Core versus periphery

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• Core versus periphery
• Economic interactions between core and periphery
  are very strong today. Is this a cause for
  concern?
• Levels of economic and institutional development
  are higher in the core.
• In the periphery, there are deep problems of
  poverty in incomes and in the basic economic
  framework.

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• Core versus periphery
• Typical periphery economic features
• Larger role for government intervention, with
  more barriers to market integration.
• Insecure fiscal structure, frequent use of
  inflation tax (seigniorage).
• Sometimes a heavy dependence on resource based
  commodity exports.
• Less secure property rights, risks for
  investors.
• Often peg exchange rates, but these collapse
  too.
• Uncertainty over macroeconomic policy goals
  and their stability over time.
• Questions even as to the permanence of
  government or institutions themselves.
• Exceptions over time some economies have moved
  away from these patterns.

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• Convergence or divergence
• Most developed countries have seen their per
  capita incomes converge since WWII.
• Theory absent barriers to the transmission of
  knowledge, capital, and goods, there is no reason
  why incomes, wages, etc. to differ across space.
• Patently, this theory has not applied (in
  general) to developing countries.

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• j

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• Problems in international finance
• The biggest recurring problems associated with
  developing countries are defaults and
  banking/exchange crises (often simultaneous).
• Examples of default
• U.S. states in early 19th century (on European
  loans)
• Argentina and others in the 1890s
• Russia 1917 (the new communist gov)
• Many countries, core and periphery, (but not
  Argentina) in the 1930s (the Great Depression)
• Many developing countries in the 1980s (esp.
  Latin America)
• Russia in 1998 and Argentina in 2001.

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• Default
• crisis in which country loses access to foreign
  funds - contraction of output and employment
• CA S I
• If CA deficit (borrowing from abroad) 5 from
  GNP
• If foreign lenders become fearful of default CA
  has to be or gt 0 - either fall in investment or
  raise in saving 5 - fall in aggregate demand
  decrease in output
• Also even worse foreign lenders will not only
  withhold new loans if they fear default but they
  will try to demand full repayment on any loans
  (liquid short term deposits). When the developing
  country repays capital outflow must have CA
  gt0 (CA surplus) raise net exports.
• Default crises self fulfilling mechanisms
  (remember balance of payments crises and bunk
  runs)

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• Problems in international finance
• Banks and finance
• In recent crises, the larger role of private
  capital flows in the world economy and its
  conduits (financial institutions) has put the
  banking sector center stage in crises.
• In many cases lax regulation of banks is a
  critical element in a crisis. E.g., moral hazard
  and bailout guarantees. Chile 1980s, Mexico 1994,
  Asian crisis 1997, Argentina 1880s, 1930s, and
  1990s.
• Not only peripheral countries (e.g. US SL
  crisis, or Japan crisis).
• But damaging effects appear much stronger
  in peripheral countries where paying the costs is
  that much harder.