The Two Meanings of Dollarization (Excerpt)

Matias Vernengo

The expression of ‘dollarization’ has at least two different meanings. In the narrow sense, it refers to massive currency substitution, in which a country, most likely a developing one, supplements its domestic unit account of fiduciary reserve assets with a foreign currency, more often than not the United States dollar or, in some cases, the euro. Note that currency substitution could be complete and might even imply the elimination of a domestic token. Full dollarization in that sense has taken place in small countries, mostly in Latin America, the Caribbean and the Pacific which are heavily dependent on the United States. Dollarization, in this sense, is the exemplification of a country foregoing its national ‘monetary sovereignty’ (Mundell 1961, p. 661).

In the broader sense, dollarization refers to US hegemony in the world economy as a result of the US dollar being the numeraire currency in international markets. This christens the United States as the premier international monetary authority that regulates and dictates the flows of international financial commitments for global economic activity. Of particular importance in this context is the fact that the key international commodities, including oil, are priced in US dollars in international markets. The former conception of dollarization can be described as dollarization strictu sensu, while the latter as latu sensu dollarization, i.e. not the specific use of  the dollar by a country, but by the whole world economy—an international system in which the dollar is de facto a global fiat money.

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Brainstorming the World, in a Pacific Setting

Martin Khor

It was almost like Penang – in the early seventies, that is.

The sea was not only green-blue in colour in the distance but crystal clear near the shore, the beach was pure white, and bright stars filled the clear sky at night.

On the road along the Coral Coast to the nearest small town there was hardly any traffic.  Like the small winding road in Penang’s northern coast to Batu Ferringhi, before the coming of the high-rise apartment blocks and the big hotels.

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Thirty years later, a Date With Justice

Aaron Schneider, Guest Blogger

For the first time in history, a perpetrator has been found guilty of genocide in a court in his or her own country. In 1982, General Efraín Rios Montt seized power in a coup and guided a counter-insurgency strategy of genocide against the Ixil Mayans of the Guatemalan highlands until a coup deposed him 17 months later.

In the civil conflict that tore this small Central American country apart, more than 2,50,000 of a population of 6.5 million are estimated to have been killed. The genocide of the Ixil Mayan population eliminated approximately five per cent of that ethnicity in Rios Montt’s short reign. For 30 years, he evaded justice, accused by various human rights and indigenous groups of war crimes but securing election as a member of Congress where he was granted parliamentary immunity from prosecution. Just under two years ago, he lost his seat for the first time, and human rights organisations and indigenous groups pressed for justice.

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Ambiguities of Separation: BRICS and the Washington Consensus

Cornel Ban

In the aftermath of the economic crisis that began in 2008 it has become fashionable to say that the BRICS buried the Washington Consensus with their state-led economic models. This rhetoric has been supported by BRICS countries themselves and has made ripples in the international financial press. But is there solid evidence for such assertions? A closer look at the empirical reality suggests a more mixed picture. As Marion Fourcade put it, in the BRICS the Washington Consensus is in fact “more invisible than irrelevant.”

The life of BRICS has had interesting turns. First, they were known as a group via Goldman Sachs investment product more than a decade ago, responding to the insatiable demands for accountability, and profit, that emanates from the financial nebulae. Then, BRICS became one of the few beacons of the global economy during the Great Recession and they did so unmoored from the institutional enforcers of the Washington Consensus. In a demonstration of the performative effects of financial marketing, the BRICS governments picked on the new acronym and formed an inter-governmental alliance of South-South cooperation with an ambitious agenda in international economic institutions.  A decade after the term BRICS was coined by investment bankers, Robert Wade noted that the economic map of the world had the United States, the European Union and the BRICs as the three poles of the emerging economic multipolarity. In all the BRICs, the liberal economic drive of the Washington Consensus dramatically altered their ideational and institutional landscape but that the commands of this development paradigm were only selectively institutionalized. The most important pattern the role of the state as a critical actor in development has been rediscovered in ways that go beyond the modest institutionalist turn experienced by the Consensus after the East Asian crisis but without crafting a consummate counter-hegemonic “state capitalist” economic model.

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Yasunizing the World

Joan Martinez Alier, Guest Blogger

In May 2013, the international press has become alive to the fact that
there is a lot of unburnable fossil fuels. “Unburnable” carbon has
become a buzz word in The Economist and in The New York Times. If the
oil, gas and coal reserves are burnt at present speed, there is no
chance whatever of limiting carbon dioxide concentration below 500 ppm.
A large part of such reserves must remain in the ground. The Grantham
Institute of the London School of Economics has produced a report that
proves that the policies advanced since 1997 by Oilwatch to leave oil in
the soil were right, and announces that the money value of fossil fuels
reserves will necessarily come down if something is effectively done
against climate change. The Economist (4 May 2013, “Unburnable Fuels”)
dismisses “technological fixes” such as carbon sequestration and
geo-engineering.

When Svante Arrhenius, a Swedish chemist and Nobel laureate, published
the first articles on climate change in 1896, the carbon dioxide
concentration in the atmosphere was 300 parts per million (ppm). It is
now reaching 400 ppm and rising 2 ppm per year. Arrhenius announced that
by burning coal found underground, industrialised countries were
releasing more and more carbon dioxide in the atmosphere and that this
would increase temperatures. He could not know that in the twentieth
century coal burning worldwide would increase seven-fold or that in
addition to coal burning would be added much more oil and natural gas;
in addition to the effects of deforestation.

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The Limits of Governing Budgetary Policies by Rules

Daniela Schwarzer

The European squabble over budgetary austerity reached a new peak a good week ago when a document drafted by leading representatives of the French Socialist Party, which reportedly had been seen by Elysée officials close to President Hollande, personally attacked German Chancellor Angela Merkel. Less mediatized, but more telling about the nature of the governance problems facing the euro area, are the statements made by Finance Minister Pierre Moscovici this weekend. After having obtained a two-year derogation for France to comply with the 3% deficit threshold of the euro area’s fiscal rules he said: “This is a turning point in the history of European integration since the euro exists. We have witnessed the end of a certain financial orthodoxy and the end of the dogma of austerity.”

Though the French government scaled down this triumphant tone subsequently, these words provoked some strong reactions in Germany. The reason for the Franco-German discord over budgetary policy are, first, competing policy preferences, deeply rooted in normative beliefs over “the right” way out of the current crisis. The German and the French economic mainstream diverge considerably over the question what should come first: The neo-classical paradigm dominant in Germany emphasizes the need for budget consolidation (expenditure cuts instead of tax increases), structural reforms and an adjustment of real price levels in order to then bring back demand, growth and employment thanks to enhanced competitiveness and increased trust among investors. The view dominant in France makes a case for more time to meet the European debt and deficit targets so that austerity does not crush domestic demand which is necessary to prevent a further deterioration of growth and employment and to enable structural reforms.

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Accounting for Ecological Capital

Edward B. Barbier

An important contribution of natural resource economics has been to treat the environment as a form of capital asset, or natural capital. But we should not restrict this concept just to those natural resources, such as minerals, fossil fuels, forests, agricultural land and fisheries, that supply the raw material and energy inputs to our economies.  Nor should we consider the capacity of the natural environment to assimilate waste and pollution the only valuable “service” that it performs.

Instead, natural capital is much broader, encompassing the whole range of goods and services that the environment provides. Many have long been considered beneficial to humans, such as nature-based recreation, eco-tourism, fishing and hunting, wildlife viewing, and enjoyment of nature’s beauty.  Natural capital should also comprise those ecosystems that through their natural functioning and habitats provide important goods and services to the economy.  Such ecological capital is a unique and important component of the entire natural endowment that supports, protects and is used by economic systems

However, there are several crucial features of ecosystems that distinguish them from other economic assets.

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The United States and the Latin American Left

Matias Vernengo

Economics is an essential part of foreign policy. One cannot think of the Cold War without the Marshall Plan that allowed reconstruction in Western Europe and containment of the Soviet Union in Western Europe. In Latin America one cannot dissociate the Cuban Revolution and the subsequent Alliance for Progress, which basically provided credit for allies in the region, pushed by Kennedy to contain Communism in the region. Geopolitics is, however, often ignored by economists, and political scientists tend to use only mainstream economics when discussing political economy issues.

In the case of US-Latin American affairs, the inability to understand the political elements of the economic process, and the incapacity to comprehend the deep causes of underdevelopment in the region explain, in part, the problematic relationship of the Obama administration with the left of center governments in the region. The Obama administration has compounded old mistakes and aggravated the mistrust from progressives in Latin America (for an early discussion of the topic go here; subscription required). John Kerry, the Secretary of the State, has referred recently to Latin America as the American “backyard,” and the Obama administration has not recognized the democratically elected government of Nicolás Maduro in Venezuela.

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Our misleading measure of income and wealth inequality: the standard Gini coefficient

Robert H. Wade

It is by now generally accepted that the sharp rise in income and wealth inequality in the US and much of Western Europe over the 1990s and 2000s was one of the bulldozer forces behind the rise in financial fragility.  And it has long been accepted that the Gini coefficient is the workhorse measure of inequality.  But it is not generally recognized that the coefficient is normally defined in a way which biases the measure in a downward direction, making inequality seem less large than another version of the coefficient would suggest.  By this alternative measure inequality is much higher than is generally thought. The standard measure is misleading us into thinking that economic growth is more “inclusive’ than it is.

Recall that the Gini coefficient is a number between zero and one that measures the degree of inequality in the distribution of income in a given society (named after an Italian statistician, Corrado Gini). The coefficient is zero for a society in which each member receives exactly the same income; it reaches its maximum value (bounded from above by 1.0) for a society in which one member receives all the income and the rest nothing.

As normally defined the Gini says that inequality remains constant—growth remains ‘inclusive’—if all individuals (or countries by average income) experience the same rate of growth, and rises only when upper incomes grow faster than lower incomes. So inequality remains constant if a two person (or two country) distribution x = (10, 40) becomes y = (20, 80). Yet the income gap has grown from 10 to 40.

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A Tax System for the 99%

Robin Broad and John Cavanagh

Paying taxes, as tens of millions of us in the United States do every April, evokes many emotions—from gratitude for government programs that feed the hungry to disgust over paying for fossil fuel subsidies and unjust wars. But among a growing number of people, it is also evoking anger over an unequal tax system that favors the 1 percent over the 99 percent.  More and more of us are saying that corporations, Wall Street, and the wealthy should pay their fair share.

The good news is that rising numbers of organizations and people are involved in struggles for a more just tax system.  Below we share the contours of three such campaigns, all of them winnable before the next U.S. president is elected.

Corporations: Daily newspaper headlines remind us that corporations are making record profits while their workers’ paychecks have been frozen for decades.  These same corporations complain that the corporate tax rate, pegged at a mere 35 percent, is one of the highest in the world.  And, corporations are lobbying furiously to cut that rate.

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