global financial crisis-imf,us dollar-national workshop english

8/4/2019 Global Financial Crisis-IMF,US Dollar-NAtional Workshop English

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National Workshop on Reforms forNational Workshop on Reforms for

Economic DevelopmentEconomic Development

of Myanmarof Myanmar Subject: IMF, U.S. Dollar, andSubject: IMF, U.S. Dollar, and

Global Financial CrisisGlobal Financial Crisis

Presenter: U MyintVenue: Myanmar International Convention

Centre (MICC)

NaypyitawDate: 19 August, 2011Time: 14:20 14:40


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IntroductionIntroduction

1.1. Many seminars and talks, byMany seminars and talks, by numerous speakersnumerous speakers,,with various backgrounds, have already beenwith various backgrounds, have already beenheld in Yangon on the global financial crisis.held in Yangon on the global financial crisis.

2.2. Since economic issues are too important to beSince economic issues are too important to be leftleft

to economists, this is to be welcomed.to economists, this is to be welcomed.3.3. After so much has been talked about, written inAfter so much has been talked about, written in

newspapers and journals,newspapers and journals, whywhy hold anotherhold another

seminar on global financial crisis?seminar on global financial crisis?


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Why another seminar on global financialWhy another seminar on global financial

crisis?crisis?

1.1. Global financial crisis raisesGlobal financial crisis raises complexcomplex issues, andissues, andmany seminars, talks and lectures, from variousmany seminars, talks and lectures, from variouspoints of view, are needed to help find out what it ispoints of view, are needed to help find out what it is

all about.all about.2.2. The crisisThe crisis continuescontinues to attract considerable interest,to attract considerable interest,

and final curtain on matter has not come down asand final curtain on matter has not come down asyet.yet.

3.3. In this seminar, we hope to look at issues not takenIn this seminar, we hope to look at issues not takenup before, and to tryup before, and to try notnot to go over ground alreadyto go over ground alreadycovered by most speakers.covered by most speakers.


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Aims of present workshopAims of present workshop

1.1. To distinguish between aTo distinguish between a diseasedisease and itsand itssymptomssymptoms..

2.2. The idea that the global crisis represents aThe idea that the global crisis represents a

warningwarning that something isthat something is very wrongvery wrong withwiththe present world financial system.the present world financial system.

3.3. If so,If so, whatwhat is basically wrong with theis basically wrong with the

present system?present system?4.4. How can this wrong beHow can this wrong be correctedcorrected??

5.5. How does all this affectHow does all this affect poor countriespoor countries??


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The IMF and the US dollarThe IMF and the US dollar

1.1. Some important aspects of the global financialSome important aspects of the global financialcrisis, and issues discussed in this seminar, cancrisis, and issues discussed in this seminar, canbe betterbe betterunderstoodunderstood by looking at two things.by looking at two things.

2.2. The first, is to look at how the InternationalThe first, is to look at how the International

Monetary Fund (Monetary Fund (IMFIMF) is set up and how it works) is set up and how it works..3.3. The second, is theThe second, is the rolerole of the United States Dollarof the United States Dollar

in world trade and financein world trade and finance ..


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The Bretton Woods ConferenceThe Bretton Woods Conference

1.1. TheThe United NationsUnited Nations Monetary and FinancialMonetary and FinancialConference was held atConference was held at Bretton WoodsBretton Woods, a town, a townin New Hampshire State, USA.in New Hampshire State, USA.

2.2. The Conference was held inThe Conference was held in July 1944July 1944 a time a time

when World War II was still raging.when World War II was still raging.

3.3. The Conference was attended by 44 countriesThe Conference was attended by 44 countriesand it adopted theand it adopted the Bretton Woods AgreementsBretton Woods Agreements..


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Bretton Woods AgreementsBretton Woods Agreements

1.1. The Bretton Woods Agreements established theThe Bretton Woods Agreements established theIMF and International Bank for ReconstructionIMF and International Bank for Reconstructionand Development (IBRD) orand Development (IBRD) orWorld BankWorld Bank..

2.2. IMF and World Bank are therefore often referredIMF and World Bank are therefore often referred

to as Bretton Woodsto as Bretton Woods institutionsinstitutions or Bretton Woodsor Bretton Woodssystemsystem..

3.3. IMF and World Bank started work in 1945 when aIMF and World Bank started work in 1945 when a

sufficient number of countries hadsufficient number of countries had rectifiedrectified thetheBretton Woods Agreements.Bretton Woods Agreements.


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Functions of World Bank and IMFFunctions of World Bank and IMF

1.1. Briefly put, the World Bank is to take care ofBriefly put, the World Bank is to take care ofpostwar reconstruction, and following that -- topostwar reconstruction, and following that -- toassist development of developing countries. Theassist development of developing countries. TheIMF, on the other hand, is to take care ofIMF, on the other hand, is to take care of

international payments, monetary, fiscal andinternational payments, monetary, fiscal andfinancial matters.financial matters.

2.2. For example, if due to bad weather and poorFor example, if due to bad weather and poor

harvest, exports fall, there is a tradeharvest, exports fall, there is a trade deficitdeficit and aand acountry needs help go to IMF.country needs help go to IMF.

3.3. ToTo buildbuild a road, dam, bridge, sea port, air port,a road, dam, bridge, sea port, air port,power station go to World Bank.power station go to World Bank.


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How IMF works (1)How IMF works (1)IMF does many things. But to keep matters simple, and toIMF does many things. But to keep matters simple, and toserve our present purpose, we need to only mention theserve our present purpose, we need to only mention the

following:following:

1.1.IMF has 187 member countries.IMF has 187 member countries.

2.2.A A quotaquota is set for each member. is set for each member.

3.3.SizeSize of quota for a country depends on its economicof quota for a country depends on its economicsituation such as per capita GDP, its importance in worldsituation such as per capita GDP, its importance in worldtrade, etc.trade, etc.

4.4.Myanmars quota at present is SDR258.4 million.Myanmars quota at present is SDR258.4 million.

5.5.On 14 March 2011: 1SDR = US$ 1.5771On 14 March 2011: 1SDR = US$ 1.5771

6.6.So Myanmars quota = US$402.4 million on that date.So Myanmars quota = US$402.4 million on that date.

7.7.Special Drawing RightsSpecial Drawing Rights (SDR) will be explained in detail(SDR) will be explained in detail

later.later.


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How IMF works (2)How IMF works (2)

6.6. Examples of quotas of few other countries in millionExamples of quotas of few other countries in million

SDRs:SDRs:CountryCountry Quota in SDRsQuota in SDRs (mil.)(mil.)LaosLaos 52.952.9CambodiaCambodia 87.587.5

ThailandThailand 1,081.91,081.9IndiaIndia 4,158.24,158.2ChinaChina 8,090.18,090.1JapanJapan 13,312.813,312.8

USAUSA 37,149.337,149.37.7. Total quotas of all countries = SDR 219.1 billion.Total quotas of all countries = SDR 219.1 billion.

8.8. A member countrysA member countrys subscriptionsubscription to IMF,to IMF, votingvotingpower, andpower, and accessaccess to IMF assistance depend on itsto IMF assistance depend on its

quota.quota.


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How IMF works (3)How IMF works (3)

9.9. Each member countryEach member country depositsdeposits in IMF:in IMF:

(a) 75% of its quota in its domestic currency;(a) 75% of its quota in its domestic currency;(b) 25% of its quota in hard currency (such as(b) 25% of its quota in hard currency (such as

US dollar, Euro, Japanese Yen, UK poundUS dollar, Euro, Japanese Yen, UK poundsterling, etc.).sterling, etc.).

10.10. When 187 member countries make such deposits,When 187 member countries make such deposits,IMF will have aIMF will have a fundfund of domestic currencies ofof domestic currencies ofmembers and hard currencies.members and hard currencies.

11.11. Hence we have an international monetary fundHence we have an international monetary fund..


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Use of IMF funds (1)Use of IMF funds (1)

1.1. Members get help from IMF byMembers get help from IMF by purchasingpurchasing anyanyforeign currency it wants from IMF with its domesticforeign currency it wants from IMF with its domesticcurrency.currency.

2.2. This willThis will increaseincrease the amount of the countrysthe amount of the countryscurrency held by IMF.currency held by IMF.

3.3. Suppose Myanmar purchases US dollarsSuppose Myanmar purchases US dollarsamounting to 25% of its quota with kyats.amounting to 25% of its quota with kyats.

4.4. Since IMF already holds 75% of Myanmars quotaSince IMF already holds 75% of Myanmars quotain kyats, this will mean IMF holding of kyats will risein kyats, this will mean IMF holding of kyats will riseto 100% of quota.to 100% of quota.


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Use of IMF funds (2)Use of IMF funds (2)

3.3. Purchase of foreign exchange for first 25% ofPurchase of foreign exchange for first 25% ofquota is called purchase in quota is called purchase in first tranchefirst tranche and can and canbe done without much fuss.be done without much fuss.

4.4. Purchases of second 25% of quota secondPurchases of second 25% of quota second

tranche, followed by third and fourth tranches,tranche, followed by third and fourth tranches,become increasingly morebecome increasingly more difficultdifficult, and the, and thecountry must meet IMFcountry must meet IMF conditionsconditions, such as, such as

requirement to make economic reforms andrequirement to make economic reforms andeconomic policy changes before the funds areeconomic policy changes before the funds arereleased.released.


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Repurchase provisionRepurchase provision

1.1. After purchase of foreign exchange from IMF withAfter purchase of foreign exchange from IMF withlocal currency, the country is required tolocal currency, the country is required to buybuybackback, or repurchase, its local currency from IMF, or repurchase, its local currency from IMFwith foreign exchange, within 3 years to 5 years.with foreign exchange, within 3 years to 5 years.

2.2. Hence IMF help is onlyHence IMF help is only short-termshort-term..3.3. IMF acts somewhat like aIMF acts somewhat like a pawnpawn shop. If you areshop. If you are

desperately in need of cash, you pawn your wifedesperately in need of cash, you pawn your wifes jewels at pawn shop. After crisis is over, yous jewels at pawn shop. After crisis is over, yourepurchase (buy back) jewels, or your wife willrepurchase (buy back) jewels, or your wife willnot love you any more.not love you any more.


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Voting Power in IMFVoting Power in IMF

1.1. Each member country has 250 basic votes plus oneEach member country has 250 basic votes plus one

vote for SDR100,000 of its quota.vote for SDR100,000 of its quota.

2.2. Myanmar has 3,266 votes which account for 0.14% ofMyanmar has 3,266 votes which account for 0.14% oftotal votes in IMF.total votes in IMF.

3.3. Due to its very small percentage of total votesDue to its very small percentage of total votesMyanmar has joined the South East AsiaMyanmar has joined the South East Asia Voting GroupVoting Group..

4.4. South East Asia voting group has 13 members -- 10South East Asia voting group has 13 members -- 10ASEAN countries + Fiji, Nepal and Tonga. The GroupASEAN countries + Fiji, Nepal and Tonga. The Group

has 89,139 votes which account for 3.85% of totalhas 89,139 votes which account for 3.85% of totalvotes.votes.

5.5. Other countries with small voting rights also form votingOther countries with small voting rights also form votinggroups. There are over a dozen such voting groups ingroups. There are over a dozen such voting groups in

IMF.IMF.


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Voting Power in IMF: Major PlayersVoting Power in IMF: Major Players

Number of votesNumber of votes Share in totalShare in total

1.1. USAUSA 372,175372,175 16.05%16.05%

2.2. JapanJapan 133,810133,810 5.77%5.77%

3.3. GermanyGermany 130,764130,764 5.64%5.64%

4.4. FranceFrance 108,067108,067 4.66%4.66%

5.5. UKUK 108,067108,067 4.66%4.66%

6.6. ChinaChina 81,583 3.52%81,583 3.52%

7.7. Saudi ArabiaSaudi Arabia 70,537 3.04%70,537 3.04%

8.8. RussiaRussia 60,136 2.59%60,136 2.59%9.9. IndiaIndia 42,264 1.82%42,264 1.82%

10.10. BrazilBrazil 31,043 1.34%31,043 1.34%

World BankWorld Bank PresidentPresident is appointed by USA.is appointed by USA.

IMFIMF Managing DirectorManaging Directoris appointed by EU.is appointed by EU.


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International moneyInternational money

1.1. When citizens of different countries engage inWhen citizens of different countries engage intradetrade, and buy and sell from each other, they, and buy and sell from each other, theyneed international money to engage in business.need international money to engage in business.

2.2. International moneyInternational money is money that will beis money that will be

acceptedaccepted by all countries to make payments, andby all countries to make payments, andto settle debts and accounts. International moneyto settle debts and accounts. International moneyis also called international means of settlementis also called international means of settlementor international liquidity.or international liquidity.


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The gold standard (1)The gold standard (1)

1.1. Under theUnder the gold standardgold standard that existed until thethat existed until the1920s, gold served as international money.1920s, gold served as international money.

2.2. Under this system, each countryUnder this system, each country fixes valuefixes value of itsof itsdomestic currency in terms of a weight in gold.domestic currency in terms of a weight in gold.

3.3. For example, Myanmar fixed the value of kyat, at aFor example, Myanmar fixed the value of kyat, at arate where:rate where:

one ounce of gold = kyats 166.667one ounce of gold = kyats 166.667

4.4. USA fixed:USA fixed:one ounce of gold = 35 dollarsone ounce of gold = 35 dollars


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The gold standard (2The gold standard (2))

5.5. If ounce of gold = US$35 = K166.667If ounce of gold = US$35 = K166.667

6.6. Then $1 = 166.667/35 = K4.7619Then $1 = 166.667/35 = K4.7619

7.7. That is the official K/$ exchange rate whenThat is the official K/$ exchange rate whenMyanmar got independence in 1948.Myanmar got independence in 1948.

8.8. Under the gold standard, suppose MyanmarUnder the gold standard, suppose Myanmarexports $20 mil. to and imports $15 mil. from Indiaexports $20 mil. to and imports $15 mil. from Indiaover a certain period.over a certain period.

9.9. Then India central bank has to pay difference ofThen India central bank has to pay difference of$5 mil. in gold to Myanmar central bank.$5 mil. in gold to Myanmar central bank.


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Gold standard and supply ofGold standard and supply of

international moneyinternational money

1.1. The main source ofThe main source ofsupplysupply of gold for the goldof gold for the goldstandard comes from gold mining.standard comes from gold mining.

2.2. Gold mining, like any other mining activity, doesGold mining, like any other mining activity, does

not ensure anot ensure a steadysteady and sure increase of goldand sure increase of goldsupply it is nature of mining that you may findsupply it is nature of mining that you may findgold or may not find gold.gold or may not find gold.

3.3. Whereas, aWhereas, a steadysteady and assured increase supplyand assured increase supplyof gold to serve as international money is neededof gold to serve as international money is neededto finance a steadily growing world trade.to finance a steadily growing world trade.


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Gold standard and liquidity problemGold standard and liquidity problem

1.1. Experience shows world gold supply onlyExperience shows world gold supply onlyincrease about 1.3% per year.increase about 1.3% per year.

2.2. World trade expands many times that rate.World trade expands many times that rate.

3.3. If world money supply increases at a much slowerIf world money supply increases at a much slower

rate than the growth in world trade, we have arate than the growth in world trade, we have aliquidityliquidity problem. problem.

4.4. Liquidity problem arises when there isLiquidity problem arises when there is shortageshortage ofof

money. For example, nuisance caused bymoney. For example, nuisance caused byshortage of K10, K20, K50, K100 and K500 notes.shortage of K10, K20, K50, K100 and K500 notes.


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Gold exchange standardGold exchange standard

1.1. The solution to the gold standard liquidityThe solution to the gold standard liquidityproblem, is to set up a new system called theproblem, is to set up a new system called thegold exchange standardgold exchange standard, beginning in the late, beginning in the late1920s.1920s.

2.2. Under the gold exchange standard, goldUnder the gold exchange standard, gold togethertogetherwith foreign exchange (mostly US dollar and UKwith foreign exchange (mostly US dollar and UKpound sterling) are used as international money.pound sterling) are used as international money.That is, under the new system, gold, US dollarThat is, under the new system, gold, US dollar

and pound sterling serve as international orand pound sterling serve as international orworldworldmoney.money.


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Reserve currenciesReserve currencies

1.1. US dollar and pound sterling that serve asUS dollar and pound sterling that serve as

international money are also called reserveinternational money are also called reservecurrencies.currencies.

2.2. This is because these currencies held by centralThis is because these currencies held by central

banks are called official foreign exchangebanks are called official foreign exchangereserves.reserves.

3.3. The amount of foreign exchange reserves held byThe amount of foreign exchange reserves held bythe central bank compared to the value of importsthe central bank compared to the value of imports

is an important measure of a countrysis an important measure of a countrys economiceconomicsituationsituation. For example, we can talk about foreign. For example, we can talk about foreignexchange reserves amounting to 3 months ofexchange reserves amounting to 3 months ofimports, 6 months of imports, etc.imports, 6 months of imports, etc.


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Monetary and non-monetary goldMonetary and non-monetary gold

1.1. Gold that serves as international money consistsGold that serves as international money consists

of gold in theof gold in the vaultsvaults of central banks of countriesof central banks of countriesin the world.in the world.

2.2. That price of gold is used to beThat price of gold is used to be fixedfixed officially atofficially at

one ounce = 35 US dollars.one ounce = 35 US dollars.3.3. But gold is aBut gold is a usefuluseful commodity in its own rightcommodity in its own right

and serves many desirable non-monetaryand serves many desirable non-monetarypurposes.purposes.


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Demand for non-monetary goldDemand for non-monetary gold

1.1. JewelleryJewellery industry demands gold.industry demands gold.

2.2. Gold is a goodGold is a good electricelectric conductor, and is veryconductor, and is veryuseful in electroplating and electronic industries. Ituseful in electroplating and electronic industries. Itis used in components inis used in components in satellitessatellites that go to outerthat go to outer

space.space.

3.3. GoldGold hoardershoarders (especially people in Latin(especially people in LatinAmerica, Middle East and India) keep gold asAmerica, Middle East and India) keep gold asform of wealth and for security.form of wealth and for security.

4.4. GoldGold speculatorsspeculators, hold gold to make profits, hold gold to make profitsthrough speculatiothrough speculation.n.


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Types of world gold holdings: 2008Types of world gold holdings: 2008

Gold Holding typeGold Holding type Share (%)Share (%)

JewelleryJewellery 52%52%

Central BanksCentral Banks 18%18%

Investments (bars & coins)Investments (bars & coins) 16%16%

IndustrialIndustrial 12%12%

UnaccountedUnaccounted 2%2%

World totalWorld total 100%100%


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Market for goldMarket for gold

1.1. If gold is aIf gold is a usefuluseful commodity, those who want itcommodity, those who want it

will pay a price for it, those who have it will bewill pay a price for it, those who have it will bewilling to sell it at a price that is, there will be awilling to sell it at a price that is, there will be amarketmarket for gold.for gold.

2.2. Markets for gold exist in London, Paris andMarkets for gold exist in London, Paris andZurich. By far the biggest isZurich. By far the biggest is LondonLondon..

3.3. When there is a market for gold, market andWhen there is a market for gold, market andofficial prices should not be tooofficial prices should not be too differentdifferent. If market. If market

price is much higher, there will be loss ofprice is much higher, there will be loss oftrusttrust andandcredibility in the official price.credibility in the official price.


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Increasing monetary gold priceIncreasing monetary gold price

1.1. Suppose monetary gold price is one ounce = 35Suppose monetary gold price is one ounce = 35dollars and price on gold market is one ounce =dollars and price on gold market is one ounce =40 dollars.40 dollars.

2.2. One way to make official price close to marketOne way to make official price close to market

price is toprice is to increaseincrease official price of gold to 40official price of gold to 40dollars per ounce.dollars per ounce.

3.3. This will not only increaseThis will not only increase valuevalue of existingof existingmonetary gold stock but higher prices willmonetary gold stock but higher prices willencourageencourage gold production, increase gold supplygold production, increase gold supplyand will further help ease liquidity problem.and will further help ease liquidity problem.


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Difficulty in raising monetary gold price (1)Difficulty in raising monetary gold price (1)

1.1. Equity problemEquity problem: Central banks of: Central banks ofrichrich countriescountrieshold largest share of worlds monetary gold stock.hold largest share of worlds monetary gold stock.In 1970, of $ 41 billion monetary gold stock,In 1970, of $ 41 billion monetary gold stock,developed countries held $ 35.7 billion, which isdeveloped countries held $ 35.7 billion, which is

87% so raising gold price makes rich, richer.87% so raising gold price makes rich, richer.2.2. Political problemPolitical problem: largest gold: largest gold producersproducers in worldin world

are South Africa and Soviet Union. Increase goldare South Africa and Soviet Union. Increase goldprice will benefit them. This is not desired forprice will benefit them. This is not desired for

political reasons -- South Africa because of itspolitical reasons -- South Africa because of itsracialracial policies, and Soviet Union because it waspolicies, and Soviet Union because it wascompetingcompeting with Western powers for influence inwith Western powers for influence in

the world arena.the world arena.


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Difficulty in raising monetary gold price (2)Difficulty in raising monetary gold price (2)

3.3. Prestige problemPrestige problem: Raising dollar price of gold: Raising dollar price of goldmeans devaluation of dollar and loss ofmeans devaluation of dollar and loss ofprestigeprestige for USA. This is especially so, as USfor USA. This is especially so, as USmade several countries in South America holdmade several countries in South America hold

dollars as official reserves.dollars as official reserves.4.4. Confidence problemConfidence problem: If official price of gold is: If official price of gold is

raised when market price is higher, then peopleraised when market price is higher, then peoplewillwill worryworry if this will be done again leading toif this will be done again leading to

loss ofloss ofconfidenceconfidence in paper currency.in paper currency.


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Monetary gold production is a uselessMonetary gold production is a uselesseconomic activity (1)economic activity (1)

1.1. Monetary gold, like any other gold, must be dugMonetary gold, like any other gold, must be dugout of the ground, by digging bigout of the ground, by digging big holesholes..

2.2. The gold ore thus obtained is processed, refined,The gold ore thus obtained is processed, refined,

melted and made intomelted and made into bricksbricks..3.3. Gold bricks are then transported thousands ofGold bricks are then transported thousands of

miles andmiles and depositeddeposited in the vaults of central banksin the vaults of central banksall over the world.all over the world.

4.4. VaultsVaults of central banks are nothing but big holesof central banks are nothing but big holesin the ground, fortified and well guarded.in the ground, fortified and well guarded.


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Monetary gold production is a uselessMonetary gold production is a uselesseconomic activity (2)economic activity (2)

5.5. Monetary gold production therefore meansMonetary gold production therefore meansdiggingdigging gold out of one big hole andgold out of one big hole and buryingburying ititagain in another big hole.again in another big hole.

6.6. This isThis is notnot a useful economic activity.a useful economic activity.7.7. Whereas, non-monetary gold production, satisfiesWhereas, non-monetary gold production, satisfies

humanhuman wantswants, and is a useful economic activity., and is a useful economic activity.

8.8. Hence, most economists want to stop using goldHence, most economists want to stop using goldas money, and toas money, and to cut linkcut link of gold to money.of gold to money.


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Need to keep official and market goldNeed to keep official and market gold

price in lineprice in line

1.1. If market price of gold isIf market price of gold is out of lineout of line andandconsistently much higher than the official price ofconsistently much higher than the official price ofgold at $35 per ounce, then official price willgold at $35 per ounce, then official price willappear weak andappear weak and unreliableunreliable..

2.2. To strengthen confidence in the official price, it isTo strengthen confidence in the official price, it isnecessary to keep market pricenecessary to keep market price closeclose to officialto officialprice.price.

3.3. This can be done by This can be done by market interventionmarket intervention in the in thegold market by setting up a gold market by setting up a gold poolgold pool by a by agroup of rich countries.group of rich countries.


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Gold pool to control market price of goldGold pool to control market price of gold

1.1. Central banks of USA, and 7 other WesternCentral banks of USA, and 7 other Westernnations set up thenations set up the gold poolgold pool in early 1960s.in early 1960s.

2.2. Aim of gold pool is to keep the market price ofAim of gold pool is to keep the market price of

gold in the London market between $35.08 andgold in the London market between $35.08 and$35.20 per ounce.$35.20 per ounce.

3.3. If price of goldIf price of gold fallsfalls to $35.08, gold pool agent willto $35.08, gold pool agent willbuybuy gold, so price does not fall further. This willgold, so price does not fall further. This will

increaseincrease gold in pool.gold in pool.4.4. If price of goldIf price of gold risesrises to $35.20, gold pool willto $35.20, gold pool will sellsell

gold, so price dont rise further. This willgold, so price dont rise further. This will reducereducesupply of gold in pool.supply of gold in pool.


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Gold pool and Pound SterlingGold pool and Pound Sterling

devaluation of 1967devaluation of 1967

1.1. Arrangements under gold pool seem to work wellArrangements under gold pool seem to work wellfor several years.for several years.

2.2. But when the British pound wasBut when the British pound was devalueddevalued on 18on 18November 1967, there was loss of faith in paperNovember 1967, there was loss of faith in papercurrency. There was fear, the dollar will becurrency. There was fear, the dollar will bedevalued as well.devalued as well.

3.3. When there is loss ofWhen there is loss offaithfaith in paper currency, whatin paper currency, what

you do is go to London and other gold marketsyou do is go to London and other gold marketsand buy gold with all the dollars and pounds thatand buy gold with all the dollars and pounds thatyou own.you own.


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End of gold poolEnd of gold pool

1.1. Within one week after pound devaluation goldWithin one week after pound devaluation goldhoarders and speculators bought 250 tons of goldhoarders and speculators bought 250 tons of gold(valued at $280 mil.) on London market.(valued at $280 mil.) on London market.

2.2. This mad goldThis mad gold buyingbuying continued with increasedcontinued with increased

frenzyfrenzy into March 1968.into March 1968.3.3. On 14 March 1968, $200 mil. worth of gold wasOn 14 March 1968, $200 mil. worth of gold was

bought in one day alone. By this date the goldbought in one day alone. By this date the goldpool had lost $3 bil. worth of gold.pool had lost $3 bil. worth of gold.

4.4. This was too much, and the pool wasThis was too much, and the pool was disbandeddisbandedon 17 March 1968.on 17 March 1968.


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Gold price rise in London marketGold price rise in London market

With disbanding of gold pool, London market goldWith disbanding of gold pool, London market goldprice was setprice was set freefree. The prie rose as follows:. The prie rose as follows:

Year/dateYear/date Price per ouncePrice per ounce

19701970 $37.4$37.4

19751975 $140.3$140.3

19851985 $327.0$327.019951995 $369.6$369.6

20052005 $513.1$513.12011 (14 March)2011 (14 March) $1,428.1$1,428.1


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World official gold holdings in Dec 2010World official gold holdings in Dec 2010

CountryCountry Gold holdingGold holding (tons)(tons) Share of totalShare of total (%)(%)

1.1. USAUSA 8,134 26.6%8,134 26.6%

2.2. GermanyGermany 3,402 11.1%3,402 11.1%

3.3. ItalyItaly 2,452 8.1%2,452 8.1%

4.4. FranceFrance 2,435 8.0%2,435 8.0%5.5. ChinaChina 1,054 3.4%1,054 3.4%

6.6. SwitzerlandSwitzerland 1,040 3.4%1,040 3.4%

7.7. RussiaRussia 775 2.6%775 2.6%

8.8. JapanJapan 765 2.5%765 2.5%9.9. IndiaIndia 558 1.8%558 1.8%

10.10. Other countriesOther countries 9,9489,948 32.5%32.5%

11.11. World totalWorld total 30,563 100.0%30,563 100.0%


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Need for new kind of world moneyNeed for new kind of world money

1.1. With all sorts ofWith all sorts ofproblemsproblems associated with goldassociated with goldand paper money why not come up with anotherand paper money why not come up with anothertype of world money, that is not gold and nottype of world money, that is not gold and notpaper.paper.

2.2. This new type of world money is the SpecialThis new type of world money is the SpecialDrawing Rights (SDRs) of IMF.Drawing Rights (SDRs) of IMF.

3.3. The decision toThe decision to createcreate SDRs was taken at theSDRs was taken at theannual meeting of IMF Board of Governors, heldannual meeting of IMF Board of Governors, held

at Rio de Janeiro, Brazil, inat Rio de Janeiro, Brazil, in September 1967September 1967..


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Special Drawing Rights (1)Special Drawing Rights (1)

1.1. SDR is called an SDR is called an international reserve assetinternational reserve asset and andtogether with gold, and reserve currencies (dollar,together with gold, and reserve currencies (dollar,Euro, pound, yen, etc.) are to be used asEuro, pound, yen, etc.) are to be used asinternational money.international money.

2.2. SDR is not gold and not paper money. It onlySDR is not gold and not paper money. It onlyexists in theexists in the booksbooks of the IMF.of the IMF.

3.3. This is nothing new. In developed countries,This is nothing new. In developed countries,

currency notes and coins are no longer usedcurrency notes and coins are no longer usedmuch for market transactions. Instead, creditmuch for market transactions. Instead, credit

cards andcards and bank accountsbank accounts are usedare used..


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4.4.

SDRs amounting toSDRs amounting to

$3.5$3.5

billion were created forbillion were created for

first time in 1 January 1970.first time in 1 January 1970.

5.5. At that time 1SDR = 1US$.At that time 1SDR = 1US$.

6.6. SDRs areSDRs are allocatedallocated to each IMF member countryto each IMF member country

according to its quota.according to its quota.

7.7. For example, in 1970 Myanmars quota was $48For example, in 1970 Myanmars quota was $48million; total quotas was $21 billion.million; total quotas was $21 billion.

8.8. So Myanmars share = $3.5 bil X 48/21,000So Myanmars share = $3.5 bil X 48/21,000= SDR 8 million.= SDR 8 million.


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9.9.

An IMF member can use SDRs toAn IMF member can use SDRs to

settlesettle

payments with any other IMF member. Suchpayments with any other IMF member. Suchsettlements are done bysettlements are done by transferringtransferring SDRs fromSDRs fromone members account to anothers account inone members account to anothers account in

IMFs books.IMFs books.10.10. Additional SDRs areAdditional SDRs are createdcreated from time to time,from time to time,

as felt required by IMF authorities.as felt required by IMF authorities.

11.11. Quota can also beQuota can also be increasedincreased over time,over time,depending on a countrys economic performancedepending on a countrys economic performancecompared to others.compared to others.


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SDR valuationSDR valuation

1.1.

At present one SDR is composed of aAt present one SDR is composed of a

basketbasket

ofof

four currencies in following proportions:four currencies in following proportions:US$ =US$ = 41.9%41.9%

Euro =Euro = 37.4%37.4%Pound sterling =Pound sterling = 11.3%11.3%Japanese Yen =Japanese Yen = 9.4%9.4%Total =Total = 100.0%100.0%

2.2. Value of SDR, and percentages of currencies inValue of SDR, and percentages of currencies inthe basket are changed by IMFthe basket are changed by IMF Executive BoardExecutive Boardevery 5 years.every 5 years.


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Valuing SDR in US dollar (1)Valuing SDR in US dollar (1)

In addition to the percentages of 4 major worldIn addition to the percentages of 4 major worldcurrencies that form SDR, the amounts of each currencycurrencies that form SDR, the amounts of each currencyin the SDR is also fixed and specified by the IMFin the SDR is also fixed and specified by the IMFExecutive Board for every 5 years. For the present 5Executive Board for every 5 years. For the present 5year period, these are as follows:year period, these are as follows:

CurrencyCurrency AmountAmountUS dollarUS dollar 0.66000.6600EuroEuro 0.42300.4230Pound sterlingPound sterling 0.11100.1110Japanese yenJapanese yen 12.100012.1000


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Valuing SDR in US dollars (2)Valuing SDR in US dollars (2)

1.1. Value of SDR in US dollars changes every day and isValue of SDR in US dollars changes every day and is

available from IMF web-site. For example, foravailable from IMF web-site. For example, for1414March 2011March 2011, the dollar exchange rate for each of 4, the dollar exchange rate for each of 4currencies in SDR prevailing on that date is used andcurrencies in SDR prevailing on that date is used andthe following calculation is made:the following calculation is made:

2.2. CurrencyCurrency AmountAmount Exchange RateExchange Rate Value in US$Value in US$

US dollarUS dollar 0.6600 1.0000 $0.66000.6600 1.0000 $0.6600EuroEuro 0.4230 1.3960 $0.59050.4230 1.3960 $0.5905PoundPound 0.1110 1.6105 $0.17880.1110 1.6105 $0.1788YenYen 12.1000 81.870012.1000 81.8700 $0.1478$0.1478

1 SDR = $1.57711 SDR = $1.5771


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Myanmars official exchange rateMyanmars official exchange rate

1.1. On 2 May 1977, Myanmars official exchangeOn 2 May 1977, Myanmars official exchangerate was fixed at:rate was fixed at:

1SDR = K8.50851SDR = K8.5085

2.2. This rate has not been changed up to now.This rate has not been changed up to now.3.3. As noted above, on 14 March 2011:As noted above, on 14 March 2011:

1SDR = US$ 1.57711SDR = US$ 1.5771

4.4. So on 14 March 2011:So on 14 March 2011:US$1 = 8.5085/1.5771 = K5.3950US$1 = 8.5085/1.5771 = K5.3950

5.5. That is official K/$ exchange rate on 14 MarchThat is official K/$ exchange rate on 14 March2011.2011.


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End of gold exchange standardEnd of gold exchange standard

1.1. After collapse of gold pool in March 1968, andAfter collapse of gold pool in March 1968, andSDR creation beginning in January 1970,SDR creation beginning in January 1970, knock-knock-outout punch to gold exchange standard came inpunch to gold exchange standard came in1971 when US President Nixon1971 when US President Nixon cut linkcut link of dollarof dollar

to gold by abolishing the fixing of official price ofto gold by abolishing the fixing of official price of$35 for one ounce of gold.$35 for one ounce of gold.

2.2. This was called This was called Nixon shockNixon shock and it ended the and it ended the

gold exchange standard.gold exchange standard.


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SDRs and reserve currencies (1)SDRs and reserve currencies (1)

1.1. With ending of golds role as international money,With ending of golds role as international money,we are left with SDRs and reserve currencieswe are left with SDRs and reserve currencies(now US dollar, Euro, pound sterling, yen) that all,(now US dollar, Euro, pound sterling, yen) that all,or most countries will accept to make payments inor most countries will accept to make payments in

international economic and business transactions.international economic and business transactions.2.2. How good are SDRs and reserve currencies inHow good are SDRs and reserve currencies in

doing their job? How well have they served thedoing their job? How well have they served the

world community, both rich and poor?world community, both rich and poor?

SDR d i (2)SDRs and reserve currencies (2)


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SDRs and reserve currencies (2)SDRs and reserve currencies (2)

1.1. Upto September 2009, a total of SDR 204 billion hasUpto September 2009, a total of SDR 204 billion has

been issued and allocated to IMF members -- not abeen issued and allocated to IMF members -- not alarge amount compared to financial flows in worldlarge amount compared to financial flows in worldeconomy that are taking place in trillions of dollars.economy that are taking place in trillions of dollars.

2.2. In March 2009, the Governor of Chinas CentralIn March 2009, the Governor of Chinas Central

Bank, proposed that SDR shouldBank, proposed that SDR should replacereplace the USthe USdollar as reserve asset (that is, international money).dollar as reserve asset (that is, international money).

3.3. Why?Why?

4.4. To find out, we have to consider economic, socialTo find out, we have to consider economic, socialand politicaland political consequencesconsequences of using a domesticof using a domesticcurrency of one country (USA) as internationalcurrency of one country (USA) as international

money by rest of world. This is taken up belomoney by rest of world. This is taken up below.w.


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Use of reserve currencies and especiallyUse of reserve currencies and especially

US dollar (1)US dollar (1)

4.4. At present, US dollar, together with a few otherAt present, US dollar, together with a few otherhard currencies (euro, pound sterling, yen, etc.)hard currencies (euro, pound sterling, yen, etc.)are used as reserve currencies or world money.are used as reserve currencies or world money.

5.5. As stated earlier, these currencies will beAs stated earlier, these currencies will beaccepted by all or most countries in buying andaccepted by all or most countries in buying andselling and in carrying out trade and otherselling and in carrying out trade and othereconomic and business transactions amongeconomic and business transactions among

themselves and with USA.themselves and with USA.


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Use of reserve currencies and especiallyUse of reserve currencies and especially

US dollar (2)US dollar (2)

6.6. Among reserve currencies, by far the widest andAmong reserve currencies, by far the widest andlargest amount used in international transactionslargest amount used in international transactionsis the US dollar.is the US dollar.

7.7. US dollar has longUS dollar has long historyhistory as reserve currency. Itas reserve currency. Itis well-known, familiar and trusted by most peopleis well-known, familiar and trusted by most peoplein world.in world.

8.8. US is biggest economy, biggest market, its banks,US is biggest economy, biggest market, its banks,companies and businesses are spread all overcompanies and businesses are spread all overthe world.the world.

9.9. We will thereforeWe will therefore concentrateconcentrate on US dollar.on US dollar.


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Demand for US dollars for worldDemand for US dollars for world

economic and trade dealingseconomic and trade dealings

There are three types of demand, namely:There are three types of demand, namely:

1.1. Transaction demandTransaction demand: to meet demand for money: to meet demand for moneyin transactions to buy and sell in market.in transactions to buy and sell in market.

2.2. Precautionary demandPrecautionary demand: to have money in store: to have money in storefor security and to meet unexpected events andfor security and to meet unexpected events andemergencies.emergencies.

3.3. Speculative demandSpeculative demand: to have money for use to: to have money for use tospeculate in foreign exchange, commodity, stockspeculate in foreign exchange, commodity, stockand financial markets.and financial markets.


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Supply of US dollars for world economy (1)Supply of US dollars for world economy (1)

1.1. How does the worldHow does the world getsgets dollars to use asdollars to use asinternational money? How can the world increaseinternational money? How can the world increaseits supply of dollars to use as internationalits supply of dollars to use as internationalmoney?money?

2.2. To answer, look atTo answer, look at tradetrade relations between USrelations between USand rest of world (R/W).and rest of world (R/W).

3.3. When R/WWhen R/W sellssells goods and services to US, itgoods and services to US, it

getsgets

dollars from US. When R/Wdollars from US. When R/W

buysbuys

goodsgoods

and services from US, itand services from US, it gives upgives up dollars to US.dollars to US.


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Supply of US dollars for world economy (2)Supply of US dollars for world economy (2)

4.4. For R/W toFor R/W to increaseincrease its dollar supply, the value ofits dollar supply, the value ofgoods and services it sells to US must be largergoods and services it sells to US must be largerthan the value of goods and services it buys fromthan the value of goods and services it buys from

US, that is, it must have aUS, that is, it must have a trade surplustrade surplus with US.with US.5.5. From US point of view, US must buy more than itFrom US point of view, US must buy more than it

sells to R/W, that is, must have asells to R/W, that is, must have a trade deficittrade deficitwith R/W, for R/W to increase its supply of dollars.with R/W, for R/W to increase its supply of dollars.


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Adjustment issueAdjustment issue

1.1. When most countries haveWhen most countries have trade deficittrade deficit, they, theycover deficit by drawing down foreign exchangecover deficit by drawing down foreign exchangereserves, by borrowing, or asking IMF for help.reserves, by borrowing, or asking IMF for help.But these measures are only good for short term,But these measures are only good for short term,

or a few years.or a few years.2.2. If trade deficit is due to a serious If trade deficit is due to a serious structuralstructural

problem and deficit continues, year after year forproblem and deficit continues, year after year formany years, the country must take many years, the country must take adjustmentadjustment

measures, to increase exports, reduce imports, ormeasures, to increase exports, reduce imports, orboth.both.

Adj d


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Adjustment and reserve currencyAdjustment and reserve currency

countrycountry

1.1. A country like US, whose domestic money isA country like US, whose domestic money isused as reserve currency,used as reserve currency, does not have to takedoes not have to takeadjustment measuresadjustment measures to correct its trade deficitto correct its trade deficit

with rest of world.with rest of world.2.2. In fact, US had trade deficits with R/W for theIn fact, US had trade deficits with R/W for the

most part of the past 60 years.most part of the past 60 years.

3.3. Reason is dollars that flowed to R/W are used forReason is dollars that flowed to R/W are used fortransaction, precautionary and speculativetransaction, precautionary and speculativepurposes and not only to buy goods and servicespurposes and not only to buy goods and servicesfrom US.from US.

US t d d fi it d fi i l fl t


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US trade deficit and financial flows toUS trade deficit and financial flows to

world economyworld economy

1.1. Trade deficit of US for many years hasTrade deficit of US for many years has floodedfloodedworld with dollars which are used to meet worldworld with dollars which are used to meet worlddemand for world money.demand for world money.

2.2. The large amounts of dollars in R/W are held byThe large amounts of dollars in R/W are held bycentral banks as exchange reserves. At present,central banks as exchange reserves. At present,these amounted to $7.4 trillion. Of this, Chinathese amounted to $7.4 trillion. Of this, Chinaheld $2.62 trillion and Japan $996 billion.held $2.62 trillion and Japan $996 billion.

3.3. Large amounts of dollars are also held by theLarge amounts of dollars are also held by theprivate sector in R/W.private sector in R/W.


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Benefits of US trade deficit and US$ asBenefits of US trade deficit and US$ as

reserve currency (1)reserve currency (1)

1.1. US trade deficit hasUS trade deficit has helped easehelped ease shortage ofshortage ofworld money or world liquidity.world money or world liquidity.

2.2. The cause of deficit is American consumers hugeThe cause of deficit is American consumers hugeappetite for imports which amounted to $2.3appetite for imports which amounted to $2.3trillion in 2007.trillion in 2007.

3.3. Selling goods in the huge US market bought rapidSelling goods in the huge US market bought rapid

income growth and prosperity to India, China andincome growth and prosperity to India, China andmany other countries in R/W.many other countries in R/W.


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Benefits of US trade deficit and US$ asBenefits of US trade deficit and US$ as

reserve currency (2)reserve currency (2)

4.4. Goods sold in the US market are produced inGoods sold in the US market are produced inChina, India & R/W by USChina, India & R/W by US multinationalsmultinationals..

5.5. Multinationals gave technology, know-how,Multinationals gave technology, know-how,

enterprise, capital, management and marketingenterprise, capital, management and marketingskills to Indians, Chinese & others in R/W to makeskills to Indians, Chinese & others in R/W to makelap-top computers, digital cameras, washinglap-top computers, digital cameras, washingmachines, out-sourcing services, etc., usingmachines, out-sourcing services, etc., using

cheap labour.cheap labour.

6.6. Large amounts of these goods and services wentLarge amounts of these goods and services wentto US and other Western countries.to US and other Western countries.


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Three big flows in world economyThree big flows in world economy

There are said to be three big flows in the worldThere are said to be three big flows in the worldeconomy. They are:economy. They are:

1.1.FirstFirst, flow of technology, know-how, capital,, flow of technology, know-how, capital,enterprise from US to China, India & R/W.enterprise from US to China, India & R/W.

2.2.SecondSecond, flow of goods and services from China,, flow of goods and services from China,India & R/W to US.India & R/W to US.

3.3.ThirdThird, financial flows between US and R/W., financial flows between US and R/W.

4.4.These 3 flows improved productivity, incomes andThese 3 flows improved productivity, incomes andliving standards in US and its trade partners inliving standards in US and its trade partners indeveloping world over the past decade.developing world over the past decade.

Di d t f US t d d fi it dDi d t f US t d d fi it d


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Disadvantages of US trade deficit andDisadvantages of US trade deficit and

US$ as reserve currency (1)US$ as reserve currency (1)

1.1. Use of domestic currency of a country (like US),Use of domestic currency of a country (like US),as reserve currency, brings someas reserve currency, brings some very usefulvery usefulbenefitsbenefits to that country.to that country.

2.2. For example, consider $7.4 trillion held by centralFor example, consider $7.4 trillion held by centralbanks of R/W as foreign exchange reserves.banks of R/W as foreign exchange reserves.

3.3. Every US dollar that is held by a person, aEvery US dollar that is held by a person, abusiness, an organization or central bank in R/W,business, an organization or central bank in R/W,represents arepresents a claimclaim on the USA.on the USA.



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4.4. That is, aThat is, a non-US personnon-US person, that has dollars, can, that has dollars, canuse those dollars to buy anything he wants fromuse those dollars to buy anything he wants fromUSA. USA must sell what he wants, provided theUSA. USA must sell what he wants, provided the

item is not a nuclear bomb, or a banneditem is not a nuclear bomb, or a bannedsubstance.substance.

5.5. But if the non-US person, does not buy anythingBut if the non-US person, does not buy anythingfrom US, but just holds on to the dollars becausefrom US, but just holds on to the dollars because

he needs dollars for trade, security andhe needs dollars for trade, security andspeculative purposes, the person isspeculative purposes, the person is not using hisnot using hisclaimclaim on US.on US.



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6.6. When person A has claim on person B, but if AWhen person A has claim on person B, but if Aholds on to claim, and does not make use of thisholds on to claim, and does not make use of thisclaim, it means A isclaim, it means A is giving a loangiving a loan to B.to B.

7.7. Trillions of dollars held by R/W central banks, andTrillions of dollars held by R/W central banks, andmore trillions held by R/W private sectors,more trillions held by R/W private sectors,represent loans to US. These loans are forrepresent loans to US. These loans are forperiods over which US has trade deficits withperiods over which US has trade deficits with

R/W, that is for 50 to 60 years.R/W, that is for 50 to 60 years.



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8.8. Question is why should USA, largest and one ofQuestion is why should USA, largest and one ofrichest countries be given loans of trillions of dollarsrichest countries be given loans of trillions of dollarsfor 50 to 60 years.for 50 to 60 years.

9.9. Poor countriesPoor countries deservedeserve to get loans more thanto get loans more thanUSA.USA.

10.10.This is importantThis is important defectdefect of the present worldof the present worldfinancial system.financial system.

H ldi i h iHolding e cessi e e change reser es is


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Holding excessive exchange reserves isHolding excessive exchange reserves is

not goodnot good

1.1. At present China has nearly $2.62 trillion worth ofAt present China has nearly $2.62 trillion worth offoreign exchange reserves.foreign exchange reserves.

2.2. Most of these are used to buy US treasury bonds,Most of these are used to buy US treasury bonds,

and kept at US banks and other financialand kept at US banks and other financialinstitutions, to earn interest and income.institutions, to earn interest and income.

3.3. Keeping excessive reserves isKeeping excessive reserves is wastefulwasteful and notand notgood.good.

4.4. Because the funds could be used for moreBecause the funds could be used for more usefulusefulpurposes within China.purposes within China.

F t f MF t f M


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Fantasy of Myanmar as reserveFantasy of Myanmar as reservecurrency countrycurrency country

1.1. DigressionDigression: Suppose, Myanmars local currency: Suppose, Myanmars local currencykyatkyat is used as reserve currency and worldis used as reserve currency and worldmoney, what will happen?money, what will happen?

2.2. Suppose, Myanmar has loan of half trillion dollarsSuppose, Myanmar has loan of half trillion dollars($500 bil.) for 20 years. Then what?($500 bil.) for 20 years. Then what?

Consequences of huge loan from R/W to USConsequences of huge loan from R/W to US


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q gq g

1.1. HighHigh consumptionconsumption with US saving rate falling to zero overwith US saving rate falling to zero overthe past years.the past years.

2.2. Engaging inEngaging in militarymilitary adventures abroad and buying upadventures abroad and buying upcompanies of other countries.companies of other countries.

3.3. ProvidingProviding easy crediteasy credit at high risks to buy houses as wellat high risks to buy houses as wellas giving easy credit to banks and other financialas giving easy credit to banks and other financial

institutions.institutions.4.4. Not providing them with properNot providing them with propersupervisionsupervision..

5.5. Over recent years,Over recent years, income distributionincome distribution in US was gettingin US was gettingworse -- particularly for those at the bottom. There wasworse -- particularly for those at the bottom. There was

political pressurepolitical pressure to do something about this and measureto do something about this and measureadopted was to give very easy credit to low income peopleadopted was to give very easy credit to low income peopleto buy houses, houses in turn provided collateral to buyto buy houses, houses in turn provided collateral to buymany other things. When the housing "bubble" bursts,many other things. When the housing "bubble" bursts,house prices fell, loans cannot be paid back, many losthouse prices fell, loans cannot be paid back, many losttheir ro erties, and that tri ered the financial crisis.their properties, and that triggered the financial crisis.

L di l f US i IMF d W ldLeading role of US in IMF and World


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Leading role of US in IMF and WorldLeading role of US in IMF and World

BankBank

1.1. IMF and World Bank have not been able toIMF and World Bank have not been able toproperlyproperly play role for which they were established.play role for which they were established.

2.2. Due to USDue to US dominancedominance, these institutions often act, these institutions often act

to achieve political and foreign policy objectives ofto achieve political and foreign policy objectives ofUSA.USA.

3.3. Established over 60 years ago, IMF and WorldEstablished over 60 years ago, IMF and WorldBank, their policies and way they work, often doBank, their policies and way they work, often donotnot reflectreflect present realities.present realities.


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Washington consensus (1)Washington consensus (1)

1.1. Fall of Berlin wall, end of Soviet Union, changesFall of Berlin wall, end of Soviet Union, changesin Eastern Europe, led toin Eastern Europe, led to loss of faithloss of faith ininsocialism, communism and central planning tosocialism, communism and central planning topromote economic growth.promote economic growth.

2.2. This was greeted with muchThis was greeted with much happinesshappiness in West,in West,and especially in Washington.and especially in Washington.

3.3. It resulted in what is called It resulted in what is called WashingtonWashington

ConsensusConsensus..


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4.4.

5.5.

6.6. WhatWhat measuresmeasures are recommended underare recommended underWashington consensus? These include:Washington consensus? These include:

7.7. Liberalize, privatize, allow freer play of marketLiberalize, privatize, allow freer play of marketforces.forces.


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8.8. Liberalize banking and insurance business,Liberalize banking and insurance business, openopenupup markets for trade and investment.markets for trade and investment.

9.9. EncourageEncourage greater flowgreater flow of international financeof international financeand capital.and capital.

10.10. Outward-orientationOutward-orientation, and to participate in and, and to participate in andtake advantage of the information revolution andtake advantage of the information revolution andthe globalization process.the globalization process.

11.11. Government shouldGovernment should get outget out of direct production.of direct production.


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12.12.Instead, government should concentrate onInstead, government should concentrate ongoverninggoverning country, promoting law & order.country, promoting law & order.

13.13. Providing essentialProviding essential public servicespublic services (such as(such ashealth, education, social welfare, protectinghealth, education, social welfare, protectingenvironment).environment).

14.14. And doing things that areAnd doing things that are market-friendlymarket-friendly andandthat support private initiative.that support private initiative.


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15.15.ToTo sum upsum up, Washington people are saying: if, Washington people are saying: ifyou want to become a modern developed countryyou want to become a modern developed countrylike us, there is now only one way left for you tolike us, there is now only one way left for you to

go, and that is to go our way, and way we havego, and that is to go our way, and way we havebeen telling you to go for the past severalbeen telling you to go for the past severaldecades.decades.

16.16.This advice wasThis advice was well receivedwell received. Even Myanmar,. Even Myanmar,

the last country to take advice from Washington,the last country to take advice from Washington,wants to establish a market-oriented economicwants to establish a market-oriented economicsystem.system.


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Washington Consensus: Serious flaws (1)Washington Consensus: Serious flaws (1)

1.1. It took over 100 years to set upIt took over 100 years to set up free enterprisefree enterprisemarket system as it exists now in US.market system as it exists now in US.

2.2. In its early history, US facedIn its early history, US faced samesame problems as inproblems as in

developing countries today.developing countries today.3.3. But after many years, US set upBut after many years, US set up mechanismsmechanisms

checks and balances to make its free marketchecks and balances to make its free marketsystem work in a more effective and sociallysystem work in a more effective and socially

responsible way.responsible way.



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1.1. Americans would readily agree their checks andAmericans would readily agree their checks and

balances and control mechanisms arebalances and control mechanisms are not perfectnot perfect..2.2. For example, Enron and several other large USFor example, Enron and several other large US

corporations providedcorporations provided misleadingmisleading informationinformationabout their performance and falsified accounts.about their performance and falsified accounts.

3.3. Revelations ofRevelations ofmisconductmisconduct by some prominent USby some prominent USChief Executive Officers (CEOs) have beenChief Executive Officers (CEOs) have been

devastating.devastating.

4.4. These CEOs have given to themselves luxuryThese CEOs have given to themselves luxuryyachts, mansions, large chunks of shares in theiryachts, mansions, large chunks of shares in theircompanies and millions of dollars tocompanies and millions of dollars to take hometake home asastheir salaries.their salaries.

W hi t C S i fl (3)W hi t C S i fl (3)


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5.5. However, despite these shortcomings, controlHowever, despite these shortcomings, controlmechanisms in the US havemechanisms in the US have wide powerswide powers to limitto limitsuch excesses and prevent them from getting outsuch excesses and prevent them from getting outof hand.of hand.

6.6. The present global crisis itself is due to theThe present global crisis itself is due to theprocess ofprocess ofderegulationderegulation and downplaying and notand downplaying and notmaking effective use of control mechanisms themaking effective use of control mechanisms theUS has -- to see that its banking, finance andUS has -- to see that its banking, finance and

business corporations do notbusiness corporations do not misbehavemisbehave and actand actin unethical and anti-social ways. That is nowin unethical and anti-social ways. That is nowgoing to change, and required regulations aregoing to change, and required regulations aregoing to be reintroduced and enforced.going to be reintroduced and enforced.


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7.7. Control mechanisms, that US has developedControl mechanisms, that US has developedover many years, just doover many years, just do not existnot exist in developingin developingcountries of today.countries of today.

8.8. Liberalization, especially of financial and capitalLiberalization, especially of financial and capitalmarkets, hold special dangers.markets, hold special dangers.

9.9. Free flow ofFree flow ofshort-term capitalshort-term capital is like driving is like drivingShan StarShan Starcar, with Mercedes Benz engine, nocar, with Mercedes Benz engine, no

brakes, at high speed, on busy highway, wherebrakes, at high speed, on busy highway, wherethere are no traffic rules, not even to drive onthere are no traffic rules, not even to drive onroads right or left side.roads right or left side.

Short term capital flows and the AsianShort term capital flows and the Asian


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financial crisis (1)financial crisis (1)

1.1. Main thing that caused Asian financial crisis ofMain thing that caused Asian financial crisis of1997/98 was huge flow of1997/98 was huge flow ofprivate capitalprivate capital into andinto andout of these counties within a very short time.out of these counties within a very short time.

2.2. In 1996, there was a net private capitalIn 1996, there was a net private capital inflowinflow ofof$97 billion into these countries. Then in the latter$97 billion into these countries. Then in the latterhalf of 1997, the flow reversed itself and therehalf of 1997, the flow reversed itself and there

was a net outflow of $12 billion.was a net outflow of $12 billion.



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financial crisis (2)financial crisis (2)

3.3. This means there was aThis means there was a turnaroundturnaround of $109 billionof $109 billionwithin a period of about 6 months, a very largewithin a period of about 6 months, a very largesum of money for these countries. It amounted tosum of money for these countries. It amounted to10% of their combined GDP.10% of their combined GDP.

4.4. There isThere is general agreementgeneral agreement that the Asianthat the Asianfinancial crisis is mainly due to this big andfinancial crisis is mainly due to this big anddevastating turnaround in short-term capital flowdevastating turnaround in short-term capital flow

that occurred in these countries.that occurred in these countries.


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Reforming international financial systemReforming international financial system

1.1. In October 2008, UN Secretary GeneralIn October 2008, UN Secretary Generalappointed a High-Level Expertsappointed a High-Level Experts Task ForceTask Force..

2.2. Task Force is to undertake aTask Force is to undertake a comprehensivecomprehensive

reviewreview of the international financial system,of the international financial system,including the major international economicincluding the major international economicinstitutions.institutions.

3.3. Task force is led byTask force is led by Joseph StiglitzJoseph Stiglitz..

April 2007, Washington, D.C., USA; Woodrow WilsonApril 2007, Washington, D.C., USA; Woodrow Wilson


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p , g , , ;p , g , , ;International Center. From left to right: U Thet Tun, UInternational Center. From left to right: U Thet Tun, UMyint,Myint, Joseph StiglitzJoseph Stiglitz, Ronald Findlay, U Myat Thein., Ronald Findlay, U Myat Thein.


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Views of some key developing countries (1)Views of some key developing countries (1)

1.1. Brazil, Russia, India and China (BRIC) held firstBrazil, Russia, India and China (BRIC) held firstannual summit in Russia on June 16 2009.annual summit in Russia on June 16 2009.

2.2. Aim is to developAim is to develop common positioncommon position onon

international financial reform and climate change.international financial reform and climate change.3.3. BRIC now account for 22% of world economy andBRIC now account for 22% of world economy and

the four countries together have 9.27% of totalthe four countries together have 9.27% of totalvotes in the IMF.votes in the IMF.


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4.4. In recent months, Russian, Chinese and BrazilianIn recent months, Russian, Chinese and Brazilianofficials said they want toofficials said they want to move awaymove away from U.S.from U.S.dollar and to use more domestic currency indollar and to use more domestic currency in

bilateral trade.bilateral trade.5.5. They have also talked aboutThey have also talked about alternatealternate reservereserve

currencies and reserve diversification.currencies and reserve diversification.

6.6. BRICs are thinking of buying each others bondsBRICs are thinking of buying each others bonds

to lessen dependence on U.S. dollar.to lessen dependence on U.S. dollar.

Vie s of some ke de eloping co ntries (3)Views of some key developing countries (3)


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7.7. BRICs want stable, predictable and moreBRICs want stable, predictable and morediversified international monetary system.diversified international monetary system.

8.8. BRICs have agreed to buy forthcoming IMFBRICs have agreed to buy forthcoming IMF

bonds to help raise needed funds. China hasbonds to help raise needed funds. China hasagreed to buy up to $50 billion, andagreed to buy up to $50 billion, andRussia, India and Brazil have pledged to buy $10Russia, India and Brazil have pledged to buy $10billion each.billion each.

9.9. For these contributions, they all seek greaterFor these contributions, they all seek greatervoting power in IMF.voting power in IMF.

Reforming institutions IMF and WorldReforming institutions IMF and World


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Bank (1)Bank (1)

1.1. IMF and World Bank should be moreIMF and World Bank should be more democraticdemocraticand not run by a few.and not run by a few.

2.2. They shouldThey should reflectreflect present realities in worldpresent realities in world

economy.economy.3.3. They should not be used toThey should not be used to serveserve political andpolitical and

foreign policy objectives of major powers.foreign policy objectives of major powers.

4.4. Developing countries should haveDeveloping countries should have more saymore say andandshould receive more equitable benefits.should receive more equitable benefits.



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Bank (2)Bank (2)

5.5. Resources and technical expertise in IMF andResources and technical expertise in IMF andWorld Bank should be more effectively used toWorld Bank should be more effectively used tohelp address financial and economic problemshelp address financial and economic problems

causing deep concern to internationalcausing deep concern to internationalcommunity.community.

6.6. Action should be guided by better policies Action should be guided by better policies Washington consensusWashington consensus must gomust go..

Question of poor countries: the bottomQuestion of poor countries: the bottom


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billion (BB) [1]billion (BB) [1]

1.1. Not long ago, developed countries had one billionNot long ago, developed countries had one billionpeople, while developing countries hadpeople, while developing countries had 5 billion5 billionpeople.people.

2.2. Now many developing countries are making goodNow many developing countries are making goodeconomic progress India, China, Korea, Brazil,economic progress India, China, Korea, Brazil,Singapore, Thailand, Malaysia, etc. They are onSingapore, Thailand, Malaysia, etc. They are onmove, and gaining momentum. So at present,move, and gaining momentum. So at present, nono

need to worryneed to worry too much about them. Four billion intoo much about them. Four billion indeveloping countries are thereforedeveloping countries are therefore OKOK..



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billion (BB) [2]billion (BB) [2]

3.3. What is worrisome are countries that haveWhat is worrisome are countries that have notnotmovedmoved, but are said to be falling behind and, but are said to be falling behind andfalling apart.falling apart.

4.4. There are 58 such countries mostly in Africa butThere are 58 such countries mostly in Africa buta few also in other parts of world.a few also in other parts of world.

5.5. A billion people live in these countries they areA billion people live in these countries they arethethe bottom billionbottom billion (BB).(BB).

6.6. WhyWhy worryworry about them look at Somalia, a failedabout them look at Somalia, a failedstate, it's people with no way out, became seastate, it's people with no way out, became seapirates causing major menace to world.pirates causing major menace to world.

Bottom billion (BB) and global financialBottom billion (BB) and global financial


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crisis (1)crisis (1)

BB countries think they areBB countries think they are immuneimmune to globalto globalfinancial disease, because:financial disease, because:

1.1. They are inThey are in isolation wardisolation ward not much dealing with not much dealing with

US and outside world.US and outside world.2.2. Economy isEconomy is underdevelopedunderdeveloped no stock market, no stock market,

banking sector is in kindergarten stage, nobanking sector is in kindergarten stage, nomultinationals, no need to worry about reservemultinationals, no need to worry about reservecurrencies, as not much reserve currencies are incurrencies, as not much reserve currencies are incountry.country.



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3.3. There is also a belief that as underdevelopedThere is also a belief that as underdevelopedcountries, financial disease cannot do much harmcountries, financial disease cannot do much harmto BB. For example, such low level economy isto BB. For example, such low level economy is

like staying onlike staying on ground floorground floorof building, so will notof building, so will notget hurt when falling out of window.get hurt when falling out of window.

4.4. But if living in high flying economy and on 10But if living in high flying economy and on 10ththfloor, falling out of window can be very painful.floor, falling out of window can be very painful.

5.5. Better still, if you stay inBetter still, if you stay in basementbasement, there is no, there is nowindow to fall out of.window to fall out of.



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6.6. Financial disease can beFinancial disease can be kept outkept out by takingby takingadministrative measures close border trade,administrative measures close border trade,cancel import and export licenses, arrest foreigncancel import and export licenses, arrest foreign

exchange dealers.exchange dealers.7.7. Immunity of BB countries can also be seen fromImmunity of BB countries can also be seen from

official statisticsofficial statistics. When many neighbours are. When many neighbours areshowing minus GDP growth rates, a BB countryshowing minus GDP growth rates, a BB country

continues to grow at high rates.continues to grow at high rates.8.8. So indicatingSo indicating no problemno problem from financial and otherfrom financial and other

exotic diseases.exotic diseases.

Problems with thinking BB countries areProblems with thinking BB countries are


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immune to global financial disease (1)immune to global financial disease (1)

1.1. Isolation ward and underdeveloped economyIsolation ward and underdeveloped economy: BB: BBcountries cannot set up isolation ward incountries cannot set up isolation ward inglobalizing world; through underground, informalglobalizing world; through underground, informal

or non-official economy, BB economies are veryor non-official economy, BB economies are verymuchmuch linkedlinked with outside world.with outside world.

2.2. Living in basementLiving in basement: when world is in crisis, and: when world is in crisis, andskysky fallingfalling all around you, you dont have to be aall around you, you dont have to be a

civil engineer to know that thecivil engineer to know that the last placelast place youyoushould be is the basement.should be is the basement.



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Problems with thinking BB countries areob e s t t g cou t es a e


3.3. Closing border tradeClosing border trade: Land border mountains,: Land border mountains,forests, malaria, rough terrain will requireforests, malaria, rough terrain will requirethousands of special forces, hundreds of guardthousands of special forces, hundreds of guard

outposts manned with officials who must beoutposts manned with officials who must behonest, and must be provided with sufficienthonest, and must be provided with sufficientfunds and equipment to close border.funds and equipment to close border.

4.4. Sea border will require whole navy to patrolSea border will require whole navy to patrol

coast.coast.5.5. Costs of these will be many times more thanCosts of these will be many times more than

value of goods kept out or kept in.value of goods kept out or kept in.



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Problems with thinking BB countries areg


6.6. Official statisticsOfficial statistics: Official statistics deal with the: Official statistics deal with theformal orformal orofficial economyofficial economy. It is possible to have. It is possible to havehigh growth in this economy, while at same timehigh growth in this economy, while at same time

global financial disease brings disaster to theglobal financial disease brings disaster to thecountys population.countys population.

7.7. This is because majority of people in BBThis is because majority of people in BBcountries live in non-official orcountries live in non-official orinformal economyinformal economy..

8.8. Since informal economy isSince informal economy is linkedlinked with outsidewith outsideworld, it is economy that gets devastated byworld, it is economy that gets devastated byglobal financial crisis.global financial crisis.



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Problems with thinking BB countries areg


5.5. Moreover, largeMoreover, large human costshuman costs that young peoplethat young peopleand poor families from BB countries have to bearand poor families from BB countries have to bearin neighbouring countries and in border areas,in neighbouring

global financial crisis-imf,us dollar-national workshop english

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