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F Ro M C a P Ita L S Urges to D Ro U G

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F Ro M C a P Ita L S Urges to D Ro U G From Capital Surges to D r o u g h t Seeking Stability for Emerging Economies Edited by Ricardo Ffrench-Davis UN Economic Commission for Latin America and the Caribbean Santiago and Stephany Griffith-Jones Institute of Development Studies Brighton, Sussex in association with the United Nations University/World Institute for Development Economics Research Studies in Development Economics and Policy General Editor: Anthony Shorrocks UNU W ORLD INSTITUTE FOR DEVELOPMENT ECONOMICS RESEARCH (UNU/W IDER) was established by the United Nations University as its first research and training centre and started work in Helsinki, Finland, in 1985. The purpose of the institute is to undertake applied research and policy analysis on structural changes affecting developing and transitional economies, to provide a forum for the advocacy of policies leading to robust, equitable and environmentally sustainable growth, and to promote capacity- strengthening and training in the field of economic and social policy-making. Its work is carried out by staff researchers and visiting scholars in Helsinki and via networks of collaborating scholars and institutions around the world. UNU World Institute for Development Economics Research (UNU/WIDER) Katajanokanlaituri 6B, FIN-00160 Helsinki, Finland Titles include: Ricardo Ffrench-Davis and Stephany Griffith-Jones editors( ) FROM CAPITAL SURGES TO DROUGHT Seeking Stability for Emerging Economies Aiguo Lu and Manuel F. Montes (editors) POVERTY, INCOM E DISTRIBUTION AND WELL-BEING IN ASIA DURING THE TRANSITION R o b e rt J. M c In t y r e a n d B r u n o D a lla g o (editors) SMALL AND M EDIUM ENTERPRISES IN TRANSITIONAL ECONOMIES Vladim ir Mikhalev (editor) INEQUALITY AND SOCIAL STRUCTURE DURING THE TRANSITION E. Wayne Nafziger and Raimo Vâyrynen (editors) THE PREVENTION OF HUMANITARIAN EMERGENCIES Laixiang Sun (editor) OWNERSHIP AND GOVERNANCE OF ENTERPRISES Recent Innovative Developments Studies in Development Economics and Policy Series Standing Order ISBN 0-333-96424-1 (outside North America only ) You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England From Capital Surges to Drought © United Nations University 2003 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms o f any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W 1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents A ct 1988. First published 2003 by PALCRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALCRAVE MACMILLAN is the global academic im print o f the Palgrave Macmillan division o f St. M artin's Press, LLC and o f Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1-40 3 9 -16 3 1 -4 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A cataloguerecord for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data From capital surges to drought:seeking stability for emerging economies/edited by Ricardo Ffrench-Davis and Stephany Criffith-Jones. p. cm. — (Studies in development economics and policy) Includes bibliographical references and index. ISBN 1 -40 3 9 -16 3 1 -4 I. Capital movements— Developing countries. 2. Monetary policy— Developing countries. 3. Capital market— Developing countries. I. Ffrench-Davis, Ricardo. II. Griffith-Jones, Stephany. III. Series. HG3891.F765 2003 332'.042—dc21 2003049831 10 987654321 12 11 10 09 08 07 06 05 04 03 Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne C ontents List of Tables List of Figures Preface Acknowledgements List of Abbreviations Notes on the Contributors 1 Capital Flows to Emerging Economies: Does the Emperor Have Clothes? Stephany Griffith-Jones 2 Financial Crises and National Policy Issues: An Overview Ricardo Ffrench-Davis Part I The Supply of Capital 3 Liquidity Black Holes: Why Modern Financial Regulation in Developed Countries is Making Short-Term Capital Flows to Developing Countries Even More Volatile Avinash Persaud 4 International Bank Lending: Water Flowing Uphill? John Hawkins 5 Bank Lending to Emerging Markets: Crossing the Border David Lubin 6 Derivatives, the Shape of International Capital Flows and the Virtues of Prudential Regulation Randall Dodd 7 Ratings since the Asian Crisis Helmut Reisen 8 Proposals for Curbing the Boom-Bust Cycle in the Supply of Capital to Emerging Markets John Williamson vi C o n te n ts 9 Corporate Risk Management and Exchange Rate Volatility in Latin America Graciela Moguillansky 10 The New Basel Capital Accord and Developing Countries: Issues, Implications and Policy Proposals Stephany Griffith-Jones and Stephen Spratt 11 The Instability of the Emerging-Market Assets Demand Schedule Valpy FitzGerald Part II National Policy Responses 12 Capital Account and Countercyclical Prudential Regulations in Developing Countries José Antonio Ocampo 13 How Optimal are the Extremes? Latin American Exchange Rate Policies during the Asian Crisis Ricardo Ffrench-Davis and Guillermo Larrain 14 Countercyclical Fiscal Policy: A Review of the Literature, Empirical Evidence and Some Policy Proposals Carlos Budnevich 15 Financial Regulation and Supervision in Emerging Markets: The Experience of Latin America since the Tequila Crisis Barbara Stallings and Rogerio Studart List of Tables 1.1 Emerging market economies: net capital flows, 1994-2003 2 1.2 International banks' involvement with all developing countries, 1998-2001 5 2.1 Latin America and East Asia: stock exchange prices, 1990-2002 23 2.2 Latin America and East Asia: GDP, 1971-2002 28 4.1 Emerging market economies' net external financing, 1996-2002 59 4.2 Consolidated international claims of BIS reporting banks for developing countries, June 2002 61 4.3 Concentration ratios 62 4.4 Borrowing by domestic non-banks from international banks: percentage denominated in domestic currency, June 2002 63 4.5 International financing of developing economies, 1990-2000 63 4.6 Real GDP, actual and forecast, 1950-2010 64 4.7 Correlations between changes in claims of BIS-reporting banks on developing economies, June 1990-June 2000 69 4.8 International banks' involvement in developing countries, June 1998-December 2000 71 A4.1 BIS reporting banks' exposure to developing countries 77 5.1 Banks' net cross-border exposure to developing countries, 1997 and 2001 81 5.2 Accounting for the fall in banks' gross cross-border exposure to developing countries, 1997-2001 83 5.3 Yesterday's problem: ratio of short-term debt to foreign exchange reserves, 1996 and 2000 84 5.4 Foreign ownership of banking sector assets in selected emerging markets, 1994 and 1999 87 5.5 Banks' in-country lending versus cross-border lending, i995 and 2001 88 6.1 Private capital flows to developing countries, 1973-81 and 1990-97 96 6.2 Maturation of East Asian stock markets, 1990-99 97 6.3 Net long-term flows to developing countries, 1990-98 98 6.4 Capital instruments, their associated risks and the derivatives used to manage the risks 99 6.5 Putable debt issued from East Asia 107 7.1 Explanatory power of the conventional determinants of sovereign ratings, 1995-98 121 vii viii L i s t o f T a b le s 72 The new Basel Capital Accord 130 7.3 Regulatory incentives for short-term interbank lending 133 9.1 Latin America: FDI and net capital transfer volatility, 1980-99 164 9.2 Most important subjects of hedging strategies 164 9.3 Most used instruments in the derivative market 167 9.4 Forward contracts in Chile, 1996-2000 169 11.1 Investment regulation of pension funds in nine OECD countries, 2001 208 13.1 Volatility in selected countries during international financial turmoil, 1997-99 247 13.2 Argentina: capital flows, real exchange rate and macroeconomic performance, 1994-99 254 13.3 Chile: capital flows, exchange rate and macroeconomic performance, 1990-2000 258 13.4 Mexico: capital flows, real exchange rate and macroeconomic performance, 1992-2000 262 15.1 Money supply as share of GDP, 1992-2000 295 15.2 Foreign bank assets as share of total bank assets, 1994-2000 296 15.3 Indicators of concentration in the banking sector, 1994 and 2000 297 15.4 Outstanding amounts of debt securities issued in domestic markets, 1989-2000 298 15.5 Bank regulation: selected indicators 300 15.6 Bank supervision: selected indicators 302 List of Figures 2.1 Latin America: cost and maturity of issues of bonds, 1992-2002 25 2.2 Argentina and Mexico: country risks, 1994-2002 26 2.3 Latin America: GDP and aggregate demand,
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