This page discusses the background for the course in international economics.
What is most striking about this recent period is globalization. There is an increased pressure for international integration. Both developed and latecomer countries are required to integrate with the global economy as fully and quickly as possible, and adopt international rules and standards (which are often American standards). International and regional organizations such as UN, WTO, World Bank, IMF, ADB, BIS, ASEAN, etc. help developing countries to integrate and adopt these rules. Sometimes they even force them to do so.
Moreover, latecomer countries are sometimes given harder conditions when they join WTO and other international organizations--even those conditions that advanced or middle-income countries have not adopted. Accession negotiation has become a place for strong countries to impose their demands on weaker countries. For this reason, latecomers face doubly difficult tasks--much faster opening despite lower levels of development.
This situation reflects the reality of post Cold War global politics. The USSR-style economic planning had collapsed, and very few countries now adopt it. Market-orientation has become dominant since there does not seem to be any other viable economic models. In addition, during the 1990s, the US economy prospered with IT and asset market booms (though there was a collapse of the bubble later). The world has become unipolar, and the pressure to adopt "international best practice" mounted. At the same time, criticism against rapid globalization and US dominance have emerged.
For developing and transition countries, there are three related reasons for caution.
First, the global market into which newcomers are integrating is a very rough place. It is competitive and unstable with the following features:
--Exchange rate instability
--Rapid, massive and changeable capital flows
--Fierce industrial competition, sometimes with unfair subsidies, dumping, and safeguards
--Commodity price fluctuation
--Selfish behavior of some of the big countries
--International rules that seem "unfair" to some members (including newcomers)
Second, for latecomer countries, preparation for integration takes time. In the private sector, it will take time to acquire technology, management skills, etc. and become competitive. For the government, policy capability cannot be improved instantly. Many laws and institutions, even after their introduction, will also take time to become really effective. Ensuring intra-government coordination and policy consistency is not so easy. All this is part of the development process, which takes time. There is a gap between required capability for integration and the actual capability of developing countries.
Third, if a country integrates without solving this capability problem, it may lose control. Integration is sometimes imposed by an outsider (by policy matrices of donors and international organizations, for example). In other cases it is a deliberate decision by the country itself or a result of regional peer pressure. At any rate, if a country with weak capability jumps into the unstable world economy, there are two types of danger: (i) acute macroeconomic crisis; and (ii) gradual but equally serious social and cultural conflicts.
Some of the events that occurred since the 1990s can be attributed, at least partly and sometimes fully, to the problem of integration with weak capability.
--Painful transition to market in the former USSR, East Europe, Mongolia, etc.
--Asian financial crisis in 1997-98
--Currency crises in Russia, Brazil, Turkey, Argentina ...
--Boom-and-bust cycles due to volatility of the IT industry
--Boom-and-bust cycles due to world commodity price fluctuation
--Collapse of manufacturing ("de-industrialization") due to import pressure in some countries
--China's WTO challenge in the future (restructuring SOEs, agriculture, old industries...)
--Violent protests against globalization at big international conferences
--Terrorism and the 9-11 attack: even this can be considered as a response to failed globalization and an explosion of anti-American feeling
Some countries manage these shocks relatively well, but others face severe political, economic or social crisis. Some countries even refuse to join the world community or talk to international organizations. Integration cannot be avoided and should be positively welcomed. But at the same time, it should be implemented carefully and wisely.
Both the developing countries themselves and the global rules must improve in order to reduce these risks. But that will take time. In the mean time, integration must be paced to the improvement of domestic capability.
Proper management of trade, investment and financial integration is the key to minimize these risks. Of these, financial aspects are the focus of this course.
Many countries in systemic transition (Kyrgyzstan, Mongolia, Kazakhstan...) liberalized trade and finance in a short period of time. The ASEAN Free Trade Area (AFTA) has also required the member countries to adopt regional free trade (including the latecomer members of CLMV: Cambodia, Laos, Myanmar and Vietnam). But a decade is a bit too short to build a strong industrial base from scratch, and most countries which opened up fast did so without prior improvement in industrial competitiveness. They hope that after opening, free trade and FDI (which is supposed to be attracted by free trade) will develop their industries. But it is not clear if that will really happen.
In Southeast Asia, the Asian crisis countries opened up the financial sector quickly in the early 1990s and was beaten badly. Their banks and non-banks were inefficient and risk-loving, and the government was not monitoring their behavior adequately.
Historically, the early comers (Western Europe, North America and Japan) were much more cautious and took a long time to execute external liberalization. In the case of Japan, its ports were forced open under American military threat in 1854. Japan had no tariff rights and free trade was imposed by major powers (until 1911). After opening, It took Japan roughly 50 years to build its textile industry. After that, Japan promoted its machinery and heavy industries under import protection from the 1920s to the 1960s (with intervening wars). Foreign technology was always welcome, but foreign capital inflows (FDI and loans) were severely restricted. Japan achieved current-account convertibility in 1964, and capital-account convertibility in 1980. It took a long time for Japan to industrialize and liberalize. (If interested in Japan's modern history, see my book Economic Development of Japan, available free of charge.)
Today's world is very different from the world in which Japan industrialized. Now, free trade and free flows of investment are the norm, even for the latest comers. Developing and transition countries now face a big challenge: overcoming a huge technology and industrial gap in a free trade environment. Most of them are trying to do that by attracting FDI. This is a new problem that Japan never faced before.
In my Japanese book (2000, see below), I classified countries according to their reaction to globalization. There seems to be several typical patterns of response when a country is subjected to a strong integration pressure beyond its handling capability:
(i) The successful type: a country builds a national consensus for active integration. The government and the private sector cooperate to change policies and institutions dramatically. While indigestion and negative reaction sometimes occur, integration is steadily promoted over time. This includes Meiji Japan and the Asian NIEs (Taiwan, Korea, Singapore, Hong Kong) in the last few decades. Even in this case, whether particular foreign systems will really take root is uncertain for a long time.
(ii) The going-my-way type: regardless of how strong the external pressure, a country decides its pace of integration by itself and reforms are implemented gradually and through trial-and-error. This can avoid big shocks or reversion to planning and control. China after Deng Xiaoping is a typical example. But small countries with little bargaining power against international organizations or big countries may find it difficult to take this path.
(iii) The big-bang type: a country jumps into the global economy through bold integration and market reforms although domestic industries, institutions and policies are still very weak. This often leads to a significant fall in output and living standards, but the government stays on course with firm resolve. Mongolia and Kyrgyzstan can be cited as examples.
(iv) The reversion type: a country, after noticing the risks of integration, refuses to liberalize and returns to economic control and regulation. This worsens the relationship with the international community and the economy often stagnates. The trade restrictions and exchange control of Myanmar, Uzbekistan and Turkmenistan may belong to this category.
(v) The time-out type: a country understands the need to prepare for integration at the general level, but cannot make concrete steps due to the lack of political will or policy capability. As a result, policy delay and inconsistency will arise (for example, committing to free trade while introducing new trade barriers). I would cite Vietnam as an example for this.
Among these, the last three types are hardly desirable. But for countries forced to pursue an almost impossible goal, these unnatural reactions may become inevitable.
First and foremost, the economic management of developing and transition countries must aim at avoiding (or at least minimizing) integration risks as much as possible.
<References>
Ohno, Kenichi, Tojokoku no Globalization: Jiritsuteki Hatten wa Kanoka? (Globalization of Developing Countries: Is Autonomous Development Possible?), Toyo Keizai Shimposha, 2000.
Ohno, Kenichi, East Asian Growth and Japanese Aid Strategy, GRIPS Development Forum, 2003. [GRIPS students can receive a copy of this book free of charge; available at Room E404]
Ohno, Kenichi, Economic Development of Japan: The Path Traveled by Japan as a Developing Country, GRIPS Development Forum, 2006.