The Mexican economic crisis of 1994-95 has been considered the first financial crisis of the XXI Century because it was the first one caused by the speculative nature of the International Financial Market. Today developing countries find themselves again in a similar scenario. International capitals are flooding the emerging markets in search of high returns that can't be found now in the indebted and slow growing developed economies.
Developing countries are one more time in a crossroad. Should they keep believing in the financial market and its invisible hand? Should they maintain inflation as their main monetary objective? Can they successfully hold the value of their currencies by intervening the market? Should they use capital controls instead?
Augusto de la Torre, World Bank's Chief Economist for LatAm., has suggested that governments in the region should fight the inflation pressures from the appreciation of their currencies by reducing expenditure (Bloomberg Oct.11, 2010). But, can countries with high percentage of population living in extreme poverty afford a reduction in expenditure? Can Governments - like the Mexican one- fighting a war against drug trafficking reduce public expenditure? Are there any other options?
While different countries are responding to the situation in different ways and using different instruments, is striking to see how the East Asian economies are willing to intervene the currency market and implement capital controls - India, China, Thailand, South Korea, Japan all have expressed their willingness to intervene the market to protect their currency from harmful "speculative" appreciation – while, on the other hand LatAm. economies (except Brazil) are once again keen on maintaining orthodox policies and letting the market do the rest.
In a liberalized economy with a high percentage of foreign ownership of banks, the reduction in the policy space is challenging in itself. In this scenario, governments should be willing to use any economic policies that have proved to be successful in maintaining financial and economic stability. This makes me wonder….Why some Latin American economists are scared of the use of government intervention? Carsten´s “clarification” in the recent IMF G-20 meeting that the increase in Mexican International Reserves was merely a result of economic fundamentals and Mexico was not going to participate in a “currency war” supports my point.
Maybe I need to remember that the politicians that are leading our economies today are part of the “Debt crises generation”. The majority of them did their PHDs in the US studying under the market fundamentalist wave of the time. Many of them were the initiators of the “remaking” of the Mexican Economy (Lustig, 1998), and saw the macroeconomic stabilization of the last two decades as a personal triumph. But, what about the deterioration of the income distribution? What about the exclusion of some economic sectors and ways of life? What about the violence and the high social and economic cost of the economic and social disintegration of the last 3 decades?
Maybe it is time to explore the policy options beyond the ones contained in the Washington consensus - that many of our leaders learnt by heart in the 90´s.
Laura,
ReplyDeleteVery interesting article. I think it touches a very important current macroeconomic issue. But when you say harmful speculative capital inflows I think the difference now is that instead of funding goverment defficits like in the later 90s, today inflows are going to finance faster growing economies and in particular the private sector. Emerging market goverments are in a much more solid financial situation than they were 10 years ago. I think this phenomenon is a reflection of a a change in the balance and dynamic of the world economy from the developing to the emerging markets (aided by a massive liquidity injection in the US). I think this access to capital will in fact result in much more dynamic economies that will represent an improvement in life quality in this countries.
RM