Friday, March 28, 2008

Liberal Democracy and Fiscal Rules

Part of my paper on Fiscal Rules for the class Macroeconomic Policy and Financial Markets.
5. Liberal Democracy:
There seems to me to be some broader questions that I must raise in the context of the ideas and concepts we have learned in class. I first start with a “Key Point” from the book “Macroeconomics: Understanding the Wealth of Nations”.

“It may seem strange for governments to hand such an important policy instrument over to an unelected group of officials and ask them to target only inflation. However, our analysis shows that the fact the central bankers are unelected and do not have a policy goal of achieving low unemployment is crucial in achieving better outcome for society.” (Miles & Scott, Ch. 16, Page 428, Ref 2a)

While this passage directly talks about the monetary branch of government, it is conceivable that these same valid points could be used to justify Fiscal Rules as shown by Buiter in “Fiscal rules in a monetary union…” (Ref. 3, Page 2); The IMF in promoting coordination of Monetary and Fiscal Policies where if one arm is independent and it coordinates with the less independent then independence must be broken from the legislative/executive branches to at least some degree (Ref. 4); and lastly The HM Treasury paper on Fiscal Stabilization (Ref. 5).

So the question that arises for me is whether strict rules based application of monetary and then fiscal policies could undermine the Liberal Democracies (Ref. 11) that much of the world is based on including most of the developed countries. This unelected group of officials for better or worse have created and fostered an atmosphere of conspiracy about the Federal Reserve System being “owned by the banking system” from both the left and right on the political spectrum.

The IMF has learned that no matter how knowledgeable the staff is about the problems facing member states, that at some point more conditionalities only lead to less compliance rather than more. Buira poses two important questions:
1. “Can program ownership by a country be made compatible with externally imposed conditionality?”
2. “Is conditionality compatible with democracy?”
The East Asian Crisis marked the high mark of conditionality with Indonesia receiving 140. Since that time other policies have been implemented by the IMF including Poverty Reduction Strategy Papers where applying member countries must develop their own strategies for dealing with poverty and receive input from all parties (Ref. 9, page 57)

Kaipur and Naim also note the change in the IMF by emphasizing “ownership” in various lending facilities and tie in between good governance and development of democratic institutions that create good economic growth. They also make an important point in: “Of greatest concern, perhaps, is the inherent tension between conditions imposed by an outside lender and the cardinal democratic principle of consent. By their very nature, IMF conditions arise not from debate and discussion within a society, but come rather from unelected foreign experts.” (Ref. 10, page 91)

C225 Session One 2008
Assignment Two
by: Ronald Rutherford
References and Footnotes



References:
1. CeFiMS Course Book, Macroeconomic Policy & Financial Markets-C225, Product 4157
a.

2. Miles David and Andrew Scott (2005) Macroeconomics: Understanding the Wealth
of Nations, Second Edition New York: Wiley.
a. Chapter 16, Page 428


3. Willem Buiter (2003), ‘How to Reform the Stability and Growth Pact’, European Bank for Reconstruction and Development.

4. E Laurens & BG de la Piedra (1998) ‘Coordination Of Monetary & Fiscal Policies’, IMF Working Paper WP/98/25.

5. HM Treasury (2003), ‘Fiscal Stabilisation and EMU’.

6. Carl Emmerson, Chris Frayne and Sarah Love (2001, Updated 2006), “The government’s fiscal rules”, http://www.ifs.org.uk/bns/bn16.pdf

7. Public Sector Finances first release (monthly), 20th February 2008 (January Data), provided by Sharone Karagach in class discussions.

8. G Sterne, ‘The use of explicit targets for monetary policy: practical experiences
of 91 economies in the 1990s’. Bank of England Quarterly Bulletin, August 1999, Vol 39, No 3. http://www.bankofengland.co.uk/qb/qb990302.pdf

9. Ariel Buira, (2005) “Challenges to the World Bank and IMF”, Chapter 3, “An Analysis of IMF Conditionality”, Anthem Press

10. Devesh Kapur and Moisés Naím, (2005), “The IMF and Democratic Governance”, Journal of Democracy, Volume 16, Number 1.

11. Liberal democracy; http://en.wikipedia.org/wiki/Liberal_democracy

12. Fiscal policy in the UK: Index; http://www.hm-treasury.gov.uk/documents/uk_economy/fiscal_policy/ukecon_fisc_index.cfm

13. UK's Government should scrap fiscal rules - NIESR; http://www.forbes.com/afxnewslimited/feeds/afx/2008/01/31/afx4601307.html
http://www.lse.co.uk/politicsNews.asp?shareprice=&ArticleCode=kzrhp9jsj49iq1i&ArticleHeadline=UKs_Government_should_scrap_fiscal_rules__NIESR

14. UK's Darling stands by budget GDP forecast despite renewed market turmoil UPDATE, http://www.iii.co.uk/news/?type=afxnews&articleid=6612481&subject=economic&action=article


15. Robert Peston, Taxpayer's £100bn Rock exposure, http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/02/taxpayers_75bn_rock_exposure.html

16. U.K. government to nationalize Northern Rock, http://www.marketwatch.com/news/story/uk-government-nationalize-northern-rock/story.aspx?guid=%7BB54FB0C9%2DFD45%2D4796%2D9FB0%2DDD042DA18612%7D&siteid=bnb

17. UK govt at risk of breaching sustainable investment rule in 2010-2011 - IFS, http://www.iii.co.uk/news/?type=afxnews&articleid=6600822&subject=economic&action=article

18. Old Lady urged to loosen purse strings, http://www.guardian.co.uk/business/2008/mar/22/bankofenglandgovernor.economics

19. JOELLEN PERRY (January 28, 2008), “Bank of England Chief
Changes Tack in Crisis”, Wall Street Journal.

20. Speech by the Chief secretary to the Treasury, Paul Boateng MP, PFI Congress, (10 June 2003), http://www.hm-treasury.gov.uk/newsroom_and_speeches/speeches/chiefsecspeeches/speech_cst_100603.cfm

21. Future, http://en.wikiquote.org/wiki/Future

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