Financial crisis, contagion, and containment : from Asia to Argentina

367 Pages·2003·5.08 MB·English

by  Desai

FINANCIAL CRISIS, CONTAGION, AND CONTAINMENT
FINANCIAL CRISIS, CONTAGION, AND
CONTAINMENT
FROM ASIA TO ARGENTINA
Padma Desai
PRINCETON UNIVERSITY PRESS PRINCETON AND OXFORD
Copyright © 2003 by Princeton University Press Published by Princeton University Press, 41
William Street, Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press, 3 Market Place, Woodstock, Oxfordshire
OX20 1SY
All Rights Reserved
Library of Congress Cataloging-in-Publication Data Desai, Padma.
Financial crisis, contagion, and containment : from Asia to
Argentina / Padma Desai.
p. cm.
Includes bibliographical references and index.
ISBN 0-691-11392-0 (alk. paper) 1. Financial crises. 2. Economic stabilization. I. Title.
HB3722 .D47 2003
332'.042—dc21 2002031745
British Library Cataloging-in-Publication Data is available This book has been composed in Sabon
Printed on acid-free paper. ∞
www.pupress.princeton.edu
Printed in the United States of America 10 9 8 7 6 5 4 3 2 1
For
TN
āchāryah pūrva-rūpam, antevāsy uttara-rūpam, vidyā
samdhih
(Taittirīya Upanisad, 1.3.3)
Contents
Preface
1
1. Introduction
2. The U.S. Economy in Transition 13
3. The Euro: Teething Troubles and Faltering Responses 46
4. Japan: The Lost Decade of the Nineties amidst Policy Paralysis 70
5. The Asian Financial Crisis 86

Blocks
1. What Are Fundamentals? What Are Structural Issues? 99
2. The Current Account and the Exchange Rate 107
3. Financial Liberalization, Capital Account Decontrol, and the 110
Regulatory Framework
4. The East Asian Crisis: A Crisis of Over-Investment or Unregulated, 117
Premature Capital Flows?
119
6. The Asian Crisis Chronology
7. The Ruble Collapses in August 1998 136

Block
5. The Ruble: Premature Capital Account Convertibility 156
8. Contagion from the Ruble to the Real 162
9. Beyond Bangkok: Crisis Erupts in Buenos Aires and in the Bosphorus 172
10. The Contagion 197
11. International Monetary Fund to the Rescue: How Did It Fare? Badly 212

Blocks
6. Was There Moral Hazard in the Asian Financial Crisis? 242
247
7. How Much Corruption? Does Corruption Matter?
253
8. Chilean Capital Inflow Tax
256
9. Capital Account Convertibility in China and India: A Cautionary
Tale of Two Countries
263
12. Crisis Prevention and Containment: The Next Steps in Financial Reform
285
References
Index 293
Preface
THE BORROWING BINGE of the eighties and the nineties was a pervasive
phenomenon in the global economy. Japanese businesses borrowed
heavily and invested unwisely in the eighties. U.S. households went
overboard in stretching their finances in the second half of the nineties.
Businesses, banks, and several governments in emerging market
economies accumulated unsustainable foreign debt obligations.
There was however a difference in the process in the developed group
at the center and the vulnerable economies at the periphery of the
international financial system. Borrowers in the developed market
economies managed their debt burden, by source and duration, of their
free will. Their policy makers undertook homegrown measures for
battling the consequences of the resulting economic booms. By contrast,
the emerging market economies analyzed in this book invited financial
and currency crises in their economies from destabilizing foreign capital
flows. These flows resulted from a premature opening of their financial
systems in an environment of hothouse pressure that emanated from
private and institutional lenders in the U.S.-led developed center. From
Asia in 1997 to Argentina in 2002, these countries struggled with the
consequences of externally imposed financial crises and International
Monetary Fund (IMF)-led policy prescriptions that they did not own.
I adopt this comparative center-periphery framework in the book for
tracing the origins and spread of financial crises. I also employ it for
arguing that emerging market economies with weak institutions and
political maneuverability cannot be expected to grow crisis-free in a
world of unrestricted capital mobility and floating exchange rates which
are the latest magic bullets uncovered by the IMF. Even the U.S.,
eurozone, and Japan, advanced market systems with institutional
capabilities and open economy adaptability face problems, which I