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711. Will Emerging Markets Escape the Next Big Systemic Financial Crisis?

Author:
Kenneth Rogoff
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
For the past four centuries, emerging market debt crises have broken out like clockwork. In the early period, it was the European countries—the emerging markets of that era—that did the defaulting, with France reneging on its external debt eight times and Spain, the all-time record holder, 13 times (see Reinhart, Rogoff, and Savastano 2003). Over the last two centuries, it is today’s emerging markets, with countries like Brazil and Mexico having defaulted eight times, and Turkey six times. Venezuela leads them all with nine defaults. Defaults were relatively unknown in Asia until the 1990s, though in large part because most of these countries had been too poor until recently to become major borrowers on the world scene. Another factor, of course, is that they have achieved independence only this century. Today, the world seems very different, with credit risk premia on emerging market debt near record lows, and most countries in a position to borrow liberally on international capital markets. Indeed, the idea that emerging market countries cannot borrow in their own currency, which Eichenbaum and Hausman (2002) term “original sin,” seems like a distant memory, with many governments having issued large pools of internal market-based debt, with foreigners freely entering these markets. Even countries like Brazil, which has experienced two hyperinflations in the past 20 years, have succeeded in issuing domestic currency bonds sold directly to international investors. Now some people are even asking if European countries like Italy may soon face higher spreads than today’s emerging markets. Has the world been turned upside down? In this article, I will consider some rather sharply opposing perspectives on the admittedly complex current situation.
Topic:
Debt, Emerging Markets, and Financial Crisis
Political Geography:
Global Focus

712. An Unconventional Perspective on the Greenspan Record

Author:
William A. Niskanen
Publication Date:
07-2006
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
On his nomination as chairman of the Federal Reserve Board, Ben Bernanke stated, “My first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years.” For that statement to provide much information, however, it is useful to understand the record of the Greenspan years.
Topic:
Financial Crisis, Federal Reserve, and Fiscal Policy
Political Geography:
North America and United States of America

713. Global Imbalances and Financial Reform with Examples from China

Author:
Raghuram G. Rajan
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
I will focus on a familiar issue, the problem of global current account imbalances, and will describe how financial sector reform can help narrow them, using examples from China. The United States is running a current account deficit approaching 6.25 percent of its GDP and over 1.5 percent of world GDP. To help finance it, the United States pulls in 70 percent of all global capital flows. Clearly, such a large deficit is unsustainable in the long run. The current situation has its roots in a series of crises over the last decade that were caused by excessive investment, such as the Japanese asset bubble, the crises in emerging markets in Asia and Latin America, and most recently, the IT bubble. Investment has fallen off sharply since, with only very cautious recovery. This is particularly true of emerging Asia and Japan. The policy response to the slowdown in investment has differed across countries. In the industrial countries, accommodative policies such as expansionary budgets and low interest rates have led to consumption- or credit-fueled growth, particularly in Anglo-Saxon countries. Government savings have fallen, especially in the United States and Japan, and household savings have virtually disappeared in some countries with housing booms. By contrast, the crises were a wake-up call in a number of emerging market countries. Historically lax policies have been tightened, with some countries running primary fiscal surpluses for the first time, and most bringing down inflation through tight monetary policy. With corporations cautious, and governments abandoning the grandiose projects of the past, investment has fallen off. Instead, exports have led growth. Many emerging markets have run current account surpluses for the first time. In emerging Asia, a corollary has been a buildup of international reserves.
Topic:
Financial Crisis, Reform, Finance, Economy, and Deficit
Political Geography:
China, Asia, North America, and United States of America

714. Five Persistent Myths About China's Banking System

Author:
Jonathan Anderson
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Of all the various topics and issues facing observers of the Chinese economy, it is safe to say that none arouses more spirited debate than the role of the financial system, and in particular the state of Chinese banks. Is the mainland on the verge of a financial crisis? Has the recent economic overheating created a new flood of bad loans? Do banks know how to allocate capital, or are they simply quasi-fiscal agencies acting at the mercy of the government? And does the rapidly opening financial system represent a gold mine or a “black hole” for foreign investors? The answers to these questions are not always straightforward, but in our experience the truth lies very much away from the extremes so often presented in the financial press. Chinese banks are by no means “out of the woods,” first and foremost because they remain stateowned institutions, but they are now well advanced from their situation only a decade ago. This means that the economy is protected from the risk of a financial crisis—but, on the other hand, the banking sector is more a sunset industry than an exciting growth sector. There are a number of myths about banks and the financial system in China but the following are the most important and most persistent: (1) China’s cost of capital is far too low; (2) Mainland banks are unreconstructed quasi-fiscal agencies; (3) Bank recapitalization is a sham; (4) Banks are already “out of the woods”; and (5) The Chinese banking system is an exciting growth industry. Let us now examine these five myths.
Topic:
Economics, Financial Crisis, Finance, Economic Growth, and Banking
Political Geography:
China and Asia

715. Stormy Days on an Open Field: Asymmetries in the Global Economy

Author:
Nancy Birdsall
Publication Date:
02-2006
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
Openness is not necessarily good for the poor. Reducing trade protection has not brought growth to today's poorest countries, and open capital markets have not been good for the poorest households in emerging market economies. In this paper I present evidence on these two points. First, countries highly dependent on primary exports two decades ago, despite their substantial engagement in trade and a marked decline in their tariff rates in the 1990s, have failed to grow. Second, within high-debt emerging market economies the financial crises of the last decade, whether induced by domestic policy problems or global contagion, have been especially costly for the poor (in welfare terms if not in terms of absolute income losses). I discuss the asymmetries in the global economy that help explain why countries and people cannot always compete on equal terms on the “level playing field” of the global economy.
Topic:
Economics, Globalization, International Trade and Finance, Poverty, and Financial Crisis

716. The Impact of the Crisis - Decline and Recovery

Author:
Joseph J. Stern
Publication Date:
01-2004
Content Type:
Working Paper
Institution:
The John F. Kennedy School of Government at Harvard University
Abstract:
When the Asian financial crisis broke in mid-1997, the expectation was that Indonesia would weather the crisis with minimal damage. Actual events soon proved these expectations widely wrong and the Indonesian economy was more severely affected than other Asian countries. In part this outcome reflected Indonesia's fundamental institutional weakness that had been overlooked in the euphoria that marked international financial markets during the 1990s, and in part the impact of the financial crisis was magnified by inconsistent internal policies and by an overly ambitious IMF program that tried to achieve too much in to short a period of time. The result was not only a severe economic contraction with rising poverty levels and growing social unrest, but a political change that resulted, in the short-run, in further economic instability and effectively delayed Indonesia's recovery.
Topic:
Politics, Financial Crisis, Banks, Currency, IMF, and Economic Recovery
Political Geography:
Indonesia, Asia, and Southeast Asia

717. The Rise and Fall of the Indonesian Economy

Author:
Joseph J. Stern
Publication Date:
06-2003
Content Type:
Working Paper
Institution:
The John F. Kennedy School of Government at Harvard University
Abstract:
The Indonesia crisis was particularly severe. What began as an economic crisis quickly evolved in to a political crisis. Most analysts failed to recognize the growing weaknesses of the economy and were caught by surprise. In part Indonesia's economic success over the period 1985 through 1997 and its records on policy reforms had persuaded many that, despite some obvious weaknesses, it would come through the Asian crisis with minimum damage. A closer analysis of the Indonesia's economic history shows that the initial reforms, carefully crafted by a highly respected group of economic technocrats, tackled many of the most serious distortions that held back economic growth. But as these reforms began to pay off in terms of higher growth rates, sharply declining poverty rates, and an increased level of integration in the global economy, the desire for further reforms waned. Over time the beneficiaries of the early reforms allied themselves with the political elites to block further reforms and in effect reduced the power of the technocrats to resist a return to the dirigiste tendencies that had marked much of Indonesia's early development efforts. While the reforms were important, in retrospect they were insufficient to create an institutional infrastructure that could weather a dramatic economic downturn.
Topic:
Corruption, Economics, Poverty, Financial Crisis, Reform, and Economic Policy
Political Geography:
Indonesia and Southeast Asia

718. Targeted Programs in an Economic Crisis: Empirical Findings from Indonesia’s Experience

Author:
Lant Pritchett, Sudarno Sumarto, and Asep Suryahadia
Publication Date:
09-2002
Content Type:
Working Paper
Institution:
The John F. Kennedy School of Government at Harvard University
Abstract:
In response to the economic, natural, and political crisis that enveloped Indonesia from August 1997 (beginning of depreciation) to May 1998 (resignation of Soeharto), the new government announced support for a set of “safety net” (JPS) programs in July 1998 budget. These included: (a) targeted sales of subsidized rice, (b) work creation programs, (c) scholarships to students and block grants to schools, (d) targeted health care subsidies, (e) community block grants. We used cross sectional and panel data to examine the targeting of these programs. First, "static participation incidence" (the relationship between program participation and household consumption expenditures) was substantially better than a uniform transfer, but substantially worse than perfect targeting --and remarkably similar for all of the JPS programs. Second, unlike standard static incidence measures, what we define as dynamic participation incidence — the relationship between changes in consumption expenditures and program participation — was very different between the JPS programs. The employment creation programs which relied on self-selection targeting was much more likely to reach those households with large shocks to their expenditures than programs based on administrative targeting such as subsidized rice sales, scholarships, and health subsidies. Third, larger coverage does not lead to either better or worse targeting: there is no general tendency across the programs for marginal incidence to be above, or below, average incidence. Fourth, the targeting design of many of the programs was not followed strictly in implementation in all of the programs. Community and individual characteristics that were de jure irrelevant played a role in targeting in practice. In the rice program, community influence led to the program going to many more than the eligible individuals. In other programs, individual characteristics appear to have influenced targeting.
Topic:
Economics, Financial Crisis, and Subsidies
Political Geography:
Indonesia and Southeast Asia

719. Replacing Potemkin Capitalism: Russia's Need for a Free-Market Financial System

Author:
Kurt Schuler and George A. Selgin
Publication Date:
06-1999
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
On August 17, 1998, Russia devalued the ruble and stopped payment on its government debt, creating a financial crisis that continues today. Some observers have blamed the financial crisis, and the poor performance of the Russian economy generally, on government policies that they claim are rigidly laissez faire. However, a closer look at the Russian financial system reveals that it remains fundamentally socialist, though it has superficial capitalist features.
Topic:
Debt, Economics, Government, and Financial Crisis
Political Geography:
Russia, Europe, and Asia