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From Rich to Poor: A Plan for Stabilizing Investment Markets in Developing Countries by Michael J. Johnston and Peter Wilamoski for the Caux Round Table. Compliments of the Papousy Endowed Chair in Business Ethics at Southern New Hampshire University. |
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ConclusionThe benefits of capital mobility across countries to the provider and user of those funds are broadly accepted. The case for the free flow of capital across nations, however, has been undermined by the belief that these capital flows can also undermine the very economies they purport to assist. Fickle or hot money has been argued to be the outcome and cause of financial and economic crisis in emerging markets. Most of the solutions proposed to end economic crises in emerging markets, and in doing so stabilize foreign capital flows, call for reform within emerging markets. These reforms involve increasing transparency of financial information, improving corporate governance, liberalizing domestic financial markets, and eliminating financial guarantees that promote moral hazard. |
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Finally, developed nations that provide capital to emerging markets should adopt policies that better price the risk of investing in emerging markets. Through a prudential capital charge, and greater disclosure by financial institutions to their providers of capital about the riskiness of investing in emerging markets, investors are less likely to be surprised by unexpected risk, and less likely to pull funds, thus stabilizing capital flows between developed and developing nations. On a voluntary basis, institutional investors might find it rewarding to establish a method for selectively exempting fund managers from including investment results of certain countries during crisis. This could both stabilize capital flows and act as an incentive toward reform. We believe this is a framework for reform that produces advantage for all sides, stability for a global economy, and lasting opportunity for future cooperation. Footnotes [1] World Economic Outlook, Financial Crises: Causes and Indicators, International Monetary Fund, p. 75, 1998 [2] Committee for Economic Development. 1999. Improving Global Financial Stability [3] Bossone and Promisel, Strengthening Financial Systems in Developing Countries: The Case for Incentive Based Financial Sector Reforms, The World Bank Group, 1998 [4] Moral hazard is risk-taking that takes place because an activity's outcome is covered by some form of insurance. The belief that their risky behavior would be insured affected not only the lending decisions of local financial institutions, but of international lenders, too. [5] In Indonesia, bankruptcy emphasized liquidation and did not allow for court-supervised corporate rescues. As a result, bankruptcy court is all but ignored. It was reported that after the onset of the crisis most companies stopped servicing debt, but few applied for bankruptcy court protection. The same environment, the ability to default with impunity, exists in Thailand. In Korea, eight chaebol filed for protection in 1997. Two years later they still operate while in default without having presented business plans for restructuring to the court. [6]Global Economic Prospects and the Developing Nations, The World Bank Group, 1998, p107 [7]Global Economic Prospects and the Developing Nations, The World Bank Group, 1998, p107 [8] This section on the role of governments whose investors are sources of capital to developing nations is adopted from Griffith-Jones. References Bagwahti, Jagdish. 1998. "The Capital Myth." Foreign Affairs (May/June) Bosssone, Biagio and Larry Promisel. 1998. Strengthening Financial Systems in Developing Countries, The World Bank Group Buiter, Willem H. and Anne C. Sibert. 1999. "UDROP: A Small Contribution to the New International Financial Architecture." University of Cambridge and Birkbeck College, University of London. Unpublished working paper. Committee for Economic Development. 1999. Improving Global Financial Stability Eichengreen, Barry. 1999. "Is Greater Private-Sector Burden Sharing Impossible?". University of California, Berkeley Griffith-Jones, Stephany. Regulatory Challenges for Source Countries of Surges in Capital Flows, unpublished, 1998 Radelet, Steven and Jeffery Sachs. 1998. "The Onset of the Financial Crisis." Unpublished working paper, 1998 Radelet, Steven and Jeffery Sachs. 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects." Unpublished working paper Report of G7 Finance Ministers. 1999. Strengthening the International Financial Architecture, International Monetary Fund. 1998. World Economic Outlook International Monetary Fund. 1998. International Capital Markets Report The World Bank. 1998. Global Economic Prospects and the Developing Countries The World Bank. 1999. Report on the International Financial Architecture The Caux Round Table Website: www.cauxroundtable.org |
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