Crises, Defaults and Controls - Essay Example

Crises, Defaults and Controls Reading Whither the Reform Agenda? In this reading, the poor of development seen in domestic securities markets of emerging economies, more so in Latin America, happens to be the drive behind the study covered therein. The state is described both as puzzling and disheartening. The low development level that local capital markets had posted together with the meagre payoff for the huge reforms effort in a couple of decades makes it a disheartening state. Lacking in clarity and consensus on the modification of the reform agenda on the capital market going forward brings about the puzzling state. Discussions in previous chapters to this paper reveal the sorry state of affairs with regard to the reforms made and the results gained and also in relation to other markets. There had been insignificant growth in domestic capital markets of various economies from early 1990s in comparison to that in industrialized economies. Some economies actually experienced deterioration in their capital markets. There has been a decrease in liquidity and listing in capital markets of many developing countries as firms cross-list and raise capital in financial centres internationally such as in London and New York. Stock markets remain segmented and highly illiquid, with capitalization and trading focused on few stocks. This chapter focuses on the more normative and puzzling part of the observation, which is motivating. This happens to be the question; what should be done on the reform agenda on capital markets going forward? To get the answers to this question, the study looks into what went wrong with all the reforms made before trying to look at what needs to be done moving forward. Three typological views are presented that shed light into perspectives that lead to different diagnoses plus policy recommendations. These views have messages summarized as (a) Get the right sequence (b) Observe patience and redouble effort and (c) Revisit fundamental issues and look into expectations Observe patience and redouble effort. This view provides that important elements of the reform package for capital markets are well known. According to this view, (a) Reforms are required to improve an enabling environment for the capital markets. (b) The reforms should have measures in place for efficiency enhancement and discipline in the market through completion. (c) Reforms in some areas have the important complementary role. (d) There is need for more specialized and technical reforms for enhancing capital market integrity and transparency. It is further noted that many of the principles, objectives and best practices for adequate operation in domestic capital markets are getting to be adopted in international standards code. Why are most capital markets underdeveloped despite the high expectations in their development? This problem can be said to be due to insufficient implementation of reforms and impatience. In some areas, failure is seen to be due to the reforms not being initiated while in others they were implemented inconsistently. Impatience by reformers has often seen them expect materialization of results sooner than expected. Getting the sequence right: This reflects a well-known line of criticism of the preceding view. It contends that to a certain degree, the reforms were the problem. The view spans a wide scale of the capital market-related reforms. The international standards code offers little guidance on how the reforms should be sequenced. The reforms success is hinged on the efforts toward systematic clarification of sequencing issues. Basic issues revisiting and reshaping expectations: This view arises after identifying shortcomings of the previous two views. The two views inadequately address some important aspects. This view seeks to fill the gaps. It advises on stepping back to revisit the basics before moving forward. The anticipation is that this will provide for better interpretation of evidence, guide on the reform agenda’s reformulation and reshaping expectations. The analysis suggests areas to be researched on that are important in the policy discussion. Further works to improve understanding of the interactions between the development of domestic capital markets and financial markets internationalization. Further research also needs to be done to understand why after reforms domestic Latin American capital markets’ development still performs poorly. Reading 2: Exporter Premiums This paper gives an analysis that seeks to prove the relationship between export business and growth of firms. It is observed that export firms tend to be better. Exporter premiums are seen to have two explanations that are non-mutual: either better firms choose to be exporters or firms get to be better with engagement in export. In both explanations, firms engaged in exportation have a high growth. Bivariate studies (Bhagwati 1978) or cross-country studies (Feder 1983), the literature concludes to the existence of a positive relationship between growth and exports. Empirical evidence supports the hypothesis of self-selection. Over 80% of studies on this issue showed that firms that exporting firms had been more productive prior to entering export market. Learning after commencing exporting was observed in a few small countries. Reorientation toward exportation was seen to be a crucial source of growth in the short run. One thing that could not be exactly known is what determines the observed productivity growth before firms entered the export market. One finding by Lopez (2005) argued that the objective of engaging in export made firms become more productive. This begs the question; are such objectives the real drive toward growth? This is with consideration of the ever present aspiration for growth in a since when it is established. Reading 3: Latin American Capitalism: Social and Economic Policy in Transition This paper gives a comparative reflection on applicability of various welfare and capitalism regime approaches. Several problems have been highlighted. Latin America’s economic development has, for the last three decades been poor, with deepening structural weaknesses. The export commodity boom in recent times has not been helpful either. Failure in human resources investments and the high income and wealth concentration has negatively impacted on the economic performance. Significant variations in income inequalities and economic development patterns can be seen in the region. As to what extent the varieties of approaches to capitalism contributes to the understanding of present economic challenges remains debatable. In contributing to this issue, Jonathan Perraton questions OECD countries’ basic division into a couple of different varieties claiming that the last quarter century has witnessed convergence among liberal coordinated market economies. Although common challenges and threats are undeniably present, there undoubtedly exist significant differences in this for the two groups. There is thus a lot to be learnt from case studies in this literature. Barrientos showed that Latin America has gone through radical changes in its welfare regime type, which is not observed in 1OECD countries. If this is to stand, then one question needs to be asked; How comes there is stability in some regions and changes in others? The importance of state forms and political processes should also be looked into. Latin America as a model brings meaningful additions to the discussion on the state’s role in the various welfare and capitalism regimes. Basically, the empirical and theoretical support to allegations that different types of economies provide different opportunities for different environments’ sustenance is supported by approaches in theorization of Latin American capitalism. The approaches are also a welcome antidote to the allegation that only neo-liberal policies are sensible (Coates 2005). The three useful analytic points in analysis of the variety of capitalism in Latin Americas are; the importance of evaluation of how production models, political regimes and welfare model link and the labour market operation as associated with each. Secondly, the role firms play in determination of the economic evolution of Latin America is central. Finally, relations between states, family and markets are key to welfare systems’ understanding. The 2neo-liberal model’s failure makes it not much of a surprise that Latin America’s policy debates are focused on searches for alternatives. The analysis described in this paper identifies common problems like lacking in incentives for redistribution and innovation and existence of a weak prevalent state. It is also shown that in the challenging global competition conditions the region faces, together with the region’s traditional primary exports’ dependence and the commodity-boom-deepened low wages, Latin America’s governments have formidable obstacles against their political mandate fulfilment and economic structure reforming. One cannot fail to ponder whether incentives described above would help out in tough situations. Reading 4: Is the 2007 US Sub-Prime Financial Crisis So Different? An International Historical Comparison This paper seeks to analyse whether the mentioned crisis was a first of its kind or not. To do this it compares the 2007 U.S’s sub-prime mortgage problem to the history of such crises. The study finds 3stunning quantitative and qualitative parallels across several financial crisis indicators that are standard. The U.S’s housing and equity prices run-up is considered by Kaminsky and Kaminsky (1999) as the leading crisis indicators in countries with large capital inflows. This indicator was found to track closely with the average of eighteen previous banking crises after world war two in industrialized countries. Comparisons show that U.S’s current account deficit pattern is markedly worse. The paper gives an account of several crises that include episodes in Japan, Finland, Spain Sweden and Norway. They are deemed most catastrophic and mark the limit policy makers avoid. Various simple comparisons are made between previous episodes and the U.S 2007 crisis. One question that the study seeks to answer is; does the U.S crisis surpass the limits as set by these episodes? How unique is the U.S case in relation to other previous crises? The paper reveals that despite concentration mainly on the U.S, many of the parallels investigated also apply in other countries that also started experiencing housing price problems in 2007. They include the United Kingdom, Ireland and Spain. Similarities were also found to be there across unhappy families. Therefore, the U.S case is no different as other countries have experienced more or less similar scenarios. References Carmen M. Reinhart & Kenneth S. Rogoff (2008). Is the 2007 US Sub-Prime Financial Crisis So Different? : An International Historical Comparison. American Economic Review: Papers & Proceedings 2008, 98:2, xx–xx http://www.aeaweb.org/articles.php?doi510.1257/aer.98.2.xx Casacuberta, C., Nestor Gandelman, Marcelo Olarreaga, Guido Porto & Eliana Rubiano. Exporter Premiums. Huber, E. (Ed.) (2002). Models of Capitalism: Lessons for Latin America. University Park, PN: Pennsylvania State University Press. Juliana Martínez, Maxine Molyneux & Diego Sánchez-Ancochea (2009). Latin American Capitalism: Economic and Social Policy in Transition. Routledge, Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK. Kaminsky, Graciela L., and Carmen M. Reinhart (1999). The Twin Crises: The Causes of Banking and Balance-of-Payments Problems. American Economic Review, 89(3): 473– 500 Martı´nez Franzoni, J. (2008). Welfare Regimes in Latin America: Capturing Constellations of Markets, Families and Policies. Latin American Politics and Society (LAPS), 50(2), 67_100Whither the Reform. Towards a Liberal-Informal Welfare Regime. In I. Gough, G. Wood, A. Barrientos, P. Bevan, P. David & G. Room (Eds.), Insecurity and welfare regimes in Asia, Africa and Latin America (pp.121_68). Cambridge: Cambridge University Press. Read More