wolf032806

Information about wolf032806

Published on April 10, 2008

Author: The_Rock

Source: authorstream.com

Content

FIXING GLOBAL FINANCE 1. Hopes Unfulfilled: capital flows and the emerging market crises Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times:  FIXING GLOBAL FINANCE 1. Hopes Unfulfilled: capital flows and the emerging market crises Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times The Bernard Schwartz Forum on Constructive Capitalism March 28th 2006 Prologue: outline of the lectures:  Prologue: outline of the lectures “Global capital markets pose the same kinds of problems that jet planes do. They are faster, more comfortable, and they get you where you are going better. But the crashes are much more spectacular.” Larry Summers. Prologue: outline of the lectures:  Prologue: outline of the lectures Finance is the heart of capitalism: When it works, the financial system provides a uniquely effective mechanism for shifting resources from those who own them, but cannot use them, to those who can use them, but do not own them. But when it fails, the financial system generates huge losses and crises, whose costs endure for years. Purely domestic crises also occur. But nowadays these are relatively easily managed. Prologue: outline of the lectures:  Prologue: outline of the lectures Crises that involve foreigners tend to be both far more costly and more difficult to manage: They usually generate exchange-rate crises, which exacerbate domestic insolvency; And they make it impossible for the domestic authorities to act as guarantors of last resort. The failure to make the global finance system work tolerably has had large adverse consequences for individual countries and even groups of countries. It has also had adverse consequences for the world as a whole: It has created global economic shocks; It has re-awakened export-oriented mercantilism; and has undermined the legitimacy of globalisation. Prologue: outline of the lectures:  Prologue: outline of the lectures The failures of the financial system have been the biggest economic failure of globalisation. Happily, since the emerging market financial crises of 1997-98, the world has not witnessed another global financial crisis. This may suggest that stability has at last been attained. But that would be premature. Stability is rather the consequence of the new pattern of global capital flows: capital flows “upstream” – from the rest of the world to highly creditworthy high-income countries and, above all, the US. Prologue: outline of the lectures:  Prologue: outline of the lectures Meanwhile, emerging market economies “smoke, but do not inhale” in global capital markets. This pattern is not only undesirable but almost certainly unsustainable: It is undesirable, because one of the most important functions of capital markets – providing a net flow of resources to poor countries – has failed to take off. It is unsustainable, because the growth in US external liabilities cannot continue at current rates. Prologue: outline of the lectures:  Prologue: outline of the lectures We must ask ourselves two questions: What has gone wrong? What do we need to do to put it right? What has gone wrong? Here are seven failures: to understand the implications of financial liberalisation; to understand the risks of international financial integration; to accept fiscal discipline; to understand the risks of currency pegs to understand what it means to live in a multi-currency world; to abandon an outmoded mercantilism; and to modernise global institutions. Prologue: outline of the lectures:  Prologue: outline of the lectures What must be reformed? Here are four main areas for reform: The macroeconomic regime: exchange rates; monetary policy; and Fiscal management. The financial sector; Excessive reliance on exports; and The global institutions. Hopes unfulfilled: introduction:  Hopes unfulfilled: introduction “The free market system has failed and failed disastrously.” Mahathir Mohamad, Financial Times, 4th September 1998. Hopes unfulfilled: introduction:  Hopes unfulfilled: introduction “The people who benefit from roiling the world currency markets are speculators, and as far as I’m concerned, they provide not much useful value.” Paul O’Neill, Financial Times, 6th May 2002. Hopes unfulfilled: introduction:  Hopes unfulfilled: introduction The last 25 years has been an age of globalisation, similar, in many ways, to that before the first world war. It has also been similar to that era in the frequency of financial crises. What has happened and why? Hopes unfulfilled: outline:  Hopes unfulfilled: outline Role of finance. The frequency of financial crises Anatomy of financial crises. Why financial crises happened. The legacy of the crises: a burned child fears the fire. 2. The role of finance :  2. The role of finance “The evidence that financial development and economic growth are linked is quite strong.” (Frederic Mishkin, 2005): King and Levine (1993) showed that the greater the financial development in 1960, the larger the economic growth over the subsequent 30 years; Levine, Loayza and Beck (2000) showed that a doubling of the size of private credit in an average developing country is associated with a two percentage point annual increase in the rate of economic growth; 2. The role of finance :  2. The role of finance Rajan and Zingales (1998) showed that industries and companies dependent on outside finance grow faster in countries with more developed financial systems; and Levine (2004) showed that financial development works by generating higher total factor productivity rather than higher investment In short, as World Bank (2001) notes “there is now a solid body of research strongly suggesting that improvements in financial arrangements precede and contribute to economic performance”. 2. The role of finance :  2. The role of finance In addition, Mishkin (2005), Rajan and Zingales (2003) and others argue persuasively that globalisation can spur financial development: Greater openness to trade generates a larger financial sector; It does so by increasing competition, which forces companies to seek outside finance; This will encourage non-financial companies to lobby for a more efficient and competitive financial sector; Globalisation also creates pressure for institutional reforms that promote financial development, such as improved accountancy, property rights, bankruptcy procedings; 2. The role of finance :  2. The role of finance Foreign competition forces domestic financial enterprises to improve their terms, if they are not to lose customers; Foreign ownership of financial institutions will improve the efficiency and services offered by the financial system, by increasing competition and offering global best practice; and Foreign involvement increases the liquidity of the financial system. 3. Failings of finance :  3. Failings of finance So, with all these advantages, what is the problem with financial liberalisation? There are well-known difficulties inherent in even the best financial system, since it involves nothing more than trades in promises. Trust is always in short supply and knowledge always limited in the financial system. 3. Failings of finance :  3. Failings of finance Inherent difficulties in financial markets are: Asymmetric information (which may mean some markets will never appear) Adverse selection (which means that providers may impose quantitative limits on their clients, especially in crises) Because of the inherent uncertainties, big mood swings occur in markets and sometimes panics: When participants know that they do not know what is going on, they may follow a few leaders and so show herding behaviour. They are more likely to behave in this way, the more unfamiliar are the markets in which they are engaged. 3. Failings of finance:  3. Failings of finance To these inherent dangers must be added those that are prevalent in liberalising emerging market economies: Simple ignorance of the consequences of liberalisation; Corrupt insider relations between politicians and banks and between owners of banks and of non-financial businesses; Non-economic obligations imposed on banks; Poor regulation; Poor legal systems and inadequate property rights 3. Failings of finance:  3. Failings of finance In addition, emerging market financial system are vulnerable to three (linked) macro-economic dangers: Fiscal indiscipline, with risks of large-scale monetary expansion; Or, partly as a result of a history of indiscipline, excessive reliance on borrowing denominated in foreign currency; And exchange-rate pegging, which gives an illusion of safety to foreign currency borrowing (and lending). The combination will inject additional fragility into any financial system. 4. Anatomy of financial crises:  4. Anatomy of financial crises Financial crises have come thick and fast. The World Bank (2001) estimated that there were 112 systemic banking crises in ninety-three countries between the late 1970s and the end of the twentieth century. Eichengreen and Bordo (2002) counted ninety-five crises in emerging market economies and another forty-four in high-income countries between 1983 and 1997: 4. Anatomy of financial crises:  4. Anatomy of financial crises Seventeen of the crises in emerging market economies were banking crises, fifty-seven were currency crises and twenty-one were “twin crises”, the most damaging of all. Nine of the crises in high-income countries were banking crises, twenty-nine were currency crises and six were twin crises. Altogether, there were twenty-six banking crises, eighty-six currency crises and twenty-seven twin crises. 4. Anatomy of financial crises:  4. Anatomy of financial crises The twin crises are more significant and more interesting. These represent the interaction of the microeconomics of finance with the macroeconomics of exchange-rate regimes and monetary and fiscal policies. 4. Anatomy of financial crises:  4. Anatomy of financial crises These crises can be very costly: According to Caprio and Klingebiel (2003), there have been 27 crises over the last quarter century with fiscal costs exceeding 10 per cent of gross domestic product and many more with costs of between 1 and 10 per cent of GDP These crises have afflicted high-income countries and emerging market economies. But the biggest have been in emerging market economies. 4. Anatomy of financial crises:  4. Anatomy of financial crises 4. Anatomy of financial crises:  4. Anatomy of financial crises 4. Failings of finance:  4. Failings of finance What is the route to crisis? According to Mishkin (2005), there have been two fundamental errors explaining the emerging market financial crises: Mismanaged liberalisation and globalisation; and/or Fiscal imbalances. The road to the twin crises: Stage 1: liberalisation and/or fiscal imbalances; Stage 2: run-up to currency crisis; Stage 3: currency crisis; and Stage 4: currency crisis causes financial crisis. 4. Failings of finance:  4. Failings of finance Stage 1 - liberalisation and/or fiscal imbalances: Excessive risk-taking by inexperienced (or corrupt) banks; Poor (or corrupt) regulation; Rapid growth of credit; Moral hazard from absolute government guaranties; Losses mount and banks cut back on lending; Banks fail and contagion affects even healthy banks; Further contraction of bank lending; 4. Failings of finance:  4. Failings of finance Regulators are overwhelmed; Regulatory forbearance also means even more risk-taking; and, above all, Foreign lending adds fuel to the flames; In the case of Korea, the chaebol’s were no longer making money by the 1990s. The chaebol and the banks they influenced started to borrow directly and indirectly abroad, because they were guaranteed by the government. In addition, fiscal imbalances cause crises, particularly in banks: Argentina 2001-2002; Russia 1998; Turkey in 2001. 4. Failings of finance:  4. Failings of finance Stage 2 - run up to currency crisis: Higher interest rates abroad undermine credit quality; A decline in cash flow and greater need to borrow when it has become more expensive; Failure of companies or political turmoil leads to panic; Declining asset prices undermines solvency even of good risks, particularly in the property sector (used as collateral); People “go for broke” as moral hazard factors become dominant: Mexico, Thailand, South Korea and Argentina all suffered from this. 4. Failings of finance:  4. Failings of finance Stage 3 - currency crisis: Residents and foreign speculators start to sell the currency and lenders pull out short-term money – a “sudden stop”; This puts governments in a bind: if they raise interest rates, to support the currency, they undermine corporate solvency and worsen the crisis; if they do not raise interest rates then the currency collapses, wiping out companies (including banks) with large net liabilities in foreign currency; This gives speculators a “sure thing”; Large fiscal deficits also undermine banks, as default comes closer, and cause speculators to run for the exit; and 4. Failings of finance:  4. Failings of finance Stage 4 – currency crisis triggers financial crisis: In countries with histories of inflation and default, loans tend to be short-term and denominated in foreign currency; Companies producing non-tradeables with foreign currency debt are wiped out; This undermines other creditworthy companies and banks; The crisis causes multiple bankruptcies in countries that also have inadequate bankruptcy procedures; Domestic credit seizes up; Inflation surges, as the currency falls, and there is a deep recession; Contagion spreads to other similarly-placed borrowing countries 5. The systemic financial crises :  5. The systemic financial crises For the purposes of our story, however there have been a limited number of events with significant legacies: The Latin American debt crisis of the 1980s; The tequila crisis, which began in Mexico in 1994-95; The Asian financial crisis of 1997-98, which spread to Brazil and Russia in 1998 and 1999; and The Argentine crisis of 2001-02. Of these the most important was the Asian financial crisis, because it was so surprising and because of its wider influence in the region. 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 5. The systemic financial crises:  5. The systemic financial crises 4. Anatomy of financial crises:  4. Anatomy of financial crises 6. The legacy of the crises :  6. The legacy of the crises These crises have had some beneficial and some malign long-term consequences The beneficial consequences have been better understanding of risks by all participants, stronger financial systems and better regulation This has occurred within the emerging market economies; Inside the global financial system; And in the international financial institutions 6. A burned child fears the fire:  6. A burned child fears the fire The malign consequences of the crises has been a widespread fear of deficits: Capital markets want to place capital in the emerging market economies, but governments are recycling them in the form of foreign currency reserves. As the emerging market economies have moved into surplus in the basic balance of payments (current account, plus private capital), global macroeconomic balance has been secured by a shift into deficit in high-income countries, above all the US. How this has happened and the implications for today’s world are the subject of the second lecture.

Related presentations


Other presentations created by The_Rock

airlines
30. 03. 2008
0 views

airlines

tradepolicy
22. 04. 2008
0 views

tradepolicy

AVCA CHRIS MWEBESA
13. 04. 2008
0 views

AVCA CHRIS MWEBESA

UEI SI2006 CitiesIntro
07. 04. 2008
0 views

UEI SI2006 CitiesIntro

Wisenews
28. 03. 2008
0 views

Wisenews

Mogi Tsinghua
27. 03. 2008
0 views

Mogi Tsinghua

2007070302122666487
26. 03. 2008
0 views

2007070302122666487

networking 101
19. 06. 2007
0 views

networking 101

Bowen Family Systems Theory
19. 02. 2008
0 views

Bowen Family Systems Theory

cipher machines
01. 01. 2008
0 views

cipher machines

huwang
29. 09. 2007
0 views

huwang

amart3
02. 10. 2007
0 views

amart3

Finland Nokia
07. 09. 2007
0 views

Finland Nokia

SINUS Milieu stud
12. 10. 2007
0 views

SINUS Milieu stud

AAS SD05 present
29. 11. 2007
0 views

AAS SD05 present

Germany Voting
27. 08. 2007
0 views

Germany Voting

disaster 2001
27. 08. 2007
0 views

disaster 2001

Bergstrom
27. 08. 2007
0 views

Bergstrom

workshop24 2
27. 08. 2007
0 views

workshop24 2

History of electric charge
20. 11. 2007
0 views

History of electric charge

Debra Lieberman
22. 11. 2007
0 views

Debra Lieberman

Reading Genres
27. 08. 2007
0 views

Reading Genres

Plant Establishment
02. 01. 2008
0 views

Plant Establishment

SPACE
03. 01. 2008
0 views

SPACE

IntroductionTo OWL
04. 01. 2008
0 views

IntroductionTo OWL

HBCU Deans Seminar 2005
01. 10. 2007
0 views

HBCU Deans Seminar 2005

genX
27. 09. 2007
0 views

genX

499HodoCuba04
11. 12. 2007
0 views

499HodoCuba04

ext ref uncertainty
27. 08. 2007
0 views

ext ref uncertainty

Intro HTML
09. 10. 2007
0 views

Intro HTML

Ransom Pollen Drift in Wheat
04. 10. 2007
0 views

Ransom Pollen Drift in Wheat

overview norway with notes final
07. 09. 2007
0 views

overview norway with notes final

2004 CFS Power Point for LEPC
26. 02. 2008
0 views

2004 CFS Power Point for LEPC

fps ml talk
28. 02. 2008
0 views

fps ml talk

11979
29. 02. 2008
0 views

11979

presentation cons 2007 e
04. 03. 2008
0 views

presentation cons 2007 e

knox trail proposal
10. 03. 2008
0 views

knox trail proposal

wwired scare
03. 01. 2008
0 views

wwired scare

Banff
13. 03. 2008
0 views

Banff

Technological Prerequisites
18. 03. 2008
0 views

Technological Prerequisites

SKH TOURCAN POWERPOINT
21. 03. 2008
0 views

SKH TOURCAN POWERPOINT

Un Arco Iris para ti 2066
21. 06. 2007
0 views

Un Arco Iris para ti 2066

Diarréia Crônica em AIDS
28. 12. 2007
0 views

Diarréia Crônica em AIDS

liebeversicherung
19. 06. 2007
0 views

liebeversicherung

Lab49 Algo v6
19. 06. 2007
0 views

Lab49 Algo v6

SWR0311
19. 06. 2007
0 views

SWR0311

Tibetan Dali Lama questions
19. 06. 2007
0 views

Tibetan Dali Lama questions

15828233
03. 10. 2007
0 views

15828233

strand
19. 06. 2007
0 views

strand

Yo quisiera ser 1953
21. 06. 2007
0 views

Yo quisiera ser 1953

Sin vicios para matrimonio 2008
21. 06. 2007
0 views

Sin vicios para matrimonio 2008

Lesson7 OverheadT ransparencies
19. 06. 2007
0 views

Lesson7 OverheadT ransparencies

Profesiones 1950
21. 06. 2007
0 views

Profesiones 1950

slides oct04
19. 06. 2007
0 views

slides oct04

Suarez pres
28. 09. 2007
0 views

Suarez pres

140103
10. 10. 2007
0 views

140103

Lec1 intro
21. 11. 2007
0 views

Lec1 intro

FIcase Oslo workshop
07. 09. 2007
0 views

FIcase Oslo workshop

two years
19. 06. 2007
0 views

two years

MEDITARE
19. 06. 2007
0 views

MEDITARE

Se necesita amor 1955
21. 06. 2007
0 views

Se necesita amor 1955

OAG Sinha
19. 06. 2007
0 views

OAG Sinha

spit
19. 06. 2007
0 views

spit