these debt certificates are paid with long-term bonds of the monetary authority, which are indexed to Chilean inflation and have liquidity in a secondary market. All operations which involve a foreign liability of the private sector, Banco del Estado or public enterprises can not have an effect on'monetary emission. (3) Potential effects on interest rates occur when the Central Bank finances the purchase of debt certificates with long-term bonds. The supply of these increases and, if the effect is significant, long-term interest rates would go up on this account. The same type of analysis applies for private sector operations which in some sense involve pressure on financial markets: debtors will ask for credit or use their available liquidity to purchase the certificates of their foreign liabilities. This will tend to move interest rates upwards. Nonetheless, Chile has experienced a dramatic decline in interest rates, both short and long, after the introduction of these mechanisms in mid-1985. Of course, there have been other factors at work to explain this development. (4) Some potential problems associated with foreign investments stemming from debt capitalization schemes are: (i) debt to equity swaps substitute, to some extent, foreign investment that would have been done with fresh resources anyway. To the extent that the substitution is important, which does not seem to be the case in Chile, this has perverse liquidity consequences for the country; (ii) pressures on the official exchange market stemming from the new investments, a potential problem, can be minimized if restrictions apply to profits-and capital repatriation. In Chile, profits coming from investments under Chapter 19 can not be sent abroad until the fifth year; capital repatriation might only occur after ten years. The real challenge posed to Chile is to make use of the market discount to reduce the foreign debt without provoking significant costs to the domestic economy. This necessarily implies the imposition of restrictions on the use of these mechanisms. Their total liberalization would provoke excessive pressure on the exchange rate gap and on real interest rates, both undesirable.outcomes.

Shadow Pricing in a Specific-Factors Model: Comment

Abstract: Recently in this journal Maneschi (1985) calculated shadow prices of factors for a small country that produces and consumes many goods, all of which are traded at fixed world prices and are produced using intersectorally mobile labour and a sector-specific capital stock. All factors are fixed in supply, and the distortions considered consist of fixed import tariffs and/or export subsidies, sector-specific wage differentials, and minimum wages. The work is closely related to that of Srinivasan and Bhagwati (1978), henceforth SB, who calculate shadow prices of factors for a country which produces two goods using two intersectorally mobile factors of production. The analysis is similar in that both papers calculate the shadow price of a factor of production as the fall in the value of the country's output measured at world prices resulting from governmental withdrawal of a unit of the factor from the private sector for use in a hypothetical project. This is always legitimate in the SB model, because fixed import tariffs, fixed export subsidies, and fixed world prices serve to freeze all product and factor prices in the domestic economy, in the face of altered factor supplies to the private sector. This means that when the government withdraws a unit of a factor from the private sector to use in a project, each individual's utility and consumption bundle will be left unchanged, and the only cost to the government will be the increase in the rate at which its foreign exchange reserves are used up, which will just equal the change in the value of domestic output at world prices. Thus, in this case, the social cost or shadow price of a unit of the factor in foreign exchange numeraire is just the change in domestic output valued at world prices.

The World Bank research observer 2 (1)

Abstract: Market behavior of grains exporters. Macroeconomic adjustment in developing countries: a policy perspective. Some theoretical aspects of agricultural policies. Macroeconomic policy and trade liberalization: some guidelines. Management of public industrial enterprises.

The effect of multilateral trade clearinghouses on the demand for international reserves

Abstract: This paper attempts to capture the portfolio incentives for central bank participation in a multilateral trade clearinghouse and to discuss the relation of those incentives to the volume of trade. Clearing­houses for the netting of multilateral intra-regional trade have existed since the 1950s, but no work to date has attempted to explore the incentive effects of such arrangements. Instead previous work, primarily empirical, has focused on the tendency of preferential arrangements (clearing as well as favorable protectionist policies) between nations to encourage trade flows between them. This paper advances the notion that the effects of clearing arrangements must be modelled as a portfolio choice problem, in order to ascertain the precise influence of clearing alone. ; The model developed here describes the choice of the central bank between holding reserve balances and investing in productive assets. For a given distribution of net export receipts and a given cash management policy of the central bank, expected daily demand for international reserves is derived. This demand is re-derived to illustrate the effects of a clearing­house; in addition, reserve demand is augmented to account for debt payments to external creditors. ; Regardless of whether the central bank makes external debt pay­ments, the clearing arrangement reduces the demand for reserves to finance trade. It is possible, were the "freed" reserves invested in development of the export industry, that the clearing arrangement could translate into an increased volume of trade. If the country is burdened with external debt payments however, it is possible that the "freed" reserves would simply be used to increase payments to external creditors.

The Endogeneity of International Liquidity

Abstract: This paper argues that the volume of international liquidity, as well as its composition and distribution, is the outcome of the operation of the international monetary system over time. It is, in other words, endogenous, and is not something which it makes sense to try to control a priori. Policies for the monetary system cannot usefully aim to achieve, by any direct or simple means, control over the aggregate amount of liquidity. The first section of the paper outlines the scope of the argument and its relation to some basic economic principles. The second section sketches a selective analytical history of international monetary arrangements from pre-1914 to 1980. The third section discusses the functions of international liquidity and liquidity creation in relation to the economic debates which began around 1960. The final section is a brief re-statement and conclusion.