Globalization hazard and delayed reform in Emerging Markets

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dc.description.abstract Capital inflows to emerging market economies rose to unprecedented heights in the first part of the 1990s and then collapsed very rapidly in the second. Such volatility could partly be explained by financial vulnerability in the emerging markets themselves, but the global nature of the phenomenon raises the suspicion that the world financial market is wrought with systemic problems that are largely independent of the individual countries affected. This paper puts forward the conjecture that phenomena such as contagion could stem from the way the capital market operates (for example, crises generated by margin calls). These systemic phenomena require systemic instruments. Unfortunately, few are available. The International Monetary Fund (IMF) operates more like a fire department than like a central bank. Liquidity is sprayed where fire is found, not on the system as a whole in the manner of a central bank faced with a liquidity crisis. The combination of domestic financial vulnerability and the lack of a worldwide safety net gives rise to what I call globalization hazard, that is, risk generated by the sudden large expansion of credit to emerging market economies in the first half of the 1990s, probably as a result of imperfect information and underdeveloped financial institutions. Several recent financial crises were low-probability events that were uninsured and perhaps uninsurable in the private sector, and they called for ex post government intervention. Government intervention, however, represents a major roadblock in the presence of delayed reform, a condition in which the government delays the implementation of socially desirable reform and wealth redistribution. Delayed reform may thus exacerbate the impact of low-probability events and possibly help to coordinate expectations on "bad" equilibria, contributing to the severity of globalization hazard. The policy implications of the globalization hazard view are diametrically opposed to those of the moral hazard view recently popularized by Meltzer. This makes the present discussion greatly relevant for the design of a new financial architecture, an issue of enormous urgency and importance. en
dc.title Globalization hazard and delayed reform in Emerging Markets en
dc.contributor.author Calvo, Guillermo A.
dc.date.accessioned 2014-11-05T20:29:10Z
dc.date.available 2014-11-05T20:29:10Z
dc.date.issued 2002-03
dc.identifier.issn 1529-7470
dc.identifier.uri http://hdl.handle.net/123456789/48696
dc.language.iso en
dc.subject Emerging markets
dc.subject Capital inflows
dc.subject Volatility
dc.subject Financial vulnerability
dc.type Article
lacea.language.supported en

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