Exchange Rate Policy
Like much of the writing in the field of exchange-rate policy, mine has been primarily advocatory. Unlike most of the recent writers, I have never been much attracted to the extreme positions of completely fixed or freely floating exchange rates. My most comprehensive attempt to explain why, and to explore the options for intermediate exchange rate regimes that would be less vulnerable to speculative pressures, is contained in Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option (published by the Institute as a Policy Analysis in September 2000). A precursor to this was Crawling Bands or Monitoring Bands: How to Manage Exchange Rates in a World of Capital Mobility, published in the first issue of International Finance in October 1998.
My writing on exchange rates long precedes the digital age. It started with The Crawling Peg, published as Princeton Essay No. 50 in 1965 and reprinted in Peter B. Kenen, ed., The International Monetary System: Highlights from Fifty Years of Princeton's Essays in International Finance (Westview Press, 1993). After the advent of generalized floating in 1973, I toyed with the reference rate proposal in "The Future Exchange Rate Regime," published in the Banca Nazionale del Lavoro Quarterly Review in June 1975. But as experience with floating rates accumulated, I became convinced that a more highly managed system than that was going to be necessary to persuade exchange rates to behave as the textbooks said they did, and hence convened a conference in Rio de Janeiro (where I was then teaching) in 1979 to explore the crawling peg's potentialities in detail. The results were published in Exchange Rate Rules: The Theory, Performance, and Prospects of the Crawling Peg (edited by me and published by Macmillan and St. Martin's Press in 1981). This was supplemented by "A Survey of the Literature on the Optimal Peg," published in the Journal of Development Economics in August 1982.
In 1981 I joined Fred Bergsten in his newly founded Institute for International Economics, and we soon discovered that we had very similar views on exchange-rate policy. Our discussions resulted in a joint paper that developed the concept of target zones for exchange rates, entitled "Exchange Rates and Trade Policy," that was published in Trade Policy for the 1980s (edited by William R. Cline and published by the Institute in 1983). I developed the notion of target zones further in one of the Institute's Policy Analyses in International Economics entitled The Exchange Rate System, first published in 1983 and in revised form in 1985. Marcus Miller and I incorporated this into a more general framework for policy coordination among the major economic powers in another of the Institute's Policy Analyses entitled Targets and Indicators: A Blueprint for the International Coordination of Economic Policy in 1987 (preceded by a paper written jointly with Hali Edison, entitled "On Evaluating and Extending the Target Zone Proposal," published in the Journal of Policy Modeling in 1987). I edited a volume entitled Estimating Equilibrium Exchange Rates that the Institute published in 1994 (a volume now rendered redundant by a much more comprehensive study edited by Lawrence Hinkle and Peter Montiel entitled Exchange Rate Misalignment: Concepts and Measurement for Developing Countries, published by the World Bank in 1999). Randy Henning and I dealt with the politics of target zones and the blueprint in "Managing the Monetary System" in Peter B. Kenen, ed., Managing the World Economy: Fifty Years After Bretton Woods, published by the Institute in 1994. I examined the new fad for currency boards in What Role for Currency Boards? published by the Institute in 1995. The last piece I wrote for the Institute before taking leave of absence to go to the World Bank was an attempt to examine how well "crawling bands" (as target zones had been renamed by Jacob Frenkel, after Paul Krugman had appropriated the latter term to refer to ERM-type zones where the authorities made a fetish of trying to avoid changes in parity) had operated in practice; the result was The Crawling Band as an Exchange Rate Regime: Lessons from Chile, Colombia, and Israel (1996).
I have written two conference papers since the PA mentioned at the beginning of this section was published. The first is a short piece entitled "Dollarization Does Not Make Sense Everywhere" that was written for a conference of the North-South Institute in Ottawa in October. I suppose the bottomline could be summarized as arguing that dollarization makes perfect sense in El Salvador, may work in Ecuador, but would be an act of insanity in Argentina. A far more comprehensive treatment of the arguments regarding dollarization is contained in a Socratic dialogue in a 1999 Spanish book by Jurgen Schuldt entitled Dolarizacion Oficial de la Economia: Un Debate en Once Actos, which has been very successful in Peru but is little known elsewhere. My other paper was presented to a conference of the Egyptian Center for Economic Studies in Cairo in November, and is entitled "Designing a Middle Way Between Fixed and Flexible Exchange Rates." In July 2001, I presented "From Bretton Woods to Bipolarity: The Evolution of Thought on Exchange Rate Regimes, 1971–2001" at the thirtieth anniversary celebrations of the Monetary Authority of Singapore.
In September 2004 I was invited to give a keynote speech to a conference on China's exchange rate policy at the Central Univeristy of Finance and Economics in Beijing, on the topic "The Choice of Exchange Rate Regime: The Relevance of International Experience to China's Decision".
One of the themes of The Crawling Peg, published as a Princeton Essay in 1965, was that the crudest form of intermediate exchange rate regime, the adjustable peg as endorsed at Bretton Woods, was bound to spawn speculative crises as capital mobility developed. I had always taken the challenge to be to design an intermediate exchange rate regime that would be consistent with a high degree of capital mobility, and I was unconvinced by the argument that what caused the 1991-92 ERM crises was the abandonment of the residual exchange controls in the EU in 1990 rather than the emergence of misalignments as a result of German reunification. Nevertheless, the Gadarene rush of investors to push money into any promising emerging market in the 1990s was an obvious potential source of trouble, and I was strongly in favor of the Chilean attempt to repel excessive inflows rather than the decision of (for example) Mexico to wallow in the inflows as long as they lasted. My sympathy with the Chilean position was nurtured by a visit that I paid to Chile as a consultant in 1991, when the problem of excessive inflows first developed, which led to "On Liberalizing the Capital Account" in Richard O'Brien, ed., Finance and the International Economy 5 (Oxford University Press, 1991) and a paper, The Management of Capital Inflows, originally published in Spanish in Pensamiento Iberoamericano, January-June, 1995.
My first comment on the East Asian crisis came in a paper entitled Learning from East Asia's Woes, presented in Dhaka in March 1998. Subsequent papers bearing on the topic are Implications of the East Asian Crisis for Debt Management, presented to an RBI Conference in January 1999, and Future Exchange Rate Regimes for Developing East Asia, presented to a conference in Singapore in June 1999.
Since returning to the Institute in October 1999, I have become inovolved in the discussions seeking a "new international financial architecture", whose purpose is essentially that of improving international mechanisms for crisis avoidance and management. Thus I was a member of the working group of the Overseas Development Council that prepared a report The Future Role of the IMF in Development that was published in April 2000, and I summarized this report and several others (including the Meltzer Commission report) in a paper entitled The Role of the IMF: A Guide to the Reports for a Commonwealth Secretariat/World Bank conference in June. In September of 2000 I presented two further papers on these issues at international conferences. One was for a meeting sponsored by the Reinventing Bretton Woods Committee and the American Council on Germany in Paris, and discussed how to go about achieving what seems to be the widely shared objective of A More Focused IMF. The other was for a meeting of the Brazilian Center for International Affairs (CEBRI) in Rio de Janeiro, and was entitled Modernizing the International Financial Architecture: Big Outstanding Issues.
In mid-2002 the financial markets became extremely restless about Brazil, driven by a combination of Brazil's high public sector debt and the fears instilled by the advance of the left-wing candidate Lula in the polls. Following a visit to Brazil in July 2002 I developed my own analysis of the situation that was published as an IIE Policy Brief Is Brazil Next?.
Doubtless I am most famous for having coined the phrase "the Washington Consensus," which makes me somewhat unhappy, partly because some reformers have taken this to suggest that the main credit for reform lies in Washington rather than with them, and partly because the term is so often used in an abusive sense markedly different from that which I intended. I originally formulated what I termed the Washington Agenda, or the Washington Consensus, in the background paper "What Washington Means by Policy Reform" for a conference held by the Institute for International Economics in November 1989, which was published as the opening chapter in the conference volume The Progress of Policy Reform in Latin America in 1990. My idea was to demonstrate to a Washington audience that still seemed to think that Latin America was stuck in the mind-frame of the 1960s and pleading for debt relief under the Brady Plan without doing anything to earn it that they were wrong, and that Latin America deserved some help. For that purpose it made sense to list the reforms that most of Washington could agree were needed in Latin America and then get authors from the region to say how much had been done along those lines in each of their countries. And in that endeavor I like to think the exercise was rather successful.
Unfortunately, my prosaic list of policy reforms that could command a consensus (and I would argue that there was more of a consensus about what needed to be done in 1989 than at just about any other time in history—remember, this was when it was proclaimed that history had ended) came to be interpreted as a policy manifesto for the "neoliberal" right, or a revelation of what the Washington-based international institutions were trying to impose on the rest of the world. My reaction to these interpretations can be found in "Revisiting the Washington Consensus," a paper I wrote for an IDB conference just before I joined the World Bank (published in 1997 by the IDB in Louis Emmerij, ed., Economic and Social Development into the XXI Century), and in What Should the [World] Bank Think About the Washington Consensus? a paper I wrote for an internal World Bank conference in July 1999, and in Economic Reform: Content, Progress, Prospects, a lecture delivered at the University of Baroda in India in November 1999.
In June 2002 I read Joe Stiglitz's new book Globalization and its Discontents, and was sufficiently peeved with his populist usage of my term to write an unsolicited review of his book. Unlike many of his reviewers, I actually regard many of his criticisms as quite substantive, but I still find his way of expressing them unfortunate, and not only because of the personal attacks in which he is prone to indulge. Late 2002 witnessed even more obituaries of the Wahington Consensus than usual, so I was finally moved to ask "Did the Washington Consensus Fail?" That was by way of a prelude to the book edited by Pedro-Pablo Kuczynski and me called "After the Washington Consensus: Restarting Growth and Reform in Latin America" that was first released at the Annual Meeting of the InterAmerican Development Bank in Milan in March 2003. The Portuguese edition appeared in August 2003, when I gave a lecture at FAAP in Sao Paulo entitled "Depois do Consenso de Washington: Uma Agenda para Reforma Economica na América Latina". A Spanish edition was published by the Universidad Peruana de Ciencias Aplicadas in December 2003 (contact Ursula Freundt at email@example.com for information). I have also discussed the new agenda and its relationship to the Washington Consensus in several shorter articles in English, such as "From Reform Agenda to Damaged Brand Name" which appeared in the September 2003 issue of Finance and Development. I was invited to give one of the World Bank's Practitioners in Development lectures on January 13, 2004, under the title "The Washington Consensus as Policy Prescription for Development". A conference under the title 'From the Washington Consensus toward a New Global Governance" organised as a part of the Forum Barcelona 2004 included my paper "A Short History of the Washington Consensus".
During my three years as Chief Economist for the South Asia Region in the World Bank I had the good fortune to visit that fascinating part of the world quite frequently. When I first went I was impressed by how all of the countries seemed to have taken the success of the East Asian countries to heart, and were seeking to learn the lessons that would allow them to engineer similar miracles at home. Less than a year later the East Asian crisis broke, and all of a sudden the antireformers had a new lease on life and were seeking to convince their fellow citizens that the crisis showed not just the folly of liberalizing capital movements but also the danger of liberalizing trade, of abolishing power subsidies and eliminating small-scale industry reservation, and of implementing all the other reforms that are needed to nurture an economic miracle in South Asia. Some reformers (most flamboyantly, I suppose, Surjit Bhalla) responded by posing the rhetorical question as to whether it would be better to have 30 years of rapid East Asian-style growth followed by a setback of a year or two, or 30 years of the Hindu rate of growth? My own reaction was different: I argued that it was the premature capital-account liberalization that caused the crisis and the other liberalization that caused the growth, and so I urged them to continue with all the other reforms while putting capital account convertibility on ice "for 30 years." My argument was put in Whither Financial Liberalization? a speech to a conference in Mumbai (Bombay) in November 1998. An earlier paper that also made the case that the East Asian crisis was primarily due to the failure to exercise due caution in accepting capital inflows was Learning from East Asia's Woes (presented to a conference of the Bangladesh Economic Association and the International Economic Association in Dhaka in March 1998).
Some of the other presentations I made in the region (most of them amount to much less than academic papers) were Trade Liberalization in Bangladesh (Dhaka, September 1999); Economists, Policy Reform, and Political Economy (keynote address to a conference on the political economy of policy reform at the Rajiv Gandhi Institute in Delhi, December 1998); On Markets and Regulation (presented to a conference on the Indian economy at the University of California at Santa Cruz, November 1998); Implications of the East Asian Crisis for Debt Management (presented to a conference of the Reserve Bank of India, January 1999); Pakistan and the World Economy (Annual Conference of the Pakistan Society of Development Economists, January 1999); Globalization: The Concept, Causes, and Consequences (a speech to the Sri Lankan Association for the Advancement of Science, December 1998); and "The Rationale for Financial Sector Reform" (Kathmandu, September 1999). Incidentally, my Princeton Essay (jointly with Molly Mahar) entitled A Survey of Financial Liberalization (1998) was sparked by a meeting with some of the financial community in Mumbai during my first visit there in November 1996, who asked what the international experience with financial liberalization had been.
My lecture on Economic Reform: Content, Progress, Prospects, delivered at the University of Baroda's 50th anniversary celebration in November 1999, may also be of interest.