جهانی شدن و 'بازی اعتماد به نفس'

We show that governments in developing countries have an incentive to play the “confidence game” — wherein the need to win the confidence of the international capital market ‘can actually prevent a country from following otherwise sensible policies and force it to follow policies that it would normally consider perverse’. This incentive arises because of a combination of a ‘conformity bias’ and ‘good news bias’ in governmental decision making in an open economy, which results in inefficient outcomes which increases rather than decreases the threat of devaluation. While institutions that encourage greater transparency and the public revelation of information, may often mitigate this inefficiency, on some occasions increased transparency may even exacerbate the inefficiency.

The globalization of capital flows in recent years, has increased access to international capital markets for many developing countries. This globalization is believed to have the potential to discipline governments in developing countries. This is because it is perceived that in order to attract foreign capital, governments have to pursue ‘sound’ economic policies in order to boost ‘market confidence’ ( Camdessus, 1998). 1 While this view seems quite plausible, the recent spate of currency crises seems to suggest that the ‘disciplining’ role of the international capital market has at the very least, not been very effective. In a perceptive commentary Krugman, 1998 and Krugman, 1999 suggests a potential reason. He argues that inefficiencies might arise because policymakers in the global economy feel compelled to play the ‘confidence game’ — where the preoccupation of policymakers is not with economic fundamentals but with winning market confidence. There is a temptation to implement “…policies that may not make sense in and of themselves but that policymakers believe will appeal to the prejudices of investors…In fact the need to win that confidence can actually prevent a country from following otherwise sensible policies and force it to follow policies that would normally seem perverse.” 2 This opinion has been echoed by Bhagwati (1998), Rodrik (1998) and Stiglitz (2002) who also conjecture that globalization and the free flow of capital has resulted in developing countries feeling ‘compelled’ to enact policies that may be inappropriate. This is somewhat easier to understand if there is a fundamental dissonance between the developmental goals of a country and the interests of foreign investors. 3 It is more puzzling once we recognize that both — a productive economic environment and increased foreign capital, raise national income. However, in this paper we argue that once we take account of the signaling aspect of policy choice, the desire to attract foreign capital rather than ‘discipline’ governments, generates perverse incentives for policymakers and results in inefficient outcomes — making currency crises more rather than less likely. 4 In that sense this paper provides an analytical underpinning to the opinions voiced by Krugman, Bhagwati and Rodrik in recent years, that globalization and the free flow of capital might generate perverse incentives for governments in developing countries. In our framework, a government that is interested in defending a fixed exchange rate, chooses between policies. Two features of our framework are worth highlighting. First, policies are assumed to be state-dependent. We assume that different policies are ‘appropriate’ for different states of the world — no policy is intrinsically superior to the other. Therefore, if the government has a very strong foreign reserve situation, the ‘appropriate’ policies are likely to be very different from the policies that it should pursue when its foreign reserve situation is precarious. Given this state-dependence, policymaking for the government would seem to be a simple matter of matching the ‘appropriate’ policy to the corresponding underlying state. However, what complicates matters is that the government does not know for sure, the underlying state of the world. This brings us to the second important aspect of our framework. In particular, the government has reliable (even if not perfect) private information about the underlying state of the world. In this framework, we show that with the globalization of capital flows, governmental decision making in developing countries might suffer from inefficiencies. In particular, we argue that, the very attempt to maintain ‘market confidence’, may result in governments feeling ‘compelled’ to enact (or persist with) policies that have an adverse impact on the economic environment. We identify two situations under which this might happen and governments have an incentive to play the ‘confidence game’. The first reason why governments play the ‘confidence game’ arises when priors are skewed in favor of a particular state of the world. So if the priors of the international capital market are that a tight fiscal policy is the correct policy, the government will be ‘compelled’ to slash budget deficits, even if it had private information that running a temporary budget deficit might be more suitable. By enacting a policy that conforms with the priors of the international capital market, the government signals that it is confident of success and hopes to attract foreign capital. If the government through its policy choice, manages to attract sufficient amount of foreign capital, so as to more than offset the adverse impact of a poorer economic environment. We call this the ‘conformity bias’ in governmental decision making. In a sense this conformity bias captures Krugman's (1998) worry that in the new global economy “sound economic policy is not sufficient to gain market confidence; one must cater to the perceptions, the prejudices, and the whims of the market.” It is quite striking to observe that, the government's attempt to enhance its ability to defend the exchange rate by playing the confidence game, makes it more rather than less vulnerable to a currency crisis. We further show that investment flows have a nonmonotonic relationship with the degree of ex–ante uncertainty about the possibility of success of any given policy. Investment increases as uncertainty decreases until a certain threshold level of uncertainty is reached. A further decrease in uncertainty results in inefficiency and a collapse of capital flows because it results in a ‘conformity bias’ in governmental decision making. 5 We then demonstrate another scenario in which a government may mislead foreign investors. Consider the case where priors are not skewed, but that the productivity of the economic environment differs across the two states. In this scenario we show that the government will have an incentive to enact a policy that signals that ‘good news’ lies ahead i.e. productivity is going to be high since good times are expected. By acting confident and reflecting its inherent optimism about the underlying fundamentals in its policy choice, the government hopes to convince foreign investors to invest more than what they would have otherwise. We call this the ‘good news bias’ in government decision making. The government will have a tendency to hope for the best and pretend that business is as usual, rather than make the necessary policy adjustments to minimize the risk of a devaluation. Do mechanisms that may mitigate the government's incentive to deceive investor and play the confidence game exist? We explore this question by examining the impact of greater transparency on government policy choices. At one level the answer to this question seems straightforward — as argued by Rogoff (1999) ‘increased transparency would undoubtedly be useful in achieving more efficient global markets’. Indeed institutions such as the IMF share this belief in the efficacy of greater transparency in ensuring efficient government policy choices. For instance, in response to the Mexican currency crisis, the IMF established mechanisms for greater transparency such as the SDSS and GDSS (see Fischer, 2002). Our analysis suggests that while greater transparency typically does improve matters, there may be some exceptions. Indeed in some cases, it is precisely the increase in public information availability that result in governments having an incentive to play the confidence game — worsening matters. This somewhat striking possibility is in accord with recent work on the social value of public information (Morris and Shin, 2002). This paper adds to the nascent literature examining various aspects of globalization. Our analysis suggests that if globalization of capital flows proceeds far enough, then governments may have an incentive to play the confidence game — lowering capital inflows and weakening fundamentals. Therefore, with globalization, some countries become more rather than less vulnerable to the threat of devaluation. Our analysis complements other recent work on some of the potential adverse effects of alternative aspects of globalization. For instance, Krugman and Venables (1995) examine the role of a reduction in transport costs on welfare. Cai and Treisman (2005) suggest that heterogeneity in institutional structure across countries, then greater capital mobility may weaken discipline. Mukand and Rodrik (2005) show how inefficiencies may arise when we account for the impact that global informational spillovers on policymaking of neighboring countries. Furthermore, our work is related to the literature on policy signaling in an open economy.6 For example, Bartolini and Drazen (1997) study the impact of imposition of capital flows by focusing on the signaling aspect of such a policy choice. The government's decision of whether to impose capital controls is observed by investors, who use it to infer about the future course of such policies. However, in our paper the observed policy choice has no dynamic implications about the future course of policies, since the emphasis over here is on the signaling of private information, and the perverse incentive effects this generates. Finally, this paper is also similar in structure to work by Prendergast and Stole (1996), Majumdar and Mukand (2004), and especially Brandenburger and Polak (1996). Under the assumption that managers care about the current valuation of firms, in the latter paper, there emerges an informational inefficiency similar to the one in this paper. There are several important differences, however. In our model the focus is on the interaction between governmental policy, exchange rates and international capital flows. In sharp contrast to their paper, our results imply that the informational inefficiency may persist even if managers care about the value of the final output, the assumption of current valuation is not essential. In Section 2.1, we set up the benchmark economy and analyze the equilibrium. Section 2.2 elaborates on the basic model and describes a specific application to fiscal policy. Section 3 explores the potential impact of international institutions in increasing transparency. Section 4 concludes with a discussion.