financialization...unctad_chapter 2 (2015)

8/18/2019 Financialization...Unctad_Chapter 2 (2015)

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UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

GENEVA

TRADE AND DEVELOPMENT

REPORT, 2015

UNITED NATIONS

New York and Geneva, 2015

Chapter II

FINANCIALIZATION AND ITSMACROECONOMIC DISCONTENTS

Making the international nancial

architecture work for development


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Financialization and Its Macroeconomic Discontents 27

Th grwng nunc f nanca markts and

nsttutns, knwn as “nancazatn”, affcts hw

wath s prducd and dstrutd (UNCTAD, 2011).

Cnsqunty, th ncrasng ntgratn f dvp-

ng and transtn cnms (DTes) nt th gananca systm, and th accratn f capta ws

nt ths cuntrs snc th turn f th mnnum,

hav fud dscussn aut th nks twn pn-

nss, nanca dpnng and cnmc dvpmnt.

incrasng nanca ntgratn has th ptnta t

nhanc accss t xtrna nancng fr dvp-

mnt. Hwvr, ths chaptr argus that thr has

n ny a wak nk twn th ntgratn f mst

DTes nt ga nanca markts and thr ng-

trm dvpmnt. Ths nk has xprncd furthr

strans n rcnt yars du t vraundant qudtygnratd y cntra anks n dvpd cuntrs.

Wh svra DTes hav xhtd strng grwth

and currnt accunt surpuss (r wr dcts) vr

th past dcad, accumuatng, n aggrgat, cnsd-

ra xtrna rsrv assts, thr gratr pnnss

t ncrasngy arg and vat ntrnatna capta

ws, spcay shrt-trm spcuatv ws, has

xpsd thm t th rsks f nanca m-and-ust

cycs.1 Ths chaptr dtas th mpcatns f such

rsks frm a macrcnmc prspctv.

Fnanca ws t DTes n th prd snc th

2008–2009 crss rct a prvusy stashd

pattrn f macrcnmc drvrs that startd t

mrg n many cuntrs gnnng n th 1980s:

a ng-trm dtrratn n th ga wag shar

and rducd puc sctr spndng n th dvpd

cnms, whch hav cntrutd t th dampn-ng f ga dmand. Ga grwth has n asd

many n xpandng fnanca qudty and th

gnratn f crdt and asst ms. Aftr th crss,

dvpd-cuntry pcs f quanttatv asng,

cupd, aftr a rf xpansnary ntrud, wth

sca austrty, hav argy prptuatd ths pat-

trn.2 Th prms f hghr rturns n nvstmnts

n DTes, and prcptns that thy psd wr rsks

than fr, mad thm an attractv atrnatv

fr ntrnatna nvstrs. Hwvr, an ncrasng

prprtn f th rsutng nanca ws nt thscuntrs has tndd t shrt-trm r f a mr

spcuatv natur, and thy ar arady xhtng

th typ f vatty rmnscnt f cndtns that

prcdd nanca crss n a numr f DTes n th

1980s and 1990s.

Ths chaptr rst cnsdrs nancazatn n

DTes at an aggrgat v, and hghghts th ra-

tnshp twn capta ws and factr ncm

paymnts, and th rsutng prssurs n trad a-

ancs. Th hghr aggrgat rats f rturn n DTes’

ats ratv t ths arnd n DTes’ assts

ar an nsufcnty acknwdgd and ptntay

Chapter II

FINANCIALIZATION AND ITS

MACROECONOMIC DISCONTENTS

A. Introduction


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Trade and Development Report, 201528

prmatc aspct f ths ratnshps. exstng

pattrns pnt t unsustana trnds fr th cur-

rnt accunt, thrfr adng t gratr nanca

fragty. Mrvr, n th currnt cntxt f sug-

gsh rcvry frm th crss, whch rqurs strng

cntrutns t ga dmand, spcay y surpus

cuntrs, th prssur t mtgat th ffct f nt

factr ncm sss n th currnt accunt s cun-

trprductv fr ga wfar.

Ths chaptr thn dscusss th mpcatns

f fnancazatn fr dmstc macrcnmc

pcy. it argus that xcssv nanca ws atr

prcs and nunc pcy n ways that cmprms

th ptnta fr sustana grwth and dvp-

mnt. Wth fuy pn capta accunts, mntary

authrts cm mr xpsd t th prssurs andxpctatns f xtrna nanc. in partcuar, arg

capta nws gnrat prssurs fr xchang-rat

apprcatn, whch s xacratd y a wdsprad

cmmtmnt t mantanng xtrmy w rats f

natn as a ga n tsf. Th rach f sca pcy

s smary mtd y a cmpusn t mantan a

nanc-frndy puc pcy stanc, whch dscur-

ags pcy ntrvntn n th th xpndtur and

rvnu sds. Th rsut s a tndncy twards a

datnary macrcnmc nvrnmnt, cupd

wth structura fragts n th systms f nancand prductv nvstmnt. A f ths dscurags

th th grwth f rust aggrgat dmand and th

dpnng f prductv capacty.

Th xpctd rprcussns f ths fragts

n dmstc aggrgat dmand ar thn dscussd

y rvwng th hstry f svra nanca crss

n trms that nk surgs n spcuatv nanc wth

prvat sctr rsk-takng and susqunt puc sc-

tr sss. Ths sss ar ncurrd as gvrnmnts

vntuay and unvrsay assum th rsks and csts

gnratd y prvat spcuatn and prductn fa-

urs. A radr, styzd framwrk thn juxtapss

dmstc and xtrna surcs f cnmc grwth,

mphaszng hw past cndtns para ths that

prva tday.

Th chaptr cncuds wth a dscussn f a

numr f pcy rspnss that dvpng cuntrs

cud cnsdr n th ght f ths fragts. Such

rspnss wud am at bttr managng nanca-

zatn and ts macrcnmc ffcts, as w as

strngthnng th nk btwn sca and mntary

pcs and dvpmnt gas. Strng dmstc

nanca rguatn nds t b at th cr f ffrts

t harnss th bnts f ntrnatna nanc. instad

f ryng n narrwy cncvd natn targtsand hgh ntrst rats t manag capta nws and

th baanc f paymnts, a judcus cmbnatn

f capta cntrs and xchang rat managmnt,

ncudng by nuncng th amunt and cmps-

tn f capta nws, wud hp mantan accss

t prductv xtrna nanc wh as ncuragng

dmstc nvstmnt. Practv sca and ndustra

pcs ar as ssnta fr gnratng th structurs

and crcumstancs that supprt dmstc prductvty

grwth and th xpansn f aggrgat dmand. Gvn

th xtnt f nancazatn and th arg sz fgba capta ws, hwvr, macrcnmc man-

agmnt at th natna v must b suppmntd

by gba masurs that dscurag th prfratn

f spcuatv nanca ws. Furthr supprt can

prvdd at th rgna v y mans f mr

sustanta mchansms fr crdt supprt and shard

rsrv funds. Pcy crdnatn shud as xtnd

t dmstc macrcnmc managmnt. And such

masurs hav a gratr chanc f succss f thy ar

mpmntd rgnay and, utmaty, gay.


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1. Liquidity expansions before and

after the crisis

inadquat ga dmand s a prmary prm

rsutng frm th Grat Rcssn that has yt t

rsvd. in part, ths rcts an ngng faur

t r-nk nanc t sustana ncm gnratn

and spndng. in th run-up t th nanca crss f

2008–2009, ffctv dmand n majr cnms

was nt supprtd y a sustand grwth f wag

ncm, whch s th man factr drvng hushd

dmand, nr, n mst cass, was t supprtd y rsng

puc sctr spndng. Frm th 1990s, sca stancswr thr mdratng r ng sujct t dwnward

adjustmnts n mst f th majr cnms. Th

xcptn was th Untd Stats twn 2001 and

2004, whr xtrardnary sca njctn hpd ft

th cnmy aftr th dt-cm crash. in th asnc

f ths tw man drvrs, GDP grwth was asd n

qudty cratn, ntay y mntary authrts

and thn y prvat nanca nsttutns (s chaptr

iii). in sm f th majr cnms, ths succdd

n stng dmand thrugh asst apprcatns

and rrwng, adng t cnsumptn ms and

prvat nvstmnt us. Th cuntrpart drvr

n thr cnms was nt xprt dmand. Ths

hazardus cnguratn f nanc and dmand was

vry dffrnt frm th prcss f crdt cratn

that sustans prductn and mpymnt gnratn.

lkws, n th rcvry frm th 2008–2009

crss, th faur t rvrs th ng-trm dt-

rratn f th wag shar, whch gan n many

cuntrs n th 1980s, was cmpundd y a gnra

shft t sca austrty y mst dvpd cnms

aftr th rf xpansnary psd f 2009–2010.Ths ft rcvry amst xcusvy dpndnt n

rnwd qudty xpansn. Hwvr, thr ar

sm mprtant dffrncs twn th pr- and

pst-crss prds that hp xpan th rcnt cn-guratn f grwth and nanca pstns acrss

th ga cnmy.

Th rst and mst vus dffrnc s th

pst-crss rs f puc sctr dcts n dv-

pd cnms, an nvta anagu f th

unprcdntd aanc sht adjustmnts f anks,

usnsss and hushds. Th scnd dffrnc s

that ths tm qudty cratn has n ngnrd

y cntra anks, unk durng th pr-crss prd

whn th man trggr fr qudty cratn wasxcssv vragng y th prvat (and shadw)

ankng sctr.3 A thrd dffrnc, a cnsqunc

f th rst tw, s that qudty xpansn has n

channd thrugh nanca sctrs as prtf

assts, ncudng n dvpng cuntrs, and s

thrfr msty dtachd frm th ra cnmy.4

Th attr cam apparnt n th rs f crss-

asst crratns amng ga quts, cmmdty

markts and currncs n th ary 2000s (TDR 2011,

UNCTAD 2012a). Prtf acatns twn

quty and currncy markts rctd msty rsk-

n/rsk-ff prcptns, wh prcvd nts

frm dvrscatn drv cmmdty nvstmnt

and rducd th nk twn asst prcs and th

prfrmanc f th undryng ra assts, spcay

twn md-2008 and md-2013. Ths cntrutd

t a ntca rs n vatty acrss a markts.

Snc 2013, fundamntas hav n mr sgncant

n xpanng prc mvmnts fr mst prmary cm-

mdts (s chaptr i). in ths cntxt, th changng

dgrs f mprtanc f drvrs f prc frmatn

n ra, nanca and frgn-xchang markts havcnsdray undrmnd th aty f pcs t

B. The chaenes of oba iquidit expansion


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nunc ra cnmc prfrmanc r mtgat

xtrna shcks.

As far as DTes ar cncrnd, thr prfr-

manc, th n th pr- and mmdat pst-crss

prds, has gnray n charactrzd y a cm-

natn f supprtv dmstc dmand and xprt

uyancy. As a grup, thy hav as njyd gratr

dmstc nanca staty than dvpd cuntrs,

dspt ncrasd razatn f nanca ws and

pnng up that has awd a gratr prsnc f

frgn anks and nvstrs n thr dmstc markts.

Hwvr, ga nancazatn n th asnc f

sufcnt rguatn f dmstc nanca markts

has ft DTes mr xpsd t th cnsquncs f

m-and-ust cycs f capta nws, as ntd

n arr TDRs and thr studs (Akyüz, 2008 and

2011). expsur t any shck manatng frm xtr-

na nanca cycs cud qucky rd th strngth

f dmstc dmand n svra DTes, wth ptnta

rprcussns fr th staty f th ga cnmy.

in Chna, whr mntary pcy strzatn

and rsrv accumuatn hav argy mdratd th

mpact f capta nws, vrndtdnss n sctrs

nkd t th cnstructn m s cmng a grw-

ng cncrn fr pcymakrs (Chandraskhar and

Ghsh, 2015; Magnus, 2014).5 Athugh a swdwn

f nvstmnt can xpctd, f ths cncds wth

a sharp dcn n husng cnstructn and nfra-

structur udng, t cud cntrut t a rvrsa

f th arg shrt-trm and quty capta nws

(as dtad w). in thr DTes, scay mr

ncusv pcs hav payd a ratvy ffctv

r n supprtng dmstc dmand y mpmntng

cuntrcycca sca masurs, advancng stratgc

pans fr xprt dvrscatn away frm prmary

cmmdts (wth mtd succss), scazng

gans frm cmmdty xtractn, and mdratng

th ffcts f xcssv capta nws va rsrv

accumuatn r dffrnt frms f capta cntrs.

Nvrthss, thr rmans a strng pssty that

th scp and mpact f such pcy masurs cud

nsufcnt t cuntr th cnsdra sz and

cnsqunt nunc f ga nanca markts.

indd, th “tapr tantrum” f 2013, whch gnratd

sustanta shcks t prfrmanc and datnary

pcy ractns n svra dvpng cuntrs,

cud prv a (md) harngr f pss capta

rvrsas t cm (Ny, 2014; UNCTAD, 2014).

Th andscap may mr changng n DTes that

hav nt mpmntd any cuntrvang pcs t

manag nancazatn.

2. The rise and aggregate risks ofcapital inows to DTEs

Cmprhnsv rcrds f xtrna ws and

stcks fr a arg numr f DTes cnrm that thr

xpsur t xtrna surcs f nancng has cntnud

t rs (Chandraskhar, 2007; Gaaghr, 2015).6 Grss

annua dbt ws (nt ws pus dbt rpaymnts)

t DTes rachd nary $1 trn n 2013. Ths s

abut v tms mr than n 2002, th ast sgn-

cant trugh aftr th squnc f nanca crss nth at 1990s and th dt-cm crash n 2001, whn

grss dbt ws t DTes amuntd t $204 n.

it shud ntd that a rsng shar f grss annua

dt ws s n accunt f dt rpaymnts, whch

grw prprtnay t th vum f accumuatd

ats vr tm. Hwvr, thr was as a hug

rs n net dt ws (.. grss nward ws mnus

rpaymnts), frm $3.5 n n 2002 t $535 -

n n 2013. Nt quty nws nt DTes, whch,

accrdng t th Wrd bank’s International Debt

Statistics 2015, cmprs prtf quty as w asdrct nvstmnt, rs mr than furfd durng that

prd, frm $152 n t $637 n (chart 2.1).

Ths ncrass f xtrna fws t DTes

d nt sm s staggrng cnsdrng that ths

cnms xprncd a prd f nary unntr-

ruptd rapd cnmc grwth aftr 2003, dspt

ng affctd t varyng dgrs y th ga

nanca crss. Cmparsns f th sam w var-

as ntd av as a pr cnt f aggrgat grss

natna ncm (GNi) ar capturd n chart 2.1. byths masur, thr was a cnsdra rs f grss

and nt dt ws frm 2002 t 2007, rsumng agan

n 2010. Partcuary fr grss ws, th pattrn s

smar t th m cyc f th 1990s, thugh nt

as dramatc as that f th 1970s whch d t th dt

crss f th ary 1980s. Nt quty nws as a pr

cnt f GNi xprncd uctuatns as w, ut

frm a cnsstnty hghr v frm th md-1990s

nwards. As a prprtn f GNi, th surcs f

xtrna nws t DTes tgthr (dt and quty)

ncrasd frm 2.8 pr cnt n 2002 t 5 pr cnt n

2013, aftr havng rachd tw hstrca rcrds f

6.6 pr cnt n 2007 and 6.2 pr cnt n 2010.


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Ths aggrgat pattrns ar nt unqu t th

argr DTes, whch hav ratvy mr dvpd

nanca and capta markts. lwr-ncm DTes7

may hav asrd a cnsdray smar vum

f capta ws, ut thr pattrns ar smar t ths

f th grup as a wh, shwng a car rs frm

2002 t 2013, wth paks n 2007 and 2010. As a

prprtn f GNi, th surcs f xtrna ws

t ths sugrup f DTes tgthr (dt and quty)

ncrasd frm 2.5 pr cnt n 2002 t 5.1 pr cnt

n 2013, aftr havng rachd a hstrca rcrd f7.7 pr cnt n 2007.

Ratv t arr prds, frm 2003 nwards

mst DTes xprncd strng grwth and currnt

accunt surpuss r wr dcts, suggstng that

nancng nds fr dvpmnt may nt hav n

th man drvr f th m n capta nws. 8

Rathr, “push” factrs k mntary cndtns and

rsk prcptns f dvpd-cuntry nvstrs, n

tandm wth stck markt apprcatns n DTes,

may hav n th dmnant drvrs (s TDR 2013,chap. iii fr a dtad cnmtrc xrcs). Nt

unratd s th fact that DTes as a wh, partcuary

th argr cnms f ths grup, accumuatd cn-

sdra amunts f xtrna rsrv assts durng

ths prd (chart 2.2).9 Undr ths crcumstancs,

rsrv accumuatn prmary rcts an xcss f

nws vr th amunts that wud nrmay

cnsstnt wth dmstc spndng and nvstmnt

pattrns. by 2013, vr 40 pr cnt f th rsrvs

hd y DTes wr “rrwd”, n th sns f nt

drvng frm a currnt accunt surpus, ut rathr

st asd frm capta nws (Akyüz, 2014: 11).

Wh pcy makrs ftn s rsrv accumua-tn as a prcautnary masur, thr ar mts t

ths stratgy. Gvn th vs f nws and rsrv

accumuatn, an mprtant qustn s whthr ths

pattrns ar cnsstnt wth nanca staty and

sustand ga dmand.

Whn cnsdrng th aanc f paymnts,

th fcus s ftn n trad dcts and surpuss,

n th assumptn that nt factr ncms10 w

smpy rct a nutra pattrn f capta ws. but

th dtrmnatn and mpcatns f th factrncm aanc nvv a fw cmpxts. Frst,

factr ncms dpnd n th vum f assts and

Chart 2.1

FOREIGN CAPITAL INFLOWS INTO DEVELOPING AND TRANSITION ECONOMIES

By COMPONENTS, 1970–2013

(Billions of dollars and percentage of GNI)

Source: UNCTAD secretariat calculations, based on World Bank, International Debt Statistics (IDS) database.

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

1 97 0 1 97 5 1 98 0 1 98 5 1 99 0 1 99 5 2 00 0 2 00 5 2 01 0

$ b i l l i o n

Total capital inflows

Net debt inflows

Inflows used to repay principal on outstanding debt

Net equity inflows

2013

0

1

2

3

4

5

6

7

8

9

10

1 97 0 1 97 5 1 98 0 1 98 5 1 99 0 1 99 5 2 00 0 2 00 5 2 01 0

P e r c e n t a g e o f G N I

2013


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ats, as w as n thr rats f rturn. in turn,

assts and ats ar accumuatd frm th ut-

ward and nward ws rspctvy. Scnd, a currnt

accunt surpus, y dntn, quas a net utw

f funds n th “capta and fnanca accunt”

(hraftr rfrrd t as th “capta accunt”).11

Cnvrsy, a currnt accunt dct w qua netnws f capta. but ths ds nt man that an

cnmy w rcv prcsy th amunt f grss

nws that match th currnt accunt dct, r hav

grss utws that xacty qua th currnt accunt

surpus. Rathr, nws and utws ar party th

autnmus rsut f nvstrs’ prcptns, adng

t msmatchs twn nanc and th ra cnmy.

As ntd av, capta nws n xcss f ths

rqurd t nanc a currnt accunt dct nd

up as rsdnts’ prvat capta utws r rsrv

accumuatn y a cntra ank. lkws, surpus

cuntrs whch, n addtn t thr arnd frgn

xchang frm trad, rcv arg amunts f prvat

nws nd up accumuatng “rrwd” rsrvs.

Takng nt cnsdratn that rats f rturn

pad t frgn nvstrs ar usuay gratr than

ths tand y prvat rsdnts r cntra anks

f dvpng cuntrs, th nd rsut s that th a-

anc f factr ncms ftn may hav a tndncy

t wrsn th currnt accunt.12 Fr xamp, rsng

nt (pstv) nvstmnt pstns f surpus DTes

cud vntuay cxst wth dcnng nt factr

ncms. Ths dsadvantags ar magnd fr

DTes wth prngd currnt accunt dcts, whr

th accumuatd rsrvs ar msty “rrwd”.

Thus, wth wrsnng nt factr ncm maancs

and trad dcts, ths DTes w fac grwng nt

aty pstns. if dct DTes d nt succd nmprvng thr trad prfrmanc, thy must dpnd

n capta nws t fu thr xtrna gatns.

by mpcatn, ths ar xtrmy frag “Pnz

nanc” schms, whr currnt ats can ny

mt y gratr rrwng, and any sma chang

n crcumstancs r sntmnt, ntrna r xtrna,

can dstaz th th nanca systm and macr-

cnmc cndtns (Mnsky, 2008).

DTes gnray am at mprvng trad prfr-

manc fr a varty f rasns ratd t grwth, andtchnca prgrss, amng thrs. but th prspcts

f vr argr nt factr paymnt utws du t

th accumuatn f nhrtd ats and unqua

rats f rturn may ntnsfy th sarch fr cnmc

stratgs t ncras nt xprts, ncudng y rduc-

ng mprts.13

in sum, th mprca vdnc rvas that

nancazatn s asscatd wth a cntnung rs

f ga capta ws t DTes.14 Furthrmr, DTes

fac unvn rats f rturn n thr assts ratvt thr ats. Frm a ga prspctv, ths

pattrns cmnd may prmatc n ways that

hav nt n suffcnty acknwdgd. Frst,

cnms may nd thmsvs n a stuatn whr

a dtrratn n thr factr ncms accunt ads

t ncrasng ats n Pnz-nanc-typ trms.

Scnd, n th currnt crcumstancs f suggsh

rcvry frm th crss, whn ffrts nd t

mad t st ga dmand, spcay y surpus

cuntrs, th am f achvng trad surpuss n

rdr t mtgat nt factr ncm sss crats a

cntractnary as.

Chart 2.2

FOREIGN RESERVE STOCKS IN DEVELOPING

AND TRANSITION ECONOMIES, 1970–2013

(Percentage of GNI)

Source: UNCTAD secretariat calculations, based on World Bank,

IDS database.

a The major economies excluded are Argentina, Brazil,

China, India, Mexico, South Africa and Turkey. Also

excluded are Algeria, Egypt, Libya, Morocco and Tunisia.

The Russian Federation is not in the IDS sample.

0

5

10

15

20

25

30

1970 1975 1980 1985 1990 1995 2000 2005 2010

Total for developing and transition economies

Developing and transition economies

excluding major economiesa

2013


9/30


3. Greater nancial integration and

increasingly unstable capital ows

Manstram vws n nanca ntgratn strssthat t w nca fr th nvstrs and rcp-

nt cuntrs, prvdd that t taks pac wthn a

“sund” macrcnmc framwrk. Rcmmndd

pcs fr DTes ncud rducng gvrnmnt ntr-

vntn (cratng a crrspndngy ggr r fr

nanca nsttutns such as prvat anks and pn-

sn funds) and ncrasng cmpttn and structura

rfrms n prduct and aur markts (Caruana,

2011; Mkn insttut, 2014a; oeCD, 2011).

by cntrast, th anayss hr adpts a radr

and mr crtca apprach t nancazatn y

mphaszng hw th push and pu factrs hav

nuncd th r-mrgnc f rsks fr DTes snc

th nanca crss. Ths gratr rsks stm frm

xtrna as w as dmstc cndtns. extrna cn-

dtns ncud xcssv ga qudty, drvn mst

rcnty y quanttatv asng n dvpd cuntrs

that was nsufcnty matchd y an xpansn f

dmand caus f sca austrty.15 Wthn DTes,

rsks hav tndd t stm frm macr-fnanca

pcs that dsrgard th mprtanc f dmstc

nanca rguatn and undrstmat th ptntaydtrus ffcts f spcuatv us. Thrfr

ths sctn strsss th cmpstn f prtf

ws as a gud t an assssmnt f ptnta rsks.16

Durng th curs f th past 10 yars, th

wght f prvat, nn-guarantd, shrt-trm spcu-

atv ws has ncrasd sgncanty n th xtrna

prtfs f many f th argr DTes (chart 2.3) as

w as fr a th DTes takn tgthr, xcudng th

cuntrs ustratd ndvduay.17 Chart 2.3 tracs

pattrns f mr spcuatv capta nws ratvt tta nws as a shar f GNi; th dffrnc

ncuds msty ng-trm r pucy-guarantd

ans t puc sctr nsttutns and frgn drct

nvstmnt (FDi). Admttdy, thr ar sgncant

dffrncs n trms f nta cndtns, havur

and thr factrs amng such a vard grup f cun-

trs. Chandraskhar (2015), fr xamp, strsss th

nunc f prvus and rcnt nanca crss n

th drctn f cuntrs’ pcy rspnss. A cas

n pnt s indnsa, whr r-rguatn and capta

cntrs n th aftrmath f th 1997–1998 Asan

nanca crss hp xpan why capta nws dd

nt rcvr unt w nt th md-2000s. Anthr

cas s that f Argntna, whr th amunt f nt

capta ws rmand mdrat aftr th 2001–2002

crss.18 othr authrs, such as Gaaghr (2015),

prps a mappng f crss-rdr nanca rgua-

tns n th wak f th 2008–2009 nanca crss,

hghghtng th cass f braz, Pru, th Rpuc f

Kra and Thaand, whch mpmntd scnd- and

thrd-gnratn masurs, prc-asd cntrs and

frgn-xchang rguatns rspctvy.

osrvatns n dvrsty ntwthstandng,

th st f cuntrs prsntd n chart 2.3 shws a

cnsdray arg prprtn f typcay unsta

r unra ws n th tta, strngy drvng

upswngs and dwnswngs, whch, n sm cass,

hav n dramatc. Wthn prds f n r twyars, n amst a f ths cnms th sz f nt

nws has vard y mr than 5 pr cnt f GNi n

thr drctn, apparnty drvn y uctuatns n

th cmnatn f prvat, nn-pucy-guarantd

dt, shrt-trm dt and prtf quty (.. unsta-

) ws. in sm cuntrs such as Suth Afrca and

Turky (as w as Ukran unt th crss f 2013),

such unsta ws rprsnt amst th ttaty f

nws, whch, cmnd, can add up t fary sg-

ncant prprtns f mr than 6 pr cnt f GNi.

Ths ws ar vn argr fr thr cuntrs suchas inda, Maaysa and Thaand. Amng th sctd

samp, ny Chna, indnsa and Mxc rct

stuatns whr mst f th nws may nt f a

shrt-trm r unsta natur. Ths can xpand,

at ast party, y th gratr r f rguatn n th

tw frmr cuntrs.

Ths pattrns rprsnt ncrasng vunrab-

ts fr DTes, nt ny bcaus f thr sz ratv

t GNi, but n partcuar bcaus f th fact that sm

markts, such as stck markts, frgn-xchangmarkts and n sm cass vn ra stat markts,

prat n sphrs ratvy bynd th rach f pubc

pcy. Ths markts ar typcay unstab and hghy

crratd wth n anthr, whch xacrbats th

ptnta fr dstabzng c-mvmnts. And wh

t may dfcut t masur th sz f frgn-

xchang markts frm th prspctv f a sng

cnmy, dmstc captazatn masurs f stck

markts ar tng: fr ths samp f DTes prsntd

n chart 2.3, dmstc captazatn s gnray cn-

sdra, n sm cass gratr than 100 pr cnt f

GDP (Akyüz, 2014; Mkn insttut, 2014).


10/30


Chart 2.3

COMPOSITION OF CAPITAL FLOWS, SELECTED DEVELOPING

AND TRANSITION ECONOMIES, 2002–2013

(Percentage of GNI)

Source: UNCTAD secretariat calculations, based on World Bank, IDS database.

Net portfolio equity inflows

Short-term net debt inflows Long-term, private non-guaranteed net debt inflows

Total net inflows

-10

-8

-6

-4

-2

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012

Argentina

2013

-4

-2

0

2

4

6

8

10

12

14 Mexico

2002 2004 2006 2008 2010 2012 2013

-10

-5

0

5

10

15

20

25

30

2002 2004 2006 2008 2010 2012

Ukraine

2013

-4

-2

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012

India

2013

-4

-2

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012

Brazil

2013

-4

-2

0

2

4

6

8

10

12

14 Thailand

2002 2004 2006 2008 2010 2012 2013

-4

-2

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012

South Africa

2013

-6

-4

-2

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012

Indonesia

2013

-4

-2

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012

China

2013

-4

-2

0

2

4

6

8

10

12

14 Turkey

2002 2004 2006 2008 2010 2012 2013

-4

-2

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012

Other DTEs

2013

-10

-5

0

5

10

15

20

25

30

2002 2004 2006 2008 2010 2012

Malaysia

2013


11/30


in many cuntrs and n th DTe sugrup,

th gap twn th tta and th cmnatn f

unsta ws ncuds FDi and nn-prtf quty

nws (chart 2.3). FDi n prductv actvts,

spcay n ndustra sctrs that undrpn dv-

pmnt, can pstvy cntrut t dvpmnt.19

Ths s partcuary th cas whn FDi n th frm f

grnd nvstmnts s apprpraty asrd at

th natna v. Hwvr, FDi data n aggrgat

shud ntrprtd wth cautn. Fr xamp, th

casscatn f FDi typcay rfrs t th sz f th

wnrshp stak (10 pr cnt r mr, accrdng t

th iMF), and nt t th qudty f th nvstmnt.

indd, nanca nnvatn and th dpnng f

f nanca markts can mak arg wnrshp staks

mr apparnt wthut sgncant changs n th

qudty f nvstmnts. Anthr xamp s th factthat ra stat, a hghy qud and vat sctr,

attractd th mst grnd FDi n 2014, and f th

tp 20 rcpnts, a but 4 wr dvpng cuntrs.20

Furthrmr, th ptnta magntud f factr

ncm paymnts ratd t FDi nds t cn-

sdrd. in 2014, th vau f ga FDi ncm

xcdd that f a FDi nws.21 ecnms that

ar majr rcpnts f FDi may xprnc th

srts f aanc-f-paymnts nstats dscussd

av, snc mantanng a sustana grwth pathrqurs gnratng sufcnt frgn xchang t

cvr xtrna paymnts, partcuary n th cntxt

f arg prt utws (TDR 1999). if FDi nws

wr t sw dwn, th prm f cvrng vn a

mdst rpatratn f prts cud qucky cm

acut, spcay whn a arg prprtn f FDi

nws cnssts f rnvstd arnngs and may

hav mr k prtf ws than ng-trm ws

(Krg, 2014).22

Ths pctur f unsta capta ws chs th

xprnc f many dvpng cuntrs n th at

1980s and th 1990s (as dscussd w). Athugh

th cmnd shar f prvat, shrt-trm and quty

capta ws as a prcntag f GNi s nw argr

than t was n ths tw dcads, at th tm, many

dvpng cuntrs startd t ry n such frms f

nancng, snc dt markts rmand vrtuay dry

aftr th dt crss that ruptd n 1982. Sngh and

Wss (1998), n a crtca anayss f th ntractns

twn spcuatv capta ws and stck markts

n dvpng cuntrs, cncudd that th rsut-ant vatty, khd f macr-nanca shcks,

msacatn f rsurcs, and svr dsruptns

t ng-trm dvpmnt gas cad nt qustn

th argumnt that dvpng cuntrs shud turn

t stck markts as a way f mzng rsurcs

fr sustana dvpmnt.

Cmbnng ths pnts n vatty arsng frm

th structur f gba capta ws wth th aggr-

gat fragts stmmng frm cuntrs’ baanc f

paymnts, ths sctn argus that th xpansn funstab, shrt-trm and spcuatv ws prsnts a

chang fr usng such xtrna nanc n ways that

cud nhanc dvpmnt. Th nxt sctn taks

up th qustn f th changs and pprtunts

fr dmstc macrcnmc managmnt.

C. The macroeconomic costs of nanciaization

1. Effects of unfettered nancial

integration on prices and policy

in addtn t th macr-nanca rsks dnt-

d av, unsta nanca ws t DTes hav

ffcts n ky prcs, such as xchang rats, and atth sam tm thy cnstran mntary and sca p-

cs. S-cad “aanc-f-paymnts-cnstrand”

grwth framwrks prvd a ass fr undrstandng

th myrad cnnctns and ns f causaty twn

xtrna ws and cnmc grwth. Thy ar asd

n th nsght that t achv sustand grwth t s

ncssary t aanc mprts and nt factr ncm

paymnts wth xprts n a sustana mannr.23 Fr

nstanc, th sz f th currnt accunt dct rxtrna dt ratv t dmstc ncm can mt

pathways t sta grwth. Pcymakrs may chang


12/30


curs y thr rducng dmstc xpndtur, and

thus mprts, r supprtng nvstmnts that trggr

fastr utput grwth, such as y ncrasng xprts

(Mrn-brd, 1998). Atrnatvy, accrdng t

ths apprach, cndtns n ntrnatna nanca

markts can dtrmn th xtnt f frgn nanc-

ng avaa, whch n turn affcts mprts and xd

nvstmnts, vntuay dtrmnng th trad aanc

and th grwth trajctry (barsa-Fh, 2001).

Ths ratnshps ar prhaps mst mm-

daty apparnt n trms f hw nanca ws, n

cmnatn wth mntary pcy ractns, affct

prcs. inuncng th ra xchang rat t mantan

cmpttvnss and ncurag th prductn f

tradas rprsnts a chang fr pcymakrs n

DTes. excssv nmna xchang rat dprcatnw tnd t xacrat dmstc prc natn du

t th hghr cst f mprtd capta and cnsump-

tn gds. Cnvrsy, xcssv nmna xchang

rat apprcatn, whn nt sufcnty cmpnsatd

y wr dmstc natn, may crat a tndncy

twards ra xchang rat apprcatn that has a

prngd ffct n th currnt accunt. Navgatng

wthn ths cnstrants s dfcut fr cntra ank

pcy n dvpng cuntrs.

intrvntns n th frgn-xchang markt tavd an apprcatn f th dmstc currncy ad

t mntary xpansn, whch cntra anks usuay

try t strz y sng gvrnmnt scurts n

mny markts. Hwvr, ths pratns may nt

ncssary rsut n ntrst rats that ar sta and

cnsstnt wth ra dmand; gnray, th ntrst

rat tnds t vrsht and s fwd y a drastc

fa. A hghr ntrst rat xrts furthr upward prs-

sur n th xchang rat as frgn nvstrs rspnd

y ngagng n ntrst rat artrag. evn assumng

that xchang-rat managmnt and rsrv accumu-atn may hpfu n th cntxt f capta nws,

ftn, ths pcy s nt symmtrca. Authrts

usuay hav gratr dfcuty cpng wth capta

rvrsas. Usng a arg amunt f rsrvs t mt

dmand fr frgn currncy can rsk vntuay

mptyng th cffrs.24 Usuay, mny markt pra-

tns amd at rasng th ntrst rat ar actvatd.

indpndnty f whthr th cntra ank s

ngagd n xpct xchang-rat managmnt, f th

havur f th cntra ank s drvn y a narrw

natn targt ru, thr w a tndncy twards

nmna apprcatn (fr furthr xpanatn, s

barsa-Fh, 2012). inatn-targtng framwrks

typcay tnd t cnfrm t narrw mntarst das

aut th xstnc f an xgnus suppy f mny

and ts mpact n natn. Thus, fwng surgs f

capta nws, mntary authrts may cnsdr t

crtca t avrt an natnary spra rsutng frm

th ncras n mny suppy. but capta utws

adng t xchang-rat dprcatns can as trg-

gr natnary prssurs va th pass-thrugh ffcts

f mprt prcs. in th cntxt f natn-targtng,

ndpndnty f th surc f natnary prssurs,

th crtca nstrumnt t tam th natn rat s th

ntrst rat, whch ftn rngs wth t prssur fr

nmna apprcatn. if ths ffct s strngr than

th prsumd ffct f rducng th natn rat,

a ra-xchang-rat apprcatn fws, wth th

ptnta f a currncy crss f th currnt accuntdtrrats sgncanty. As a mattr f fact, hgh

ntrst rats hav prvrs ffcts n prc frma-

tn, as prducrs tnd t pass n th hghr cst

f rrwng y rasng prcs (lav, 2001). Th

dstazng ffct f spcuatv capta mvmnts

n nmna xchang rats, cmnd wth natn

targtng rgms that am at hgh ntrst rats, may

nt ny crat aanc-f-paymnts prms n th

shrt run, rsutng frm an vrshtng and succs-

sv crrctns f ntrst rats; t may, n th ng

run, as transat nt swr grwth, caus raxchang rats tnd t rman apprcatd n rdr

t avrt nanca shcks, ffctvy damagng th

currnt accunt (Frnk and Raptt, 2009).

Chart 2.4 ustrats sm f th mntnd

ntractns twn capta ws, xchang rats

and shrt-trm pcy rats fr th sam cuntrs

shwn n chart 2.3. in sm cass, th suggstd

nuncs f xtrna capta n th macrcnmc

nvrnmnt sm unamguus. incrass n cap-

ta nws n xcss f what s ndd t nancra dmand tnd t xrt upward prssur n th

xchang rat. Ths nunc may magnd

durng cmmdty prc ms fr nt cmmdty

xprtrs. braz, Maaysa, Ukran and t sm

xtnt inda appar t rprsntatv f ths pat-

trns, wh Chna s an xcptn, as th authrts

hav managd a stady apprcatn f th xchang

rat. Fr th ntr grup f DTes, th ratnshp

hds qut w dspt th hgh v f aggrgatn.

in thr cass (.g. Suth Afrca and Turky), th

crratn apps ny fr sctv yars, wh n

Thaand th varatns n th xchang rat sm t

nuncd y th pac f capta nws vr th


13/30


Chart 2.4

NET CAPITAL INFLOWS, NOMINAL EXCHANGE RATES AND NOMINAL INTEREST

RATES IN SElECTED DEvElOPINg AND TRANSITION ECONOMIES, 2002–2013

Source: UNCTAD secretariat calculations, based on World Bank, IDS database; IMF, World Economic Outlook , April 2015; and IMF,

International Financial Statistics database.

Total net inflows (percentages of GNI) Short-term interest rate (per cent)

Exchange rate ($ per local currency, 2000 = 1) (right scale)

0.0

0.5

1.0

1.5

-10

0

10

20

2002 2004 2006 2008 2010 2012

Indonesia

2013

0.0

0.5

1.0

1.5

0

5

10

15

20

2002 2004 2006 2008 2010 2012

Malaysia

2013

0.0

0.5

1.0

1.5

0

5

10

15

2002 2004 2006 2008 2010 2012

India

2013

0.0

0.5

1.0

1.5

0

5

10

15

2002 2004 2006 2008 2010 2012

South Africa

2013

0.0

0.5

1.0

1.5

-5

0

5

10

15

2002 2004 2006 2008 2010 2012

Thailand

2013

0.0

0.5

1.0

1.5

0

5

10

15

2002 2004 2006 2008 2010 2012

Mexico

2013

0.0

0.5

1.0

1.5

0

10

20

30

40

2002 2004 2006 2008 2010 2012

Ukraine

2013

0.0

0.5

1.0

1.5

0

5

10

15

2002 2004 2006 2008 2010 2012

Other DTEs

2013

0.0

0.5

1.0

1.5

-10

0

10

20

30

40

2002 2004 2006 2008 2010 2012

Turkey

2013

0.0

0.5

1.0

1.5

0

10

20

30

40

2002 2004 2006 2008 2010 2012

Brazil

2013

0.0

0.5

1.0

1.5

0

5

10

15

2002 2004 2006 2008 2010 2012

China

2013

0.0

0.5

1.0

1.5

-10

0

10

20

30

40

2002 2004 2006 2008 2010 2012

Argentina

2013


14/30


mdum trm, wth cntra bank ntrvntn actng

vr th shrt trm. Argntna shws a stady currncy

dprcatn n nmna trms, rsutng nt frm cap-ta mvmnts (whch rmand subdud), but rathr

rctng ts natn rat and practv xchang-rat

managmnt. in ths mr ambguus cass, t sms

that thr drvrs, ncudng sm dgr f practv pcy managmnt, may b th caus f xchang rat

uctuatns. indnsa, as ntd arr, has fr svra

yars mantand varyng rgms f xchang-rat

managmnt, wh th rsumptn f capta nws

sms t hav rspndd t th cmmdty m that

startd n 2003–2004.

Typcay, th crratns twn capta ws

and xchang-rat cycs ar mr prnuncd n

th shrt trm. indd, drastc capta w rvrsasccurrd n md-2013 n many f th cnms

dscussd hr fwng th annuncmnt y th

Untd Stats Fdra Rsrv that t wud rduc

th pac f quanttatv asng. Sharp dprcatnsfwd, and n sm cnms t tk spcc

mntary pcy rspnss t hat th turnarund.

Fars that nstabts f ths knd, and prhaps f a

gratr magntud, w mrg fwng a tghtnngf Untd Stats mntary pcy ar justab n vw

f such xprncs. Sm shrt-trm mntary pcy

rspnss t changs n capta ws ar dscrnb n

th annua ws shwn n chart 2.4, whr dcra-

tns n th pac f capta nws ar fwd byntrst rat ncrass – a pattrn that s ftn qucky

rvrsd. in ths cass, ntrst rat uctuatns can sharp frm n yar t th nxt. Ths vatty

may hav damagng ffcts n nanca staty and

n th nvrnmnt fr prductv ng-trm nvst-

mnt. What s mr, caus hgh ntrst rats arftn nt sufcnty ffctv, r may vn hampr

ffrts t cntr nfatn, a rsutng tndncy

twards apprcatn f th ra xchang rat w

hav astng ffcts n th currnt accunt.

T sum up, t appars that, fr th mst part, th

cnms shwn n chart 2.4, as w as many thrs,

hav n advrsy affctd y th gazatn fnanc as a rsut f prvrs ffcts n xchang

rats, and vat and ftn hgh ntrst rats. in

sm cuntrs, sm dgr f capta cntrs may

hav hpd mtgat ths ffcts (Gaaghr 2015;ostry t a. 2010).

exchang rats, th aanc f paymnts and

mntary pcy ar th mst frqunty dscussdaspcts f th macrcnmc cnsquncs f

nanca ws. Hwvr, nancazatn as may

xrt gnra dfatnary prssurs n natna

cnms, party as a rsut f th cnstrants thatpn capta accunts mps n sca pcy (Patnak

and Rawa, 2005; Patnak 2006).25 As ntd av, n

an nvrnmnt charactrzd y fr and typcayunsta nanca ws, pcymakrs cd cntr

vr th dmstc ntrst rat, wth th rsut that th

rat that prvas s gnray hghr than what wud

apprprat t supprt dmstc capta frmatn,

dampnng cnmc actvty and wrng GDP. inaddtn, nancazatn and pn capta accunts

xrt macrcnmc prssurs that tnd t rstrct

sca pcy. intrvntnst pcs and xpansn-

ary sca stancs, n mattr hw mprtant thy arfr dvpmnt, may a cncrn fr ntrnatna

nanc. Whthr ths sntmnts stm frm a farf unsustana dt accumuatn r natn, r

a dsr t xpand th scp fr prvat nvstrs y mtng th rach f th puc sctr, r smpy

frm rsstanc t a practv r fr th puc

sctr, th rsut tnds t th sam: pcymakrs

cm apprhnsv that gvrnmnt spndng maydrv nanc away (Krugman, 2000; Patnak, 2006).

Rcnt dats aut sca austrty and grwth

rct th ths cncrn and th prvanc f th

da that puc dcts and dt ar unquvcay ad fr grwth, vn whn th mprca vdnc

shws thrws (Hrndn t a., 2013).26 on th

rvnu sd, tax rcpts may dcn fr tw ratdrasns: rst, du t wr vs f cnmc actvty

asscatd wth wakr puc stancs; and scnd

du t ngng prssurs t ffr ntrnatna nvs-

trs favura tax rats st thy mv swhr.Th upsht s ss gvrnmnt actvty, whch drcty

rducs natna ncm as a rsut f mtd gvrn-

mnt spndng, ut as ndrcty wrs prductv

capacty y rstrctng th typs f puc nvstmntsn physca and human capta that supprt prvat

nvstmnt and prductvty grwth.

Furthrmr, pnnss f th capta accunt, y strngy atrng ratv prcs and dmand pat-

trns, may hav ngr trm ffcts as w, ncudng

y cratng dndustrazatn prssurs n DTes.

Gvn ths rsk, t s mprtant t cnsdr th ntr-actn twn, and squncng f, razatn f

th capta and currnt accunts. Ths has n, n

partcuar, th xprnc n parts f latn Amrca

and su-Saharan Afrca (datng ack t th at 1970sn sm cuntrs), whr capta accunt drgua-

tn, whch ntay d t massv capta nws

and currncy apprcatns, tk pac at th sam


15/30


tm as ncrasd pnnss t trad. Th wr cst

and gratr varty f ndustra mprts cnsttutd

a gan fr cnsumrs and a surc f mprtd nputs

nt prductn; but thy as dprssd th ratv prcs f trada gds and srvcs (th mprtdand xprtd), squzng dmstc prt margns

and wags, and wrng dmstc nvstmnt and

mpymnt.

Rcnt mprca vdnc shws hw, n cn-

ms wth ss dvpd manufacturng ndustrs,

ths cndtns can hw ut ca capacts

(TDR 2003; Rdrk, 2015).27 Ths has mant st

pprtunts fr grwth and fr an xpansn fhghr quaty mpymnt, snc ndustra grwth

s ssnta fr th. indd, n such cass, thr has

n an ncras n ftn nfrma, wr prductvtysrvc sctr js.

Thus, nancazatn and pn capta accunts,

and th hghr ntrst rats thy ftn rqur t

mantan staty, cmprms dmstc nvst-mnt and th aty f gvrnmnts t supprt t,

ndpndnty f whthr any nws r utws

hav takn pac (Patnak and Rawa, 2005; Krg,

2014c). Whn nws r utws d ccur, thycan hav dtrus ffcts n ndustrazatn and

dvpmnt n varus ways. As dscussd av,

capta nws xrt prssurs fr ra xchang rat

apprcatn and vat th prmacy f shrt-trmrturns n spcuatv markts vr ng-trm prj-

cts that ras prductv capacty (Patnak, 2003).

Ths maks t mr dfcut t cnduct th typ fstructuray transfrmatv nvstmnts rqurd fr

dvpmnt. on th thr hand, suddn stps r

capta w rvrsas can turn datnary tndncs

nt cntractnary crss, rsutng n substanta racnmc and human csts and rgatng sca pcy

t srvcng dbt rathr than supprtng dvpmnt.

Th nxt sctn uss th rcnt hstry f nancacrss n DTes as a gud t dtrmnng th cns-quncs f such vrxpsur t spcuatv nanc.

2. Learning from the past: Public sectornances and economic developmentafter nancial crises

As dscussd av, nanca razatn

and drguatn prvd an pnng fr a surg f

capta ws as w as dmstc ndng, addng t

th khd f us n stck markts and ra

stat markts. Such arg nws ar ftn magn-

d by th way sca and mntary pcs adapt t

nvstrs’ xpctatns. Th cnsqunt bud-up n

nanca fragty, drvn by argy prvat spcuatnand rsk-takng, s ftn swfty unwund by a crss,

wth substanta ngatv ra ffcts and a sharp rs

n pubc dbt. Tab 2.1 sts cuntrs and th dats

f thr currncy, svrgn dbt r bankng crss,grupd by th fur wavs f nanca crss dntd:

varus dbt crss n th 1980s, th Mxcan crss n

1994–1995 and ts s-cad tqua ffcts, th Asan

nanca crss n 1997–1998, and ts rpp ffcts

n cuntrs utsd th Asan rgn.28 it s nt a

cmpt st f a f th nanca crss that ccurrddurng ths prds, ut rathr a rprsntatv

samp dctatd y data avaaty and cr thms.

Amst a f ths crss psds std (31 utf 33) wr prcdd y a “capta w nanza”,

dnd as an unusuay arg ngatv surg n th

currnt accunt aanc.29 Smary, dmstc crdt

ms prcdd crss nary 75 pr cnt f th tm

(24 ut f th 33 psds std). in th ta,mnmum ra pr capta GDP grwth rfrs t th

mnmum grwth rat wthn fur yars f th start

f th crss (ncudng th crss yar, rcrdd as

th arst yar that any f th thr typs f crss gan, and s rfrrd t as tm T ). its ntnt s t

mak nfrncs, hwvr rugh, aut th utput

sss rsutng frm ths crss. Th ast tw

cumns ndcat th csts f th nanca crss ntrms f th grwng puc dt, th t dmstc

and xtrna crdtrs. Cmparng puc dt as

a shar f GDP th yar fr th nanca crss

gns (T-1) ratv t tw yars aftr (T+2) fr thntr grup f crss std, th mdan (avrag)

ncras n tta grss cntra gvrnmnt dt s

85.9 (124.3) pr cnt, wh th mdan (avrag)

ncras n xtrna gvrnmnt dt s 42 (60.5) pr

cnt. intrstngy, athugh sca msmanagmnt sa frqunt rfran n manstram accunts f nan-

ca crss, t s typcay th puc dng f th

prvat ust, and a th csts asscatd wth t (.g.natnazng prvat dt, rcaptazng anks, and

th mpact f currncy dvauatn n th vau f

frgn currncy ats), that run up puc dt.

(a) Lessons of the 1980s

Th latn Amrcan dt crss f th 1980s

caught many nvstrs and anaysts y surprs.30

Th wrd had nt wtnssd a majr fnanca


16/30


17/30


crss snc th 1930s, cmmdty prcs wr hgh

and ra ntrst rats w. Fush wth ptrdars,

many dvpd-cuntry anks prvdd nancng

t (msty prvat) rrwrs n dvpng cn-

ms as an atrnatv t th ackustr nvstmnt

pprtunts at hm. Th fact that th ans wr

vrsn y anks (and nt asd n nds) was

suppsd t nhanc nfrmatn and vrsght, add-

ng t th gnra sns f cndnc and ptmsm

that prvad (Rnhart and Rgff, 2009). Many

dvpng cuntrs usd ths funds t cp wth

prc shcks, mantanng grwth n th fac f

muntng aanc-f-paymnts cnstrants; vn

xprtrs rrwd havy, drawn n y ntrnatna

ndrs agr t xtnd ans (Pama, 2003). At th

pcy v, a numr f latn Amrcan cuntrs

ntrducd nanca drguatn and trad ra-zatn n th 1970s, spcay ths n th Suthrn

cn (Argntna, Ch and Uruguay).

bgnnng n 1979, thr was a srs f ga

cnmc shcks nvvng ra ntrst rat hks.

Ths wr a cnsqunc f Untd Stats ffrts

t tam natn, ntnsd rcssn n dvpd

cuntrs and a fa n nn- cmmdty prcs. As

a rsut, ptmsm swfty gav way t panc. Th

cut-ff n ndng, aanc-f-paymnts crss and

dvauatns that nsud d t a cascad f dfauts(s ta 2.1 fr a parta st). in rspns t th

aarmng spctr f wdsprad ankruptcs, latn

Amrcan gvrnmnts natnazd what had n

argy prvat dt, wth rngtatn and srvcng

rchstratd y ntrnatna nanca nsttutns

n th cndtn f mpmntng stazatn and

structura adjustmnt prgramms (Díaz-Ajandr,

1985; Yungr, 1993; Dam t a., 2013).

lkng ack at ths prd, thr wr svra

rasns t crtca f dmstc pcy chcs, suchas razng dmstc nanca markts wthut

mpmntng adquat vrsght, r undrstmatng

th dtrus ffcts f ra-xchang-rat apprca-

tn n th cntxt f trad razatn. but DTes’

dmstc pcs and cnmc structurs vard

much mr than crtcs typcay mphaszd. Fr

nstanc, sm Gvrnmnts had ratvy ntr-

vntnst mds f cnmc gvrnanc (.g. as

n braz), wh thrs ngagd n mr fr markt

rfrms, ncudng nanca razatn (.g. as n

Argntna, Ch and Uruguay). A thrd st had pn

capta accunts ut mpsd mts n prvat sctr

accss t xtrna nanc (.g. as n Mxc and th

bvaran Rpuc f Vnzua) (Díaz-Ajandr,

1984). What ths cuntrs dd shar wr th sam

xtrna cnmc cndtns that gnratd capta

w nanzas n th yars adng up t th crss,

a cnsqunt ud-up f nanca fragty, and th

nvta crash that fwd n th hs f cm-

mn cnmc shcks (Stgtz, 2003).31 expct

and mpct puc guarants f prvat dt thn

transfrmd th crss nt svrgn dt prms.

Prdctay, gvn th dmnant cnmc para-

dgm f th ra, ary cnmc mds that grw ut

f th xprncs f th 1980s dt crss fcusd

prmary n th changs f “sca sustanaty”,

and hw sca dcts and xpansnary pcs, fr

nstanc, mad cnms vunra t spcuatv

attacks n th cntxt f ffctvy xd xchangrat rgms (.g. Krugman, 1979; ostfd, 1994).

Accrdngy, gvrnmnt msstps cud gnrat a

ss f nvstr cndnc, nducng a sf-fung

prphcy as nvstr fars wud fu th currncy

dprcatn that had sparkd thr unas n th rst

pac (Krugman, 2014). Th cnvntna wsdm

that mrgd mphaszd gttng a cuntry’s s-

ca hus n rdr, and ttng markts d th rst

(Cav, 2005). Ths prspctv was as rctd

n th pcy prscrptns asscatd wth structura

adjustmnt, whch accrdd prrty t srvcng dtand rqurd razatn and prvatzatn.

(b) The return of capital ows to

Latin America

in 1989, Mxc sgnd n t th Untd Stats

Gvrnmnt’s brady Pan, whch was dsgnd t

furthr ncurag fr markt rfrms and as dt

urdns y cnvrtng gvrnmnt dt nt ndscatrazd y Untd Stats Trasury s. A

numr f thr cuntrs swpt up n th 1980s dt

crss sn fwd Mxc’s xamp. Ths marks

th gnnng, partcuary n latn Amrca, f th

ra whr th Washngtn Cnsnsus n cnmc

pcy dmnatd much f th thnkng n hw t

manag ga ntgratn and th dmstc cnmy,

ncudng strng cmmtmnts t nanca raza-

tn and prvatzatn (Dam t a., 2013). Ths

rfrms and dt rstructurngs asd cncrn vr

sca dt, agd as t th ky pcy mstak

f th 1980s, and rpnd accss t ntrnatna

capta fr dtr cuntrs.


18/30


Attractd y ratvy hgh rats f rturn,

and rassurd y dmstc pcy rfrms and th

prspct f a satsfactry cncusn f th ngta-

tns n th Nrth Amrcan Fr Trad Agrmnt

(NAFTA), prtf nvstrs hrdd nt Mxc,

drvng ms n dmstc crdt (hpd y th

prvatzatn f cmmrca anks) and stck prcs,

ut ths dd tt t st ra GDP grwth (Gra,

1996). in 1994, an ncras n ntrst rats n th

Untd Stats, as w as a srs f dstazng

ptca vnts, ndd th capta w nanza and

ncsstatd th drawng dwn f rsrvs n rdr

t nanc th sustanta currnt accunt dct

(Mrn-brd and Rs, 2004). intrnatna nvs-

trs cam cncrnd that Mxc’s xchang

rat, whch was ssntay pggd t th Untd

Stats dar, was hadd fr dvauatn. As thssf-fung crss typcay wrk, th cnsqunt

capta utws nducd th currncy crss that

nvstrs had fard. in th ad-up t th crss,

Mxc’s ncrasng ranc n dar-dnmnatd

dt nstrumnts cad tesobonos ntrducd add-

tna rsks, stkng nvstrs’ far f dfaut and

crss (lustg, 1995). Th Cntn Admnstratn

hpd scur a quck aut that gav prrty t

nd rpaymnt and furthrd nra rfrms

(FtzGrad, 1996; Gra, 1996).

Th Mxcan crss cratd dvauatn prssur

amng a numr f thr mrgng markts as wr-

rd nvstrs r-vauatd rsk n th cntxt f xd

xchang rats (th s-cad “tqua ffct”). Th

strngst mpact was ft n Argntna. in ary 1991,

Argntna had stashd a currncy ard, whch

mantand a xd pg f ts currncy t th Untd

Stats dar and stashd that th mntary as

wud ntry cvrd y ntrnatna rsrvs

(an arrangmnt that prsstd t 2001, whn th

crss that th schm hpd t ud nay ruptd).Wh th rgm was ffctv at curng hgh na-

tn, th razatn f trad and nanc d t an

apprcatn f th ra xchang rat, ncrasng

currnt accunt dcts and xtrna dt (Dam t

a., 2013). Whn th Mxcan crss struck, Argntna

as facd suddn capta utws, many frm

rsdnts’ dpsts n dmstc anks. Th prssur

n Argntna’s anks prvd t strng, frcng th

gvrnmnt t ngtat a aut agrmnt wth th

iMF n 1995. iMF supprt, whch was cndtna

n th Gvrnmnt tghtnng ts sca pcy y

ncrasng taxs, pnd th way fr sgncant fr-

gn nancng f gvrnmnt dt (Cacagn, 1997;

bughtn, 2012). braz avdd a smar fat argy

y rasng shrt-trm ntrst rats, whch ntrducd

thr fragts (.. prsstnty hgh ntrst rats,

ncudng n puc dt) that rndrd t suscpt

t crss atr n th dcad (Pama, 2011).

Thugh mtd n scp and ratvy shrt-

vd, ths crss changd sm f th cnvntna

wsdm n th dtrmnng rs f fundamntas

and razatn, as w as th rputatn f sm

f th “star studnts” that had fwd ths pcy

advc (bughtn, 2012: 487–488). Thr wr

sm ffrts t suggst th ack f dmstc savngs

as an nsufcnty rcgnzd vunraty, ut th

spctacuar savrs caught up n th Asan nanca

crss a cup f yars atr qucky undrmnd

that n f rasnng (Cav, 2005). A mr ndur-ng atrnatv xpanatn, fr what wud cm

a cmmn nra “xcptnasm” stry, ad

th am fr th crss squary n th Mxcan

Gvrnmnt fr cnmc msmanagmnt, ptca

vrrach and crruptn (Gra, 2006). echs f

ths rasnng wud rappar t try and xpan th

Asan nanca crss.

(c) The Asian nancial crisis and beyond

if th Mxcan crss caught many y surprs,

th Asan nanca crss cam as a vrta shck.

Mst f th rgn’s macrcnmc fundamntas

smd ndsputay sund: grwth and savngs

rats wr hgh, and snc sca pcy was gnr-

ay cnsrvatv, mst rrwng was prvat. in

1996, th yar fr th crss ht, currnt accunt

dcts n Maaysa and Thaand wr n th arg

sd,32 and th rgn’s vra grwth had dcnd

sghty, ut nn f ths ray justd th xtrm

aarm and cnsqunt dscatn that wud snfw (Krugman, 1999).

As wth thr crss, th pathway t th Asan

nanca crss gan wth nanca razatn,

th n th capta accunt and n dmstc nanca

markts (Mnts, 1998). Ths rfrms wr party n

rspns t prssur frm dmstc rms and anks,

whch wr agr t accss wr ntrst ans n

ga capta markts fr nvstmnts at hm; and

arg nsttutna nvstrs n dvpd cuntrs

wr happy t g (Wad, 1998). Suth-east

Asan gvrnmnts cavd n t th prssur, and,

n sm cass, had dvpd vstd ntrsts n


19/30


awng prprty us t grw (Wad, 2004).33

Th practca rsut was wdsprad xpansn f

prvat ndng, much f whch was nkd t shrt-

trm, hard-currncy-dnmnatd dt nstrumnts

(Gra, 1999). At th sam tm, capta nws

wr asscatd wth hghr rats f natn and

ra xchang rat apprcatn, adng t a ss f

ntrnatna cmpttvnss and wrsnng cur-

rnt accunts (Chandraskhar and Ghsh, 2013).

Ths changs drv vn mr nvstrs nt th

ra stat and stck markt us, spcay n

Suth-east Asa. Wth grwng sgns f waknss

n Thaand’s asst markts y 1995, and ga

capta startng t shft away frm mrgng markts

as th Untd Stats Fdra Rsrv rasd ntrst

rats n March 1997, nvstrs cam ncrasngy

wrrd that Thaand’s pggd xchang rat wudnt hd (Wad, 1998). Th Tha cntra ank, aftr

unsuccssfuy usng ts rsrvs t dfnd th aht

aganst spcuatv attacks, nay t th currncy

at n Juy 1997. Th aht’s cnsqunt dprcatn

spkd nvstrs, sttng ff cntagn rst t ngh-

urng cnms n Suth-east Asa (indnsa,

Maaysa and th Phppns), and thn t Hng

Kng (Chna), th Rpuc f Kra and Tawan

Prvnc f Chna.34 Th iMF swfty mvd n t

hp cntan th crss, pushng an agnda that has

snc n crtczd fr pssy wrsnng th cn-tagn and dpnng th crss (Radt and Sachs,

2000), as w as vr-rachng n ts mpstn f

markt-rntd structura rfrms (Crtty and l,

2004; Stgtz 2002).

outsd Asa, th Russan Fdratn was nxt

t pud nt a crss. Sn aftr razng

fnanc and awng mr frgn partcpatn

n ts stck and puc nd markts, th Russan

Fdratn facd an ncrasngy wdsprad rvrsa

f capta ws t mrgng markts – ntay d nth Russan Fdratn’s cas y th xt f nvstrs

frm braz and th Rpuc f Kra n rspns t

th Asan nanca crss (Pnt and Uatv, 2010).

Dcnng cmmdty prcs furthr cmprmsd

th aty f th Russan Fdratn t dfnd ts

xd xchang rat, rsutng n dvauatn and

dfaut n 1998. Th arg prvat sctr sss (th

dmstcay and amng ntrnatna nvstrs) gn-

ratd y th Russan crss nducd a suddn stp f

capta ws t latn Amrca, whch manfstd as

a srs f nanca crss and w grwth that cam

t dud th “st haf-dcad” f 1998–2002

(TDR 1999; Cav and Tav, 2005).

Th xprncs f Argntna and braz us-

trat ths dynamcs and thr nks wth vunr-

ats stashd n prr crss. braz’s systm

f puc nancng was svry waknd y ts

ffrts t wathr th tqua crss, whr n addtn

t rasng ntrst rats, a ankng sctr rstructur-

ng add th Gvrnmnt wth ts f addtna

dt. Th cnmc swdwn and vry hgh ntr-

st paymnts causd braz’s ntrna sca dt t

sar twn 1994 and 1998, wth ntrst n puc

dmstc dt amuntng t 3.4 pr cnt f GDP n

1994 and 7.3 pr cnt f GDP n 1998 (TDR 1999;

Sanz and Cacagn, 1999).35 Dfndng th currncy

pg n ght f th suddn stp n capta nws and

nsufcnt rsrvs cam qucky untna, and

currncy crss and dvauatn nsud n ary 1999.

in Argntna, wth unsustana xchang rats,any cnmc grwth ncrasd ts trad dct, ut

th ack f grwth d t a sca dct: nthr f

ths dcts was cnsstnt wth th cnvrtty

rgm. Ths cntradctn cud crcumvntd as

ng as xtrna nancng kpt wng. Hwvr,

whn that stppd, tugh sca austrty and iMF

assstanc cud nt prvnt an cnmc mpsn,

a run n dpsts and a parta dfaut n puc dt

(Cacagn, 2003; Cav and Tav, 2005; Dam t a.

2013; Gra, 2006). Ra avrag annua pr capta

GDP grwth n Argntna sank t -4.2 pr cnt dur-ng th st haf-dcad, wh th avrag fr latn

Amrca as a wh was 0.2 pr cnt.36

(d) Public sector nances in the context of

nancial liberalization and systemic risk

Ths rf rvw cary suggsts that th k-

hd f nanca crss ncrasd as DTes razd

thr capta accunts and dmstc nanca markts,

whch d ntay t surgs n capta nws andthn t th suddn stps r rvrsas that amst

aways nsu.37 And athugh capta w nanzas

ncrasd n tandm wth fr markt pcy stancs

n dvpng cuntrs, thy cntnud t sg-

ncanty drvn y crcumstancs xtrna t th

cnms that hstd thm, such as changs n g-

a cmmdty prcs r n Untd Stats ntrst rats,

r y th psychgca and cnmc cntagn

ffcts f crss swhr. Ths xtrna frcs

ntract wth dmstc macr pcy and structur n

ways that ras vra fragty and rsk. but dmstc

factrs ar ny sgncant whn thy xst wthn

a argr ga nanca systm charactrzd y


20/30


t much qudty and nt nugh macrprudnta

rguatn, rdng n wavs f ptmsm, xcssv

prvat rsk-takng and vr-rrwng that prcd

th nvta crash – a dynamc that s ndmc t

th nanca systm tsf (Mnsky, 1992).

Th argy prvat rsk-takng asscatd wth

nanca razatn thn cms a puc dt prm. Th mst prxmat rasns nvv th

xpct and mpct guarants that gvrnmnts

prvd n prvat ats and th natnaza-

tn f ad prvat dts. but a nanca crss as

systmatcay rducs puc rvnus and wath

thrugh th ffcts f xchang-rat dprcatn n

puc assts and ats, ncrass n ra ntrst

rats, dcns n ra utput, and th addtna r-

rwng rqurd t da wth th csts f th crss

(d b t a., 2006). Athugh svrgn dfauts

ar a cmmn fatur f nanca crss n DTes,cntrary t th cmmn rhtrc arund dvpmnt

macrcnmcs, n th cass anaysd, arg puc

dt s mst ftn a cnsqunc, nt a caus.

evn amng cuntrs such as Argntna,

Mxc and th Russan Fdratn, whr puc

dt was dntd as a majr surc f th nan-

ca fragty that pushd thr cnms nt crss

n th 1990s, thr s amp rm fr quacatn.

Ta 2.2 taks a csr k at puc dt fr ths

thr cuntrs n thr rspctv pr- and pst-crss

yars. Rfrnc v rfrs t puc dt as a shar

f GDP thr yars prr t th crss dat (T-3), and

pr-crss grwth t th prcntag ncras n that

v vr th thr yars adng up t th crss. by

way f cmparsn, th grwth n puc dt aftr

th crss prsntd n ta 2.1 s rpatd hr.

Tta and xtrna puc dt as a shar f GDP

fr Mxc was actuay n th dcn fr th

crss, wh th pr-crss dt vs f th Russan

Fdratn and Argntna crtany dd nt prtndth crss that fwd. Hwvr, ths gurs d

nt captur hw th structur f dt maks DTe

gvrnmnts mr vunra than thr dt vs

suggst (.g. th xtnt f frgn-xchang-nkd

ats and shrt-trm maturts). evn thn, thr

ar argumnts t mad aut th rspctv rs

f sca prgacy vrsus havng t nd t th rus

f ga nanca markts.

3. Looming losses: Fiscal stance,macro policy and aggregate demand

Ths chaptr shws that xpsur t unrgu-

atd and arg nanca ws atrs macrcnmc

dvpmnts n ways that can ad t a swdwn

f GDP grwth as w as unsta ntrna dynam-

cs markd y suddn shfts f ncm and wath

twn th man sctrs (prvat, puc and

xtrna). A cnvnnt way t map ths shfts and

thr ratnshp wth cnmc grwth s y usng

th “dmand stancs” framwrk (s Gdy and

Crpps, 1983; Gdy and McCarthy, 1998; and

Table 2.2

FINANCIAL CRISIS AND PUBLIC DEBT IN MEXICO, THE RUSSIAN FEDERATION AND ARGENTINA

(Per cent)

Total gross public debt

as a share of GDP

Total gross external public debt

as a share of GDP

Country (crisis date)

Reference

level

Pre-crisis

growth

Post-crisis

growth

Reference

level

Pre-crisis

growth

Post-crisis

growth

Mexico (1994) 42.6 -29.2 26.4 37.3 -10.7 47.0

Russian Federation (1998) 30.2 34.1 39.5 31.0 4.0 96.4

Argentina (2001) 37.6 19.8 208.1 47.9 6.2 149.9

Source: UNCTAD secretariat calculations, based on data from Reinhart and Rogoff, 2010a.

Note: Time T refers to the crisis year in parentheses. The columns refer to the following:

Reference level is debt as a share of GDP at (T-3);

Pre-crisis growth refers to the percentage change between (T-3) and (T-1);Post-crisis growth refers to the percentage change between (T-1) and (T+3).


21/30


Tayr, 2001 and 2006). Ths framwrk rassrts th

Kynsan prncp that sustand grwth rqurs

cntnuusy ncrasng njctns (whch, n smp

macrcnmc trms, ncud prvat nvstmnt,

gvrnmnt xpndtur and xprts) nt th w

f ncm. Ths njctns, n turn, rqur a stady

grwth f akags (masurd y th prpnsty t

sav, th tax rat and th mprt prpnsty), whch

vr tm nsur nanca staty, as crdt rss

ang th crcuar w f ncm. Thus GDP grwth

can xpand as th grwth, ang sta nrms,

f njctns ratv t akags; ths vntuay

dtrmn nanca transfrs twn th man sc-

trs. Such rats f njctns t akags ar trmd

stancs and prvd a masur th f dmand drvrs

and nanca aancs.38

Thrfr, a usfu way t assss changs n

havur s t trac th pattrns f th thr stancs

(sca, prvat and xtrna) ang th path f grwth.

each f th thr stancs can srvd ratv t

GDP n rdr t s whch cmpnnts f aggrgat

dmand ar cntractnary and whch prvd stmu-

us t th cnmy. Wakr sca stancs (dcns

n gvrnmnt xpndtur ratv t th tax rat),

wakr prvat stancs (dcns n nvstmnt ra-

tv t th savngs prpnsty), and wakr xtrna

stancs (dcns n xprts ratv t th mprt prpnsty) advrsy affct th grwth path and may

gnrat nanca maancs that ncras nanca

nstaty.

Appyng ths framwrk t th crss dscussd

n th prvus sctn and std n ta 2.1, w nd

that n tw thrds f ths cass, th adng surc f

dmand shftd away frm th dmstc stancs (pr-

vat and gvrnmnt) fr th crss, and twards

th xtrna stanc aftr th crss.39 Ths rcts a

tndncy, pst-crss, fr xtrna accunts t g ntsurpus wh dmstc surcs f dmand tapr ff.

Structura trnds and cycca ffcts jnty cm nt

pay. Currnt accunt razatn prr t a crss,

ang wth nanca nws and strng xchang

rats, aw an xpansn f dmstc dmand wth

sustanta mprt akags. Aftr a crss, wag

cmprssn and wr prts, ang wth sca

cntractn and ntrst rat hks t attract capta

nws, wakn prvat sctr stancs and wr

mprts. Strngr xtrna stancs msty drv frm

a dcn n dmstc dmand and th cnsqunt

swft rductn f mprts. Rgardng th dmstc

sctrs, th trggrs ar a shft twards dvragng

f hushds (hghr savng prpnsts) and a

cntractn f gvrnmnt xpndtur whn austr-

ty s appd (partcuary aftr prvat sctr sss

ar transfrrd t th puc sctr and sca ma-

ancs grw as a rsut). Furthr, dprcatn f th

xchang rat can frqunty mak th frgn sctr

th adng surc f ffctv dmand wthut any

sustanta ncras n ra xprt capacty.

Tw addtna cnsdratns srv t hghght

th usfunss f th framwrk dscrd av t

trac dmand drvrs n sm DTes aftr th crss:

() th uffr r payd y cmmdty xprt rv-

nus, and () changng vws n cuntrcycca

sca pcy amng DTes. Rsng cmmdty prcs

(a trnd nw n rvrsa) hav sustand – at tms

narrwy – prvat sctr prtaty, prsrvngptmsm n th fac f ngng nanca vatty. in

addtn, whn grwth acrss th Suth dcratd n

2009 du t a cntractn f xprts t th Nrth and

th suddn stp f capta nws, cuntrcycca

pcy rspnss mad a rcvry pss n 2010

(Gra and Gaaghr, 2015). Dspt ths phm-

ra rvrsas n cuntrcycca pcy cnvntns,

pwrfu nanca markt nsttutns mantan thr

asd, shrt-trm prspctv whch hangs n th

mprtanc f nanca ratngs (s as chaptr iV).

A pcy avrsn t prvdng a strng sca stmuushas n th ru. Fsca rthdxy and an xcssv

ranc n mntary pcy hav gnratd nanca

fragty and xchang-rat nstaty n majr dv-

png cnms (Akyüz, 2013). Suscptty t

nanca prssurs s hghtnd thr whn puc

sctrs ncur dt drcty r, as s mr frqunty

th cas, crcutusy whn ncrasd qudty gnr-

ats prvat sctr dt that s utmaty takn n y

th puc sctr. intrst paymnts n dt, whthr

puc r prvat, furthr dampn dmstc stancs.

T summarz, th mst mprtant mnts

that wr prsnt n prvus crss and whch

prsst tday ar: pn capta accunts; ht mny

cycs wrsnd y mntary xpansn n dv-

pd cuntrs and a cnsqunt rs n xtrna

and ntrna dt (n partcuar shrt-trm dt); a

shft away frm dpnng ndustra dvpmnt;

and cnstrants n usng sca pcy as a t fr

structura transfrmatn and ndustra xpansn,

as mntary pcy cntnus t prmt th da-

tnary trnds favurd y ga nanca nvstrs.

Vry rady, ths faturs appy t many cuntrs

tday t varyng dgrs, dpndng n thr nanca


22/30


ws, stcks f dt, and mvmnts n xchang

rats and ntrst rats. Cary, th mst vunra

cnms ar ths whr dmstc actvts ar

hghy cncntratd n ny a fw sctrs.

Th anayss n ths chaptr has fcusd n

th rshapng f ga nanca markts, adng

t th Grat Rcssn and ts aftrmath t th pr-snt day. Th xtrardnary grwth f unrguatd

ga nanca markts, n tandm wth wakr

dmstc rguatn n mst DTes, has xacratd

th vunrats f ths cuntrs, rathr than

prvdng ncrasd fnancng fr dvpmnt

nds (dscussd n chaptr Vi f ths Report ).

Th chaptr has strssd that xcssv prvat

capta nws, partcuary ths f an unsta

r spcuatv natur, affct th cnguratn f

nt factr paymnts, xchang rats, ntrst rats

and thr prcs, and nunc mntary and sca pcy stancs n prvrs ways. Whn DTes fac

th thrat f suddn stps r capta w rvrsas

as cndtns n ga markts chang, th rsuts

can vn wrs. it s car frm th dscussn

that undr ths crcumstancs, pcymakrs’ sarch

fr atrnatvs t nsur mr sta utcms s

cmng ncrasngy changng.

A sgncanty mr sta macrcnmc

nvrnmnt fr dvpmnt s mpaus wthut

cctv ffrts t rfrm th ntrnatna mntaryand nanca archtctur, th sujct f chaptr iii.

Nvrthss, thr ar a numr f ptns that st

rman wthn th purvw f natna pcy. T

car, nn f th prpsd rcmmndatns ca fr

dnkng frm th ga cnmy n trms f thr

trad r nanc, ut rathr fr ttr managng th

nks t prmt dvpmnt.

on st f crtca pcy chcs rsts n th

aty t nunc th xchang rat. Wh avd-

ng “crnr sutns”, such as xd xchang rats

r fuy razd xchang rats, sm srt f

managd at rmans an attractv ptn (Ghsh,

2007; Dam t a., 2013). Th managmnt f th

xchang rat (as dscrd y ths authrs and

thrs) wth a vw t gudng ts vutn as a tfr dvpmnt ntas cmnatns f mntary

pcy, cntra ank pratns and ncms p-

cs. Hw ths s achvd n practc dpnds n th

partcuar crcumstancs n ach cuntry, ncudng

thr nsttutna dvrsty and thr aanc shts.40

As dscussd av, gudng th vutn f

th ra xchang rat n an nvrnmnt f arg and

drguatd ga nanc, and a ga xchang

systm dmnatd y a fw rsrv currncs,

w xtrmy dfcut wthut sm dgr fmanagmnt f th capta accunt. Th pss

us f capta cntrs as a t fr dvpmnt and

nanca staty has gand gratr accptaty y

many gvrnmnts and ntrnatna rganzatns

n rcnt yars. indd, UNCTAD has n a ng-

standng advcat f such a pcy: n th ary 1990s,

t suggstd that DTes shud cnsdr masurs that

“dscurag capta ws that wr nt ratd t ra

nvstmnt r t trad transactns ut wr mt-

vatd y shrt-trm gans” (UNCTAD, 2012: 50).

Ths and cmpmntary rcmmndatns amdat rstrng staty and avrtng systmc crss

ar vn mr rvant n tday’s cntxt, as as

vdncd y dvpd cuntrs svry ht y th

Grat Rcssn and ts aftrmath. Agan, th crcum-

stancs and scp fr actn dffr frm cuntry t

cuntry, as ds th dgr f rgna crdnatn

rqurd t nsur succss.

in an ffrt t avd th currncy and ntrst

rat rsks hstrcay asscatd wth xtrna dt,

DTes hav as shftd mr f thr rrwng

frm dt dnmnatd n frgn currncs t n

dnmnatd n dmstc currncy.41 but nt a

D. Concudin poic discussion


23/30


dvpng cuntrs can attract ntrnatna nvs-

trs t dmstc scurts markts. And vn whn

thy d, thr s th addtna rsk that argr shars

f dt, rgardss f currncy dnmnatn, w

hd y mr ntrnatnay m nvstrs.

Rcnt vdnc ars ut ths warnng: gratr

frgn partcpatn n dmstc currncy svrgn

nd markts has n asscatd wth hghtnd

vatty as a rsut f ncrasd xpsur t ga

nanca shcks (ek and Ky, 2015).

A smary mxd rsut s sn n th grwth

f ntrnatna rsrvs amng DTes. Th ud-up

f rsrvs s n prncp msty prcautnary, n

th sns that t s xpctd t guard aganst a hst f

s ntrducd y arg and spcuatv ntrnatna

capta nws and th ngatv cnmc and scacnsquncs f thr smtms suddn r sustan-

ta dpartur. Prcautnary rsrv uffrs as

hdg aganst th ss f pcy autnmy that ftn

accmpans iMF-typ auts r aganst prssurs

t prvd th macr pcy cndtns prfrrd y

ntrnatna nanca nvstrs (Gra, 2006). but

vn f rsrv accumuatn ds ffr sm prtc-

tn, prvdng sm pcy spac t cuntrs whs

currncs ar undr attack, thr s an pprtunty

cst t tyng up dvpmnt rsurcs n ths man-

nr. Furthrmr, whn pcymakrs try t cuntrcapta w rvrsas thrugh th us f rsrvs, thy

ftn nd up rsrtng t cmpmntary masurs,

such as ntrst rat ncrass, as th stck f rsrvs

dcns. Ths pcy rspnss utmaty wakn

th cnmy and rd cndnc vn furthr. As

ntd av, such trad-ffs ps a chang t

cntra ank pcy.

in cnsdrng pcy ptns, cntra anks

n DTes shud carfuy vauat th mpcatns

f narrwy appd nfatn-targtng rgms.Prssng t hard t achv natn rats dmd

dsra mr ftn n dvpd-cuntry cntxts

cud asy ad t hgh ntrst rats and appr-

catn f th ra xchang rat, th f whch

dscurag prductv nvstmnt and hnc dv-

pmnt. St, th wdsprad (frma and nfrma)

adptn f natn targtng y sm dvpng

cuntrs’ cntra anks rcts ra apprhnsn

vr any hnt f natn, gvn thr hstrs f

hgh natn. but pray mr mprtant s th

wdsprad f that natn targtng rgms gv

mr crdty t th cntra anks that mpmnt

thm, wrng xpctatns f natn and nang

hghr mpymnt rats fr a gvn v f natn.

Hwvr, th mprca vdnc ds nt supprt th

crdty argumnt (epstn, 2007). indd, sta

prc frmatn prcsss and sustand ncrass f

hgh-quaty mpymnt n a dvpng cuntry

cntxt ar cmpx gas that rqur attntn t

th vra staty f crdt and nanca ws.

but cntra anks can d mr than ny man-

tan prc staty r cmpttv xchang rats t

supprt dvpmnt, as attstd y th hstrca

rcrd. Aftr th Scnd Wrd War, cntra anks

n eurp and Japan usd ntrst rat cngs, su-

sdzd crdts and crdt acatn pcs t gud

rcnstructn and factat ndustra upgradng

(epstn, 2015). Smar pcs wr fwd y th

nwy ndustrazng cuntrs n th scnd haf fth twntth cntury, whr cntra anks prvdd

ky supprt t dvpmnt anks and thr gvrn-

mnts’ sca pcs (Amsdn, 2001; TDR 2013).

Prc staty gas can st hp gud ths typs

f pcy chcs, as whn targtd r susdzd

crdt ncurags prductvty and mpymnt

grwth rathr than actvts that gnrat natn-

ary prssurs (epstn and Ydan, 2009), r whn

ncms pcs nsur that wag grwth tracks

prductvty grwth.

Hwvr, as vdncd y th faurs f dv-

pd cnms t fuy mrg frm th rcnt crss,

mntary pcy an s nt sufcnt. Practv s-

ca and ndustra pcs ar ssnta fr gnratng

th structurs and cndtns that supprt dmstc

prductvty grwth and th xpansn f aggrgat

dmand. Mantanng strng and sta sca stancs

can hp ncras prductn and ncms, gnrat

hgh-quaty mpymnt, and ncurag a mr

gataran dstrutn f ncm (whch xrts a

furthr pstv ffct n aggrgat dmand). Pcsthat nsur that wag ncms ncras cncmtanty

wth prductvty grwth nhanc ths mchansms.

by xtnsn, trad pcy as nds t agnd

wth dmstc gas and pcs fr prductvty

and wag grwth, ncudng n ga, rgna and

atra trad ngtatns (s TDR 2014).

Ths crcumstancs hghght th nd fr mr

ffctv ntrnatna pcy crdnatn. Gvn

th shr sz f ga capta ws, ndvdua

cuntrs’ managmnt masurs, such as capta

cntrs, xchang rat managmnt, cntra ank

pcy cnsstnt wth stratgc dvpmnt nds,


24/30


and a tghtr rguatn f dmstc nanca systms,

may nt nugh. Dmstc pcy ptns shud

suppmntd y ga and rgna masurs that

dscurag th prfratn f spcuatv nanca

ws. in addtn, mr sustanta mchansms

cud stashd fr crdt supprt and shard

rsrv funds at th rgna v. At th sam

tm, mpmntng cuntrcycca macrcnmc

pcs, mprvng ncm dstrutn and xtnd-

ng sca spac fr dvpmnt purpss hav a

sgncanty gratr chanc f succss whn appd

as y partnr cuntrs, and ffctvy, th wrd at

arg. indd, dmstc pcy stmu, whn appd

y ny a fw cuntrs, ar cnsdray waknd

whn th nrta f macr pcy rthdxs prvas

n partnr cuntrs.42 Such cndtns can vn yd

prvrs ffcts f ga nvstrs and ntrnatna

nanca nsttutns rspnd n ways that gnrat

gratr vatty and uncrtanty. Ths aspcts ar

dscussd furthr n th nxt chaptr.

Notes

1 Athugh mdd-ncm cuntrs tnd t mr

ntgratd nt th ga cnmy, and as such,

smngy mr xpsd t th ffcts f nanca-

zatn, th magntuds f capta ws ratv t

GDP and thr macrcnmc ffcts dscussd n

ths chaptr appy t a DTes (s sctn b.2 frmr dta.)

2 Amng a grup f 26 dvpd cuntrs, a ut 4

(Franc, Japan, Swdn and Swtzrand) had cn-

tractnary sca stancs ratv t thr ng-run

trnd twn th scnd quartr f 2010 and th

furth quartr f 2013 (TDR 2014, chart 2.1).

3 S Chandraskhar (2007) fr an anayss f factrs

that d t an xpsn f ga qudty cratn

y prvat agnts aftr th 1997 Asan crss, whch

was transmttd t dvpng cuntrs thrugh th

pratns f hdg-funds, frgn drct nvstmnt

n th frm f prtf quty and ncrasd mrgrsand acqustns.

4 Thnk tanks prvdng anaytca nsghts fr ntr-

natna nvstrs trumptd th ptntay attrac-

tv rturns f dvpng cnms. S, fr

xamp, Accntur, 2012; back Rck, 2011; Crdt

Suss, 2011; ecnmst intgnc Unt, 2011;

UbS, 2012; and Ahmd and Zat, 2013, fr a mr

rgrus anayss f factrs dtrmnng th ra-

tv attractvnss f mrgng markt cnms

as nvstmnt dstnatns. (Th attr study as

vauats th nunc f th uncnvntna mn-

tary pcy f th Untd Stats as a factr n th

cmpstn f ws, a arg prprtn f whch

ar prtf acatns.)

5 Th crash n Chna’s stck markt n Jun–Juy

2015, and th Gvrnmnt’s rspnss t t, ch

ths wrrs ( Bloomberg Business, “Chna stcks

pung as Stat supprt fas t rvv cndnc”,

8 Juy 2015).

6 Th Wrd bank’s International Debt Statistics 2015 cntans rcrds f 125 cuntrs, f whch 121 ar

DTes accrdng t th Untd Natns casscatn.

Unss thrws spcd, th mprca dscussn

rfrs t ths grup f 121 DTes. eswhr n th

chaptr th trm DTes rfrs t a dvpng and

transtn cnms.

7 Ths ar dntd as a th 121 DTes mnus

Agra, Argntna, braz, Chna, egypt, inda,

Mxc, Mrcc, Suth Afrca, Tunsa and Turky.

8 Thr ar a fw xcptns amng DTes whr cur-

rnt accunt dcts n th 2000s wr sgncanty

argr than ths n th 1990s, ncudng, mst nta- y, inda, Suth Afrca and Turky.

9 evn cuntrs wth a currnt accunt surpus

tand addtna nancng t manag thr prt-

fs, ncras thr asst accumuatn uffrs n

vw f uncrtants, and cp wth ntrtmpra

ncnsstncs (snc xpctd xpndturs ar

dcdd n advanc f arnd ncm), r vn fr

nanca spcuatn purpss.

10 Th currnt accunt s th sum f th trad aanc

and th aanc n transfrs and nt factr ncms.

Nt factr ncms ar prmary th arnngs n

utward nvstmnts and ans ss paymnts mad

t frgn nvstrs and crdtrs. Rmttanc ws

frm rsdnts wrkng arad ar as accuntd


25/30


as factr ncms and fr sm DTes (.g. inda,

Mxc and th Phppns) th sz f such ws

s sustanta.

11 Any statstca rrrs twn th currnt and th

capta and nanca accunts n th aanc f pay-

mnts ar capturd y th “nt rrrs and mssns”catgry; ths tm s usd t prsrv th accuntng

prncp f quaty twn th currnt accunt and

th capta and nanca accunts.

12 Th dscussn that fws draws frm th anaytca

framwrk dvpd y Krg, 2014a.

13 in thry, th stuatn fr surpus cuntrs xpsd

t unfttrd capta ws wud prsnt smar

changs. evn thy cud fac dcnng trnds n

nt factr ncms, and thrfr dwnward prssur

n thr currnt accunts. Asd frm thr factrs

drvng thr xprt succsss, th prspcts f fa-

ng nt factr ncms mght gnrat prssur tcmpnsat y amng at vr gratr trad surpuss.

14 Wh th aggrgat prspctv takn n ths sc-

tn s crtca fr pnpntng th macrnanca

mpcatns f capta ws n th currnt cntxt,

th dtad anayss w shds a dffrnt ght y

dstngushng twn mr unsta and spcua-

tv shrt-trm ws and ths that ar ngr trm

and mr ky t ttr nkd t dvpmnt

nds.

15 Ths cnguratn f pcs s fund, fr nstanc,

n th Untd Stats, th urzn and th Untd

Kngdm, and ny partay n Japan whr quan-

ttatv asng was accmpand y sm dgrf sca raxatn. S TDR 2014 fr an xtnsv

anayss.

16 Ths prspctv s n n wth rcnt studs such

as ths y Gaaghr (2015), Katnrunnr and

Karacmn (frthcmng), Katnrunnr and

Pancra (2014) and Pw (2013).

17 Sm cuntrs f smar rvanc, such as th

Russan Fdratn, ar nt ncudd du t th ack

f dtad data n th Wrd bank’s International

Debt Statistics.

18 Th spk n prvat capta nws rcrdd n 2005

s n fact th way th Wrd bank rcrdd dtrf.

19 Fr a dscussn aut channng FDi fr th gd

f dvpmnt, s th jnt UNCTAD/ilo vum

n ndustra pcy (Saazar-Xrnachs t a., 2014).

20 S Financial Times, “Ra stat and Chna dm-

nat FDi ws”, 4 Jun 2015.

21 UNCTAD, 2015: 18, ta i.5.

22 btwn 2011 and 2013, nt FDi nws t DTes

cnsstd f, n avrag, rnvstd arnngs (45 pr

cnt) and ntra-rm ans (22 pr cnt); th rman-

ng 33 pr cnt cnsstd f quty, ncudng mrg-

rs and acqustns (UNCTAD, World Investment

Report dataas).

23 Fr a rcnt rvw, s Thrwa, 2011.

24 S Patnak (2007) fr an anaytca xpsé f th

mtd ffctvnss f prcautnary hdngs f

frgn-xchang rsrvs; and as Trja Zan

(2015), wth spca rfrnc t cntra anks n

latn Amrca.

25 Fr frma drvatns f th pnts mad hr, sPatnak and Rawa, 2005; and Patnak, 2006.

26 Hrndn t a. (2013) rpcat and mprcay

chang Rnhart and Rgff (2010 and 2010c),

whs wrtngs hav n wdy usd t supprt

sca austrty argumnts asd n th styzd nd-

ng that puc dt xcdng 90 pr cnt f GDP

rducs grwth. Hrndn t a. (2013) cncud that

Rnhart’s and Rgff’s sctv xcusn f data,

cdng rrrs and napprprat wghtng f sum-

mary statstcs undr th rsut n puc dt and

grwth. Whn ths rrrs ar crrctd, th rsuts

shw that th grwth cnsquncs f puc dtvary and th ffcts ar mdst.

27 in latn Amrca, th cntxt f vrvaud xchang

rats, xpandng dmstc dmand and a mr pn

trad rgm, “d t ncrasd mprts and a grw-

ng currnt-accunt dct, whch was nancd by

frgn nvstrs wh wr attractd by th prms

f hghr rturns. Hwvr, th cratv prcss f

tchngca prgrss and rstructurng rmand

t carrd ut, and th macrcnmc nvrn-

mnt f hgh ntrst rats, strng xchang rats

and vat capta ws dd tt t supprt th

nw nvstmnt rqurd fr such a transfrmatn.

Thus pcy rfrms wr unsuccssfu caus th‘cratv’ mnt n th ‘dstructn’ prcss fad

t rng aut ra transfrmatn f th prductv

structur thrugh hghr nvstmnt and tchng-

ca chang” (TDR 2003: 145–146).

28 Ths rpp ffcts ar grupd sparaty frm

th Asan nanca crss n rdr t dffrntat

twn th rgna cntagn f that crss and

hw ths csts manfstd n thr mrgng markt

cnms.

29 Ths data and th trm “capta w nanza” ar

frm Rnhart and Rnhart (2008), wh nt that,

athugh a ttr masur wud rsrv accu-muatn ss th currnt accunt aanc, th ngr

tm srs and gratr cnsstncy f data n th

currnt accunt mak ths a satsfactry susttut.

30 Ths sctn mts th dscussn t latn Amrca.

Many thr dvpng cuntrs wr swpt up

n th sam cyc f nanca crss, ut th latn

Amrcan xprnc s mmatc f th argr

cnmc frcs at wrk.

31 evn braz, whch had capta cntrs and dd nt

xprnc much capta ght, suffrd caus f

th gnra suspnsn f ndng t latn Amrca

(Díaz-Ajandr, 1984).

32 As a shar f GDP, th currnt accunt dcts

f Thaand and Maaysa that yar wr -8.1 and


26/30


-4.4 pr cnt rspctvy (iMF, World Economic

Outlook dataas, octr 2014).

33 Wad cnsdrs th Rpuc f Kra a dffr-

nt cas n th grunds that thr t was mr th

ndustra cngmrats that had nks wth nanc

thrugh thr accss t chap frgn capta, rathrthan vstd ntrsts n prprty.

34 Tawan Prvnc f Chna and Hng Kng (Chna)

succssfuy fndd ff spcuatv attacks, ut th

Rpuc f Kra was much mr xpsd caus

f shrt-trm dt.

35 by cntrast, gvrnmnt spndng n gds and

srvcs as a shar f GDP rs frm 19.2 pr cnt

n 1994 t 20.6 pr cnt n 1998, wth th uk f th

rs ccurrng n 1995 (whn t ncrasd t 21 pr

cnt) as a rsut f a n-tm pstv shck f

natn-ratd adjustmnt f wags and saars

(UNCTADstat ). 36 Surc: Wrd bank, World Development Indicators

dataas.

37 S as Dmrgüç-Kunt and Dtragach,1998;

Rnhart and Rnhart, 2008; and Wr, 2001.

38 in mathmatca trms, th man accuntng dntty

dns GDP as th sum f cnsumptn (C), prvat

nvstmnt (i), gvrnmnt xpndtur (G) and

xprts (X) mnus mprts (M). Smp assumptns

aw spcfyng th tax rat (t) and th savngs and

mprt prpnsts, s and m rspctvy, as:

T = t · GDP; S = s · GDP; M = m · GDP,

whr T stands fr tta tax rvnu and S fr prvat

savngs. Arrangmnts f ths quatns arund thaccuntng dntty yd th xprssn:

GDP = (G + i + X)/(t + s + m), r atrnatvy:

GDP = wt · (G/t) + w

s · (i/s) + w

m · (X/m)

whr wt, w

s and w

m ar th wghts f ach f

th akags (tax, savngs and mprt prpns-

ts, rspctvy). Ths quatn stashs that

grwth f GDP dpnds n th grwth f th thr

varas, G/t, i/s and X/m; dnd as sca stanc,

prvat stanc and xtrna sctr stanc, rspc-

tvy, ampd y th strngth f th rspctvmutprs, gvn th mntnd wghts, n th

macrcnmc cntxt. T avd cmpcatng

th prsntatn wth drvatn f th stady stat

cndtns, t s sufcnt t nt that ths stancs

rct nanca cndtns as w, whr a argr

numratr than th dnmnatr pnts twards a nt

rrwng pstn. Thus, a stady path f sustand

grwth and nanca staty rqurs that nn f

ths stancs grw at a prprtnay fastr pac

than th thrs fr a prngd prd f tm.

39 Th xtrna accunt cam th adng drvr n

40 pr cnt f ths cass, and cam sgncantymr mprtant n anthr 27 pr cnt f cass.

40 S Frnk and Tayr (2006) fr a dscussn f

th varyng crcumstancs and changs that ar

asscatd wth managng th xhang rat t supprt

dvpmnt.

41 Data frm th Wrd bank (2013) ndcat that at

th nd f 2012 th shar f nn-rsdnt hdngs

n ca DTe dt markts was 26.6 pr cnt, and

that t was as hgh as 40 pr cnt n sm cnms

(ctd n Akyüz, 2014: 20).

42 S TDR 2013, annx t chap. i, whr a ga

md smuatn prvds mprca ustratn

f th fact that pcs asd n mprvd aurncm and supprtv sca pcy yd wakr

rsuts, vn f st pstv, whn partnr cuntrs

tak an ppst stanc and prt n a typca “fr-

rdr” mannr.

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