Lessons of the Crisis for the Economic Theory

On April 4^th Marek Dabrowsky gave a public lecture on ‘The global economic crisis: some lessons for the economic theory and economic policy’ at the HSE. The event took place as part of the XII International Academic Conference on Economic and Social Development.

Marek Dabrowsky is President, and one of the founders of the CASE – The Center for Social and Economic Research in Warsaw and Member of the Scientific Council of the Gaidar Institute for Economic Policy in Moscow. Since the end of 1980s Marek Dabrowsky has been involved in policy research and advice in Azerbaijan, Belarus, Bulgaria, Egypt, Georgia, Iraq, Kazakhstan, Kyrgyzstan, Macedonia, Moldova, Mongolia, Poland, Romania, Russia, Serbia, Syria, Turkmenistan, Ukraine, Uzbekistan and Yemen. Dabrowsky is former First Deputy Minister of Finance (1989-1990), Member of Parliament (1991-1993) and Member of the Monetary Policy Council of the National Bank of Poland (1998-2004). Marek Dabrowsky is also a consultant to the World Bank and UNDP. Currently the sphere of his academic interests include the problems of macroeconomic policy, globalization, financial crises, political economy of transformation, European integration, European Neighborhood Policy and the role of international financial organizations.

Marek Dabrowsky’s lecture was dedicated to the analysis of the consequences of the financial crisis from the perspective of macroeconomic theory. The crisis revealed some contradictions between the economic theory and the established economic practices. The modern economy may be global, but the management of the economy is still carried out on the national level. Most of the theoretical models also describe separate national economies.

In his speech the Polish economist listed a number of problems which he believes need a new approach: factors influencing the current account balance; ‘national’ models of monetary policy; the correlation between monetary policy and stability of the financial sector; the policy of smoothing business cycles and its results; the necessity of global coordination of macroeconomic policy and financial regulation.

Marek Dabrowsky analyzed the account balance factor and described the traditional approach to this problem: it is well accepted that the trade balance and the current account balance are determined by the internal factors of competitiveness, trade policy and exchange rate policy. But in the context of the free floating of capital, its result is determined by the financial operation account balance, and the current account balance should be adjusted through the mechanism of the real exchange rate.

Due to globalization, national economic policy loses direct control over account balance and the real exchange rate. ‘It is also necessary to remember that the global total of the national account deficits and surpluses is zero: which means that if in one country the balance is corrected, in another country it will inevitably alter in the opposite direction’, Dabrowsky said. In addition to this, in a modern economy the capital is transnational: foreign capital is no different from the domestic one and has no fixed abode.

Globalization has considerable consequences for monetary policy, but not all of them are reflected in financial theory, Marek Dabrowsky said. As a result of the free floating of capital, the global monetary supply is determined by factors which are beyond the control of any national monetary policy.

Evgeniy Yasin and Marek Dabrowsky

The results of the monetary policy of key central banks (particularly the U.S. Federal Reserve System) are far beyond the parameters of their formal competencies. Inflation is exported to developing countries, and national monetary policies have to reckon with the results of the large players’ policies. But the theory lacks a definition of the global monetary supply and methods of measuring it; it is unable to analyze the factors influencing its growth or decline. All theoretical models of monetary policy analyze its context and consequences only in the framework of separate national economies.

So, according to Marek Dabrowsky, the necessity of a global coordination of monetary policy has become topical in the world of economics. But not all coordination measures can be successful. For example, the Polish economist believes discussion of exchange rate policies and account balance targeting to be ‘unpromising’. At the same time, he thinks that discussion of the global demand management policy is quite relevant.

Evgeniy Yasin, Academic Supervisor of the HSE, commented on the presentation of his Polish colleague and mentioned that in Russia this topic is still not seen as a priority. Evgeniy Yasin recommended that colleagues who participated in the meeting should pay more attention to this theme and study it in their research work.

Russian colleagues, in turn, showed an active interest in the problems covered in Marek Dabrowsky’s lecture. After the lecture he was asked many questions relating to various aspects of the economic theory and policy: topics included the introduction of a gold standard, the policy of the U.S. Federal Reserve System and other problems of economic regulation.

Maria Pustovoyt, specially for the HSE News Service