Anne O. Krueger
October 23, 2015—The international financial system that took root after World War II still needs to grapple with issues such as the “ideal” exchange-rate regimes, the “sensible” use of capital controls, and the power of global institutions, the distinguished economist Anne O. Krueger told analysts and other staff at Nathan Associates Inc.
“The international part of the international financial system is not solved,” Dr. Krueger said on October 22, speaking from decades of experience. Decisions by individual nations have a greater global impact than before because the United States and, to a lesser extent, Europe, no longer anchor the world economy.
A senior research professor of international economics at Johns Hopkins University’s School for Advanced International Studies and senior fellow at the Stanford Center for International Development, Dr. Krueger formerly served as chief economist of the World Bank and a first deputy managing director of the International Monetary Fund.
In her talk as part of Nathan’s “Economists Present” series, Dr. Krueger recounted the various debt crises and responses since the Bretton Woods agreement of 1944. Each crisis has its own characteristics, multiple and disputable causes, and set of lessons, she said. “There will continue to be debate about the factors underlying the Great Recession [of 2007-2008] for many years,” she said.
After the Asian financial crisis of 1997–1998, for instance, it became “widely thought that a floating exchange rate, avoidance of currency mismatches, and a reasonable and sustainable fiscal positions would be bulwarks” against future capital account crises in emerging markets. Many actions over the years had a role in the crisis, including an order by the South Korean government earlier in the 1990s for banks to lower their interest rates.
Korean banks, seeking more revenue, lent to banks in Thailand, where rates were higher. When the Thai baht depreciated, companies could not service the foreign exchange debt and “banking systems in the lending countries found themselves with nonperforming loans” and in need of government rescue.
The Greek debt crisis, Dr. Krueger said, has tested the power of the International Monetary Fund. The IMF, for example, had sought domestic reforms in Greece as a loan condition. When the IMF declined to grant the loan because Greece had not carried out agreed-to reforms, the Europeans—with U.S. support—applied pressure and the loan went through.
“How can the IMF insist on reforms when the European partners push for lending in the absence of sufficient reform?” she said. “How can the IMF get more clout in cases such as the Greek” crisis?
Policies should be judicious, she said. Capital flows—the movement across countries of debt, securities, lending, and direct investment, for example—“can be a force for faster world economic growth.” Limits on those flows may be justified at times to keep economic crises from spreading. However, capital controls can be ineffective when one form of capital is targeted, because “it takes people a month or two” to get around them. For instance, an agreement to sell stock and buy it back at a higher price can be devised to get around restrictions on short-term lending.
Without making a specific prediction, Dr. Krueger said “one of the regrettable certainties” is that there will be another financial crisis. The big question is, “can we do things that will make it less severe?”